Construction contracts are typically entered into by an employer and a contractor or consultant. The usual position under contract law is that an individual who is not party to that contract cannot bring a claim for breach of the contract, as there is no direct contractual link between the third party and the consultant.
However, third parties such as purchasers, funders and tenants, may need the ability to bring a claim for a breach of a construction contract to which they are not a party. To create a contractual link between the third party and the contractor or consultant, construction contracts typically provide for third parties to rely on the original contract by way of collateral warranties or third-party rights.
What is a collateral warranty?
A collateral warranty is a document entered into between the contractor or consultant with the third party that effectively replicates the main obligations in the original contract. It provides that the contractor or consultant owes the third party the same duty of care as it does the employer under the original contract.
Collateral warranties to purchasers and funders often contain step-in rights which provide that the purchaser/funder can serve notice in certain circumstances to “step into the shoes” of the employer under the original contract. However, this does mean the purchaser/funder then becomes responsible for payment of the consultants’ fees.
What are third party rights?
Third party rights are an alternative to warranties. The Contract Rights of Third Parties Act 1999 (“1999 Act”) attempted to simplify the process to allow third parties to have rights in relation to contracts without the need for additional documentation. Under the 1999 Act, a person who is not a party to a contract may enforce a term in a contract if this is expressly provided in the original contract.
Construction contracts can therefore often provide for construction remedies by way of third party rights instead of warranties, and on service of a third-party rights notice on the contractor or consultant, the third party benefits from rights in respect of the original contract. The notice does not need to be signed by either the contractor/consultant or the third party. This reduces the administrative burden of the circulation and signing of large numbers of warranties on projects, and as with warranties, third party rights can also contain step-in rights for purchasers/funders.
What is the difference?
In practice, there is no difference between collateral warranties and third-party rights; they both achieve the same goal of giving direct recourse by a third party against the contractor/consultant.
The use of third-party rights is being gradually embraced and becoming more regularly used in construction projects as an alternative to warranties. There are, however, still some third parties, in particular funders, who prefer the comfort of having a collateral warranty in place which has been signed by the relevant parties.
The Hamlins Construction team has extensive expertise in negotiating construction contracts and warranties and seeks to obtain the best outcome possible for every client. If you would like to find out how we can help you, please get in touch with Stephanie Brown or Ben Kilshaw.