A recent survey by the Society of Construction Law showed an increasing use of third party rights schedules instead of collateral warranties. But acceptance is by no means universal. Third party rights (TPR) schedules in construction contracts set out rights equivalent to those in collateral warranties, which would be enforced under the Contracts (Rights of Third Parties) Act 1999 (the Act).
The Act entitles a person, who is not a party to a contract, to enforce a term of the contract in his own right, against a party to the contract, where the term obligates (or purports to do so) the party to confer a benefit on the third party. A TPR schedule sets out the rights for which a third party can enforce by virtue of the Act. The contract will either name the specific beneficiary who is to benefit or identify the class of which the beneficiary is a member, such as 'funders' or 'tenants' of the works.
The main reason for replacing collateral warranties with TPR schedules is convenience. It is simply easier and cheaper to use a single third party rights schedule and a clause of the contract identifying the third parties, instead a plethora of collateral warranties.
Despite this many funding institutions remain sceptical. Recent court decisions establish that where third party rights arise in contracts generally they will be enforced. However the Act's specific application to TPR schedules in construction remains untested in the courts.
The clause in a collateral warranty, that can be the most important to a funder, relates to step-in rights. A funder can 'step into' a building contract to pre-empt termination by the contractor where the employer defaults. A well drafted step-in clause will provide for consent by the employer and an obligation by the funder to pay the contractor on stepping in. These features cannot readily be established by a third party rights schedule, leaving a third party funder with the risk of not having enforceable rights of step-in. For this reason many funders are unwilling to give up the security of a collateral warranty when the alternative appears less adequate and offers greater uncertainty.