Synergy News & Blog: London Office

An Alternative to Collateral Warranties? – The Contracts (Rights of Third Parties) Act

On 2 February 2017 Michael Chilton from EMW Law LLP visited our Hemel Hempstead office and delivered an insightful talk on the Contracts (Rights of Third Parties) Act 1999 to our team. I am delighted to share with you a summary of this engaging and informative session on our blog.

“The Contracts (Rights of Third Parties) Act 1999 came into force in 2000. The Act enables a third party to a contract to enforce some of the terms (subject to certain rules) and provides an efficient alternative to collateral warranties or assignment.

For example, that could include a right for a vendor to enforce a term of:

  • A professional appointment entered into between the employer and its consultant i.e. architect, engineer, quantity surveyor
  • A building contract entered into between the employer and its contractor

What does the Act say?

Section 1 of the Act provides that a third party to the contract is able to enforce a term of the contract if:

  • The contract expressly provides that the third party has the right to do so
  • The term of the contract purports to confer a benefit on the third party unless, on a proper construction of the contract, it appears that the parties did not intend the contract to be enforceable by the third party
  • The third party is expressly identified in the contract by name, as a member of a class or as answering a particular description. It is worth noting that the specific name of the third party need not necessarily be in existence when a contract is entered into so a class is acceptable at this stage

How are the third party rights created?

The contract or appointment is drafted to include a number of key items. This includes a clause or clauses which confirms that a third party may enforce and either a standalone schedule of third party rights (which is similar to the requirements of a collateral warranty) or a schedule identifying the clauses in the underlying contract which the third party may enforce or standard provisions within the contract.

Items you will typically see within a schedule will include:

  • Assignment rights- Please note if a contract is silent on assignment it can be by default assigned as many times as required, it is therefore usual to specify a limit on this in the schedule
  • Compliance with the underlying contract
  • Duty of skill and care obligations
  • Limitations on liability
  • Deleterious materials
  • Copyright License
  • PI Insurance
  • Step in –Funders/ employers only

Whichever option is adopted the benefits should be consistent with the remainder of the contract i.e.  the schedule should mirror  the clauses that appear in the main contract.

Once finalised a notice is served to the contractor, consultant or sub-contractor confirming that the rights have been created and this form of notice is contained in the underlying contract.

What should I watch out for?

Things to watch when using the Third Party Act are that section 2 of the Act can prevent the parties to a contract from withdrawing or amending its terms once the third party rights are created i.e. nothing can be changed without the permission of the third party. However this obstacle can be easily overcome by adding an additional clause which allows the parties to rescind or vary the contract without the consent of the third party.

The other area which can cause problems is  step in rights.  Third Party Rights can only grant rights to a beneficiary but not create obligations. Most step in rights contain an obligation on the third party to pay any outstanding monies. This can be rectified  by the inclusion of a clause that states that the step in right is only enforceable subject to certain conditions i.e. a funder can only step in and take over a contract  once they have paid  the outstanding costs applicable at the time of the step in. Please note that this solution has not yet been tested in the courts.

So, what are the benefits?

Although Collateral Warranties are still preferred by funders and considered the safer option the use of the Contracts (Rights of Third Parties ) Act does offer some attractive benefits. The use of the act is cheaper than the alternative and expedites time as there is less paperwork. Once the notice has been served no further action is required. It is also equally effective provided the drafting is correct.”

Posted on 7/2/2017

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