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Prettys Solicitors Ipswich
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Third party rights

January 2017 - Issue 89

Although collateral warranties have been used in the construction industry for a long time, there have always been a number of issues, particularly that for a collateral warranty to be of use to a beneficiary, it must be a separate contract and executed. Although this is usually not a problem for small projects when there are large projects with a number of beneficiaries it may be hard to keep track of the collateral warranties that are in place and ensure all are finalised, signed and completed in the required forms.

A simpler and cheaper option is to rely on the Contracts (Rights of Third Parties) Act 1999 (“the Act”). However, it is currently not widely relied on in the construction industry; however, this is not through want of trying. For a number of years the industry standard form contracts have included third party right provisions yet parties choose to amend this and in their place require collateral warranties.

There are a number of reasons for parties opting for collateral warranties over relying on the Act:

1 - Right to adjudicate

Previous case law such as Hurley Palmer Flatt Limited v Barclays Bank Plc, where a third party notice of adjudication and referral notice were held to be ineffective and thus they were left unable to commence adjudication proceedings, have left third parties concerned when it comes to not having a collateral warranty to rely on.

However, this can be easily rectified. In the above case, the clauses within the agreement were not drafted as to allow third parties to rely on the procedural rights contained in it. A simple solution is to ensure that any contract is drafted to expressly permit those with third party rights to adjudicate to enforce their rights.

2 - The third party right to prevent a contract from being varied or rescinded

The Act includes a provision that prevents the parties to the contract varying or rescinding the contract where it would affect the third parties’ rights unless their consent is obtained. Although this may not be acceptable to some parties, a further provision in the Act allows parties to expressly state in the contract that it can be varied or rescinded without the third party consent. 

3 - Difficulty with step-in rights

It is normal for collateral warranties in favour of funders to include step in rights with an obligation upon the funder to pay any sums due to the contractor if a step-in occurs. The Act does not have the same obligation and this is likely to be unacceptable to a contractor who is granting step-in rights.

This can also be resolved through drafting, so that the step-in rights are enforceable only upon sums due reflecting the effect of the collateral warranty.

4 - Limited amount of case-law

It is believed that one of the main reasons parties are not opting to rely on the Act is the unknown. Limited amounts of parties have relied on the Act in the somewhat short period it has been around, meaning there is not much case law to refer to, which whilst this fear of the unknown exists is unlikely to change, causing a viscous circle to break.

Arguably, the above demonstrates, parties are sticking with what they know, even though there are cases where collateral warranties bring parties difficulties and irrespective of there being no evidence that the Act provides less effective rights. Careful drafting of a contract can ensure that third party rights are given without, not least, the administrative burden that coincides with use of collateral warranties.

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