The third party way

I make no apologies for returning again to the subject of the Contracts (Rights of Third Parties) Bill, which is likely to receive royal assent in the next month or so. The debate about it in these pages (and elsewhere) has been unimaginative: I have heralded the obvious advantages it creates for the development industry in its quest for collateral warranties; consultants have treated it with suspicion or overt hostility; the construction industry generally has been predictably negative about its drafting and some have suggested that it argues for codifying construction law so that the rest of the legal system does not apply.

Producers of standard forms have universally excluded any potential application of the bill. In the case of Standard Form of Architects Appointment/1999 and ACE conditions of engagement, this is presumably a matter of policy. That policy has been adopted by ICE 7th Edition. In the case of the JCT, though, the decision to exclude the application of the bill was acknowledged to be a temporary measure while a working party looked at the whole issue.

Trying to approach the bill constructively, what third party rights should be created under building contracts?

Let us get the obvious rights required to dispense with collateral warranties out of the way first. Construction contracts should:

• Create step-in rights for funders

• Extend the benefit of certain defined contractual rights to funders, purchasers and tenants. The rights should include, for example, the right to claim for breach of design and workmanship obligations, but not the right to pursue remedies for delay

• The remedies of funders, purchasers and tenants might be subject to a net contribution clause or other restrictions. But these should not extend to the client’s own rights

• The application of those provisions of the bill that require third parties’ consent before rights can be varied needs to be excluded.

  It has always been anomalous that, under standard forms, the contractor looks to the employer for loss and/or expense or damages arising from defaults by the professional team. Should we not debate whether consultancy agreements should contain clear obligations on the professional team to issue information in accordance with the information release schedules as and when necessary under the building contract, so giving the contractor the benefit of that right and therefore the opportunity to pursue the architect directly in place of the employer?

• Contractors should be able to look to the architect or design team directly for redress, not the employer

• Contractual rights should mirror the statutory framework

Similarly, in relation to discrepancies, divergencies or errors in documents produced by the design team, why can’t the contractor enforce remedies directly against the design team rather than having to involve the employer?

Why can’t the appointment of the planning supervisor by the client require him to undertake to perform his duties in accordance with the Construction (Design and Management) Regulations both for the benefit of the employer and the principal contractor?

Similarly, why can’t the building contract require the contractor to act as principal contractor for the benefit of the employer and of the planning supervisor? The matrix of contractual rights is then established that mirrors the statutory framework.

Less contentiously, the contractor’s indemnities in respect of personal injury or death or damage to property could extend to those third parties – identified by name or class – that could be affected by acts or neglects of the contractor. The same could apply to the contractor’s obligation to maintain insurance against those risks. In both cases, this will give the third party the ability to sue the contractor directly under a contractual indemnity. This is obviously preferable to a negligence or nuisance claim.

In relation to time, particularly in subcontracts and trade contracts, the bill gives other subcontractors the chance to sue the subcontractor who is in delay directly for the losses that they suffer as a result. Similarly, in relation to damage to other contractor’s work. This could dispense with the morass created by the existing contra-charge system managed by construction managers/main contractors.

On a similar point, employers could create reciprocal obligations on contractors working on the same site not to interfere with each other’s work so as to avoid being caught in the middle of loss and expense claims in these circumstances.

Then the need for trust funds as advocated by Sir Michael Latham would disappear. It would be possible to include in main contracts rights in favour of subcontractors to be paid directly – which the subcontractor or sub-subcontractor could enforce in defined circumstances.

Similarly, consultants/contractors might want to see rights for them to secure direct payment from funders that they could enforce if the developer defaulted.