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Using third party rights

28 February 2008

The construction industry has long used collateral warranties to give contractual rights to third parties who have an interest in the development. The Contracts (Rights of Third Parties) Act 1999 offers an alternative means of providing those rights.

The construction industry has long used collateral warranties to give contractual rights to third parties who have an interest in the development. The Contracts (Rights of Third Parties) Act 1999 offers an alternative means of providing those rights.

The industry maintained at the time that they had got round the issue of third party enforceability of contracts by using collateral warranties and as a result did not need the legislation.

The industry approach

Despite the Act coming into force in 2000, the industry approach has only recently changed and the new forms of JCT contracts (2005) and newly drafted British Property Federation and Construction Industry Council consultancy agreements now provide for third party rights to take precedence over warranties.

The benefits of third party rights

The Act was intended to apply to avoid the need for drafting separate documents to enforce contractual terms to which you were not a party. However, the construction industry has chosen not to follow the blanket approach of allowing the entirety of a contract to apply to a third party but has instead chosen to have specific rights that are to apply to third parties by way of a third party rights schedule.

This is akin to the rights provided under collateral warranties and therefore there is the same negotiation required as there is with warranties; the terms of the third party right Schedule will essentially mirror those of a collateral warranty and may therefore include limitations on liability such as an exclusion of consequential losses, a net contribution clause or a cap on liability.

This approach has meant that few parties have been willing to change their standard documentation to use third party rights.

There is however a key benefit, being the actual implementation and procurement of the rights. A warranty document (often up to 10 pages in length) requires execution by the parties and is often difficult to procure once the development is complete and the warrantors have been paid, and even harder if there is a dispute with that warrantor. In contrast, with third party rights, all that is needed to activate third party rights contained in the Schedule is that a notice is sent to the “warrantor” stating the nature of the third party interest (e.g. tenant/funder/purchaser) and their identity.

This notice does not need to be acknowledged by the “warrantor” and therefore increases the certainty for the developer that it is able to obtain the rights and the timeframe within which it can do so.

Are there any downsides

Admittedly, nothing is ever perfect. Given the speed (or rather lack of it) with which the construction industry has adopted the use of third party rights, it is not surprising to note that it is still not common for sub-contractors to be faced with giving third party rights as opposed to warranties, particularly when the requirement to give third party rights by sub-contractors is not yet contained within the JCT standard forms of contract nor in sub-contracts generally. However, once the reasoning behind the use of third party rights has been explained to sub-contractors it is usually accepted.

There can also be reluctance from some funders to accept third party rights in place of collateral warranties, but again this stance is slowly changing and now even the toughest of lenders will generally accept this approach.

Shoosmiths’ approach

Our experience shows that in a multi-let development, a great deal of time, money and hassle can be saved by the developer by using third party rights. All of Shoosmiths standard documentation now contains third party rights options. If you would like to know more on how this could be of benefit, please do not hesitate to contact a member of our construction team.

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Charissa Shears

Associate
T: 08700 86 6742
I: +44 (0)1489 61 6742
E: charissa.shears@shoosmiths.co.uk