REUTERS | Mike Blake

Third party rights – ten years on and the initial nervousness is thawing!

The Contracts (Rights of Third Parties) Act 1999 (the Act) has applied (unless specifically excluded) to contracts entered into since 11 May 2000. Ten years on, it seemed timely for us to take stock of receptiveness to third party rights among the industry’s key players. The outcome was encouraging.

Industry views

Over the last few years we have seen a clear increase in acceptance of third party rights (in preference to collateral warranties). Our experience shows that advocates of third party rights are no longer restricted to a handful of forward-thinking developers who endorsed them from the beginning. Rather, our work on major recent developments in the City and Canary Wharf demonstrates the acceptability of third party rights to many leading developers, institutional investors, funders, tenants and public sector organisations. Third party rights are not yet universally accepted – with some third parties still insisting on collateral warranties – but the trend is definitely in the right direction, and a definitive movement away from the initial nervousness with which the Act was greeted.

What’s happening in the standard form contracts?

Our policy at BLP has always been to encourage the use of third party rights and we are certainly not alone in this. The JCT Major Projects Form and some other standard forms (such as the CIC Consultants’ Contract) unequivocally favour third party rights, as does the City of London Law Society’s Construction Law Practice Committee. Slightly unhelpfully, third party rights are included in the JCT’s 2005 suite, but only as an optional alternative to collateral warranties (although the use of bespoke drafting in place of the JCT’s continues to be the norm in our experience). Given the trends that we have seen, perhaps more standard forms will follow suit. Let’s hope so.

No more collateral warranties?

Such progress can only be a good thing. Aside from the inevitable and significant reduction in time and paper expended on the treadmill of collateral warranty production, the necessary third party rights schedules require minimal additional drafting since they are so similar in content and format to the forms of collateral warranty we all used previously. Similarly, the care with which third parties (in favour of whom rights are to be granted under the Act) need to be identified is no greater than that which has always been necessary when defining the categories of beneficiary of collateral warranties.

Drafting tips

In the meantime, for those of you who are getting to grips with drafting third party rights provisions, hopefully the following key points will serve as useful tips:

  • Any generic class of third party beneficiary needs to be worded widely enough, in the same way as when using collateral warranties.
  • Include in the contract an express right for the parties to amend the contract’s terms and settle claims without the consent of any third party (otherwise the Act restricts the right of the parties to do so).
  • In the case of a third party who was part of a generic group when the contract was entered into, invoke the third party rights in their favour at a later date (once their identity is known) by issuing a notice to the warrantor in which the third party’s identity is stipulated, together with any other variables (for example, whether any optional parts of the schedule of third party rights apply to that particular third party).
  • Make sure that, where a beneficiary is to have a right to step in to a contract (typically funders and purchasers of uncompleted buildings), the contract includes an enforceable undertaking (as a condition to such step-in) for the third party to pay the warrantor.

Hopefully, ten years from now collateral warranties will be a thing of the past…?

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