In the construction industry, the interests of third parties — including purchasers and tenants — are significant. Why then does it seem likely, in the short term at least, the sector will continue to rely on collateral warranties to protect these rights?
For each construction project, there is a multitude of interest in it being built and designed correctly, including from those not often party to the building contract or professional team appointments — such as funders, purchasers and tenants.
And finding a way to enforce these third party rights is essential: without a contract, there are certain claims they can’t make, such as damages for defects including those appearing years after completion.
Picture the scene — you’ve bought an office block from a developer and, it turns out, there’s a problem with the drainage system.
With nothing in your purchase agreement allowing you to claim against the seller, never mind the architect who designed it, you’ll have to pay to fix the defect yourself.
Now, the Rights of Third Parties (Scotland) Act 2017 applies to contracts entered into from 26 February, 2018.
It gives third parties contractual rights in certain circumstances, and replaces the common law doctrine of ius quaesitum tertio.
But how will it affect the standard construction industry approach of using collateral warranties as an alternative to this common law to create these rights?
Collateral warranties provide a direct contractual link between the third party and, for example, the architect or engineer.
Claims under collateral warranties are covered by professional indemnity insurance, so granting those has become common practice, and the warranties generally —
Reform of third party rights has widely been seen a necessary step to bring greater clarity, particularly in relation to common law.
What does the 2017 Act say about creating third party rights?
Not really, certainly in the short term.
It’s likely collateral warranties will remain the preferred option. Let’s take the situation south of the border as an example: nothing much changed in England after similar legislation was introduced in the late 1990s.
There, collateral warranties are still the norm.
And here, attempts such as drafting third party rights into construction contracts — where the contractor is responsible for design — have not been particularly popular.
In fact, the standard form contracts for construction introduced third party schedules in 2005 in an attempt to avoid the use of collateral warranties, but routinely these are deleted in favour of the latter.
These rights under the 2017 Act are untested, so third party beneficiaries, particularly funders, will likely want to stick with insurance-backed warranties. Of course we won’t see them tested in courts until people start using them and things go wrong, so we’re some way off.
Meanwhile at the very least, the new legislation offers the construction industry an alternative to collateral warranties that some may be keen to explore.
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