You Can Lead a Horse to Water

Collateral warranties continue to play a significant role in construction projects despite recent legislation which means that they are no longer essential. Will a change of position by the JCT finally herald the beginning of the end of the warranty, and a change in practice by the industry?

The JCT has recently announced its acceptance of the recommendations of its own working party on third party rights. The working party has recommended that the provisions of the Contracts (Rights of Third Parties) Act 1999 should be included in the JCT98, WCD98 and IFC98 forms of building contract, as well as associated sub-contracts as an optional provision. Until now, the Act has been expressly excluded.

The Act, which has applied to all contracts entered into since May 2000, provides an exception to the basic legal doctrine of privity of contract i.e. that a contract cannot confer rights or impose obligations arising under it on any person other than the original contracting parties.

Under the Act, third parties can be identified by name, or as a member of a particular class such as "tenants" or "purchasers", and given the power to enforce a contact term in their own right.

The third parties who are given rights may then enforce these rights by means of all the usual contract law remedies such as injunctions, specific performance and damages for breach, and the contracting parties are free to agree the extent to which rights are granted and the limitations that will apply.

Although this mechanism already applies in other countries including the US, Australia and most member states of the EU, the Act has not so far been generally accepted by the UK construction industry. Indeed, the JCT issued Amendment 2 in January 2000 which excluded the effect of the Act from its standard form contracts. Similarly, the model architect's appointment, SFA 99 and the ICE forms also exclude the provisions of the Act. Parties to a transaction have in almost all cases continued to negotiate collateral warranties as a means of providing third parties with rights in respect of construction projects. A number of factors have led to this approach:

Warranties are tried, tested and familiar and do not involve a learning curve. If the Act were to be generally adopted, then developers, contractors, consultants and their lawyers and insurers would need to change their approach. Initially this could have a time and cost consequence.

The beneficiary of a warranty has its own...