It is becoming increasingly frequent in hotel developments to rely on third party rights clauses (TPR clauses) in build contracts and appointments as an alternative to collateral warranties. This note examines how such clauses work and whether they are an acceptable alternative.
The purpose of collateral warranties is to give the end user direct recourse to the developer/contractor and professional team should build defects emerge during occupation. The end user is often a tenant entering into an agreement for lease with a developer prior to completion of the development and taking on a full insuring and repairing lease on completion. TPR clauses achieve a similar result by using existing statute law.
Under the Contracts (Rights of Third Parties) Act, a person who is not a party to a contract may enforce a term of that contract if:
(a) the contract expressly provides that he may, or,
(b) the term purports to confer a benefit on him.
A third party would benefit under the first point if it is expressly identified by name in the building contract or professional team appointment documents (the Construction Documents). In addition, it would also benefit if it is identified by name, or as a member of a class, or answering a particular description. Further, the third party concerned does not need to be in existence at the time the relevant Construction Document is entered into. Therefore, one could capture a future funder as a specific category of person who would have rights under the Construction Documents.
There have been concerns with the second point as it is potentially far reaching. For example, a contractor might be obliged to undertake works in a way that minimised inconvenience to tenants or adjacent occupiers, with the effect that the contract purported to confer a benefit on those tenants or occupiers. Therefore, a contractor could face claims for damages for breach of contract from a whole new group of people. This has resulted in many contracts expressly excluding the operation of TPR clauses.
The Advantages of using TPR clauses
- The main benefit of using TPR clauses is that it is not necessary to negotiate and obtain collateral warranties. This substantially reduces cost for all parties. However, careful drafting is still required to ensure TPR clauses work as intended. If you are thinking of going down this route as a future tenant, your legal advisers would need to make sure you have the right to approve any TPR clauses in the Construction Documents, failing which collateral warranties will need to be delivered at completion.
- Using TPR clauses removes the problem that sometimes collateral warranties are not back to back with the Construction Documents. This is often not a concern to you as a beneficiary of the collateral warranty, but is certainly an issue for contractors and consultants. This is a useful argument to use with contractors and professional team members in the event that they object to the use of TPR clauses.
- It is easy to confer independent rights of enforcement on future end users by naming them as “members of a class” and therefore these rights do not need to be assigned to future buyers/tenants, thus removing any difficulties arising from assignment.
Relying on TPR clauses has been resisted in the past as it was new and people prefer a document in their hand setting everything out. Also, there were concerns as mentioned above about the conferring of benefits and uncertainty as to how the courts would interpret such clauses. However, these concerns can be easily dealt with by contract drafting expressly excluding selected provisions in the TPR Act, and there have now been a number of Court cases providing guidance on how TPR clauses will be viewed by the Courts. It is worth therefore considering the use of TPR clauses, especially, as they have been adopted as an option in many of the JCT contracts, BPF forms and other standard form contracts.
If you wish to discuss this article or anything relating to third party rights clauses, please contact Janan Kanagaratnam at email@example.com
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.