Design-builder’s right to sue the owner’s consulting engineer for deficiencies in the bridging documents that engineer prepared, on a third-party beneficiary basis. Arco Ingenieros v. CDM International, Inc. United States District Court for the District of Massachusetts (2019), by Hugh Anderson

Summary: In 2009 Tropical Storm Ida struck El Salvador, causing widespread damage. Two years later the United States Agency for International Development (USAID) embarked on a program to build several schools and a health clinic in El Salvador, to replace facilities that had been destroyed or damaged by the storm. USAID had a master contract with a U.S. A/E firm, CDM International, for design services around the world. USAID issued a Task Order to CDM International to assess the proposed sites in El Salvador and develop preliminary designs. The preliminary designs (bridging documents) would then be used by design-build contractors selected to complete the designs and construct the facilities.

The USAID-CDM task order agreement required CDM to prepare design documents that were at least 30% final. The RFP seeking design-build contractors informed the proposers that the selected contractor would be contractually required to base the final design on the CDM preliminary (30%) design.

USAID selected Arco, a Salvadoran design/construction company, and entered into design-build contracts for the facilities. After the projects were underway, Arco contended that it had found numerous design defects in the preliminary designs that CDM had prepared, and that the designs fell short of the standard for 30% completion. These problems led to various delays and costs: according to Arco these included redrawing the designs, obtaining new permits, conducting additional excavation and geotechnical studies, and demolishing additional existing buildings. USAID withheld payments from Arco, deepening the impact of the problems. According to Arco, its damages were nearly $9 million.

The published decision does not address the status of change orders or claims by Arco against USAID. Presumably the result of any such attempts at obtaining additional compensation from USAID were not fully satisfactory to Arco—perhaps not even partially satisfactory—because Arco sought an alternate remedy, by filing a lawsuit against CDM seeking recovery of Arco’s damages.

The lawsuit was filed in federal district court in Massachusetts, where CDM has a principal office. One of the seven claims in the lawsuit was that Arco was a third-party beneficiary of the USAID-CDM agreement, thus allowing Arco to pursue a breach of contract claim against CDM. CDM filed a motion to dismiss the third-party beneficiary—breach of contract claim.

Decision: The federal court granted CDM’s motion to dismiss, holding that Arco was not a third-party beneficiary of the USAID-CDM task order agreement. As a starting point, not all third parties who benefit from a contract can sue to enforce the contract. Massachusetts distinguishes between intended beneficiaries, who have contract rights, and incidental beneficiaries, who do not. A third party earns “intended” status only if the contents of the contract or the circumstances surrounding the contract show a clear and definite intent to benefit the third party. However, to be classified as an intended beneficiary it is not necessary that the third party be named or identified in the contract.

In its analysis of the USAID-CDM task order agreement, the district court first noted that the document does not indicate that it is intended to benefit the design-builder. Instead, the court concluded, the various tasks in CDM’s scope of services were all intended to benefit USAID and its projects. The benefit to the design-builder was incidental only.

The court noted that in addition to its preliminary design duties, CDM also was required to oversee the design-build contractor’s performance of its duties. From this, the court concluded that there was no intent to benefit the design-builder; rather, the design-builder was being burdened by the imposition of oversight.

The court also cautioned against drawing conclusions from the potential for the impact of one contract on another. In construction, the court explained, there are typically several intertwined contracts. “Inevitable consequences” may flow from a breach of one contract to a second contract, but unless there is a manifest intent to the contrary, a contract does not create enforcement rights in a third party that enters into a separate contract with the project owner.

Comment: It would certainly be possible for another court to look at the same set of facts and conclude that the design-builder was an intended beneficiary of the preliminary design effort, especially given that design-builder was required to use the preliminary designs as the basis for its design services.

When EJCDC prepared the 2016 EJCDC Design-Build documents, the committee decided that the new edition would require that the design-builder take full responsibility for the contents of any preliminary design (bridging) documents furnished to the design-builder. This position was taken partly for clarity’s sake, but more fundamentally was driven by the need to promote quality in the design. Ambiguity as to responsibility, casual acceptance of the work of another designer, and subsequent finger-pointing and evasion of responsibility were all identified as concerns if the design-builder was allowed to rely on the preliminary design.

Owners can maximize the benefits of the design-build delivery method by turning over the design to the design-builder as early in the process as possible. This involves reliance on project objectives, design criteria, and conceptual designs, rather than on mandated bridging documents that are too far developed to allow for creative solutions to design and construction challenges