By Jonathan Gaskell, a partner at DWF LLP
I have written a couple of times previously in this publication about the use of third party rights as an alternative to collateral warranties in construction projects in Scotland. A decision of the Court of Session from earlier this year made me think again about whether the now is the right time for the industry to look again at third party rights as an alternative to collateral warranties.
The case in question is (1) The Engine Yard Edinburgh Limited and (2) Allenbuild Limited v Bayne Stevenson Associates Limited.
In that case, the court was asked to decide whether an obligation in a professional appointment for Bayne Stevenson (a structural engineer) to execute and deliver a collateral warranty within seven days of a written request had prescribed, on the basis that the request for the warranty had been made more than five years after the date of the appointment.
The court held that Bayne Stevenson’s obligation to provide a collateral warranty existed as soon as the appointment was concluded – and that the obligation to execute and deliver the collateral warranty could have been enforced at any time after the appointment was entered into.
The requirement in the appointment that a collateral warranty was to be provided within seven days of a written request was concerned with the performance of the obligation, as opposed to its substance. Therefore, the five year prescriptive period started when the appointment was entered into, and by the time that a collateral warranty had been requested, Bayne Stevenson’s obligation to provide a warranty had already prescribed (or extinguished).
This decision has given rise to concerns amongst lawyers, as it is not unusual for collateral warranties to be requested more than five years after a contract has been entered into.
The drafting in contracts can be looked at to try and get round the potential difficulty created by the decision – for example, deferring the commencement of the obligation to provide the collateral warranty until the request to provide it is made.
But the case did make me wonder whether the use of third party rights might be another way to avoid the difficulty. To remind you, the Contract (Third Party Rights) (Scotland) Act 2017 came into effect in 2018. It allows a person who is not a party to a contract to acquire the right to enforce the terms of it where a contracting party undertakes that it will do, or not do, something for the benefit of that person, and the parties intend that the person should be legally entitled to enforce that undertaking.
In construction contracts, there are two ways of setting up third party rights. The most common way is for the contract to contain a schedule of clauses which resemble those in a typical collateral warranty, with an undertaking from the party carrying out the work or services that a third party is entitled to enforce the provisions of the schedule for its benefit. This is the approach taken, for example, by the Scottish Building Contract Committee in its main contracts.
Alternatively, the contract may contain an undertaking that a third party may enforce for its benefit specific clauses in the body of the contract itself (for example, provisions relating to the standard of performance and professional indemnity insurance).
Either way, the third party rights take effect by the giving of a notice by the employer to the other party specifying that the named beneficiary (who will typically fall within a pre-agreed class of types of beneficiaries whom should benefit from third party rights) has acquired the third party rights. As such, there is no obligation which needs to be enforced against the party giving the rights to allow the third party to rely on them which could fall foul of prescription; the coming into effect of the rights is simply triggered by the notice given to the party providing them.
Obviously there will be a separate question of how prescription may apply to an actual claim under the third party rights – which is likely to be the same as that under the building contract or professional appointment to which the rights relate. But that is broadly the position under collateral warranties, where the party giving the warranty can typically rely on any defence which it would have had under the underlying contract.
Lack of familiarity with third party rights and the desire of interested parties to have a ‘signed’ document to rely on, allied to some perceived difficulties with their use (for example to allow ‘step-in’) continue prevent the market from embracing them, but these difficulties should not be unsurmountable.
Is it not at long last time to embrace change and efficiency and shift away from the use of collateral warranties?
