Contractors and design professionals often rely on “no third-party beneficiary” provisions to limit contractual liability to the parties that actually signed the agreement. A recent Louisiana appellate court decision serves as a reminder that courts may look beyond boilerplate language and examine the substance of the relationship and the purpose of the contract itself.
In City of Shreveport v. CDM Smith Inc., the Court of Appeal of Louisiana, Second Circuit, held that a city could pursue a breach of contract claim against an engineering subcontractor despite an express provision in the subcontract stating that no third-party beneficiaries existed.
The Dispute
The City of Shreveport filed suit against the prime design firm, BKI, which had been retained to create a hydraulic model for the city’s sewer system. The City alleged that the hydraulic model was defective and asserted claims for breach of contract and gross negligence.
The City also sued BKI’s engineering subcontractor, Black & Veatch (“B&V”), which had performed a portion of the work under a subcontract with BKI.
B&V moved to dismiss the City’s breach of contract claim, arguing that it had no contractual relationship with the City. Because B&V’s contract was with BKI—not the City—it contended that the City lacked any right to sue it for breach of contract.
The trial court agreed and dismissed the claim. However, the Louisiana Second Circuit reversed that decision.
The Contract Language
At the center of the dispute was Section 6.7.3 of the subcontract between BKI and B&V, which provided:
“Nothing under this Agreement shall be construed to give any rights or benefits in this Agreement to anyone other than ENGINEER and CONSULTANT and all duties and responsibilities undertaken pursuant to this Agreement will be for the sole benefit of ENGINEER and CONSULTANT and not for the benefit of any other party.”
The provision was plainly intended to disclaim any third-party beneficiary rights.
Ordinarily, such language would appear to foreclose claims by parties who did not sign the subcontract. Yet the court found that the inquiry did not end there.
The City’s Theory: A Stipulation Pour Autrui
Louisiana law recognizes the concept of a stipulation pour autrui—a contractual provision that creates a benefit for a third party. When such a provision exists, the third-party beneficiary may acquire rights under the contract even though it is not a signatory.
The City argued that the subcontract between BKI and B&V effectively constituted a stipulation pour autrui because it was specifically designed to perform a portion of the City’s sewer project and was intended to benefit the City.
B&V countered that a stipulation pour autrui must be manifestly clear and that the subcontract expressly stated that no benefits were intended for any party other than BKI and B&V.
The Court’s Analysis
In evaluating whether a stipulation pour autrui existed, the court applied Louisiana’s established three-part test:
- The stipulation for the third party must be manifestly clear.
- There must be certainty as to the benefit provided to the third party.
- The benefit must not be merely incidental to the contract.
The court focused heavily on the overall structure and purpose of the subcontract.
According to the court, the subcontract repeatedly referenced the prime agreement between the City and BKI and was expressly tied to the City’s sewer project. The subcontract acknowledged that:
- B&V had received the City’s project plans.
- B&V would receive project drawings, specifications, schedules, and related materials necessary to perform its work.
- BKI’s ability to fulfill its obligations to the City depended on B&V’s timely performance.
- Payment to B&V was conditioned upon payment by the City to BKI.
- The subcontract would automatically terminate if the prime agreement was terminated.
Taken together, these provisions demonstrated that the subcontract existed solely to facilitate performance of the City’s project.
The appellate court concluded that the subcontract “was clearly intended to benefit the owner of the project, the City,” and that the City was therefore a third-party beneficiary.
Why the Court Rejected the Disclaimer
Perhaps the most significant aspect of the decision is that the court looked beyond the subcontract’s express disclaimer of third-party beneficiary rights.
Although Section 6.7.3 stated that the agreement was not intended to benefit any other party, the court found that the substance of the subcontract told a different story. The extensive references to the prime agreement, the project’s purpose, the City’s role in payment, and the dependency of performance obligations all pointed toward an intent to benefit the City directly.
The court ultimately held that:
- The subcontract clearly manifested an intent to benefit the City.
- The benefit was specific and identifiable—the creation of the hydraulic model for the City’s sewer system.
- The benefit was not merely incidental because B&V’s work was performed directly in furtherance of the City’s project.
Accordingly, the City qualified as a third-party beneficiary and could pursue its contract-based claims against the subcontractor.
Key Takeaways for Contractors and Design Professionals
This decision provides several important lessons for parties involved in public and private construction projects.
Boilerplate May Not Be Enough
A standard “no third-party beneficiaries” clause does not necessarily guarantee protection if the remainder of the agreement demonstrates a clear intent to benefit a project owner.
Courts Examine the Entire Contract
Courts may look beyond isolated provisions and evaluate the contract as a whole. References to the prime contract, project-specific obligations, payment mechanisms, and performance dependencies can all influence whether a third-party beneficiary relationship exists.
Project Owners May Have Broader Rights Than Expected
Owners may be able to pursue subcontractors directly when the subcontract is closely intertwined with the prime contract and clearly designed to advance the owner’s interests.
Careful Drafting Matters
Prime contractors and subcontractors should carefully review subcontract language and ensure that the overall agreement aligns with their intended allocation of risk. A disclaimer of third-party beneficiary rights may be undermined if other provisions suggest the opposite intent.
Conclusion
The Louisiana Second Circuit’s decision in City of Shreveport v. CDM Smith Inc. highlights an important reality of contract interpretation: courts often focus on substance over form. Even where a subcontract expressly disclaims third-party beneficiary rights, a project owner may still be deemed a beneficiary if the contract’s structure and purpose demonstrate a clear intent to confer a direct benefit.
For contractors, engineers, and design professionals, the case serves as a cautionary reminder that contractual disclaimers should be consistent with the rest of the agreement—and that courts may not allow a single clause to override the practical realities of a project’s contractual framework.
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