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Prettys Solicitors Ipswich
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An introduction to collateral warranties and third party rights

Septembe 2017 - Issue 97

Collateral warranties and third party rights are key to construction and engineering projects since they allow third parties to enforce the benefit of a contract to which they are not a party themselves.  The law of privity of contract means that without being expressly agreed, third parties cannot enforce a term of a contract they are involved in. Therefore it is commonplace in the construction and development industry for third parties such as funders, purchasers and tenants to require collateral warranties or expressly agreed third party rights to ensure they can enforce terms in an underlying contract entered into by others.

What is the difference between collateral warranties and third party rights?

In practice both collateral warranties and third party rights aim to do the same thing, to give third party beneficiaries “construction security” in contracts in which they have an interest. However, collateral warranties are favoured more in practice due to them being more familiar in the industry. Third party rights are getting more common but nervousness over the effectiveness of ‘step-in’ rights under third party rights renders them a harder sell than the tried and tested (albeit administratively demanding) option of collateral warranties. Like any other contract, detailed review is paramount.

Why are collateral warranties and third party rights required?

Collateral warranties and third party rights are a necessity for construction contracts as unless you are a party to a contract or the Third Party Rights Act applies, you are unable to enforce a term of a contract. However, the Third Party Rights Act is only applicable if the contract expressly says that a third party has these specific rights (and they are usually excluded). Furthermore, a claim in tort is not usually successful in these type of cases as tort law does not generally allow for a claim for pure economic loss. Therefore, you need a contractual route of redress and this is what collateral warranties and third party rights achieve.

Want to find out more?

Our Rebecca Palmer will be delivering a training session to members of the RICS in Chelmsford on 5th October as part of the RICS CPD Foundation. Visit www.rics.org to find out more.

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