Utah law requires that owners’ claims against general contractors and design professionals with whom the owner has direct contracts (collectively referred to hereafter as “generals”) and their respective subcontractors and subconsultants (collectively referred to hereafter as “subs”) for construction and design defects be based upon contract rather than tort. This does not present a problem when owners bring claims against generals with whom they are in privity, but does present problems when owners want to sue subs directly, a situation that often arises particularly in design-related cases. Thus, owners must be vigilant when contracting with their generals to ensure that generals include language in their subcontracts and consulting agreements (collectively referred to hereafter as “subcontracts”) that provide owners with third-party beneficiary rights to pursue claims against the subs. This has become even more necessary in today’s construction industry when even venerable and trusted generals are struggling to survive.
Utah courts long ago concluded that when dealing with construction claims, Utah courts would not accept negligence and negligent misrepresentation claims that many other jurisdictions embrace.[1] This was a conscious decision. The Utah courts’ reasoning was based on the economic loss rule and the “importance of the parties' right to negotiate the terms of a contract, limited only by statutory prohibitions or public policy.”[2] The Utah legislature subsequently codified the economic loss rule and required plaintiffs in a construction or construction design defect case to be “in privity of contract with the original contractor, architect, engineer, or the real estate developer.”[3]
To overcome this rule in Utah, an owner is best served by ensuring that the subcontracts identify the owner as a third-party beneficiary. “Third-party beneficiaries are persons who are recognized as having enforceable rights created in them by a contract to which they are not parties and for which they give no consideration.”[4] To be a third-party beneficiary under Utah law, a plaintiff must show that the contract was “undertaken for the plaintiff's direct benefit and the contract itself must affirmatively make this intention clear.”[5] To determine this intent, the court must “look to the language of the contract to determine its meaning and the intent of the contracting parties [and] consider each contract provision . . . in relation to all of the others, with a view toward giving effect to all and ignoring none."[6] Thus, to preserve rights against subs, an owner is best served making sure that the direct benefits intended for the owner are reflected in the subcontracts. In addition to language in a subcontract that specifically states that the subcontract is intended to provide a direct benefit to the owner, two other potential options may exist for establishing a third-party beneficiary claim under Utah law: 1) incorporation of the prime contract into the applicable subcontract; and 2) a flow down provision in the subcontract.
The owner may require his generals to include language in the various subcontracts that incorporates some or all of the terms of the prime contract into the subcontracts.[7] By incorporating the terms of the prime contract into the subcontract...
