On Tuesday, I wrote about Michigan third-party beneficiary law, which essentially holds that only intended beneficiaries of a contract, as opposed to incidental beneficiaries, have the right to sue on a contract despite not having originally been a party to the contract. A party is an intended beneficiary only where there’s an express promise. A recent Court of Appeals cases threatens to undo much of this law.
In Vanerian, the plaintiff homeowner’s insurance company hired Pugh to repair damage to the plaintiff’s basement caused by flooding. Pugh recommend that the homeowner contact her previous flooring contractor, G&G, to make the repairs to her floor. Having previously performed work for the plaintiff, a representative of G&G met with the plaintiff to discuss the necessary repairs. G&G then contracted with Pugh to replace the floor, the written agreement being entitled “Marie Vanerian Residence.” Thereafter, the plaintiff’s basement flooded again, causing damage to the floor installed by G&G. The plaintiff sued Pugh and G&G, asserting that she was an intended third-party beneficiary of the subcontract between Pugh and G&G. The trial court disagreed, dismissing the case. The Michigan Court of Appeals reversed.
In finding that the plaintiff homeowner was a third-party beneficiary of the contract between Pugh and G&G, the Court held:
Here, the plaintiff was not an incidental beneficiary; the whole and singular purpose of the contract was to secure repairs to the flooring in plaintiff’s basement. The focus of the contract is on restoring plaintiff’s property; defendant promised to do the work directly for plaintiff. … Viewing the contract objectively, defendant undertook a promise directly for plaintiff’s benefit, and plaintiff is expressly referred to in the contract. Any argument that defendant was not clearly aware that the scope of its contractual undertakings encompassed plaintiff is absurd, given the nature of the contract; it was the “Marie Vanerian Residence” job.
In so holding, the Vanerian court’s reasoning is in direct conflict with established Michigan law. The fact that “the whole and singular purpose of the [Vanerian] contract” was to benefit the plaintiff, or that the “focus of the contract is on restoring plaintiff’s property,” or even that the “plaintiff is expressly referred to in the contract” is simply insufficient to confer third-party beneficiary status on the plaintiff in Vanerian. A reference to the person in a subcontract, without more, is not “clear contractual language” that the subcontractor promised to act for the benefit of such person.
More importantly, the Vanerian decision makes almost every subcontractor liable on a third-party beneficiary theory where there is a single end-client. In such a case, the subcontractor is almost always going to know who is ultimately benefiting from his services, and commonsense would dictate that contractor and subcontract would likely identify such person when referring to the project. It cannot be the case that under those circumstances the subcontractor is automatically expressly promising to provide the work for the end-client as opposed to the contractor. To so hold is to completely eliminate third-party beneficiary law in Michigan in these cases and to greatly increase the potential liability of Michigan tradesmen.
If you provide subcontractor services in Michigan (regardless of your industry), make sure you are properly protected from potential plaintiffs claiming third-party beneficiary status. At a minimum, you should avoid direct contact with the end client, avoid referencing the end client in your subcontract, invoices, or purchase orders, and insist that the main contractor’s agreement with the end client contain a provision waiving any third-party beneficiary rights.
–Matt
