At last we have a contract that caters for third-party rights, but this extra option in the new JCT design-and-build contract could pose a problem

third-party right schedules have been much debated since the implementation of the Contracts (Rights of Third Parties) Act 1999, but until now few people have actually written them into their contracts.

The JCT’s design-and-build form includes provisions for third-party rights schedules and for the collateral warranties that they are proposed to replace. Will this sea change in standard construction contracts tip the balance in favour of use of third-party right schedules?

The form includes options for the contractor to provide either a collateral warranty or to extend rights detailed in schedules to a purchaser, tenant and funder. A similar approach is adopted in the recently published British Property Federation Consultancy Agreement and is expected to be followed by the Construction Industry Council.

The design-and-build contract does not go as far as making the third-party rights schedules the default option if collateral warranties are not specified, unless a third party is identified.

However, it is easy to see that those using design and build might be tempted to select these “ready-made” third-party rights schedules where collateral warranty forms are not immediately to hand. This could lead to problems.

The ready-made schedules are necessarily general and the rights set out do not suit all. The particular needs of developers and third parties on specific projects mean that such schedules are likely to be hotly negotiated, even more so than collateral warranties. Will the contractor be able to persuade his subcontractors to use third-party rights schedules? Will members of the project team also embrace this approach? This may be a tall order to achieve across a project.

The other possible outcome is that developers and their project team may be faced with a mix of collateral warranties and third-party right schedules across a project. The danger here is that third parties could be exposed to gaps in their protection.

Developers and their project team should consider which option – collateral warranties or third-party rights schedules – best suits their project. Once that is done, they need to take extra care in completing the contract documents or risk being in a position where third parties may not be entitled to the rights they require or expect, which may restrict the developer in dealing with its property investment.

Will the contractor be able to persuade his subcontractors to use third-party rights schedules? This may be a tall order

In particular they need to take care to define the parties that are to have benefits. Design and build includes suggested definitions of purchaser, tenant or funder but these terms need to be completed to ensure that all relevant third parties are identified.

But what of other interested third parties? The contract is silent on this. For example, a third party could be a local authority adopting works, or a group company whose subsidiary procures the works, or a landlord whose tenant undertakes major works. All may need rights.

There are also potential pitfalls for those who opt for collateral warranties. To oblige a contractor to provide a collateral warranty it must be given a written notice, together with a copy of the specified form of collateral warranty. If notice is not given, the contractor will not be obliged to provide a collateral warranty at all. If notice is given but without a copy of the specified form of collateral warranty, the contractor will only be obliged to provide the default JCT collateral warranty.

The problem with the default JCT collateral warranty is that it is a template that has to be completed, and arguments can then arise as to how this should be done, which leaves the rights open to negotiation.

Funders, purchasers and tenants take certain comfort from collateral warranties as separate physical documents that can be “assigned” to others in the future. Finance and property documents commonly anticipate a suite of collateral warranties from the design and construction team. If third-party rights schedules are to be widely embraced a review of these project documents will be necessary.

Collateral warranties or third-party rights schedules – which option will you choose?