The Contracts (Right of Third Parties) Act makes collateral warranties and their bureaucratic complications redundant. Yet some lawyers seem reluctant to see them go
Collateral warranties are probably seen by many as a racket dreamed up by lawyers, but in the past they were the only effective means of protecting third parties that might suffer from defective work. With the introduction of the Contracts (Rights of Third Parties) Act in 1999, collateral warranties should have become redundant. Yet many of my fellow lawyers view the act as a legislative white elephant, which means we continue as before.

As a construction lawyer, I do not feel that I have a vested interest in perpetuating collateral warranties. Since their first appearance, collateral warranties have mushroomed into a bureaucratic monstrosity. The whole process becomes positively surreal when, as often happens on developments of any size, collateral warranties are demanded from an array of subcontractors as well as the main contractor, even if the latter is a blue-chip design-and-build contractor. The resultant chaos is easy to imagine when you consider that the process relies on the administrative skills of the main contractor, which may have more important things to do (building things, for example).

Take as an example a fairly simple construction management development involving, say, a construction manager, five professionals and about 10 significant trade contractors, which is funded by a bank, will be let to about seven tenants and will eventually be sold to an investment purchaser. By my reckoning that could involve almost 150 warranties. I have established that the need for all those warranties can be avoided in this situation by preparing a schedule of terms similar to those found in a collateral warranty and including a clause in the contract/appointment allowing named categories of third party to enforce those terms. In a development similar to that outlined above, this arrangement was accepted by the construction manager, all the professionals and all trade contractors appointed so far. It was also accepted by the funder, one of the biggest banks in the country. This shows that the act can be put into practice where there is a will to do so.

When the act came into force we were told that "the industry" would not accept it, a view that appeared to be confirmed when wholesale exclusions of the act started to appear in the various standard form building contracts and appointments. However, somewhat to my surprise, I have found recently that the supply side of the industry (including some of the more intractable insurers) can be won round to the idea of third-party rights under the act, provided it can be demonstrated that liabilities are not being increased by comparison with collateral warranties.

The most resolute defenders of the status quo are now third party beneficiaries or, perhaps more accurately, their lawyers.

It is curious that every other country manages perfectly well without collateral warranties. Here, the usual explanation offered for refusing to give them up is that the act (although passed two-and-half years ago) is not "tried and tested". Yet how can it be tried and tested if people refuse to use it? People must decide for themselves whether it works; my view is that it can be made to work.

It is of course true that even where the act is used, it will still be necessary to negotiate the scope of third-party rights and the categories of parties that are to enjoy them. However, nobody should underestimate the cost in time (and therefore money) of having to prepare large numbers of separate collateral warranties, circulate them for signature, and then chase after them when they are conveniently mislaid or held up in someone's in-tray. What if a party refuses point blank to execute a collateral warranty, whatever the contract says? It is unlikely that the courts would order specific performance, and if damages are claimed, it may be difficult to show what loss has been suffered as a result of the failure to execute a collateral warranty. This problem does not arise where the act is used.

It is simply not good enough to attempt to justify this bureaucratic paperchase by claiming that the market has not yet accepted the abandonment of collateral warranties in favour of the act. If nobody is prepared to take the lead, nothing will ever change. It is time the more forward-looking parts of the industry co-ordinated their efforts towards breaking this vicious circle.