Mark Vyvyan | Fredrikson
Most people building a home enter into an agreement with a general contractor. In turn, that general contractor enters into agreements with subcontractors to actually build the home. At first glance, it may seem that those subcontracts are intended to benefit the homeowner, as the work under the subcontract will result in the construction of their home. However, in a recent decision, the Wisconsin Court of Appeals found that a homeowner was not a third-party beneficiary to a subcontract.
In Brekken v. Hegland Custom Construction, Inc., No. 2023AP675, 2024 WL 4041355 (Wis. Ct. App. September 4, 2024), a homeowner, Brekken, contracted with Gordon Larson Construction. In turn, Larson entered into a subcontract with Hegland Custom Construction for framing and carpentry work on the home being built for Brekken. During the course of the project, Brekken made payments directly to Hegland. Ultimately, Brekken disputed some change orders on the project and refused to make any further payment to Hegland. Thereafter, Hegland stopped work on Brekken’s home. Ultimately Brekken hired another company to complete the remaining work.
Brekken later commenced suit against Hegland alleging that it had not completed the work under the subcontract and had been overpaid for previous work. In bringing these claims, Brekken alleged he was a third-party beneficiary of the subcontract between Larson and Hegland. Brekken’s primary argument was not surprising; namely, that the context of the contract made it obvious that Hegland’s work was to be performed for his benefit because it would result in the construction of his home.
Under Wisconsin law, someone wishing to enforce a contract must either be a party to that contract or a third-party beneficiary of the contract. While Brekken did not sign the subcontract and was therefore not a party to it, he claimed the subcontract was entered into directly and primarily for his benefit. The Brekken Court rejected that argument. In so doing, the Brekken Court focused on the lack of any specific indication in the subcontract that Brekken was a beneficiary.
The decision in Brekken provides guidance to both homeowners and subcontractors. Homeowners who wish to pursue claims directly against their subcontractors should make sure that any subcontract includes explicit language making clear that the homeowner is intended to be a beneficiary. In contrast, subcontractors wishing to avoid direct claims from disgruntled homeowners should include language to the contrary (or at minimum have the subcontract remain silent on third-party beneficiaries).
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