## Facts

- Northland Mortgage Company owned private development properties in Maple Grove and Plymouth, Minnesota.
- Northland hired Construction Leaders, Inc. as general contractor to perform utilities construction on the two projects.
- Travelers Indemnity Company issued performance bonds for the work (two construction contracts; five phases; five bonds).
- Each bond named Construction Leaders as principal, Travelers as surety, and Northland as obligee.
- Construction Leaders defaulted during performance and became apparently insolvent.
- Travelers arranged for completion of the bonded work by hiring another contractor.
- Some suppliers and subcontractors remained unpaid, including Cretex Companies, Inc. and Ess Brothers & Sons, Inc.
- Cretex and Ess Brothers could have filed mechanic’s liens on Northland’s private property but did not; they believed their materials were going to public projects and learned otherwise too late to preserve lien rights.
- After losing lien rights, Cretex and Ess Brothers sued Travelers to recover on the performance bonds, alleging they were third-party beneficiaries; they also sued Construction Leaders for breach of their subcontracts.
- On cross-motions for summary judgment, the trial court ruled the suppliers could recover against Travelers on the bonds and also found Construction Leaders liable; the parties later stipulated to damages.
- Travelers appealed the judgment against it on the performance bonds.

## Issues

1. Under Minnesota third-party beneficiary law, when may a nonparty enforce a contract, and should Minnesota follow Restatement (Second) of Contracts § 302’s “intended beneficiary” approach?
2. Are unpaid subcontractors and material suppliers on a private construction project intended third-party beneficiaries who may sue the surety on the general contractor’s performance bond issued to the owner?

## Decision

- The Minnesota Supreme Court reversed the trial court’s judgment against Travelers.
- The court adopted the Restatement (Second) of Contracts § 302 intended-beneficiary approach, recognizing intended beneficiaries under either an “intent to benefit” or “duty owed” test.
- Applying that approach, the court held Cretex and Ess Brothers were not intended beneficiaries of the performance bonds and therefore could not recover from Travelers.
- The court ruled that any benefit to suppliers from completion of the work (and from the bond’s lien-related protections for the owner) was incidental to the bond’s purpose of protecting the owner/obligee.

## Legal Principles

- Minnesota follows Restatement (Second) of Contracts § 302: a third party may enforce a contract only if the third party is an intended beneficiary; incidental beneficiaries have no right of action.
- Intended beneficiary status may be shown under:
  - the “intent to benefit” test (the contract manifests an intent to give the third party an enforceable right), or
  - the “duty owed” test (the promisee’s purpose is to satisfy a duty it owes to the third party).
- A performance bond given by a contractor to an owner generally secures the contractor’s performance for the owner’s benefit; it is not, without clear terms, a payment guarantee for subcontractors or suppliers.
- Bond language that protects the owner against losses related to mechanic’s liens indicates an intent to benefit the owner by shielding the property, not an intent to give unpaid suppliers a direct right to payment from the surety.
- In private construction, subcontractors and suppliers ordinarily have mechanic’s lien remedies; the availability (and loss) of those remedies does not expand a performance bond into a substitute payment bond.
- Courts will not convert a performance bond into a combined performance-and-payment obligation without express contractual direction.

## Conclusion

Cretex and Ess Brothers, unpaid suppliers on a private development, could not enforce the contractor’s performance bonds issued to Northland because the bonds were intended to protect the owner’s completion and lien-risk interests, not to grant suppliers a direct right to payment; adopting Restatement (Second) § 302, the Minnesota Supreme Court held the suppliers were at most incidental beneficiaries and reversed the judgment against the surety.


Cretex Cos., Inc. v. Constr. Leaders, Inc., 342 N.W.2d 135 (Minn. 1984)