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Is the introduction of the rights of third parties in the Contracts (Third Party Rights) Act a good thing?

Yes

This Act applies to all contracts governed by English Law, unless the Act is expressly excluded. It reforms the doctrine of Privity of Contract, which provides that under English Law, a person who is not a party to a contract cannot enforce it even though the obligations under it are for his or her benefit. It means that these third parties can receive the benefit of the rights under the contract, even though they are not a party to it.

The main reason why the Act is advantageous for the construction and engineering industry is due to the complex contractual relationships which arise within the industry, such as the likelihood of transfer of ownership of a project once completed, and the extensive use of subcontractors. Thus many parties are reliant upon other parties when there is often no direct contractual relationship between them.

The Act ensures that the rights obtained by all the parties are clear and can be accurately assessed from the outset.

To overcome some of the problems which arise due to this, and especially since the limitation of ability for a party to bring a claim in tort, the courts have displayed what can only be described as examples of judicial yoga in interpretation of contractual rights to ensure that those parties who were not party to the original contract can receive the benefit of the contract. See for example the case of St Martins Property Corporation Ltd v Sir Robert McAlpine (1993).

Theoretically, the Act removes the need for collateral warranties, as the legislation can be used to provide rights for future owners or tenants of a building, or for subcontractors.

The question which remains is: is it not more beneficial for the parties entering into a contract to allow third parties to obtain benefits under the contract? This would create certainty as to the scope of those rights, instead of allowing the courts to display complex examples of judicial yoga which would result in less certainty for the parties, not to mention expensive legal fees.

No

The new law will enable third parties to enforce directly a contractual term in a contract if it confers or purports to confer a benefit on them. They will have the rights and remedies which would have been available if they had been party to the contract, unless the contract expressly excludes the Act. The Act is a genuinely reforming measure which will need to be addressed.

In the short term, while the operation and interpretation of the Act is being observed, most contracts affecting civil engineers will need to drafted to state that they do not confer or purport to confer on any third party any benefit or any right to enforce any term of the contract.

Current advice from lawyers and construction industry professional bodies is to this effect.

Consulting engineers, for example, will not wish unwittingly to confer rights to funders, purchasers and tenants which could extend liabilities beyond that which would exist by the provision of collateral warranties. Warranty provisions can limit or exclude liability for economic or consequential losses, or cap all liabilities, which may not be possible in the engineer's main appointment contract.

For construction work, employers and contractors will not want to unwittingly confer rights to multiple third parties.

The presence of an onerous main contract and numerous supplier and subcontractor contacts could dramatically extend risks and liabilities.

Once the implications of the new law become more widely understood and accepted, however, I believe we will see more frequent provisions in contracts which do allow and confer certain rights to particular classes of third party persons or organisations but exclude all other third party rights.

It is unlikely, however, that such provisions will be made in all contracts or that the Act will mean the end of collateral warranties.

The facts

Main contractors contribute to conflict and inefficiency in construction by failing to pay their subcontractors on time.

Late payment often results in expensive court cases, adding to costs.

Main contractors often ask subcontractors to pay them money in the form of collateral warranties. These are often withheld if they consider work to be below standard.

Subcontractors who are constantly paid late are put under immense pressure and can go out of business if cash flow problems caused by this persist.

The new legislation should make clients put pressure on main contractors to pay their subbies on time. Clients will do this if subcontractors threaten to sue them because main contractors refuse to pay up.

Contracts like the ICE's Engineering Construction Contract have been modified to account for the new legislation.

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