Third Party Rights – the future in construction?
The Contracts (Rights of Third Parties) Act 1999 ("the Act") is one which may not be particularly familiar or indeed exciting, even to those working in the construction industry – it's certainly an Act which has received little comment in case law. This is despite the fact that the Act is referred to in the majority of construction contracts and commercial contracts – though most often only to exclude it! However, a recent case has brought the Act into the limelight.
The Contracts (Rights of Third Parties) Act 1999
The Act allows third parties to enforce terms of contracts that they are not a party to, but which benefit them in some way, or which the contract allows them to enforce. It also gives parties access to various remedies if those contract terms are breached. However, the majority of companies and industry professionals have shied away from using third party rights, seeing them as too much of a risk.
The perception of risk has no doubt not been helped by the fact that a beneficiary (a class of beneficiaries is also satisfactory) needs to be expressly identified in a contract in order for it to seek to enforce its rights. This means that the drafting of the contract is absolutely key and any ambiguity could leave the third party with no rights of enforcement at all. It is perhaps no wonder then that many have chosen to stick with the 'tried and tested' collateral warranty as a means of enforcing their rights instead. But could the recent judgment in Chudley v Clydesdale Bank PLC  EWHC 2117 (Comm) help to change this?
Chudley v Clydesdale Bank PLC
The case of Chudley v Clydesdale Bank PLC actually relates to a banking matter rather than construction. However, the guidance given by the High Court on identifying third parties under the Act is particularly relevant to the construction industry and those looking at obtaining and/or enforcing third party rights.
The Claimants (a group of investors) argued that they, as a third party, were entitled to enforce the terms of a Letter of Instruction between the Bank and an investment company who were seeking to open a client account. A particular clause within the Letter of Instruction requested that the Bank open a "Segregated Client Account" – no other reference or definition was included in the letter as to who the 'clients' using that account would actually be. The Claimants argued that the fact the account was referred to as a “Client” account was sufficient to identify those paying into that account as 'clients' and that those 'clients' were a class of third party beneficiary for the purposes of the Act. As it turned out, the court accepted the Claimants' interpretation.
The judge held that:
- It was permissible to identify a class of beneficiaries via a process of interpretation of the express terms of the agreement. However, this would not be the case where beneficiaries might only be capable of impliedly being identified by express terms. Therefore, the fact that the account was referred to as a "Client" account was key as this was an express provision identifying a class of beneficiaries. Without this, the class of beneficiaries may only have been able to have been implied and a different view may have been taken.
- The same contractual term could satisfy the requirements for both the express identification of the third party and the intention to confer a benefit under the Act.
The decision in Chudley v Clydesdale Bank PLC goes to support the view that the courts will seek wherever possible to uphold Third Party Rights and to be flexible in their approach to identifying classes of beneficiaries; as they did in Starlight Shipping Co v Allianz Marine & Aviation Versicherungs AG  EWHC 3068 (Comm).
Support for the Act does appear to be increasing, with its use becoming more commonplace, particularly on large development projects involving numerous beneficiaries. However, many banks and other investors have been reluctant to move away from the long established world of collateral warranties. Should this judicial approach continue, parties may begin to gain confidence in the use of third party rights and move away from their favoured collateral warranties, which can be notoriously time consuming to obtain.
The use of general beneficiary classes within third party rights schedules could be of particular benefit to Employers and Funders but would perhaps be less well met by the warrantors themselves or indeed, their insurers.
If you would like to discuss third party rights or collateral warranties, please contact a member of the Construction & Engineering team at Michelmores.