Texas Construction Law Blog

In construction disputes, owners typically deal with defects within the scope of work of the subcontractor or vendor by pursuing claims directly against the general contractor. The owner, however, may consider pursuing claims directly against a subcontractor or vendor under certain circumstances.

Potential Reasons for a Direct Claim Against a Subcontractor/Vendor

There are various scenarios in which an owner wants to be in the driver’s seat in connection with defective work solely attributable to a subcontractor or vendor. First, time may be of the essence on a project and the owner may not want to be involved in a dispute with a general contractor while finalizing a project. Second, the general contractor’s work may have been completed and all remaining issues may relate to the scope of work of a subcontractor or vendor. Third, the general contractor could be insolvent and the only viable recovery is against a subcontractor or vendor.

Pre-Dispute Mechanism

The most practical mechanism to preserve the right for an owner to pursue direct claims against a subcontractor/vendor is to expressly include these rights in the contract between the owner and general contractor and in the contract between the general contractor and the subcontractor/vendor. Both contracts should contain express language stating that the owner has third-party beneficiary rights and should assign a warranty and other claims to the owner, which would allow the owner to pursue a direct claim against a subcontract or vendor. This is especially important in situations dealing with new technology from a vendor where the vendor is best suited to quickly resolve the construction/equipment defects.

Applicable Legal Standard for Third-Party Beneficiary Rights

Standard third-party beneficiary rights include that the contracting parties intended to secure a benefit for a third-party and entered into a contract for that third-party’s benefit.

Post-Dispute Mechanisms

While there is a presumption against third-party beneficiary status, the question of whether a third-party beneficiary right exists is a question of law and courts/arbitrators must examine the entire contract and give effect to all provisions of a contract so that none are rendered meaningless. If third-party beneficiary rights do not exist, another solution is to obtain an assignment from the general contractor, or the owner could file declaratory claims against the general contractor and subcontractor/vendor in the same proceedings and encourage the general contractor to file a cross-claim against the subcontractor or vendor.

Bottom Line

The optimal solution is to incorporate third-party rights in favor of the owner in the relevant contracts. However, an assignment or strategic pursuit of claims can benefit the owner and minimize the impact on a project.