Survey on Third Party Rights in the UK Construction Industry

I would like to invite you to participate in an important construction industry survey on the
Contracts (Rights of Third Parties) Act 1999 (the “Act”).

This survey is being conducted amongst developers, contractors, consultants, sub-

contractors, lenders, tenants and law firms, in each case both large and medium-sized.

It is being conducted in conjunction with a lecture to be given at the Society of Construction

Law on 7 September 2010.

One of the Act’s aims was to reduce the construction industry's reliance on collateral
warranties. Nevertheless, more than a decade on from Act being passed, collateral
warranties are still commonly used instead of third party rights under the Act. This research
seeks to gain an understanding of the reasons why.

This survey is conducted on an anonymous basis to encourage respondents to be candid

with their views and beliefs. Neither respondents nor their companies will be publicly
identified without the relevant respondent's prior written consent. No individual's survey
responses will be passed on or disclosed by the author of this survey.

The survey can be found exclusively online at:

http://www.surveymonkey.com/s/9HQ7LBW

Please note that the web address is case sensitive.

Please complete the survey by Tuesday, 31 August 2010. It should take you between 10
and 15 minutes. A copy of the completed survey and my analysis will be sent to you, if
requested.

If you do not feel you are the appropriate person in your company to complete this survey,
please feel free to forward this letter to someone who is.

For further reading, I attach notes on some of the subjects covered by this letter.

Thank you for your assistance.

Yours sincerely

Francis Ho
Enc: Survey Notes
Survey Notes

About collateral warranties and the Contracts (Rights of Third Parties) Act 1999

Collateral warranties have played an important role in the UK’s construction and real estate
markets for decades. On most construction projects, a number of parties will require
recourse to the designers and contractors involved in the event that there are defects or
other problems with the completed project. These parties may include tenants, lenders
providing the finance for construction or a future purchaser of the building.

Under English law’s doctrine of privity of contract, it is generally the rule that only the parties
to the contract can enforce any rights in relation to it. It will usually be the case that only the
developer has entered into contracts with the construction team so any third parties with an
interest in the project do not have any contractual claims against any of the construction
team.

In the past, these parties might have been able to seek recourse under the law of tort (which
allows for persons to have liability to third parties). However, English courts have generally
eroded the ability for third parties to claim against contractors and designers in tort in recent
years, and this is no longer considered to be a worthwhile course to pursue.

The solution used, instead, has been for developers to require their construction team
members to provide collateral warranties in favour of such third parties. Since a collateral
warranty is essentially a contract, it avoids the issue of privity of contract whilst giving third
parties the desired rights to claim (through straightforward contract law).

There is a large body of case law confirming that collateral warranties work and are effective.
However, they have had many critics over the years. As contracts themselves they have to
satisfy English law’s rules in order be upheld as contracts to be effective, they typically
require significant administrative time from all the parties involved (including lawyers’ fees)
and they increase the amount of paperwork associated with the project. For parties will large
construction teams and numerous third parties with property interests (e.g. large shopping
malls), preparing and procuring the requisite collateral warranties can constitute a significant
task.

In addition, as defects in a completed project may not become apparent until several years
have passed, collateral warranties need to be stored safely until the limitation period for a
potential claim has passed. Generally, this means a period of 12 years from practical
completion.

One of the aims of the Contracts (Rights of Third Parties) Act 1999 was to remove the
construction industry’s reliance on collateral warranties by creating a further exception to the
doctrine of privity. Instead, the contracts between developers and construction team
members could specify that certain third parties (or classes of third parties) would be entitled
to rights (generally referred to as “third party rights”) and this would vest in them rights
equivalent to what they would be used to received under a collateral warranty.

The Act applies to the jurisdictions of England and Wales, and Northern Ireland.
Nevertheless, more than a decade since the Act was passed, collateral warranties are still
commonly used and some in the industry remain suspicious of third party rights. This survey
aims to discover and understand why this is the case and what the general industry picture
of third party rights is.

In doing so, it will be the first major survey with such aims and its findings should be of
interest to all those companies involved in construction in the UK.

Further information:

A copy of the Act can be found at http://bit.ly/thirdpartiesact.

About the Society of Construction Law

Founded in 1983, the Society seeks to promote education, study and research in the field of
construction law and related subjects for the benefit of the public and the whole of the
construction industry. As part of its activities, it has a calendar of regular talks and events
throughout the UK.

The Society’s members hail from all sectors of the construction industry and include
architects, engineers, surveyors, contractors, developers, solicitors, barristers, arbitrators
and experts.

Further information:

For more details on the Society of Construction Law please visit its website at
www.scl.org.uk.

Francis Ho
August 2010