Be wary of assignments and third-party beneficiaries

HandshakeYou sign a contract after you’ve negotiated an agreement that determines the rights and obligations of both parties. You think you know your client. But are you and your client the only two who can determine how that relationship is going to work? In recent years, there has been an increase in “other parties” having an impact on the professional relationship. Firms have to be prepared to respond when the client wants to include others in the contract for professional services.

It used to be that only the two parties to a contract (in legal terms, those “in privity”) could enforce the terms and obtain the benefits of the agreement. But there are two ways through which a party not in privity can have a direct impact on your contract, your relationship with your client, and the likelihood of project success. Those ways are the assignment of the contract—or of any claims resulting from a contractual relationship—and the establishment of a third-party beneficiary status.

Standard professional services agreements contain provisions prohibiting assignment unless it is mutually agreed to by the parties. The design firm does not have to consent to an assignment, to provide a certification as part of the consent to assignment, or to furnish future services to an assignee. Although the standard agreements limit the abilities of the parties to a contract to assign the rights and obligations established during contract negotiations, design professionals are increasingly facing demands to consent to contingent assignments to lenders.

If problems occur on a project, there might be an assignment of claims. Depending on state law, the standard contracts may be interpreted to allow the client to assign any rights to bring a claim against the design professional. Thus, the design firm may find that a client has assigned a professional liability or contractual claim to a third party such as a lender or contractor. In some states, a contractor who might be precluded by the economic loss doctrine from bringing a claim against a design professional may be assigned the right to demand compensation.

Standard contracts also clearly disclaim any implication that the contract provisions are for the benefit of tenants, lenders, contractors, or even the independent consultants of the prime professional. Under the rule of privity, only the other party to the contract can sue for breach; third parties cannot maintain such an action. The law recognizes that the parties to the contract may owe a duty to another entity, but only if the contract is intended to benefit such a third party. The contract must be undertaken for the third party’s direct benefit and the contract must contain language which affirmatively makes that intention clear. Thus, in contract negotiations a design professional may extend the right to enforce the contract to a party not involved in the negotiations.

For protection of the design firm, the agreement should preclude all assignments without the firm’s assent. To the fullest extent of the law, no assignment or transfer of rights or interests should be permitted without written agreement and any assignment should preserve the design firm’s rights against the client. To prevent the interference in the contract by a third party, the duties and responsibilities should be stated for the sole and exclusive benefit of the client and the design firm. Affirmatively stating that no third-party beneficiary relationship is intended can keep the project relationship on track.

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