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KEEPING THIRD PARTIES AT ARM’S LENGTH

Jul 2012 , Vol. VI, No.1

Authored by attorney Ned Nicholas

If we contract with someone we expect that if we don’t hold up our end of the bargain, then we may get sued for breach of contract.  That is one of the known risks of doing business.  But we don’t expect to get sued for breach of that contract by someone who was not party to the contract.  But that’s possible under a legal doctrine called third party beneficiary of contract.

The doctrine provides that if in contracting the parties to the contract intended to benefit a third party (that is someone not a party to the contract) then the third party may sue for breach of the contract.

This makes sense where the contracting parties actually intend to benefit a third party, but what about where a third party points some contract language to craft an argument that there was an intent to benefit, but in fact there was no such intent?

Under Virginia law, the contract language must show that the contracting parties “clearly and definitely” intended to benefit the third party.  So the proof bar is fairly high, and most third-party beneficiary claims fail.

But defending a third-party claim can be expensive.  One way to avoid this expense is to include in the contract a provision clearly stating that nothing in the contract is intended to confer a benefit on any third-party.  Because of a couple of Supreme Court of Virginia opinions giving effect to such provisions, this sort of language may convince a third-party that a lawsuit is not worth the trouble.

The Supreme Court issued the more recent of the referenced opinions in April of 2012, holding that a contractor was not liable to a sub-subcontractor on a third-party beneficiary theory.

Authored by attorney Ned Nicholas, these articles are meant to bring awareness to these topics and are not intended to be used as legal advice.  For more information, contact Ned Nicholas or Bill Franczek at 757-446-8600. Visit www.vanblk.com, for our library of Construction Law Tips.  Suggestions for a topic? E-mail bfranczek@vanblk.com.

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