The latest measure to excite the warring clans is the Contracts (Rights of Third Parties) Bill. Were it not for a robust approach by the Lord Chancellor’s department, we can assume that the history of this would be as protracted as the Scheme for Construction Contracts.
The new proposals were heralded by a Law Commission consultation paper that was greeted with enthusiasm by all readers except, of course, those in the construction industry. When the bill’s parliamentary passage was accelerated, the industry geared up for a good fight. And although the bill is now almost certain to become law, the carping continues. The latest manifestation is a recent editorial comment in the Construction Industry Law Letter, which postulates thunderclouds ahead.
What the act does is partly to abolish the doctrine of privity of contract. It will enable third parties to enforce a contract term that “purports to confer a benefit” on them. So, if I promise a contractor that I will, in certain circumstances, pay a nominated subcontractor directly, that subcontractor can hold me to my bargain if the contractor does not do so. He probably thought he could anyway, so it is self-evidently correct that the law be reformed to allow him to do so.
But this is not self-evident to the industry. Critics of this “unworkable” bill seem oblivious to the knots that the industry and the courts tie themselves in to avoid the consequences of the rule of privity.
Who can sensibly defend the cascades of collateral warranties that flow in torrents down the construction industry supply chain and, with increasing frequency, back up again into the courts? Who can predict the ebbs and flows of the law of negligence as it attempts to define a reasonable level of protection for parties that have not created a contractual relationship? It is very notable that many of the landmark decisions in the law of tort address problems in the building industry.
And what of more recent judicial attempts to prevent remedies against wrong-doers in the construction industry falling into a “legal black hole”? The editor of the CIIL seems oblivious to the irony that his criticism of the bill appeared in an issue that devoted more than two pages to the case of John Harris Partnership vs Groveworld Limited. This case further developed the principle that a party to a contract had the right to recover a third party’s loss (even though the third party was not a party to the contract) where the parties to the contract “contemplated” that the third party might suffer this loss.
- Third-party rights are currently allowed but vague, leading to a legal “black hole”
- The bill could obviate collateral warranties
- It is responsive to needs of contracting parties
This doctrine was first developed in the Linden Gardens litigation in 1994 and has had a startling development ever since. This alone is sufficient reason for law reform.
Far from offering the welcome that might be expected to the proposed rules, the editor of the CIIL concludes that “the silver lining to this cloud seems to be that it is comparatively easy to prevent the legislation biting”. He advocates excluding the act: in other words, parties should make it clear in the contract that no rights are conferred on third parties. So, apart from adding still further to the complexity of the industry’s contracts, the bill will achieve nothing.
No one would suggest that such radical reform is without problems. We believe that one of the main areas of difficulty is, as the editor of CIIL highlights, clause 2. This is not because of the use of the term “vary”, which has an ordinary English meaning that should not be confused with the specific meaning given to it in construction contracts; it is because clause 2 limits the power of the parties to reach agreements between themselves. They cannot do anything that would affect the third party’s entitlement unless she or he has consented. The rationale for this is clear but, in practice, its operation may be difficult.
But the bill is very flexible: the express terms of the contract may allow for the requirement for the third party’s consent to be excluded by agreement. In other words, the bill allows the parties to craft the terms of the benefit conferred on the third party as they wish. It anticipates many of the difficulties that are now being raised.
Unshackled by the arcane doctrine of privity, the bill could enable the law to enforce rights that the parties to a contract intend to confer on third parties. But, instead, the industry prefers to continue with collateral warranties, speculative litigation and uncertainty of outcome.
Ann Minogue is a partner in solicitor Cameron McKenna.