Contracts II, Pages 1257–1263

Cretex Companies v. Construction Leaders, Inc.

Supreme Court of Minnesota, 1984

Facts:

Northland hired defendant Construction Leaders as its general constructor to develop two properties. Defendant Travelers wrote the performance bonds for the projects, agreeing to pay Northland if Construction Leaders did not fulfill the contract. During the work, Construction Leaders defaulted and became insolvent. Travelers hired another contractor, who completed the work, but some of Construction Leaders's subcontractors, such as plaintiffs, were never paid. Plaintiffs assumed they could not file liens against Northland and thus did not. They then sued defendants for breach of contract and to enforce the performance bonds.

Procedural History:

Trial court granted plaintiff summary judgment on the issue of liability on both claims. The parties stipulated damages, and Travelers appealed on the issue of whether plaintiffs are entitled to their claims under the performance bonds.

Issue:

Are unpaid materialmen third-party intended beneficiaries under performance bonds?

Plaintiff's Argument:

The bond was conditioned on performance of the contract. Performing the contract includes paying the subcontractors and materialmen like plaintiffs. Therefore, the bond is intended to benefit plaintiffs.

Rule:

For a third-party beneficiary to be able to enforce a contract, there must be an intent to benefit the third party through the contract's performance or the promisor's performance must perform a duty owed to the third party by the promisee.

Reasoning:

The purpose of the bond was to ensure that Construction Leaders performed the contract for Northland. It also indemnified Northland against losses from liens filed against its property because of Construction Leaders's default in paying its materialmen and indemnified from loss by a failure to do so. This only evidences an intent to benefit Northland.

While the performance would have benefitted plaintiffs, that does not mean that that was the intent of it. Paying unpaid, non-lienholding subcontractors was not required under the bond. This is a private construction project, so plaintiffs could have filed their own liens against the property, so there would be no reason for the contracting parties to confer a benefit upon them.

Holding:

Plaintiffs were not intended third-party beneficiaries and therefore not entitled to recover. Reversed.

Dissenting Opinion:

Yetka: The bond obligated Travelers to perform the contract, which required it to pay for all materials, labor, etc. Under the contract's language, it could not be performed until these were paid for. Plaintiffs would have been aware of the bond going in. If Travelers did not want the bond to include this, it should have clearly stated so. Since it did not, plaintiffs had a right to rely on the bond, and the trial court should be affirmed.

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