Opinion
No. 60363-9-I.
September 2, 2008.
Appeal from a judgment of the Superior Court for King County, No. 05-2-14644-3, Michael Hayden, J., entered July 3, 2007.
In this condominium construction defect case, the homeowners association, as assignee of the owner, appeals the trial court's summary judgment order dismissing the subcontractors. The association contends that the owner was an intended third party beneficiary of the subcontracts between the contractor and the subcontractors. The subcontractors cross-appeal the trial court's rulings related to a settlement agreement between the association and the owner and the subsequent reasonableness hearing. Because the subcontracts unambiguously evidence an intent to preclude all direct claims by the owner against the subcontractors, the owner is not an intended third party beneficiary of the subcontracts. As we affirm the trial court's dismissal of the subcontractors, we do not address the subcontractors' challenge to the settlement agreement and reasonableness hearing.
FACTS
Far Northwest Development Co., LLC ("Far Northwest" or "Owner") was formed by Faramarz Ghoddoussi for the purpose of constructing and selling the Somerset Village Townhomes. On July 27, 1999, Far Northwest entered into a contract with Steinvall Construction Co. ("Steinvall" or "Contractor") to build the project. Section 3.2.1 of the contract's general conditions gives Steinvall sole responsibility for supervising, directing, and coordinating the construction work, and section 10 makes Steinvall responsible for jobsite safety. Section 12.1 requires Steinvall to promptly correct any work rejected by Far Northwest, and section 3.2.2 makes Steinvall responsible to Far Northwest for its acts and omissions as well as those of its subcontractors. In section 9.2.2, Far Northwest disclaims any obligation to pay Steinvall's subcontractors section 1.2 states, "The Contract Documents shall not be construed to create a contractual relationship of any kind . . . between the Owner and a Subcontractor. . . ."
Steinvall subcontracted portions of the work to Allied Construction, Inc., Washington Insulation, Hills Construction Trust, Dom Construction, and Star Services using two different subcontract forms. Both forms incorporate the general conditions laid out in the contract between Far Northwest and Steinvall, stating in Schedule B to both subcontracts, "The contract general conditions and special conditions shall form a part of these specifications with the same force and effect as though repeated herein." In addition, under article 1 of the long form, the subcontractors commit to performing the work "strictly in accordance with the contract between Owner and Contractor" and to "be bound to the Contractor by the terms . . . of the Contract Documents." Likewise, on the first page of the short form, the subcontractors agree to perform all work "in accordance with the Contract dated the 27th day of July, 1999, between the OWNER and the CONTRACTOR, and the general and special conditions of said Contract."
Dom Construction, Hills Construction, and Star Services signed the "long form" subcontract, while Allied Construction and Washington Insulation signed the "short form" subcontract. We refer to the "long form" or "short form" when referring to provisions unique to one form or another. We use the term "subcontractors" to refer either to all five companies or to the subset of subcontractors that signed one form or another.
Several provisions of the subcontracts impose obligations on the subcontractors in connection with Far Northwest. For example, under Schedule C of both forms, the subcontractors are required to obtain insurance that includes the interests of Far Northwest. Article 11 of the long form and Section L of the short form require the subcontractors to indemnify the Owner and the Contractor from certain types of claims. Article 14 of the long form requires the subcontractors to "implement safety measures . . . conforming to those required or recommended . . . by Contractor and Owner." Section V of the short form requires the subcontractors to submit to arbitration "[a]ny controversy or claim affecting only [O]wner and Subcontractor." Article 20 of the long form requires the subcontractors' work to be satisfactory to the Owner and the Contractor.
However, we note that Schedule D of the long form empowers the Contractor "not the Owner" to demand removal of unsafe subcontractor employees. In addition, it requires the subcontractors to provide the Contractor "not the Owner" with a copy of its jobsite safety plan.
After construction was completed, a dispute arose between Far Northwest and Steinvall over contract payments. They subsequently settled all claims against each other. As part of the settlement, Far Northwest and Steinvall agreed to release each other from "any and all claims arising or relating in any way to the project known as Somerset Village."
On April 29, 2005, the Somerset Village Townhomes Condominium Owners' Association ("the Association") filed a lawsuit against Far Northwest based on alleged construction defects. Far Northwest could not bring an action against Steinvall because of the settlement release it had signed earlier. Consequently, it filed an action directly against the subcontractors, contending that it was a third party beneficiary of the subcontracts between Steinvall and the subcontractors.
On September 22, 2006, the trial court dismissed on summary judgment Far Northwest's claims against the subcontractors. Far Northwest, Ghoddoussi, and the Association then reached a settlement in which Far Northwest agreed to a stipulated judgment against it and to assign its claims against the subcontractors to the Association in exchange for a covenant not to execute on its other assets. At a reasonableness hearing held over the subcontractors' objection, the trial court determined the settlement was reasonable and approved the stipulated judgment. This appeal followed.
The trial court later dismissed another subcontractor, Star Services, based on the same arguments. The trial court subsequently denied motions for reconsideration filed by Far Northwest and the Association in an oral ruling on May 25, 2007.
ANALYSIS
An appellate court reviews a summary judgment order de novo, engaging in the same inquiry as the trial court. Simpson Tacoma Kraft Co. v. Dep't of Ecology, 119 Wn.2d 640, 646, 835 P.2d 1030 (1992). Where, as here, there are no material facts in dispute, the court must determine if the moving party was entitled to summary judgment as a matter of law. Doyle v. State Farm Ins. Co., 61 Wn. App. 640, 642, 811 P.2d 968 (1991).
The Association argues that the trial court erred in granting the subcontractors summary judgment because Far Northwest was an intended third party beneficiary of the subcontracts between Steinvall and the subcontractors. Generally, only the parties to a contract can sue to enforce the contract's terms. Lobak Partitions, Inc. v. Atlas Constr. Co., 50 Wn. App. 493, 497, 749 P.2d 716 (1988). However, when one party contracts with another to benefit a third party, then the third party may be able to maintain an action for breach of the contract. Grand Lodge of Scandinavian Fraternity of Am. v. U.S. Fid. Guar. Co., 2 Wn.2d 561, 569, 98 P.2d 971 (1940). But it is not enough that the third party would benefit from performance of the contract; if the benefit is indirect, incidental, or inconsequential, the third party has no enforcement rights. See Donald B. Murphy Contractors, Inc. v. King County, 112 Wn. App. 192, 196, 49 P.3d 912 (2002); see also Restatement (Second) of Contracts § 315 (1981). The key question in determining whether or not a third party may enforce the contract is whether the parties intended the promisor to assume a direct obligation to the third party at the time they entered into the contract. Lonsdale v. Chesterfield, 99 Wn.2d 353, 360-61, 662 P.2d 385 (1983).
The test of whether the parties intended to make a third party beneficiary contract is an objective one. Postlewait Constr., Inc. v. Great Am. Ins. Cos., 106 Wn.2d 96, 99, 720 P.2d 805 (1986). The parties' intent is assessed by construing the terms of the contract as a whole, in light of the circumstances in which it was made. Id. at 99-100. Performance of the contract must necessarily and directly benefit the third party. Lonsdale, 99 Wn.2d at 362. The requisite intent is not simply a desire, purpose, or motive to benefit the third party; it is an intent to assume a direct obligation to the third party. Vikingstad v. Baggott, 46 Wn.2d 494, 496-97, 282 P.2d 824 (1955); see also Postlewait, 106 Wn.2d at 100 (noting that a desire to benefit a third party is not the same as an intent to assume a direct obligation to that party); 17A Am. Jur. 2d Contracts § 430 (2008) (describing the test as "whether the contracting parties intended that a third person should receive a benefit which might be enforced in the courts.") (emphasis added).
In the construction context, the property owner is generally not an intended third party beneficiary of a contract between a general contractor and a subcontractor. Warner v. Design Build Homes, Inc., 128 Wn. App. 34, 43, 114 P.3d 664 (2005). In Warner, homeowners brought an action against a subcontractor involved in their home's construction based on the theory that they were intended third party beneficiaries of the subcontract between it and the general contractor. Id. at 36. The court rejected their argument, holding that they were merely incidental beneficiaries of the subcontract. Id. at 43-44. In support of its conclusion, the court quoted from Corbin on Contracts.
Such contracts [between a principal contractor and subcontractors] are made to enable the principal contractor to perform; and their performance by the subcontractor does not in itself discharge the principal contractor's duty to the owner with whom he has contracted. The installation of plumbing fixtures or the construction of cement floors by a subcontractor is not a discharge of the principal contractor's duty to the owner to deliver a finished building containing those items; and if after their installation the undelivered building is destroyed by fire, the principal contractor must replace them for the owner, even though he must pay the subcontractor in full and has no right that the latter shall replace them. It seems, therefore, that the owner has no right against the subcontractor, in the absence of clear words to the contrary. . . . the benefit that [the owner] receives from performance must be regarded as merely incidental.
Id. at 43 (quoting 9 Arthur Linton Corbin, Corbin on Contracts § 779D (1979)). The court also cited an example from the Restatements to further illustrate the principle that owners are generally not intended third party beneficiaries of subcontracts. "`A contracts to erect a building for C. B then contracts with A to supply lumber needed for the building. C is an incidental beneficiary of B's promise, and B is an incidental beneficiary of C's promise to pay A for the building.'" Id. at 44 (quoting Restatement (Second) of Contracts § 302 cmt. e, illus. 19 (1979)). This example also illustrates the rule that a subcontractor cannot usually sue an owner as the third party beneficiary of the owner's contract with the general contractor.
The principle that there is a "buffer zone" between subcontractors and owners is discussed in Pierce Associates., Inc. v. Nemours Foundation, 865 F.2d 530, 539 (3d Cir. 1988), in which the Third Circuit concluded that an owner could not maintain a breach of contract claim against a subcontractor on a third party beneficiary theory. The court stated,
Typically when major construction is involved an owner has neither the desire nor the ability to negotiate with and supervise the multitude of trades and skills required to complete a project. Consequently an owner will engage a general contractor. The general contractor will retain, coordinate and supervise subcontractors. The owner looks to the general contractor, not the subcontractors, both for performance of the total construction project and for any damages or other relief if there is a default in performance. . . .
The general contractor, in turn, who is responsible for the performance of the subcontractors, has a right of action against any subcontractor which defaults. . . .
Thus the typical owner is insulated from the subcontractors both during the course of construction and during the pursuit of remedies in the event of a default. Conversely, the subcontractors are insulated from the owner. The owner deals with and, if necessary, sues the general contractor, and the general contractor deals with and, if necessary, sues the subcontractors.
Id. at 535-36.
While these relationships between owners, general contractors, and subcontractors are typical in the construction industry, there is nothing to prevent a departure from this pattern. A contractor and subcontractor may agree to confer on an owner rights that are enforceable directly against the subcontractor, but the intent to do so must appear in the contract documents. Pierce Assocs., 865 F.2d at 536. In the absence of words showing a clearly contrary intent, the subcontractors' promises are intended to be for the benefit of the general contractor, not the owner, and the owner will not be deemed an intended third party beneficiary. See Warner, 128 Wn. App. at 43-44. Accordingly, we must determine whether the subcontracts here evince a clear intent on the part of Steinvall and the subcontractors to confer on Far Northwest a direct right of action against the subcontractors.
The contractual relationships here fall into the traditional owner-contractor-subcontractor mold. Pierce Assocs., 865 F.2d at 536. The general conditions of the contract between Steinvall and Far Northwest were incorporated into both subcontract forms. Section 3.2.1 of the general conditions makes Steinvall solely responsible for supervising, directing, and coordinating the construction work. The conditions do not demonstrate that the subcontractors are directly responsible to the Owner; indeed, section 3.2.2 expressly states, "The Contractor shall be responsible to the Owner for acts and omissions of the . . . Subcontractors. . . ." Similarly, section 12.1 requires Steinvall, not the subcontractors, to promptly correct work rejected by the Owner. While article 14 of the long form requires the subcontractors to implement safety measures approved by the Owner, Steinvall remains responsible to Far Northwest for jobsite safety under section 10 of the general conditions, and it was Steinvall "not the Owner" that was empowered to demand removal of unsafe subcontractor employees pursuant to schedule D of the long form. In section 9.2.2 of the general conditions, Far Northwest expressly disclaims any obligation for paying the subcontractors directly. Finally, section 1.2 of the general conditions, which states, "The Contract Documents shall not be construed to create a contractual relationship of any kind . . . between the Owner and a Subcontractor. . . .", provides strong evidence that the parties intended to maintain the traditional "buffer zone" between Far Northwest and the subcontractors.
The Association argues that the subcontractors intended to assume direct obligations to Far Northwest because several subcontract provisions impose obligations on the subcontractors vis-á-vis Far Northwest. For example, the Association points to the subcontracts' indemnity and insurance provisions, the provision in the short form requiring subcontractors to resolve disputes with the Owner through arbitration, and the long form's requirement that the work be satisfactory to the Owner. The Association argues that these provisions reflect an intent to benefit Far Northwest. But a desire to benefit a third party is not the same as an intent to assume a direct obligation to that party. See Donald B. Murphy, 112 Wn. App. at 196-97 (insurance provision that benefited third party was insufficient to establish intent of promisor to assume a direct obligation to that party); Pierce Assocs., 865 F.2d at 538 (provisions requiring satisfaction of owner and indemnification of owner only incidentally benefited owner). "In every construction subcontract the owner is the one which ultimately benefits from its performance. However, this does not create a third party beneficiary relationship." Pierce Assocs., 865 F.2d at 538. None of the provisions the Association cites contain words that clearly show an intent to confer on Far Northwest a direct right of action against the subcontractors. Any doubts about whether the parties intended to create a third party beneficiary contract are dispelled by the express disclaimer of "any kind" of contractual relationship between the Owner and the subcontractors.
In addition to the contractual provisions, the Association also points to extrinsic evidence that Far Northwest was involved in selecting and directing the subcontractors and argues that this course of conduct meant that "the subcontractors understood that their work was for [Far Northwest]." Amended Br. of Appellant at 36. However, this evidence is of limited value in determining the intent of the subcontractors at the time they entered into their contracts with Steinvall. See Lonsdale v. Chesterfield, 99 Wn.2d 353, 361, 662 P.2d 385 (1983). Moreover, direct interaction between an owner and a subcontractor does not create a third party beneficiary contract in the absence of clear words of intent in the contract documents. See Outlaw v. Airtech Air Conditioning Heating, Inc., 412 F.3d 156, 165 (D.C. Cir. 2005) (where owner's vigorous involvement in construction project was insufficient to make her a third party beneficiary of subcontract).
A third party beneficiary contract is a kind of contract. See Donald B. Murphy, 112 Wn. App. at 196; Black's Law Dictionary 349 (8th ed. 2004).
The Association argues that cases from other jurisdictions support its position. But none of the cases it cites involve a provision like the one present here, that "[t]he Contract Documents shall not be construed to create a contractual relationship of any kind . . . between the Owner and a Subcontractor . . ." Courts that have interpreted this provision (or similar language) have concluded that it prevents a party from maintaining an action based on a third party beneficiary theory. See, e.g., Pierce Assocs., 865 F.2d at 537; E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas, 551 F.2d 1026, 1031 (5th Cir. 1977); Honey v. George Hyman Constr. Co., 63 F.R.D. 443, 450 (D.D.C. 1974); Fed. Mogul Corp. v. Universal Constr. Co., 376 So. 2d 716, 724 (Ala.Civ.App. 1979).
However, the Association contends that this provision does not preclude a third party beneficiary contract arising from the subcontracts because it refers only to "Contract Documents," which are defined to include the conditions, drawings, and specifications agreed upon by Steinvall and Far Northwest. This argument is not persuasive because the subcontracts repeatedly incorporate the Steinvall and Far Northwest contract general conditions and its "no contractual relationship" provision. The subcontractors also agreed to be bound by the conditions and perform in accordance with them. We hold that by incorporating the provisions discussed above and the "no contractual relationship" language into their contracts, Steinvall and the subcontractors unambiguously expressed their intent that there be no third party beneficiary relationship between Far Northwest and the subcontractors.
For example, under article I of the long form, the subcontractor committed to performing the work "strictly in accordance with the contract between Owner and Contractor" and to "be bound to the Contractor by the terms . . . of the Contract Documents." Likewise, on the first page of the short form, the subcontractor agreed to perform all work "in accordance with the Contract dated the 27th day of July, 1999, between the OWNER and the CONTRACTOR, and the general and special conditions of said Contract." This conclusion is also supported by the reasoning in Pierce Associates, in which the Third Circuit rejected the precise argument the Association makes here. Both the subcontractors and the Association rely on cases from other jurisdictions for their third party beneficiary arguments. Pierce Associates is especially persuasive because it involves application of the same basic legal test to virtually identical contractual language.
Because the contract language here does not manifest an intent by Steinvall and the subcontractors to create a third party beneficiary contract, the Association has no standing to maintain an action against the subcontractors. As we resolve this threshold question in favor of the subcontractors, we do not reach their contentions involving the settlement agreement and reasonableness hearing.
We also decline to address this issue because the record is unclear regarding what occurred below and what impact the reasonableness hearing might have on other subcontractors and further trial court proceedings.
Affirmed.