For those fed up with chasing collateral warranties, “third party rights” provide an alternative. This stems from the Contracts (Rights of Third Parties) Act 1999 (the Act).
The Act enables a party, not originally a party to the contract, to take advantage of the terms and conditions of the contract. There is considerable nervousness about the Act. It tends to be excluded from contracts because no one likes to think that an unknown party at the start of the contract can be entitled to benefit from it.
However, given the problems with obtaining collateral warranties, the Act holds some attraction.
The application of third party rights appeared for the first time in standard construction contracts, in the JCT 2005 suite of contracts. The JCT standard building contract, major projects and design and build forms contain a schedule entitled Third party rights. In Part 2 of the contract particulars, third party rights are broken down into rights offered by a third party memorandum set out in the schedule, or rights set out in collateral warranties.
The schedule containing the third party rights memorandum is almost identical to the contents of a collateral warranty. You could therefore be forgiven for thinking that the schedule can be used and collateral warranties can be forgotten.
However, the third party rights memorandum only relates to the contractor and the beneficiary of those rights. Sub-contractors, who form the major part of the construction workforce, are not included.
All is not lost though. Third party rights can be made to track down to sub-contracts. For this to take effect, employers need an obligation imposed on the main contractor to drill third party rights provisions down to its sub-contractors. This is increasingly being offered on major development projects and might eventually lead to a reduction in collateral warranties, if not their demise.
It is worth considering ways to reduce the need to put collateral warranties in place. As long as the correct procedures are incorporated at the start of the project and are followed through, this can now be done.