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Vocabulary check: third-party contract rights

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Katriona: Katriona Taggart, hello?

Philip: Hi, Katriona. It’s me. How’s it going?

Katriona: Oh, hi Philip. Fine, thanks. How can I help?

Philip: I promise to be quick. I know we’re meeting next week, but I just wanted to check on a couple of things beforehand.

Katriona: Sure, that’s fine.

Philip: Great. OK. Well, I told you last week that Furmstone have won the contract to develop the new tram system?

Katriona: Yes. Problems?

Philip: No, not as such. More a question of wanting to avoid them. We’re now working out a draft contract. I’ve just been looking through the Construction Industry Council website and wanted to ask you about an Act that I think might raise difficulties.

Katriona: You must mean the Rights of Third Parties Act?

Philip: Yes. How did you know?

Katriona: Lucky guess! No, actually I’ve just been working on some of the issues the Act raises for another construction firm.

Philip: I bet they want to make sure that no rights are conferred on third parties.

Katriona: Exactly!

Philip: Thought so. We want to do the same. We’re worried that the Act may grant any subcontractors new rights enforceable against either us, or the local transport authority, who have hired us to develop the new tram system. This is obviously something we want to avoid if at all possible.

Katriona: This is a common concern; it’s often the case when a new law is passed. Companies get nervous when new statutes come into force and sometimes do everything possible to avoid the consequences. You’re a particularly conservative bunch in the construction industry!

Philip: Hey!

Katriona: Anyway, I understand your concern regarding the Rights of Third Parties Act. It fundamentally changes the old privity of contract rule. Before the Act, it wasn’t possible for parties to enforce rights under contracts to which they weren’t a signatory. This new act allows contracting parties to confer rights on third parties, which these third parties can then enforce even if they haven’t signed a contract with the main contractors.

Philip: OK. So tell me if I’ve got this right. We have a contract with the local transport authority. Let’s say we decide to subcontract the construction of the tram stations to another firm. They then in turn subcontract another company to put in the windows. If this last company, the people putting in the windows, don’t get paid by our subcontractors, the window company might be able to sue us for damages.

Katriona: That may be the case. At least, that’s the kind of example the industry is worried about. The Act applies to virtually all contracts.

Philip: Right, thanks. So this Act is bad news. I don’t want our subcontractors to be able to confer benefits on another party that this third party might be able to enforce against us.

Katriona: Well, you need to think about this carefully. In some cases, these new rights might make the drafting of contracts easier for you.

Philip: In what way?

Katriona: Well, for example it saves having to rely on collateral contracts when wanting to confer rights on third parties.

Philip: Collateral contracts?

Katriona: In situations where a subcontract, such as the one between Furmstone and the company managing the station, runs alongside the main contract, as with Furmstone and the local transport authority, we call it a collateral contract. They are not quite the same as subcontracts, which don’t normally lead to enforceable rights. Until the new Act, collateral contracts were one of the few exceptions to the privity of contract rule. They could give rise to enforceable rights against a main contractor.

Philip: OK, sure. That much I know. But my point is that we want to avoid conferring rights on third parties, whether by use of collateral contracts or through this new Act.

Katriona: That might be difficult. As you know, there are situations when you might need to confer enforceable third party rights. Until now you’ve only been able to use collateral contracts, which can become quite complicated. Under the new act, that’s no longer necessary. It should actually simplify the whole process of sub-contracting.

Philip: In what way? Sorry, I should know this but until recently I’ve not really been involved in the legal side of things.

Katriona: OK, let’s take a familiar example. Let’s say that the conditions of engagement of an architect hired by you to design the main station state that the architect will provide information to the company managing the station to allow the company’s designers to prepare fit-out drawings for furnishings and services.

Philip: That’s fairly standard.

Katriona: Yes. But let’s just say that for whatever reason the architect fails to provide this information. Before the Act, the company managing the station couldn’t enforce that obligation directly against the architect. It would be up to you.

Philip: But if the new Act were to apply, a third party could enforce the obligation to provide the information? So we wouldn’t have to put pressure on the architect ourselves?

Katriona: Exactly, it makes things easier for both you and the third party, in this case the company managing the station.

Philip: Well, if the Act does simplify things, why are so many standard forms of contract now including clauses expressly stating that no third party rights are granted?

Katriona: Well, the Act is still in its early days. No industry precedents have been established, so most lawyers are advising clients to use some kind of disclaimer…. er…wait a moment, I’ve got an example somewhere. Right, got it. If you want to avoid conferring third party rights you need to include something like this “Nothing in this contract confers or purports to confer on any third party any benefit or right to enforce any term of this contract.” Such disclaimers are standard in certain construction contracts.

Philip: Katriona, thanks—you’ve been a great help. I won’t keep you any longer. I’ll discuss this with my partners and I’ll get back to you.

Katriona: OK. I think it would be useful if you can get the draft contracts to me for Tuesday morning. I’ll take a look at them and let you know what kinds of third party rights you could be creating. If it is in your interests that some parts of the contract be enforceable by third parties we can discuss this on…next Thursday afternoon, right?

Philip: That should be OK. I’ve got a meeting on Thursday morning, but if I’m running late I’ll let you know. Thanks for the help—see you next week.

Katriona: That’s fine—see you then. Bye.

Read Transcript


conditions of engagement

collateral contract

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