Episode 42:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week we will be talking about Third Party Rights— PC3 of the Part 3 Criteria.

Lets start by defining who and what is a Third Party:

A third party is an entity/person or persons that is involved in some way in an interaction which is mainly between two other entities or persons. The third party may or may not be officially part of the contract or agreement between the two primary entities or person.

Now lets look at what Third Party Rights Are:

Third Party Rights are created under the underlying contract itself and to create them no separate form of contract is required. They are an alternative to collateral warranties which we covered in the last episode. The use of Third Party Rights was enabled by the Contracts (Rights of Third Parties) Act 1999 and it essentially affects the law in relation to privity of contract. 

If privity of contract is in place this causes issues to third parties, who unless are expressly stated in the contract or have a Collateral Warranty, won’t be able to benefit from the contract as this depends on the enforcement by the parties to the contract. So it can be frustrating to third parties, when the contracting parties don’t take the necessary steps to secure the benefit, this can be either because the contracting party is unwilling to cause friction or confrontation with the other contracting party or because there is already a dispute between the third party and the contracting party who can enforce the benefit on their behalf. An example of this is where a contractor has a contract with the client to pass onto the subcontractor payments for work done so they finish the work but the client has no direct contract with them and can only badger the contractor to pay them in order to continue with the works who has the contract with the subcontractors. 

Before the Contracts (Rights of Third Parties) Act 1999 came into force, the best a third party could do was attempt to persuade one of the parties to sue the other on their behalf in order to be compensated for the third parties lack of benefit. But of course the risk is that the party to the contract doesn’t want to waste the time and money to sue the other party. 

So to resolve the privity of contract issues for third parties, this is where the Contract (Rights of Third Parties) Act 1999 came into effect to give the third party direct right to use on the relevant contract. Its aim is not to remove privity of contract but to create an exception. 

So looking more specifically at the Act itself:

It provides third parties with the right to enforce a term of the contract where either the contract contains an express term to that effect or where the contract purports to provide a benefit on that third party. In both instances, the third party must be expressly identified in the contract by name, class or description - but this information doesn’t have to be in place at the time of the contract. 

So the third party in essence can enforce positive rights such as a claim to payment and defensive rights such as an exclusion clause. But a key thing to note here is that the term can’t be enforced on someone else’s contract if the contracting parties didn’t intend that term to be enforceable by the third party in the first instance. In essence this means that a term can be expressed in the benefit of a third party but it precludes that third party from enforcing that benefit or contracting out the statutory provisions altogether. The benefiting terms within the contract are only for the third party and not the whole contract and the third party can only exercise their rights in accordance with and subject to the terms and conditions of the contract. 

The contracting parties, do however, have the option to exclude the Contracts(Rights of Third Parties) Act 1999 altogether and not have the option for any third party to be able to have any benefits on the contract. 

Now when it comes to third party arrangements and the architect appointment, architects need to be wary of the wording to be entered into the appointment when it comes to third party rights which should include:

A clause stating that each and every agreement relating to or affecting the Project which has been or shall be entered into by the Client from time to time and disclosed to the Architect - so this sort of clause obliges the architect to perform their services in order not to cause or contribute to any breach of such agreements by the client. But of course the architects duty only extends to reasonable skill and care. If for any reason the client insists on using bespoke appointment and wording then the additional wording will need to make clear the architects obligation to carry out the services in compliance with any third party agreements is subject to the terms of the appointment itself taking precedence in the event of any discrepancy or conflict between the terms of the third party agreement and the appointment so the architect avoids taking on any additional unnecessary risk which may cause them liability issues. If for any reason the client does not agree to this, the architect should insist on an additional fee to cover potential risk that any services provided under the appointment may cause or contribute to a breach of the third party agreement or at least add additional wording to the appointment that only a breach of the appointment or negligence would fall within the scope of the obligation not just the architects performance of services. 

And the architect should also ensure that their obligation in relation to third party agreements is only effective to the extent that the architect has received a copy of the agreement before starting their services, as the architect can’t be expected to carry out the services in compliance with a document they haven’t seen or agreed to and they should be entitled to recover additional costs of re-doing any services required by the third party agreement. 

So linking to the previous episode on collateral warranties, what are the differences between collateral warranties and third party rights?

Majority of bespoke forms offer options for the client to request either collateral warranties or third party rights. Depending on the third parties preference, the client will typically go with the preferred option which meets their requirements depending on the project. Now when it comes to architects, some PI insurers aren’t too keen on insuring third party rights and prefer architects go down the collateral warranties route. 

Even if the PI insurers agree to the third party rights, the architect should still be wary of third party rights, because once the third party right obligation has been agreed in the appointment there’s no turning back - so if the client gives a third party notice, the architect will need to decide whether their willing to agree or not this is essentially also the case when agreeing to a collateral warranty. But until the architect actually signs the agreement, the proposed collateral warranty can’t be enforced upon the architect unlike third party rights. 

Third party rights are a simple and straight forward way of vesting rights in purchasers and tenants avoiding problems created by the need to secure the execution of collateral warranties. Funders in general however tend to prefer collateral warranties because of their provision of ‘step-in’ rights. Purchasers and tenants don’t necessarily have a preference of either as both methods grant them the rights they require. 

A few reasons why Third Part Rights may not be preferable may be due to:

• The construction industry in general being more familiar with collateral warranties
• Collateral warranty is a separate contract between the parties 
• Sub-contractors are more familiar with collateral warranties so extra time and negotiations will be required resulting in a time-consuming and expensive process if third party rights are to be used instead 
• If third party rights were to be used with sub-contractors, the third party clauses will need to be included and reviewed in every single sub-contact 
• And as already mentioned, some banks an funders tend to prefer collateral warranties

So to sum up what I discussed today:

• The Contracts (Rights of Third Parties) Act 1999 introduced the change to the law on privity of contract which provides that a person who is not a party to a contract will be entitled to enforce a term of the contract and to achieve this the third party rights clause is enabled in the appointment.
• When a beneficiary is identified in the appointment by name, class or description, the client will give notice to the architect of their obligations to be extended to the beneficiary -  the architect does have the right to object to this agreement, however, if the beneficiary is within the scope of the third party right obligation the architect can’t do anything at this stage to deny the granting of the third party rights
• It is possible to exclude third party rights from the Conditions of the Appointment preventing third parties bringing claims against the architect
• As an architect before agreeing or signing anything first check and confirm your PI insurers position and preference 

I would recommend reading the Contracts (Rights of Third Parties) Act 1999 on the government website which I’ve provided in the episode notes.