Reed Smith Client Alerts

Authors: Laura Riddeck

Type: Client Alerts

The recent Part 8 decision in Hurley Palmer Flatt v Barclays Bank Plc considered the application of the Contract (Rights of Third Parties Act) 1999 (the Act) and whether a third party could rely on the contractual right to adjudication. This is a rare judicial consideration of the Act – although it has been in force for well over a decade, it has been the subject of limited judicial commentary. The case indicates that it is important that contracts should expressly set out the rights that a third party is intended to be granted rather than relying on statute to imply these.

Background The Act was introduced as a way to get around the traditional rule of privity of contract (i.e. that one must be a party to a contract to be able to benefit from it). Under the Act, third parties are permitted to benefit from contractual terms where they are identified by name or by class in the contract.

The Act is now referred to in most commercial contracts, but in the vast majority of instances the sole reference is to exclude its applicability so that third parties cannot gain unintended benefits; this is now a boilerplate clause in many contracts. In construction contracts, however, it is common for third party stakeholders with a relevant interest to use the Act to rely on the work by contractors and professional consultants. Another common use of the Act is to enable affiliates or group companies of a party to a contract to rely on that contract.

Facts The contract in question was an appointment for the provision of engineering services between Hurley Palmer Flatt and Barclays Plc. The contract contained a clause permitting “Affiliates” of Barclays 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”. Separately, the contract gave parties the right to refer disputes to adjudication.

Barclays Bank Plc, who fell within the definition of an “Affiliate”, had a claim against Hurley Palmer Flatt in relation to the chilled water system, and served a notice of adjudication for related damages. Hurley Palmer Flatt brought Part 8 proceedings challenging Barclays’ right to adjudicate.

Relying on a remedy under the contract The focus of the case was whether Barclays, as a third party, could rely on and use the contractual dispute resolution procedure of adjudication. The court construed the third party rights clause as permitting reliance on terms relating to liability rather than procedure. The court determined that the adjudication clause related to procedure rather than liability and, accordingly, the third party could not rely on it.

The court also considered whether adjudication could be considered a “remedy” under the contract (as the Act specifically grants a third party the right to use any remedy that it would have as a party to the underlying contract). The conclusion was that the Act here meant remedies available in an action for breach of contract (such as damages, injunctions, specific performance and so on) rather than a method of dispute resolution.

The court also noted that the position under the Act was clearly different in respect of arbitration and adjudication. The Act allows rights, but not obligations, to be vested in third parties. However, rights can be granted subject to the fulfilment of certain conditions – for example, a condition that a third party can only exercise its right by bringing its claim in arbitration, not through the courts. Adjudication is not a direct analogy to arbitration, as it is an optional procedure rather than a compulsory one. Indeed, the Act deals specifically with arbitration, providing that where a third party right is subject to a term providing for arbitration, the third party is to be treated as a party to an arbitration agreement. There are no such provision for adjudication which leaves, as Ramsay J noted, the court to fill in the gaps.

Third party rights are not a “construction contract” Many commentators on construction contracts were surprised in 2012 when the Technology and Construction Court determined that a collateral warranty constituted a “construction contract” for the purposes of the Housing Grants, Construction and Regeneration Act (HGCRA), which, under section 108, grants parties to a construction contract the right to refer disputes to adjudication.

This was not an issue in dispute in the case, but Ramsey J did state that it was clear that section 7(4) of the Act would preclude the provisions of the HGCRA applying to the third party’s rights. This section states “a third party shall not… be treated as a party to the contract for the purposes of any other Act (or any instrument made under any other Act)” – on this basis, a third party cannot rely on the rights set out in section 108 of HGCRA, which benefit parties to a construction contract only.

The analysis seems to be, therefore, that there is no independent contract between the third party and the contractor/consultant and a third party cannot rely on rights implied by the HGCRA. This does seem to be a distinguishing factor between collateral warranties and third party rights, which perhaps creates an inconsistency as, to most commentators, the position under a collateral warranty and as the beneficiary of third party rights should be analogous.

Conclusion While raising interesting points about the interpretation of the Act, the main takeaway from the case seems to be that (as always) clarity of drafting is paramount: if you mean for a third party to be able to rely on and use certain provisions, then say so. Parties are free to confer the right to refer disputes to adjudication on a third party – it seems now that this needs to be express rather than implied.

This may not seem an obvious provision – adjudication is designed for “quick and dirty” resolutions to payment disputes, which might not be relevant for third parties without any payment obligations. However, the right to adjudicate can also be a useful tool with defects claims and so it may prove useful for the right to be expressly incorporated in third party rights provisions.

Client Alert 2014-276