Collateral Warranties ' Why?

• Published date: 20 July 2023
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning
• Law Firm: Blaser Mills
• Author: Lewis Cohen

When it comes to construction contracts, there are often multiple parties involved, each with their own interests and concerns. An important aspect of these contracts is third party rights, which allow individuals or organisations who are not directly involved in the agreement to enforce certain terms or protections.

In this article we look into third party rights in construction contracts, examining the legislation that governs them, the benefits they offer, and the importance of collateral warranties in ensuring their effectiveness.

Whether you are a contractor, subcontractor, or other party involved in the construction process, understanding third party rights is essential for protecting your interests and ensuring a successful project outcome.

What are third party rights?

Third party rights exist to enable a third party who is not a party to a contract to enforce the terms of the contract.

In construction documents, third party rights are often a set of rights expressly enforceable by a third party and set out in a schedule to a professional appointment or building contract.

Third parties who often acquire third party rights are as follows:

• Funders;
• Purchasers; and
• Tenants who occupy the premises after completion.

Which piece of legislation regulates third party rights?

The Contracts (Rights of Third Parties) Act 1999 ("the Act") regulates third party rights in a construction context.

The introductory text to the Act confirms that this is an act to make provision for the enforcement of contractual terms by third parties.

Section 1(1) of the Act allows the parties to a contract to grant a third party the right to enforce a term of that contract. Section 1(1) states as follows:

Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if-

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

However, it should be highlighted that in accordance with subsection (2):

Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

Prior to the introduction of the Act, parties relied on collateral warranties to protect third party rights, and indeed, this practice continues.

Whilst third parties can rely on the Act, it is restrictive. The Act does not allow a third party to be put under...