The future of Third Party Rights

Third party rights are increasingly being considered in place of collateral warranties. However, the use of third party rights by Employers may reduce following the decision in Hurley Palmer Flatt Limited v Barclays Bank plc [2014].

Where a purchaser, tenant or funder of buildings are affected by defective design or workmanship they may not be able to recover losses from the professional consultant or building contractor that is responsible because they have no rights under the relevant contract between the employer and the party who is responsible for the defect. Third party rights can solve this problem, by granting rights to a third party (such as a purchaser, tenant or funder) to make claims under a contract.

The Contracts (Rights of Third Parties) Act 1999 (the ‘Act’) can be used to give a non-party to a contract a right to enforce specific terms of the contract. The Act (which is often expressly excluded in contracts) provides that a person who is not a party to the contract may enforce a term of the contract if:

• the contract expressly provides that he may (a beneficiary is often described as a class of people e.g. a first purchaser); or
• the contract term purports to confer a benefit on him (for example a schedule setting out the detailed terms that a third party may enforce).

Whilst the Act was aimed at the construction industry to do away with the need for collateral warranties on each construction project, collateral warranties remain popular and the most common mechanism to give third parties contractual rights of recovery. Another alternative to third party rights is assigning the benefit of the construction documents to a third party.

Hurley Palmer Flatt Limited v Barclays Bank plc

    (i) the facts

Hurley Palmer Flatt was appointed in 2008 by Barclays PLC (the ‘Client’) to undertake mechanical and electrical design services on a data centre project in Gloucester.

A dispute arose over the chilled water system, leading to a claim against Hurley Palmer Flatt for over £4 million in relation to defects and an adjudication was commenced. However, the adjudication was not brought by the Client but by a third party, Barclays Bank PLC, based on its rights as an ‘Affiliate’ under the appointment.

The issue before the court was whether or not the rights given to Barclays Bank PLC in the appointment as a third party Affiliate included the right to have liability under the appointment determined by adjudication.

     (ii) third party rights in the appointment

Clause 14 of the appointment dealt with third party rights. In the appointment, Hurley Palmer Flatt was described as the ‘Consulting Engineer’.

Specifically, clause 14.2 provided that “save as expressly provided in Clause 14.3 and Clause 10 (Collateral Warranties) nothing in this Agreement shall confer or purport to confer on any third party any benefit or right to enforce any terms of this Agreement.”

Clause 14.3 provided that: “any Affiliate with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as ‘Client’ always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the Client.” It was agreed that Barclays Bank PLC was an ‘Affiliate’ within the definition of the appointment.

    (iii) adjudication provisions in the appointment

The appointment also included a provision for adjudication, which stated that the adjudication provisions contained in Part 1 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 applied to the appointment.

     (iv) proceedings

Hurley Palmer Flatt argued that under the Act, the enforcement of Barclays Bank PLC’s rights under clause 14.3 had to be by court proceedings. Hurley Palmer Flatt claimed that adjudication was a contractual dispute resolution method to be used between itself and the Client only.

In contrast, Barclays Bank PLC claimed it had a right to adjudication as a procedural right as part of the benefit given to it by clause 14.3 of the appointment.

    (v) decision

The court concluded that Barclays Bank PLC was not entitled to commence adjudication proceedings and so the adjudicator did not have jurisdiction to determine the dispute.

The judge confirmed that clause 14.3 was limited to the ability of an Affiliate to enforce terms of the appointment relating to Hurley Palmer Flatt’s liability, but did not extend to procedural rights under the appointment, such as a right to adjudication. The result of this decision is that if Barclays Bank PLC (as Affiliate) wanted to pursue a claim against Hurley Palmer Flatt it would need to go through the courts.

The judgement provides some good news for parties (e.g. designers, consultants and contractors) giving third party rights as it confines the class of parties to which adjudication is available.

From an employer’s perspective, the effect of this case and the decision in Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited [2013] (see our previous article on this here), where it was held that a collateral warranty was a construction contract entitling the beneficiary of that warranty to adjudicate against the contractor, is likely to be that collateral warranties will be more attractive than relying on third party rights, particularly, if an employer wants adjudication to be available to group companies with an interest in the project.

What to consider when using third party rights

• if the intention is to give a third party the procedural right to adjudicate disputes then this needs to be expressly provided within the appointment
• whilst it is convenient not having to execute a formal contract to be able to rely on third party rights, a disadvantage of third party rights is not being able to predict how a court may construe the appointment in the event of a dispute
• it is unlikely that the judge’s reasoning in Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited [2013] would be applied to third party rights meaning third party rights are not construction contracts and therefore not subject to adjudication and payment provisions of the HGCRA 1996