Summing up. Number 31 – Privity of contract

A contract made under English law only confers benefits on the parties to that contract. Nobody who is not a party to the contract – "a third party" – can claim under it.

Why is this a problem? Many key players in the construction industry (for example, funders, purchasers and tenants) are third parties to the building contract and professional team appointments. Although these third parties may have valuable interests in the building being procured, they have no contractual redress under these procurement contracts.

How are third parties protected?

A third party to a contract may have rights in negligence against a defaulting party. But it is difficult to succeed in such an action, despite signs that wider rights in tort are being recognised by the courts. A more effective method is the use of collateral warranties, These give the third party a direct contractual link to the contractors and professional team. However, they remain an emotive topic.

Should third parties be able to enforce terms of a contract made for their benefit? The Law Commission has suggested reform of privity of contract in its recent report on the matter. Its draft bill, the Contracts (Rights of Third Parties) Bill, has been adopted by the government and is making its way through parliament.

What will be the effect of the proposed legislation?

The act will allow, but not compel, parties to a contract to use a term of the contract to confer benefits on third parties. Because of collateral warranties, the scope of third party rights is already an established concept in construction circles and, largely, the boundaries have been set. It seems unlikely that the act will alter these boundaries, but it may in time reduce the perceived need for collateral warranties. It may also help to overcome the difficulties inherent in procuring warranties after a development is complete. That said, it will be premature to remove warranties from the risk management agenda just yet.