Contracts (Rights of Third Parties) Bill 2

A commentary by Paul J. Cowan

The Contracts (Rights of Third Parties) Bill has the potential to revolutionise the scope of third parties’ rights under construction contracts. The doctrine of privity of contract, which requires someone to be a party to a contract in order to enforce its terms, has been a touchstone principle in English contract law since the 19th century. As we move into the 21st century, this legislation heralds a fundamental change.

The Bill completed its passage in the House of Lords on 14th June 1999 and now awaits its third reading in the House of Commons, which is anticipated early in the new session. As it progressed through Parliament, the Bill faced a concerted effort by the construction lobby to dilute its effects. Indeed, an amendment was proposed to exclude construction contracts from the scope of the legislation altogether. Why has it generated such hostility from the construction industry? Is this reaction justified? What is all the fuss about?

In essence, the Bill will allow third parties to construction contracts directly to take the benefit of rights under the contracts and to be able to enforce them. Until now, as a result of the doctrine of privity, third parties have only been able to do this through collateral warranties which have been specifically executed in their favour.

Under the Bill, third parties will be able to enforce terms of the contracts where they are expressly granted rights or where the contract “purports” to grant them rights. The latter raises the possibility of third party rights being implied by Courts or arbitrators where the contracting parties had not really intended this to happen. It is suggested that it is the potential for uncertainty as to when third parties can claim rights (and what those rights might be) that is at the root of the construction industry’s fears. These fears have been compounded by provisions in the legislation that will restrict the ability of the main contracting parties to vary or rescind the third parties’ entitlements under the contract, once granted.

What might this mean in a practice? As an example, it could allow a prospective tenant of a development who is identified in the contract or appointment to enforce design and workmanship obligations such as requirements that the works will be designed and carried out in accordance with the client’s specification. Where there is no particular agreed procedure for amendments to be made to the specification, this might mean that the client and his designers could not change the specification without getting the consent of all the prospective tenants.

However, these worries can be overcome. The Bill makes it very clear that the third parties’ rights are always subject to what the contract says and what has been agreed. So, it will be open to the employer and the engineer to specify in the appointment that no third parties shall be able to enforce any of its terms. As a result, provided that a little thought is given to the position of third parties, there is no reason why any parties to construction contracts should be in any worse position than they are at the moment.

Beyond the option to keep things as they are, the Bill actually offers the prospect of improving and simplifying the nature of construction contracts. If properly taken advantage of, the legislation has the potential to streamline the provision of third party rights by removing the need for collateral warranties, not to mention the time and expense involved in producing, reviewing and executing them. With the prospect of third parties being able directly to take the benefit of rights under the contract or appointment, there will no longer be any legal need for contractors and consultants to enter into what is often a myriad of separate collateral agreements in any given project. All that is required is for the parties to take the initiative and realise the opportunity offered by the legislation to improve efficiency and to reduce the volume of legal paperwork that is currently generated in construction contracts.

In contrast to this potential, the response of the publishers of the industry’s standard forms has been limited. The latest versions of the ACE and ICE conditions of contract include provisions which simply exclude the possibility of third parties acquiring any rights. A similar provision is included in the RIBA’s SFA/99 conditions and the JCT is intending to follow suit. It is to be hoped that as the legislation becomes established, the industry’s standard forms will adopt a less restrictive approach.

When are the changes going to happen? The Bill is intended to take effect 6 months after it is passed (though the Bill allows parties to “contract in” before the end of the 6 month period). It will not therefore apply until some way into next year, leaving enough time to get to grips with the changes that the legislation will introduce. Overall, it is suggested that the approach of the legislation should be seen as a genuinely positive development and which should be welcomed, as much by the construction industry as in other sectors. However, whether welcomed or not, the Bill is going to become law. The construction industry should be ready to meet it.