Third Party Rights as Construction Security

The Contracts (Rights of Third Parties) Act 1999 allows persons that are not party to a contract to enforce contractual terms in specified circumstances. The award of third party rights (“TPRs”) as a statutory exception to the common law ‘privity of contract’ rule (i.e. that only parties to a contract can enforce it) has been available for over 20 years, but uptake of TPRs as a route to rights has been patchy since. Collateral warranties remain the preferred direct contractual link by which a purchaser, tenant or funder can obtain security from the contractor, professional team and design sub-contractors on a construction project.

Recently, however, we are increasingly seeing TPRs being used to secure rights for interested parties, particularly on larger high value projects with large numbers of professional consultants. A significant advantage to using TPRs is not needing to circulate documents and obtain signatures to multiple engrossments as is typically required with collateral warranties. In these living with COVID times, when many people are now regularly working from home or occasionally isolating, this can be a significant benefit in terms of cost and time, particularly so when a deadline is approaching.

If you are thinking of using TPRs as an alternative to collateral warranties, points to consider include:

• specific provision for the grant of TPRs can be included in building contracts, professional team appointments and, with some forethought (see below), can also be used for sub- contractors;
• the option of granting TPRs can be drafted into a contract in addition to the usual collateral warranty provisions thereby deferring the choice and enabling use of TPRs, for example, if difficulties obtaining a collateral warranty arise;
• the TPRs being awarded are normally set out in a ‘TPRs Schedule’ to the relevant contract or appointment. This Schedule may be as extensive as a collateral warranty, or as minimal as just referring to specific provisions in the contract or appointment that may be relied upon by the TPR beneficiary;
• once the contract or appointment is entered into, the TPRs are awarded by way of a TPR Notice being sent by the contracting client to the relevant contractor, consultant or sub- contractor stating the rights being awarded and the details of the beneficiary. The TPRs are usually drafted to vest immediately upon service of the TPR Notice;
• when using TPRs it is important to ensure that the TPR Notice has been served correctly and to obtain proof of this – it is best practice to agree the form of notice and method of service when drafting the TPR provisions and to get an acknowledgement from the promisor recipient or evidence of delivery once the TPR Notice has been served;
• if use of TPRs with sub-contracts is intended, an agreed sub-contractor’s TPR Schedule will need to be included in the building contract along with an obligation upon the Contractor requiring it to:
  • include provisions requiring its sub-contractors to grant the required rights in its sub- contracts; and
  • issue TPR Notices and provide evidence of this once the sub-contracts have been entered into.

If you would like further advice on using TPRs our construction team is waiting to help.