Those of you who thrive on legal niceties will remember that in May 2000 the act came into force, enabling a third party to sue where a contract expressly or purportedly allowed it to. Previously, only the parties to a contract had had that right.
A year on, there has been very little take-up in construction contracts of the rights available under the act. In most cases, the provisions of the act are excluded by agreement between the parties. In my own dealings, 90% of the draft contracts I see contain such exclusions.
Why, you might ask, is this the case, bearing in mind that the draft documentation is generally drawn up by a developer's lawyers? You might expect them to be at pains to achieve the widest possible rights and benefits for third parties such as the purchaser, tenant and financier. The answer lies in the following factors.
First, put yourself in the shoes of the third party, say the purchaser of a development. On the one hand, you could have your own contract (a collateral warranty) with, for example, the engineer. The contract names you as a party. It is all fairly brief and unambiguous as legal documents go, and it concerns your terms and nothing else. You can file it away knowing it is ready if needed.
On the other hand, you could take the following course: you ask your lawyer about your terms with the engineer and a rather substantial bundle of legal documentation comes thudding down on the table. "Well," you say, "that certainly looks comprehensive – you must have twisted his arm to get all that!"
Lawyers may have cursed collateral warranties for years but they are finding them as hard to throw away as old slippers
"Ah, no," responds your lawyer, "actually, only clauses 3c (viii), 58d (ii), and 83f are intended to pass on any rights to you. I've attached Post-it notes to the relevant bits. For heaven's sake don't lose them." The rest of the contract concerns the developer and the engineer, not you. In fact, you aren't mentioned by name at all, but don't let that worry you. There's a new act, admittedly pretty untested as yet, but it should mean you can sue the engineer on this contract even though you don't feature in it, as such." Not exactly tempting, is it?
And it is not just third-party reluctance that has proved a hurdle for the act. One or two lawyers with whom I have had dealings have been honest enough to confess that they are just a little twitchy about wording the main contract to confer an intended benefit onto a third party, and so dispensing with the good old collateral warranty. Lawyers may have cursed them for years, but they are finding them as hard to throw away as old slippers.
In addition, we have the traditional diehards who exclude the act because they simply object in principle to the whole idea of third-party rights in contracts. True, the construction industry probably needed the act rather less than certain other areas of commerce as it had the collateral warranty mechanism to deal with third-party rights. But in
this industry, too, there have been instances of injustice to third parties. Space does not allow me to revisit those here, but they were illustrated in this section by myself and other legal contributors at the time of the passing of the act (see, for example, 29 October 1999, page 62-63).
The final, and perhaps the most compelling reason, I have come across for excluding third-party rights under the act is a practical one. Construction contracts are known to be among the most complex. Giving rights to third parties means adding yet another complicating factor, and therefore time and cost.
Postscript
Melinda Parisotti is a barrister and a director of Wren Managers Limited.
