What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

Construction (2nd edition)

Australia Small Flag Australia

Rights may be granted to third parties under tripartite agreements (e.g. to restrict variations and additional expenditure without approval, or step in rights in the event of a principal's breach or insolvency). Collateral warranties may also be required from the a builder direct to a funder, purchaser or tenant.

Belgium Small Flag Belgium

Various securities in order to preserve funders’ rights and protect their investment exist (e.g. (silent) mortgage).

Purchasers of a building, althoug they may not be involved in the contractual relation between the client (seller) and the contractor, benefit from several possibilities, such as a direct claim against the contractor in case of hidden defects.

Also noteworthy is the possibility for subcontractors to introduce a direct claim against the client, even in the absence of a direct contractual relation. (article 1798 of the Civil Code).

China Small Flag China

In some customized projects, the employer may grant purchasers, renters or the actual users of the project to review or approve the drawings or specifications, and the financing parties may, to some extent, be entitled to review the payment schedule and supporting documents. Such authorization is usually agreed by the parties under contract and such practice is often case by case subject to the parties’ bargain and negotiation.

Croatia Small Flag Croatia

In the case of project finance, funders are granted various securities on monetary claims, bank guarantees and other securities given by the contractor to the employer, shares of the company of the employer. In public infrastructure projects securities are usually not given on public land and infrastructure to be built.

Germany Small Flag Germany

In general rights granted to third parties depend on the individual contract between the third party and the contractual party.

A contract situation that is typical of building law is the so called building promoter contract (Bauträgervertrag, sections 650u and 650v BGB). There, a construction company erects a building builds with its own funds and at its own risk and then sells the property (single apartments or as a whole). Subsequently, the purchaser is provided with both the ownership of the property and the building ed on it. The money of the buyer is usually secured by bank guarantee. This contains a clear regulation for dealing with already paid instalments in case of insolvency of the building promoter.

Greece Small Flag Greece

Art. 410 et seq. of the GCC recognize the concept and regulate certain aspects of contracts entered into to the benefit of third parties. The most common third party rights are those vested in the financiers of construction projects, especially where these are financed with limited recourse financing or involve public private partnerships (PPPs). In particular, such rights are usually established by means of direct agreements whereby the contractor (i) consents to the provision of security under the construction contract to the financiers of the employer, (ii) undertakes not to terminate the contract without prior notice to same financiers and (iii) commits to complying with any step-in rights that such financiers enjoy under the project and financing agreements.

Switzerland Small Flag Switzerland

Contracts usually limit duties and rights of the parties to the agreement. Buyers get control and monitoring rights when buying turn-key projects.

United States Small Flag United States

Contracts in the United States typically do not provide for third-party beneficiary rights. In the event that parties to a contract do want to give rights to third-parties, U.S. law requires that such intent be clearly expressed in the contract. Express third-party beneficiaries have the same rights to enforce the contractual promises in the contract as the original contracting parties.

Third-party rights can also be created incidentally in construction contracts. The potential for incidental third-party beneficiaries varies by state with most state court holding that downstream contractors, subcontractors and material suppliers are not third-party beneficiaries to contracts between a general contract and an owner. Most courts have a strong presumption against incidental third-party rights, and expect any third-party rights to be expressly granted in the contract.

Austria Small Flag Austria

If (and to what extent) rights are granted to third parties is always an issue of the specific project.

Cyprus Small Flag Cyprus

The doctrine of privity of contract means that a party who is not a party to a contract cannot take advantage of any rights under that contract.

Rights of third parties to claim in tort are limited as it is generally not possible to recover pure economic loss without a contractual relationship.

As an alternative to collateral warranties, since the introduction of the Contracts (Rights of Third Parties) Act 1999, non-parties have the ability to enforce specific rights under the contract. These rights are generally set out in a schedule to the main contract.

Brazil Small Flag Brazil

Brazilian law recognizes different rights and collateral warranties in favour of third parties who take part in construction projects. For this purpose, such intent shall be preferably expressed in the relevant contracts.

The different forms of project financing in Brazil consider several possibilities for the structuring of collateral warranties and third-party rights, including: (i) pledge or fiduciary sale of shares and assets; (ii) pledge or fiduciary assignment of rights and receivables; (iii) corporate bank guarantees; (iv) parent company guarantees; (v) mortgage or fiduciary sale of land and buildings; and (vi) step-in rights. Moreover, especially in favour of purchasers, Brazilian law also recognizes institutes such as "reserve of ownership" and "fiduciary alienation" ("trust receipt"), among others.

Depending on each asset type, said securities shall require prior registration with the relevant public registry, since Brazilian law does not recognize "blanket liens".

Ireland Small Flag Ireland

Funders, purchasers and tenants of commercial premises are typically granted contractual rights against the main contractor, key sub-contractors and design team members. This is achieved by way of a direct agreement between such parties, known as a ‘collateral warranty’. A funder, if providing development finance, will require rights allowing it to step in to the main contract, key sub-contracts and design team appointments in the event of borrower insolvency. Collateral warranties also allow the beneficiaries thereof to pursue a contracting party in the event of defects in the works where the beneficiary suffers a loss.

Mexico Small Flag Mexico

In general construction contracts there are no rights granted to third parties.

United Kingdom Small Flag United Kingdom

The doctrine of privity of contract means that a party who is not a party to a contract cannot take advantage of any rights under that contract. In addition, as per the answer to question 5, rights of third parties to claim in tort are limited as it is generally not possible to recover pure economic loss without a contractual relationship. As a result purchasers, funders and tenants enter into separate contracts with contractors called collateral warranties.

As an alternative to collateral warranties, since the introduction of the Contracts (Rights of Third Parties) Act 1999, non-parties have the ability to enforce specific rights under the contract. These rights are generally set out in a schedule to the main contract.

Spain Small Flag Spain

Banks as providers of funds, usually establish together with the money loan a mortgage guarantee that falls on the land and the building, so that in case the developer stops paying the loan, the may execute the aforementioned guarantee, that is to say, they may take to public auction the land and the building, after filing a judicial action of foreclosure.

Regarding the buyers, they can register their property in the Property Registry. Two things can happen, that are subrogated in the loan and mortgage guarantee subscribed by the promoter with the bank, in which case, the charge will appear in the property registry, or that it acquires without charges, in which case, should it come down to a foreclosure by part of the bank, this does not affect them if the load does not appear in his home.

Regarding tenants in buildings to be demolished for subsequent construction, they are granted a right of relocation and return, as long as it constitutes their habitual residence (Article 19.2 of Legislative Decree 7/2015, of October 30th, which approves the Consolidated Text of the Land and Urban Rehabilitation Law (Official Gazette of the State No. 261 of October 31, 2015).

Turkey Small Flag Turkey

Regarding the projects financed through project finance method, a step-in right is normally expected to be included for the benefit of the banks or funders. Apart from that, the parties do not commonly articulate specific rights for third parties.

South Africa Small Flag South Africa

South African contract law emphasises privity of contract and will not infer or recognise third party rights under a contract unless such rights are clearly stipulated and accepted by the third party as would make it privy to the contract. As a result purchasers, funders and tenants typically require performance guarantees and/or enter into separate direct contracts with contractors or employers where necessary, which provide for appropriate recourse by way of covenants, indemnities, warranties and/or step in rights to protect their interests in a construction contract.

France Small Flag France

It is not common to provide for direct specific third parties rights in contractor agreements benefitting to funders, purchasers or renters, except for performance bonds, which may be provided for the benefit, as second rank beneficiaries, of such third parties in addition to the project owner.

Sweden Small Flag Sweden

Even though third parties in general are not granted rights in contracts, it is, unless otherwise agreed, possible for a party to grant its rights to a third party.

Furthermore, the General Conditions AB 04 and ABT 06 provide that the contractor in some cases is liable for the developer´s liability vis-á-vis a third party, e.g. a renter.

Denmark Small Flag Denmark

Rights are generally not granted to third parties in Danish construction contracts.

The AB Standards state that if a claim for defects cannot be made against the contractor or consultant (or it involves great difficulties), the employer is entitled to make the claim directly against the contractor’s sub-contractors or consultant’s sub-consultants.

Claims made directly against sub-contractors and sub-consultants are, provided that the AB Standards have been agreed upon, subject to any limitation of liability clause in the main contract and in the sub-contract.

South Korea Small Flag South Korea

  • Third parties outside of a construction and engineering contract do not have any contractual rights in the contract, unless such a right for a third party is clearly specified in the contract and the third party expresses its intention to avail the right to the obligor. It is not very common for parties to provide specific rights for third parties in their contracts. Third parties may claim damages in tort unless otherwise limited by statute.
  • Article 404 of the Civil Act sets forth the right of subrogation for a creditor. Funders, purchasers or renters may exercise such a right of subrogation to claim contractual rights under the contract on behalf of an employer or contractor. If the object of the exercise of such a right is monetary in nature, the subrogee may directly claim any payments under the subrogor’s contract, and set them off against receivables due from the subrogor.

Updated: June 3, 2019