The Contracts (Rights of Third Parties) Act 1999 came into effect last year, but the property industry adheres to the old ways of dealing with third-party rights. Maria Harris argues that this should change
Despite the introduction of the Contracts (Rights of Third Parties) Act 1999 (the Act), the industry continues to grant third-party rights by way of collateral warranties or deeds of assignment. Why is this?
Implications and concerns
The Act enables someone who is not a party to a contract to enforce one of its terms if: it is expressly provided by the contract; or intended by the parties. The third party must be expressly identified, either by name, or, more generally, as a member of a specific class or as answering a particular description. It may be granted rights to all or part of the contract, but is subject to its limitations. The easiest way of dealing with third-party rights is by way of an additional clause.
For example, in a contract where the third-party rights replace collateral warranties, these rights could include: a duty of care; an obligation not to specify deleterious materials; an obligation to maintain professional indemnity insurance; and a right to use the copyright licence. In this situation, using the Act to impose third-party rights will spare the parties from producing and signing a myriad of separate collateral warranties.
Concerns are shared by industry professionals and third parties alike.
The following issues concern the former.
Obligations owed by a professional are sometimes more limited in warranties than under the appointment or building contract.
Limitations contained in a warranty can be brought into the main contract. The Act is flexible in allowing parties to determine the extent of third-party rights.
Rights can vary according to the beneficiary: eg a tenant warranty often limits recovery to the cost of repair of the building.
Send a copy contract to a third party with the rights of the other third parties blanked out, rather than produce separate documents for different beneficiaries.
How does the professional know to whom he is obligated?
Careful drafting will: identify which third parties have which rights; deal with assignments; include an obligation on the client to give notice whenever a third-party right crystallises; and will exclude all other third-party rights.
Of course, third parties also have their own concerns.
Third-party rights must be agreed at the start of the construction process.
This is true, but a warranty is usually agreed at the same time as the appointment.
The employer and the professional may alter terms without informing third parties.
The Act allows for this.The third-party clause should contain a condition whereby no party may alter the relevant parts of the contract without the third party’s consent. This would not affect changes concerning the day-to-day running of the contract, which the parties could vary autonomously.
What about step-in rights?
When a third party has a right to step into an appointment or building contract it almost always agrees to assume the payment obligation to the professional. This may require a short, separate deed.
Take the first step
The construction team at SJ Berwin is confident that this approach can work, but it will need to be accepted by the industry. We are keen to receive comments and invite debate on the matter. Is there anyone else out there who is prepared to take the first step with us?
