REALWorld Law


Rights of purchasers, tenants and banks

How are third parties who are not parties to the construction contract – such as purchasers, tenants and lending banks providing finance towards the development – afforded protection and given rights against the original designers and contractors involved in the design and construction of the project?

United States

United States

A contract may extend certain rights to third parties who are not parties to the contract. Such third parties are referred to as third-party beneficiaries, and both the third-party beneficiaries and the rights afforded the third-party beneficiaries must be provided for expressly in the contract. However, because third-party beneficiaries are not parties to the contract, they do not have corresponding obligations. Accordingly, third-party beneficiaries may enforce certain of the owner’s rights as expressly set forth in the contract, yet not be subject to claims.

A simple example is a right of the owner to audit contractor’s records. If the owner has the right to audit the contractor’s records under a contract, then a third-party beneficiary also has such right and could arrange directly with the contractor to exam the contractor’s records without first seeking permission from the owner.

A more significant example is the right of the third-party beneficiary to a warranty by the contractor; the third-party beneficiary could enforce a warranty against the contractor, even though the third-party beneficiary did not enter into the contract with the contractor and has no privity.

A contract also may provide specific requirements with which the contractor must comply in order to afford protections to a purchaser, tenant, or lender. For example, the contractor may be required cooperate with a purchaser, not interfere with tenant’s business, cooperate with lender, enter into an escrow if requested by lender, obey the landlord’s rules and regulations, etc.