What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?
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).
It is not uncommon for lenders and other third parties to enter into direct agreements with employers and contractors. As in other jurisdictions, such agreements would grant lenders step-in rights in the event of employer default for a specific period of time during which lenders assume the employer’s obligations and have the opportunity to remedy the breach.
Rights are generally not granted to third parties in Danish construction contracts.
AB 92/ABT 93 states that if a claim for defects cannot be made against the contractor (or it involves great difficulties), the employer is entitled to make the claim directly against the contractor’s sub-contractors.
In some cases (of more severe negligence), employers can make claims directly against sub-contractors and sub-consultants based on general principles of tort. In such cases, any limitation of liability in the main contract or the sub-contract will not apply to such claims, as the claims are not based on contractual rights.
In Spanish Law, contracts do not produce any effects on third parties, meaning that third parties do not have any rights granted by contracts. It is the principle of contractual relativity. There is only an extra contractual liability working in case of damages to third parties.
Under the Construction Law, a Construction Contract must cover the rights of third parties other than the worker and the contracting parties. Therefore, the rights to third parties are commonly granted based on the mutual consent of contracting parties to set forth relevant provisions in the Construction Contract.
One of the rights which is commonly granted is step in rights which enables one party (the beneficiary) to “step in” the role of another party and to assume all rights and obligations of such party if (for example) there has been serious breach of contract.
In general in a construction contract, there are no rights granted to third parties. For example there are no liens nor similar provisions in the law.
In general, rights granted to third parties depend on the each of the contracts. However, the rights that are commonly granted to third parties are, in general, the possibility of accessing and verifying how the project advances with independent engineers and in some cases, such as PPP projects, it is common to establish lenders’ step-in rights.
Contracts usually limit duties and rights to the parties to the agreement. Buyers get control and monitoring rights when buying turn-key projects.
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 builder direct to a funder, purchaser or tenant.
Third parties can not bring claims directly against the parties to a contract. However, a contracting party may assign its contractual rights to a third party. Additionally, a second or subsequent owner of a building will in many circumstances be entitled to make claims for defects against the contractor in accordance with the original contract.
Unless a third party is expressly given a right under the contract, third parties cannot generally obtain rights under construction contracts and bring claims against the contractor in respect of delays or defects. If a contract is worded to give rights to a third party (which would be very rare in a construction contract), exclusions and limitations of liability in the contract will typically be given effect.
Collateral warranties by designers, sub-contractors or others are rarely used in Swedish projects. However, in project finance structures, which are common in the wind power industry and some other industries, direct agreements or other instruments giving rights to the lenders are commonly used.
The Contracts (Rights of Third Parties) Ordinance (Cap. 623) came into force on 1 January 2016 and enables persons who are not parties to a contract to enforce rights under that contract.
In Hong Kong, the use of collateral warranties is still at an early stage of development, although they are used by many private developer and have been used by Government bodies in large-scale, signature projects.
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.
Contracts in the United States typically do not provide for third-party beneficiary rights. In the event that parties to a contract wish 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 courts 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.
In practice no rights are granted to third parties. Thus, only when an initially as third party marked party becomes a regular party to a contract, only in such cases will its rights be respected by the other parties thereto.
If funders or lenders are involved with a project, they may have rights to step in (prior to termination by the Contractor for an Employer’s breach) or to have the contract (and the relevant securities) assigned to it under the construction contract. Lenders may also gain the benefit of a collateral warranty, if one is required by the contract.
These rights are typically set out in the contract itself – the Contractor may agree:
(a) that the contract can be assigned to certain parties;
(b) to enter into a tripartite agreement with a lender; or
(c) to provide a collateral warranty to the lender once the works are complete (or once the works commence).
As many of the construction projects are self-funded, lender involvement with contracts is not particularly common in the UAE.
Renters and subsequent purchasers have no rights as against the Contractor under the construction contract. The Contractor is rarely a party to, or otherwise involved with any sales or letting of the project.
A contract constellation that is typical of building law is the so called building promoter contract (Bauträgervertrag), in which the construction company builds with its own money and at its own risk. Subsequently, the purchaser is provided with both the ownership of the property and the building placed on it. The money of the buyer is usually secured by an exemption statement of a bank. This contains a clear regulation for dealing with already paid installments in case of insolvency of the building promoter.
In general rights granted to third parties depend on the individual contract between the third party and the contractual party.
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.
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. In particular, such rights are usually vested 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.
Generally, no rights are granted to third parties. As an exception, however, contractors with government contracts assign their receivables to banks/lenders in order to obtain financing. The government, represented by the Ministry of Finance, usually consents to such assignments of receivables. Another exception is found in project financings where the lenders insist on direct agreements amongst the lenders, borrower and the offtaker/client relating to the project agreements allowing the lenders to step-in in the event the borrower is in default.
The doctrine of privity of contract extends contractual rights only to parties to the contract. Unlike some other jurisdictions such as the UK, third party rights are not governed by any statutory legislation in Malaysia. Nonetheless, third parties can obtain rights if there are collateral warranties, which circumvents the privity rule by creating separate independent contracts collateral to the consultancy or construction contract.