Much of the debate on the proposed Contracts Bill centres on the implications of a clause that confers potentially troublesome benefits on third parties not privy to a contract. A flight of fancy or a real worry?
"The flight is overbooked Sir. You will have to wait for the next one unless you're willing to sit in the jump seat," said the stewardess as I tried to board my plane to Cannes for the MIPIM conference.

That jump seat sounded a little precarious but I had no choice – I had to host a lunch in a few hours. For those who have never had the pleasure, the jump seat is behind the pilot in the cockpit and gives you the most outstanding view of our planet that you are ever likely to see, short of going to the moon.

The pilots were the parties to the contract and I was the third party having benefits conferred upon me.

"There's the Eiffel Tower," said the co-pilot as I mused about the bill – the Contracts (Rights of Third Parties) Bill now in the Lords.

This new piece of legislation is designed to help contracting parties who want to give enforceable rights to others. All sounds very positive, so why should it cause soul-searching within the construction industry? Hadn't the Law Commission seen construction as a major beneficiary? So, why did the Association of Consulting Engineers' new conditions of engagement (my in-flight reading) state so clearly that the act was not to apply to any of its terms?

The ACE is unhappy about the so-called second limb of section 1. The first limb is fine. If you say, in so many words "future tenants can enforce a clause in the building contract that obliges the contractor to build with proper materials and workmanship," nobody seems to have a problem.

It is when you say "contractors must be careful not to upset the neighbours and cause a nuisance," that you run into difficulties. Does such a clause, to use the language of the bill, "purport to confer a benefit" on an identified class of third parties so they can sue the contractor directly, as if they had each signed the contract? Does a clause requiring compliance with the Construction (Design and Management) Regulations give similar rights to any persons who might be adversely affected if a breach occurs?

  • The legislation is designed to help contracting parties who want to give enforceable rights to others
  • Collateral warranties will not vanish overnight but they might do eventually

This is the so-called second limb of the enforceability test. If a contract term "purports to confer a benefit on a third party", a "rebuttable presumption" will arise (the Law Commission's language) in favour of that party, so that he can enforce the term himself. Unless the "promisor" (the builder in our case) can show that, as a matter of contractual interpretation there was no intention to confer a legally enforceable right, a claim may stand. That means the burden of proof of what the contract intended to achieve rests squarely on the builder's shoulders. Ever tried to prove a negative?

Why could the bill not stop at the first limb? The answer is that this would not have solved one of the major problems the reform was aimed at. Remember Beswick vs Beswick1? When Mr Beswick willed his business to his nephew he extracted a promise that after his death, the nephew would pay his widow an annuity. After Mr Beswick's death, the nephew failed to pay the annuity. The Court of Appeal said Mrs Beswick had no claim in her own right. The privity rule, that only the parties to a contract could enforce rights created by it, stood in her way. The first limb of the new rule in this bill would not help a modern Mrs Beswick, so something like the second limb is inevitable.

But construction contracts are littered with provisions that "purport to confer" benefits on others. A management contractor could put a clause in its works contract permitting the client to sue the works contractors direct for delays or defective work. Clients could use the main contract to confer rights on subcontractors to sue direct if not paid by main contractors. The possibilities are endless.

The debate about the effects of the new bill has so far centred on the issue of whether or not collateral warranties will become a thing of the past, but as my examples show, there are other equally important issues.

Of course, collateral warranties will not disappear overnight, although they might do over time. But they will change. Assignment clauses will not be necessary because all future tenants can be named as beneficiaries – but watch out for the insurer's reaction in such cases. The bill removes the protection of the Unfair Contract Terms Act from the third party beneficiary. Does this have an implication for collateral warranties?

If a consultant or contractor has a "net contribution clause" in today's collateral warranty it would have to pass the reasonableness test of the act to be enforceable by way of defence. No court has yet been asked to consider the principle. So, an architect trying to argue that its share of the blame should only attract 10% of the liability might have a problem. But for the future – such a clause written into a consultant's appointment for the benefit of future tenants would not run the risk of offending the act. Something to think about? A perfect touchdown in Nice, and I was in a land where third-party rights have been around since Napoleon.