UK: New Year's Revolution - Death of Collateral Warranties?

Last Updated: 5 January 1999
New Year's Revolution - Death of Collateral Warranties?

By
Emma Colquhoun

One of the characteristic features of construction contracts is that they are, more often than not, made with the intention of benefiting someone who is not a party to them, such as the future owner or occupier of the building. That person (as "third party") generally has no right to sue for breach of the relevant contract, notwithstanding that he is the party most affected by defective work. The result? The proliferation of side contracts ("collateral warranties") which grow up alongside the building contract and professional appointments.

Now - imagine a world where such later purchasers or tenants of a building have the right to enforce the contractual obligations of the professional team and building contractor directly without the cost, complexity and inconvenience of a large number of separate contracts and warranties.

In a matter of months this world should become a reality, when a radical new piece of legislation known as the Contracts (Rights of Third Parties) Bill receives Royal Assent. The new Act will impact on all construction industry contracts which are entered into after an initial grace period of six months from the day on which the Act comes into force.

Under the Bill the contracting parties will be able to confer a right to enforce their contract on a third party, provided the third party is expressly identified in the contract by name, class or description. Indeed, the third party need not even be in existence at the time when the contract is entered into (for example, a company yet to be incorporated). By way of illustration, the employer and main contractor under a building contract will be able to give future occupiers of the building the right to enforce the contractor's obligations under the contract without the need for the parties to draw up separate collateral warranties or to name the occupiers.

Once such a third party has the right to enforce a term of a contract, the Bill prevents the parties to the contract from undermining his right by cancelling or varying the provisions of the contract without his consent except in very limited circumstances.

The Bill has attempted to address the position of the defendant contractor or professional, now vulnerable to claimants on all sides with rights to sue. It sets out the defences available to a defendant and eliminates the prospect of him being forced to pay up twice, once to his contractual partner and once to the third party, in respect of the same breach of contract.

One word of caution: although the Bill is not expected to be amended the provisions are subject to amendment as the Bill progresses through Parliament.

In this brave new world, there will no longer be any need to assign the benefit of the main contract to future purchasers and tenants, now that they can simply be named in the main contract as a class of potential beneficiaries.

The proposed reform of the law has not, of course, met with universal acclaim. Bodies representing the interests of the professional team have voiced the concern that clients will insist on professionals signing up to standard form deeds of appointment which confer the widest possible rights on as yet unidentified third parties, on a "take it or leave it" basis. On this view the professional team will have their position negotiated away before they even start. At the moment the process of negotiating collateral warranties direct with known individuals at least gives them some control over their own destiny.

It remains to be seen whether the net effect of the new legislation on the construction industry will result in the complete demise of the collateral warranty. We will return to this subject again when the dust has settled...

This article was first published in Marcfarlanes' Construction Press March 1999 issue.

Macfarlanes' Construction Press is intended to provide general information about developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice, please contact Tony Blackler.

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