Construction Lender Found Liable for Payments to General Contractor Despite Lack of Contractual Relationship

Saul Ewing Arnstein & Lehr LLP
Contact

Saul Ewing Arnstein & Lehr LLP

A Delaware trial court, applying New Jersey and Delaware law, recently ruled that a general contractor, despite not being a party to either a loan agreement or loan commitment, could successfully recover damages from a construction lender. See BCD Assocs., LLC v. Crown Bank, No. CV N15C-11-062 EMD, 2022 WL 1316234, at *1 (Del. Super. Ct. May 2, 2022). The court explained that even though the loan agreement expressly provided that there were no third-party beneficiaries to the contract, “contractually, factually, and practically,” the general contractor was in fact an intended third-party beneficiary under the circumstances, and ruled that the general contract could recover under unjust enrichment and promissory estoppel claims.

The case involved a construction loan agreement between Crown Bank (“Lender”) and MRPC Christiana, LLC (“Owner”) for the renovation of a hotel. The Owner entered into a construction agreement with BCD Associates (“Contractor”). Once construction began, the Contractor would submit invoices for the work it completed, and the Lender would review and approve the invoices for payment. The Lender would pay the Contractor 90 percent of the approved invoices and retain 10 percent (“Retainage”). The Retainage was to be paid upon completion of the hotel renovations. Under this arrangement, the Lender “cut out the middle man” and paid the Contractor directly rather than the Lender paying the Owner and the Owner paying the Contractor.

The dispute arose when the Lender failed to pay the Contractor the Retainage of $1,083,677.91 once the project was completed. The Lender argued that because no contract existed between the Contractor and the Lender, the Contractor could not pursue contract claims or “quasi-contractual” claims. The court nevertheless found that the Lender had contractual obligations to the Contractor. The court explained that, under New Jersey law, a third-party beneficiary is a person or entity that “the contracting parties intended…should receive a benefit which might be enforced in the courts.” (Of note, the loan agreement was governed by New Jersey law.) The Lender, by paying the Contractor directly, made the Contractor an intended beneficiary to both the loan agreement and the loan commitment. Both the Lender and the Owner benefitted from the work done by the Contractor, and the court required the Lender to compensate the Contractor the agreed upon Retainage. Ultimately, the court awarded damages in the amount of the full Retainage withheld, $1,083,677.91, under a third-party beneficiary contract claim (New Jersey law) and under unjust enrichment and promissory estoppel claims (Delaware law).

This case sets precedent that where a lender pays a contractor directly, it can create a legally binding relationship subject to the terms of the lender’s agreements with the owner. In other words, a general contractor may have grounds to sue a construction lender for contract claims regardless of whether the contractor is a party to or mentioned in the contract, or even if the contract specifies that there are no third-party beneficiaries.

With contributions by Ellen Mannion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing Arnstein & Lehr LLP | Attorney Advertising

Written by:

Saul Ewing Arnstein & Lehr LLP
Contact
more
less

Saul Ewing Arnstein & Lehr LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.