Contracts (Rights of Third Parties) Ordinance · Collateral warranty v third party rights 16 • There is no difference in practice between collateral warranties and third party rights

Contracts (Rights of Third

Edmund Wan and James Wilkinson

Parties) Ordinance King & Wood Mallesons | 22 September 2016

King & Wood Mallesons / www.kwm.com 2

Overview of

Ordinance.

Impact on

construction

contracts.

Standard form

contracts.

01 02 03

Nuts and bolts.

04

01 Overview of Ordinance

King & Wood Mallesons / www.kwm.com

Snapshot

4

Ordinance came into operation on 1 January 2016.

Applies to contracts

entered into on or after

1 January 2016.

Allows third parties to enforce

contractual terms subject to

contracting parties’ intention.

Reforms doctrine of

privity.


Privity of Contract

5

Employer Sub-

contractor

Main Contractor

• Only parties to a contract

may enforce rights under

the contract.

• This prevents effect being

given to contracting

parties’ intention to benefit

a third party.


Third party rights under Ordinance

6

Employer Sub-

contractor

Main Contractor

• A third party may enforce a

term of a contract if:

• the contract expressly

provides that the third

party may do so; or

• the term purports to

confer a benefit on the

third party and is

intended to be

enforceable by the third

party.

• The third party must be

expressly identified in the

contract by name, as a

member of a class or as

answering a particular

description.


Third party rights under Ordinance

7

Employer Sub-

contractor

Main Contractor

Example – Rights conferred

on third party

• “Sub-contractor shall have the

right to enforce the contract.”

• “Sub-contractor shall have the

right to enforce clauses 3 and

4 of the contract against

Employer.”

Example – No rights conferred

on third party

• “Contractor agrees with

Employer to provide

renovation services to

Owner’s apartment. All

disputes arising from this

renovation contract shall be

dealt with between Contractor

and Employer only.”


Remedies available to third party

8

• Third party may seek any

remedy that would be available

to him had he been named a

party to the contract.

• Eg damages, injunctions,

specific performance.

• Including a remedy under rules

of equity.

• The Ordinance does not affect

a right or remedy of a third

party that exists or is available

apart from the Ordinance.


Opting out of Ordinance

9

If contracting parties do not wish the

Ordinance to be applicable to their

contract, they may make an express

provision to that effect in the contract

(i.e. contract out).

Example of opt-out clause

“The Contracts (Rights of Third

Parties) Ordinance shall not

apply to this contract and unless

specifically herein provided no

person other than the parties to

thiscontract shall have any rights

under it nor shall it be

enforceable by any person other

than the parties to it.”

02 Impact on construction contracts


Prior to Ordinance

11

Employer Contractor

Design Consultant Purchaser

Sale and

purchase

agreement

Design

contract

Funder

Prior to Ordinance

• Funder/Purchaser could not

sue the Contractor or

Design Consultant for

defects in the work.

• Difficult for

Funder/Purchaser to

recover damages in tort,

since recovery for pure

economic loss is available

only in limited

circumstances.


Prior to Ordinance

12

Employer Contractor


Sale and

purchase

agreement

Design

contract

Funder

Collateral warranties

• Collateral warranties

may be used to protect

third party rights. Direct

contractual relationship

between third party and

contractor/professional

consultant.


Options under the Ordinance

13

Employer Contractor


Sale and

purchase

agreement

Design

contract

Funder

Employer and Design Consultant

under the Ordinance

• Contract between Employer and

Contractor may give Design

Consultant right to claim payment

directly from Employer.

• Contract between Contractor and

Design Consultant may give

Employer right to claim directly

against Design Consultant.



14

Employer Contractor


Sale and

purchase

agreement

Design

contract

Funder

Purchaser’s rights under the

Ordinance

• Contracts may give rights for

Purchaser to sue Contractor or

Design Consultant.



15

Employer Contractor


Sale and

purchase

agreement

Design

contract

Funder

Funder’s rights under the

Ordinance

• Contracts may give right for

Funder to sue Contractor or

Design Consultant.


Collateral warranty v third party rights

16

• There is no difference in practice between collateral

warranties and third party rights in a construction or

engineering project. Either may give effective construction

security.

• In the UK, collateral warranties remain popular because:

• They are familiar. Historically, construction lawyers are

more familiar with collateral warranties. Once a collateral

warranty is formally entered into, it is a contract like any

other. Even though they have been available for ten years,

third party rights are a more recent creation of statute.

• It may be easier to grant step-in rights. If a borrower (such

as a developer) becomes insolvent, a funder wants to be

able to step in to its shoes to complete and sell the project

for the best price. Some argue it is easier to include

effective step-in rights in a collateral warranty. However,

those who prefer third party rights feel it is just as

straightforward in practice to use third party rights to grant

step-in rights.

03 Standard form contracts


NEC 3

18

Option to confer rights on third parties

Clause Y3.1 ECC

“A person or organisation who is not one of the Parties may

enforce a term of the contract under the Contracts (Rights of

Third Parties) Act 1999 only if the term and the person or

organisation are stated in the Contract Data.”


HKIA Building Contract (2005)

19

Clause 29.3

“If it is stated in the Contract that the

Employer will require a Nominated Sub-

Contractor or Nominated Supplier to enter

into a sub-contractor or supplier warranty

agreement with the Employer, the

Contractor shall, before entering into a

sub-contract or supply contract with that

Nominated Sub-Contractor or Nominated

Supplier, ensure that the Nominated Sub-

Contractor or Nominated Supplier has

given the sub-contractor or supplier

warranty agreement to the Employer in the

form set out in the Contract Bills or the

Specification or, if not set out in either of

those documents, in the form set out in

Schedules 2 and 3 of the Conditions.”

Schedule 2 – Form of Warranty to be given by NSC

“(a) We will commence and complete the Sub-Contract Works in

accordance with the Sub-Contract.

(b) We will indemnify the Employer against all extra costs that may be

incurred by non-performance of the Sub-Contract Works, by late

completion of the Sub-Contract Works or by any breach of these

warranties.

(c) We have exercised and will exercise all reasonable skill and care in:-

(i) the design of the Sub-Contract Works insofar as the Sub-

Contract Works have been or will be designed by us; and

(ii) the selection of materials and goods for the Sub-Contract Works

insofar as such materials and goods have been or will be

selected by us.

(d) We will comply with and satisfy any performance specification or

requirements insofar as such performance specification or

requirements are included or referred to in the Tender Documents

and/or our Tender as part of the description of the Sub-Contract

Works.”

Collateral warranties


JCT 2011

20

Clause 7A-1

“Where clause 7A is stated in Part 2 of the

Contract Particulars to apply to a

Purchaser or Tenant, P&T Rights shall vest

in that Purchaser or Tenant on the date of

receipt by the Contractor of the Employer’s

notice to that effect, stating the name of

the Purchaser or Tenant and the nature of

his interest in the Works.”

Rights conferred on purchasers, tenants and funders

Clause 7B-1

“Where clause 7B is stated in Part 2 of the

Contract Particulars to apply to a Funder,

the Employer may by notice to the

Contractor confer Funder Rights on the

Funder identified in the notice. Those

rights shall vest in the Funder on the date

of receipt by the Contractor of the

Employer’s notice.”

04 Nuts and bolts


Rescission and variation

22

Restriction on rescission and variation

• If a contract is enforceable by the third party, parties to the contract may not, without the third party’s consent, by agreement rescind or vary the contract so that the third party’s right under the term is altered or extinguished where:

• the third party has assented to the term and the promisor has received notice of the assent; or

• the third party has relied on the term and the promisor is aware of the reliance or can reasonably be expected to have foreseen that the third party would rely on the term.

Express terms override restrictions

• Contracting parties may override the above requirement by way of an express term in the contract provided the third party is aware of such express term or reasonable steps have been taken by one or more parties to the contract to make the third party aware of such express term.

Court may intervene

• A party to the contract may apply to the court to make an order dispensing with the third party’s consent.

• The court may make the order if:

• the other party or each other party to the contract agrees to rescind or vary the contract; and

• the court thinks it just and practicable to make the order.


Defences

23

Example: Contract between

Buyer and Seller. Seller is to

supply concrete to Buyer.

Buyer is to make payment

direct to Manufacturer. In

breach of the contract, Seller

did not provide the concrete

to Buyer. Manufacturer sues

Buyer for the payment. Buyer

may raise the defence of

breach of contract.

If a third party brings proceedings

to enforce the contract, the

promisor may raise the following by

way of defence or set-off:

1. A matter that:

(a) arises from or in

connection with the

contract and is relevant to

the term; and

(b) would have been available

to the promisor by way of

defence or set-off if the

proceedings had been

brought by the promisee.

Buyer Distributor

Manu-facturer

Supply of

concrete

Sale of

concrete

Buyer to pay

Manufacturer

direct


Defences

24

2. A matter in respect of which

the following conditions are

met:

(a) an express term of the

contract provides for it

to be available to the

promisor by way of

defence or set-off in

proceedings brought by

the third party; and

(b) the matter would have

been available to the

promisor by way of

defence or set-off if the

proceedings had been

brought by the

promisee.

Example: Distributor supplies

concrete to Buyer. Under the

contract, Buyer agrees to pay

the price to Manufacturer.

Buyer has borrowed money

from Distributor and the loan is

due on demand.

The contract for sale of

between Distributor and Buyer

contains the following clause:

“If Buyer fails to pay

Manufacturer, and

Manufacturer enforces

contractor against Buyer,

Buyer is entitled to raise

any defence and set-off as

is available against Buyer

under the loan agreement.”

Buyer Distributor

Manu-facturer

Supply of

concrete

Sale of

concrete

Buyer to pay

Manufacturer

direct

Loan


Defences

25

3. A matter that would have

been available to the

promisor by way of defence

or set-off if the third party

had been a party to the

contract.

Example: Buyer agrees

with Distributor to pay a

sum of money to

Manufacturer.

Manufacturer has

induced Buyer to enter

into the contract with

Distributor by

misrepresentation.

Buyer may have a

defence against

Manufacturer that the

contract is voidable for

misrepresentation.

Buyer Distributor

Manu-facturer

Sale of

concrete

Buyer to pay

Manufacturer

direct


Protection from double liability

26

The promisor is

protected from double

liability under the

Ordinance.

On obligations

If the contract is


party and the promisor

has wholly or partly

performed the promisor’s

obligations to the third

party, then the promisor

is discharged from the

obligations owed to the

promisee to the extent of

having performed the

same obligations to the

third party.

On loss

If the contract is


party and the promisee

has recovered from the

promisor a sum for:

• the third party’s loss;

or

• the expense of making

good to the third party

the promisor’s default,

then a court or arbitral

tribunal must reduce any

award to the third party

to the extent it thinks

appropriate to take

account of the sum

recovered.


Dispute resolution

27

Arbitration

If a third party’s right to enforce a term of a

contract is subject to an arbitration agreement,

the third party is treated as a party to the

arbitration agreement for the purposes of

enforcement of the term, unless on a proper

construction of the contract, the third party is not

intended to be so treated.

A third party will have a procedural right under a

contract to submit disputes to arbitration if:

• the contract term is enforceable by the third

party;

• the term provides that the dispute between

the third party and the promisor is to be

submitted to arbitration; and

• the term constitutes an arbitration agreement.

Exclusive jurisdiction

clause

If a contract term is

enforceable by a third party

and the contract contains

an exclusive jurisdiction

clause, then the third party

is bound by the exclusive

jurisdiction clause if there is

any dispute relating to the

enforcement of the term by

the third party against the

promisor, unless on a

proper construction of the

term, the third party is not

intended to be so bound.


Assignment

28

A third party may assign to another

person a right under a term of a contract

enforceable by the third party unless:

• the contract expressly provides

otherwise; or

• on a proper construction of the

contract, the right is personal to the

third party and is not assignable.

Contracts (Rights of Third

Edmund Wan and James Wilkinson

Parties) Ordinance King & Wood Mallesons | 22 September 2016