UK: Collateral Warranties - Time For Change?

Last Updated: 17 June 2005
Article by Clive Lovatt

The Contracts (Rights of Third Parties) Act 1999 has now been in force over five years. It remains a much under used piece of legislation and its application is still specifically excluded from many property development and construction contracts. There are a number of reasons why the Act has received a reluctant welcome. There are other and better reasons why that reluctance should be overcome.

Privity of Contract

As is well known, the Act creates an exception to "privity of contract" – the doctrine that generally a contract cannot confer rights or impose obligations on any person save those who are party to the contract - which has long been central to English law. The point was established as long ago as 1861 in Tweddle v. Atkinson and in 1915 the then Lord Chancellor, Viscount Haldane, delivering his judgement in Dunlop Pneumatic Tyre Company Limited v. Selfridge & Co. Limited said:

"…in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it."

It should therefore be of no surprise that attempts to amend the doctrine of privity have been slow to come to fruition and slow to gain acceptance. Just how long though is surprising. In 1937 the 6th Interim Report of the Law Revision Committee said:

"We therefore recommend that where a contract by its express terms purports to confer a benefit directly on a third party, the third party shall be entitled to enforce the provision in its own name, provided that the promisor shall be entitled to raise as against the third party any defence that would have been valid against the promisee."

Notwithstanding this, it was not until the Law Commission Report on privity of contract made in 1996 that sufficient momentum was generated for the Act to reach the statute books, with it provisionally coming into force in November 1999 and fully so in May 2000, a full 63 years after the Law Revision Committee's report.

In the interim, English law had been inventive in providing aggrieved parties with remedies. The tort of negligence expanded rapidly through the 1960s and 1970s only to be cut back to first principles by decisions of the House of Lords at the end of the 1980s. In the law of contract, some cracks appeared in the façade of privity of contract with decisions in cases such as St. Martins Property Corporation v. Sir Robert McAlpine and Darlington Borough Council v. Wiltshier Northern Limited. Above all, English law and specifically the property and construction industries, adopted the use of collateral warranties.

Why is use of the Act avoided?

Almost all property and construction lawyers would agree that collateral warranties are often time consuming, difficult and expensive to negotiate and procure. The absence of executed warranties can delay the signing of transactions. Some warranties, for example those given by sub-contractors, can by their nature remain unexecuted many months after the date of the original transaction. The costs of pursuing recalcitrant warrantors can form a significant percentage of the legal costs incurred in a property development or construction project.

Despite this, the operation of the Act is excluded from property and construction documents on many more occasions than its use is adopted. Even projects based on the JCT Major Projects form (the first important new form to be produced by the JCT following the coming into force of the Act) often actually proceed on the basis that collateral warranties will be provided. This is notwithstanding the fact that the standard form produced by the JCT utilises the provisions of the Act.

Why is this the case? When the Act first came into force, a number of commentators expressed concerns that many clauses in commercial contracts could be construed as conferring unintended rights on third parties. It was perceived as "safer" to exclude operation of the Act in total. In addition, and crucially, the attitude to the Act of professional indemnity insurers was unknown.

Five years on, it is clear that the Act can be used effectively and that insurers have few concerns as to the operation of the Act itself (whilst of course remaining concerned as to the nature and extent of the rights confered on third parties). However, the familiarity and certainty of warranties, coupled with the entrenched habits of both legal advisers and their clients have ensured the the continued use of warranties.

Time For Change?

The Act is an effective piece of legislation. Such concerns as to its operation as remain (these are explored in more detail below) can be overcome. The Act offers the opportunity to reduce cost and save time. Most importantly, use of the Act can remove commercial barriers to the closing of property and construction transactions. These advantages should be embraced.

At Addleshaw Goddard, we have sought to do just this. In recent months we have introduced to the property and construction market our initiative under the Act "Three in One Contracting – an end to collateral warranties". At the heart of the initiative are a suite of documents, covering consultants' appointments, bespoke amendments to the principal JCT forms of contract and forms of sub-contract, which incorporate the drafting necessary to make effective use of the Act.

So in a "typical" development project, the usual beneficiaries of collateral warranties still benefit from the protection that a warranty would provide, but instead of receiving a warranty document each beneficiary is instead nominated by service of a pro-forma notice. This is sent by the developer's legal advisers to the relevant consultants and contractors and sets out the identity of the beneficiary, the nature of the beneficiary's interest and the nature of the rights confered upon him.

By way of example, a beneficiary under an appointment acquires the benefit of the duty of care clause under the appointment along with the copyright clause, professional indemnity clause and the prohibited materials clause. Funders obtain the benefit of step-in provisions (about which more is said below).

The position is similar for beneficiaries under the building contract, save that in place of the duty of care clause, the beneficiary acquires the the benefit of the contractor's promise to carry out the works in accordance with the building contract along with (in design and build projects) the contractor's warranty of skill and care in design.

Using the Act

The introduction of Three in One Contracting has raised questions and concerns from consultants and contractors and from beneficiaries. Set out below are some of the more frequently raised concerns along with our approach to the problems raised.

Will there be uncontrolled numbers of beneficiaries?

In the same way as the number of collateral warranties which may be given in favour of any category of beneficiary are normally limited by the principal contract to which the warranty relates, that contract can and should limit the number of beneficiaries who may be nominated to receive rights under the Act.

The risk of confering unintended rights on third parties can be simply avoided by excluding the Act save to the extent that rights are expressly confered on a beneficiary.

What happens to "no greater liability" clauses?

No greater liability clauses are commonly found in collateral warranties. Their purpose is to make it clear that the warranty does not impose a burden which is greater or different to that imposed by the principal contract to which the warranty relates. The wording of such clauses is often the subject of detailed negotiation and construing the effect of completed clauses can be problematical.

Using the Act overcomes these difficulties. The Act states at sections 1(4) and 1(5) that a third party can only enforce a contract term subject to and in accordance with any other relevant terms of the contract and that for the purpose of enforcing a term, the third party has the remedies he would have had if he had been a party to the contract.

How is set-off dealt with?

We have approached set-off in the same way as we would do so in relation to a warranty, namely that a beneficiary should be affected by financial claims by the consultant or contractor against the employer only where that beneficiary has exercised a right of step-in.

What about assignment?

A right given under the Act can be assigned in the same way as any other right under a contract and it is therefore up to the parties to place any commercial limitation on assignment which they wish to see.

What about net contribution?

Net contribution provisions remain amongst the most hotly debated clauses in collateral warranties. If the principle of net contribution is accepted, a net contribution clause can be added to an appointment or building contract, insofar as concerns liability towards any beneficiary.

How long do the third party rights last?

Section 7(3) of the Act amends the Limitation Act 1980 so that a third party's ability to claim under the Act is limited to six years for a simple contract an twelve years for a deed.

How do step-in provisions work?

The Act addresses rights (or benefits) but does not deal in any way with the obligations (or burdens) of a contract . The Act cannot of itself therefore adequately address step-in provisions, which will normally set out obligations as to payment and the continued observance of the terms of the contract by the party exercising the right of step-in.

The problem is easily resolved, however, by specifying that any notice of step-in must be in the form of a deed and must include an undertaking by the relevant beneficiary to pay, or to guarantee payment, in accordance with the step-in provisions of the appointment or building contract.

How does use of the Act affect termination and variations?

The manner in which a contract can be terminated or varied is a matter for the parties to the relevant contract. We have approached our standard documents by making it clear that the contracting parties can exercise a right of termination without needing to obtain the consent of any nominated beneficiary. The exception to this is of course where a beneficiary has been given step-in rights, in which case he is entitled to be given the specified period of notice of intention to terminate.

The employer is in addition allowed to vary the works or any consultant's services without needing the consent of any beneficiary. Any other changes to the terms of any appointment or building contract require the consent of the beneficiaries if any have already been nominated.

Does adjudication apply to the third party?

The threat of adjudication under the Construction Act from a third party beneficiary would be a serious (and probably well founded) concern for many contractors and consultants. It is not, however, a real threat. Section 108 of the Construction Act only confers an entitlement to adjudicate on a party to the contract. Section 7(4) of the Act makes it clear that the grant of third party rights does not make the beneficiary of those rights a party to the contract.


The Act offers benefits in terms of cost and time saving to those involved in property development and construction projects which are difficult to ignore. To the extent that the Act does not resolve issues of importance to the contractors and consultants giving third party rights and the beneficiaries of such rights, those issues can be resolved by careful drafting of the relevant contract provisions.

The questions which have been raised with us since our launch of Three in One Contracting, however, illustrate that the Act and its workings are still unfamiliar to a significant proportion of the property market. The benefits of the Act have been embraced by a number of developers, but others (including importantly banks and others providing property finance) have barely considered its use.

The process of familiarisation is in the hands of the market's advisers and it is a task which we should undertake with enthusiasm.

Cases Cited

Tweddle v. Atkinson (1861) 1 B. & S. 393;

Dunlop Pneumatic Tyre Co Ltd v. Selfridge & Co Ltd [1915] A.C. 847;

St Martins Property Corporation v. Sir Robert McAlpine 57 BLR 57;

Darlington Borough Council v. Wiltshier Northern Limited 69 BLR 1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.