A third-party beneficiary, in contract law, is a person who may have the right to sue on a contract, despite not having originally been a party to the contract.  Think, for example, of the homeowner who hires a contractor who then hires a subcontractor.  If the subcontractor fails to perform, under certain circumstances, the homeowner may be a third-party beneficiary of the subcontract between the contractor and the sub, and have the right to sue the sub directly.

In order to obtain that right, however, under Michigan law, the homeowner must be an intended beneficiary of the contract, as opposed to an incidental beneficiary.  A homeowner is an intended beneficiary only where there’s an express promise by the subcontractor to act for the benefit of the third party; and a subcontractor’s “awareness” that its work ultimately benefits a third party is not evidence that such subcontractor promised to perform its contractual obligations for such party.

The law is not merely limited to the construction industry and instead applies to any industry in which subcontractors are used (software, manufacturing, legal, etc.).  The net effect is to limit the liability of Michigan subcontracts and clarify exactly when they will be held liable to third parties.

A recent Court of Appeals case, however, stands to jeopardize this otherwise clear law.  More on that case and its potential effect on Michigan subcontractors tomorrow.

–Matt