In any construction project, it is important that interested parties, such as funders, tenants and purchasers, understand how they can acquire enforceable rights against parties who have carried out works or services, such as contractors and professional consultants. Two widely used options to ensure such rights are acquired are the granting of collateral warranties and third party rights. These both operate to provide a contractual link between construction parties and those third parties with an interest in the works or services, however, the instruments work quite differently.
Why are these important?
Defective design or workmanship by a contractor or a professional consultant can potentially result in serious financial consequences, not just for the employer/developer but for other third parties with an interest in the development, such as funders, tenants and purchasers. Possible impacts for a funder or purchaser may be a reduction in investment value, while a tenant under a full repairing and insuring lease may face increased maintenance and repair costs as a result. In the absence of a direct contractual link to the construction party responsible for the defects, these third parties often have little or no means of legal recourse and are left out of pocket. A collateral warranty or the granting of third party rights “bridges the gap” and provides a direct contractual route of recourse for such parties.
Collateral warranties
Collateral Warranties are standalone agreements that establish a direct contractual relationship between a third party and a construction party. Typically forms of Collateral Warranty are appended to Build Contracts and Appointments, and the terms largely mirror the key terms of the underlying Build Contract or Appointment.
Third party rights
The Contract (Third Party Rights) (Scotland) Act 2017 and the Contracts (Rights of Third Parties) Act 1999 both allow third parties to enforce the terms of a contract where they are not a party to such contract, as long as the contract expressly provides for it. This can simplify matters by removing the need for a separate collateral warranty.
However, third party rights require careful drafting, and the following should be considered:
- the third party to benefit from such rights must be clearly named or described;
- rights usually only "vest" once a formal notice is served; and
- care must be taken to ensure amendments to the underlying contract do not affect the rights granted.
In practice, it is important that all parties follow the notice provisions carefully to ensure third parties can rely on the rights granted.
What is the difference?
Although both collateral warranties and third party rights ultimately provide for the passing of rights, the main difference between the two options is that the granting of third party rights does not require signature by the grantor – the employer/developer can simply issue notice to the construction party advising of the granting of rights. Practically, this can be more time and cost efficient as it avoids the need to seek the approval and signature of the construction party – it is a quicker and simpler process. This can also be helpful in circumstances where the employer/developer relationship with a construction party has deteriorated such that the construction party may not be forthcoming in providing a collateral warranty, notwithstanding they may be contractually obliged to do so.
With that said, in our experience collateral warranties still appear to remain the most common approach and most favourable to third parties to receive rights (in particular, funders and purchasers). Most third parties prefer this more traditional method and like to hold a document which has been signed by the grantor of rights.
Conclusion
Both collateral warranties and third party rights can provide important protections for interested third parties. The best option depends on the specific situation and the third party's particular preference, however, providing for both under build contracts and appointments can provide flexibility where required.
If you are looking for any advice in relation to collateral warranties or third party rights, please get in touch with one of our construction solicitors.
