UK: Third-Party Agreements: A Contractor's Perspective

It seems to have become a constantly recurring theme recently when reviewing amendments to building contracts that the contractor is expected to assume all of the employer's obligations, liabilities and risks under agreements the employer has entered into "up the line" that relate to the carrying out of the works as if these obligations were set out in the building contract. Typical third-party agreements may include an agreement for lease or a licence to alter agreed with the employer's landlord or a funding agreement with a bank.

The wording inserted into the schedule of amendments will usually impose the following on the contractor: the contractor is deemed to have read and have full knowledge of the third-party agreements (even where it does not have any knowledge of them at all and usually has not even been sent a copy), it must not put the employer in breach of any of the employer's obligations under these agreements and it must perform all of the obligations under these agreements as if they were directly incorporated into the building contract. Therefore, all the provisions in the third-party agreement that place an obligation on the employer in relation to the works should be read as being the contractor's obligation too. It is as simple as that. How and why has this come about?

The negotiation, drafting and agreement of the terms of most third-party agreements (whether property or finance related) will usually be driven by factors more pressing at the time than avoiding conflicts between their final terms and those of a building contract. As mere construction lawyers, we become involved much later in the process or where the contractor may not even have been involved at all. In effect, therefore, the agreement for lease, licence to alter or funding agreement is often presented to the contractor as a fait accompli– it "is what it is". There is no room for manoeuvre and the landlord/funder will not accept anything else. From the employer's perspective (i.e. the tenant or the borrower), it does not want to be left exposed to risk because it has agreed to something "up the line" but cannot get the contractor to mirror those same obligations "down the line". The employer will therefore simply want the contractor to take on board all of its obligations (in so far as they relate to the works) so that there are no potential gaps. But, wait a minute – just because the employer has agreed to something up the line (in order to obtain his lease or be able to draw down funds), why should the contractor be left holding the baby?

Just as we should never advise in a vacuum without understanding the specifics of a job (i.e. where it is, what's being built, is it high risk or run of the mill, etc.?) and the impact those specific factors may have on carrying out the works in practice, so should third-party agreements not be negotiated and agreed in isolation. Without consulting contractors and/or construction specialists little or no thought may be given as to how these agreements sit with the contractor's obligations under the building contract and the reality of how works will be carried out in practice.

The employer's lawyers may argue that the contractor was involved at the "drafting stage" of a third-party agreement. However, although the contractor may have had some input in relation to the technical documents appended to, e.g. a licence to alter, it is rarely the case that it has been involved in negotiating and drafting the legal and operative provisions.

There are potentially many issues lurking within the third-party agreements which may be foisted on to contractors. Some may be obvious but others may be hidden and not immediately apparent. A more efficient approach is for the employer to identify those obligations that he really needs the contractor to comply with and only pass those down in the schedule of amendments. However, in our experience it is rare for this exercise to be undertaken – the time, effort and cost involved are off-putting so the employer simply passes the entire third-party agreement down wholesale. For the contractor then, spotting any potential conflicts or additional obligations is like looking for a needle in a haystack.

The employer's lawyers will often counter this with "Ah, but this is only in so far as these obligations 'relate to the carrying out of the works' so the contractor doesn't need to worry". Does this do the trick and neatly resolve the problem? No, unfortunately it does not when you take a closer look at the specific obligations in these agreements.

An obvious example relates to timing. A licence to alter or agreement for lease will often include an obligation on the tenant to procure that the works are complete by a specific date or within a specified time of having entered into the agreement. What is the effect of this if the works go on beyond this date? Under an agreement for lease, this may entitle the landlord to terminate the tenant's right to do the works. The contractor's obligations in relation to the date for completion of the works, however, are clearly set out in the contract particulars and there is a mechanism in the building contract that clearly provides that if there is an event entitling the contractor to an extension of time the completion date is pushed out accordingly. Under the building contract the contractor's only obligation is to pay LDs and nothing else, so does the late contractor also pick up the bill if the licence to alter is terminated?

Another example relates to obtaining all necessary consents, an obligation on the tenant which will usually be included in any licence to alter. The contractor should be very careful to check precisely the promises it may be making to the employer/tenant under the third-party agreement versus its commitments under the building contract. This can be a classic case of obligations being imposed by the back door. For example, the building contract may be completely silent on who is to obtain planning permission. Alternatively, the building contract may provide that the contractor's obligations are simply to assist the employer in the process of obtaining all necessary consents but it is the employer's responsibility to actually obtain them. If the licence to alter states that the tenant is under an absolute obligation to obtain any consents necessary for the carrying out of the works (e.g. planning permission, party wall awards, etc.), which it often will, the contractor will assume this obligation, by virtue of the third-party agreements clause, as if it is directly set out in the building contract. The employer/tenant can then simply point to this clause and say that as this obligation relates to the carrying out of the works it is incorporated into the building contract and is the contractor's risk. The position can be made even worse if the licence to alter also provides for the landlord to be indemnified against any liability by reason of any failure to obtain any consent, permit or licence, etc. If the tenant/employer decides to proceed prior to obtaining planning permission or fails to obtain it, any enforcement action taken by the planning authorities will be the contractor's liability. In fact, the opposite should actually be the case – the contractor should be seeking an indemnity from the employer/tenant in case it instructs the works to proceed without having obtained planning.

Another sobering example is a requirement, potentially buried in the small print of a lengthy funding agreement, to provide a performance bond upon request and which may not crop up until later in the project or when the employer decides to re-finance its loan. The danger is obvious – the contractor may be completely unaware of this obligation until it is far too late. What surety will agree to provide a bond halfway through a project or in the potential event that the contractor's credit rating has subsequently fallen since the start of the job?

Does including a priority clause (i.e. setting out which contract prevails in the event of conflicts between them) solve the problem? Not necessarily. There could be obligations imposed on the contractor under a third-party agreement which do not necessarily conflict with, but which are additional to, those set out in the building contract. For example, an agreement for lease may include an obligation to carry out the works "to the Landlord's surveyor's satisfaction". Under the building contract the contractor is required to carry out the works to the standard required under the building contract, no more and no less. What might the landlord's surveyor say in addition to this?

Third-party agreements may be defined narrowly (i.e. specific agreements which are expressly listed) or widely and generally (i.e. any third-party agreement that the employer has entered or may enter into in the future). Even if the contractor agrees to be bound by third-party agreements provided to it before the date of entering into the building contract, it needs to read them very carefully to spot any conflicts/additional obligations, and price and programme its works accordingly. Where the employer has the ability to provide further third-party agreements during the course of the project, the contractor simply may not be able to comply at all.

This begs the question, what is it the employer wants to pass on to the contractor that it is not already able to do via the mechanisms contained in the building contract? The employer has the ability, after all, to vary, suspend or stop the works if it so chooses. What more does it need to accomplish? Or, in the rush to get all contracts signed and sealed and proceed with the project, is it just being lazy? It seems that the job of finding the needle in the haystack must fall to somebody, but why should it be the contractor? It is unreasonable to expect the contractor to pick up all of these risks "by the back door" of the third-party agreements. Spotting the conflicts or any additional obligations is an onerous task and one which it may not actually undertake at the appropriate time – it is then only later that the reality of the obligations it has assumed comes back to bite.


This article is taken from Fenwick Elliott's 2017/2018 Annual Review. To read further articles go to Fenwick Elliott Annual Review 2018/2019


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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions