Third Party Rights

Question 1

What mechanisms are you aware of which can confer third party rights for construction contracts?

Answer 1

• Collateral warranties.
• The Contracts (Rights of Third Parties) Act 1999.

Question 2

Why are third party rights important in the construction industry?

Answer 2

• Third parties with an interest within a construction project (such as funders, future purchasers or future tenants) may suffer from defective design or workmanship from a contractor or consultant.
• Third parties do not have a contractual link to the contractor or consultant, and as such, are not able to enforce the conditions of a contract or sue the responsible party due the doctrine of privity of contract.
• Claims for tort of negligence for the cost or repairing / reinstating defective building works are likely to be unsuccessful as it is ‘pure economic loss’.
• Therefore, third party rights offer security to third parties that they can enforce the conditions of contract in relation to building works in which they have an interest.

Question 3

What is meant by privity of contract?

Answer 3

• The doctrine of privity of contract means a party can only enforce a contract if he is party to it meaning third parties cannot enforce the terms of a contract.

Only parties directly involved in a contract can enforce its terms or be held liable under it.

Question 4

What is a collateral warranty?

Answer 4

• A collateral warranty is a contract between a party employed under a principal contract called the warrantor (such as a contractor or a consultant) and a third party called the beneficiary (such as purchaser or tenant).
• The warrantor warrants to the beneficiary that it has fulfilled it’s professional obligations under the principal contract.

Question 5

Outline your understanding of the Contracts (Rights of Third Parties) Act 1999?

Answer 5

• The Contracts (Rights of Third Parties) Act 1999 allows third parties to enforce a specific term of the contract if:

o The contract expressly states that he may, or;
o The contract purports to confer a benefit on him.
o The third party is identified in the contract by name or as answering to a certain description (such as tenant or purchaser).

Internet:
The Contracts (Rights of Third Parties) Act 1999 modifies the common law rule of privity of contract, allowing third parties to enforce terms of a contract if they are expressly identified or if the contract “purports to confer a benefit” on them. This means that a third party can sue for breach of contract even if they weren’t a party to the original agreement, if the contract was made with the intention of benefiting them.

Question 6

6) What is the difference between collateral warranties and third party rights?

Answer 6

• Collateral warranties are a separate contract which is associated with a principal contract.
• In contrast, third party rights are recorded within the principal contract.