Fourth Circuit Holds That Contractor's Guaranty to Pay Subcontractor Does Not Create Third-Party Beneficiary Relationship With Supplier

We have previously written about the difficulty faced by subcontractors and suppliers when asserting third-party beneficiary claims against owners or general contractors (click here). A recent decision by the U.S. Court of Appeals for the Fourth Circuit continues that trend and demonstrates how, in the absence of a timely payment bond claim or properly-perfected mechanic's lien, subcontractors and suppliers have few available remedies outside of a standard breach of contract claim.

In U.S. ex rel. Potomac Valley Brick & Supply Co. v. Grahams Construction, Inc., 585 Fed.Appx. 173 (4th Cir. 2014), Potomac Valley, a bricks and mortar supplier to a construction project at Andrews Air Force Base, filed suit against the project's general contractor and its surety bond when the masonry subcontractor failed to make payment. During discovery, the general contractor produced an email in which it guaranteed payment to the masonry subcontractor for the bricks and mortar, even if the materials were installed by another subcontractor. Although the email did not mention, nor was it sent to, Potomac Valley, the supplier amended its lawsuit to assert that it was a third-party beneficiary of the email "contract" between the general contractor and subcontractor. The district court granted summary judgment on the third-party beneficiary claim, as well as the Miller Act claim due to lack of timeliness of notice. Potomac Valley appealed solely as to the third-party beneficiary claim.

On appeal, the Fourth Circuit held that, even if the email constituted a contract, Potomac Valley was not an intended third-party beneficiary of the contract. Under Maryland law, an "individual is a third-party beneficiary to a contract if the contract was intended for his or her benefit and it clearly appears that the parties intended to recognize him or her as the primary party in interest and as privy to the promise." This determination is made based upon "the language of the instrument and consideration of the surrounding circumstances." The Fourth Circuit held that, here, the email and the surrounding circumstances demonstrated that the email was sent in order to ensure that the cost of the bricks and mortar would not be borne by the masonry subcontractor in the event another subcontractor completed its work. Therefore, since there was no evidence that the email was drafted with the intention of specifically benefiting the supplier, Potomac Valley, the Fourth Circuit affirmed the district court's grant of summary judgment.

Categories: Legal Updates