The primary question in a third-party beneficiary case is whether the contract manifests an intent to benefit a third party. However, this intent need not be to benefit a third party directly.
Apellant was hired by a bank to monitor the progress of new home construction for appellees, who had obtained a construction loan from the bank. The contractor defaulted after all of the original construction loan proceeds and a portion of a second mortgage loan had been paid out by the bank. Appellees recovered judgment against appellant on a third-party beneficiary theory based on appellant's alleged failure to properly monitor the progress of construction, which allowed funds to be improperly released to the defaulting contractor. The court of appeals reversed the judgment because erroneous progress reports were not the cause of any loss to appellees. The court vacated the decision of the court of appeals and affirmed the judgment of the district court.
Were plaintiffs third-party beneficiaries of the contract between the defendant and contractor?
Appellees qualified as third-party beneficiaries of the agreement between the bank and appellant. The court found that although the initial construction loan might have been disbursed prior to the faulty completion estimate, the erroneous reporting of the project's completion caused the bank to disburse other funds of appellees that would have been retained had the report been accurate.