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Scottish construction contracting just got easier

You’ve had a professional team design you a building and a contractor build it. You need to borrow money to refinance the building, but the lender wants to know that he can sue the people who designed and built the building. Your tenant knows he’ll be on the hook for repairing the building so he will want to sue the building contractor and professional team if the repair is caused by their mistake. When you sell the building, the buyer wants to know that the people who designed and built the building are on the hook if they did a bad job.

What do you do? You get the professional team and the contractor to sign collateral warranties in favour of lender, tenant and buyer. These are new contracts entered into directly with each of the lender, the tenant and the buyer, under which the contractors and professional team agree that they have complied with their obligations under the main contracts and, if they have not, the lender, tenant or buyer can sue them directly.

This leads to extra paperwork and chasing around, particularly when you need collateral warranties years after the building was built. Is there an easier way?

In Scotland, we had the traditional Jus Quaesitum Tertio (JQT). This “right in favour of a third party” allows two parties to a contract (a developer and a building contractor, say) to grant rights directly to a third party (a buyer of a building, say). Problem solved, so why the rigmarole of collateral warranties? Two reasons – first, cross-border operators influenced Scottish practice by importing collateral warranties from England, where JQT never existed and; and secondly, the exact scope of JQT in Scotland was fuzzy. So, we in Scotland aped the tested English approach.

England got its own third party rights under the Contracts (Rights of Third Parties) Act 1999. This Act sat virtually unused for a few years. The construction industry then realised that “Third Party Rights Notices” could be issued, granting direct, collateral warranty-style rights to buyers, lenders and tenants without getting the contractor and professional team to sign new documents.

Scotland has caught up with England. The Contract (Third Party Rights) (Scotland) Act 2017 abolishes the old JQT and replaces it with statutory third party rights. How they work is set out in the new Act, so there is less fuzziness. It gives developers, contractors and professionals[1] the ability to grant buyers, tenants and lenders rights to enforce building contracts and professional appointments on collateral warranty terms, without needing extra signatures from contractors and the professional team.

The new law came into force on 28 February 2018, but it doesn’t affect agreements created before then. We expect it will take some time for practice to catch up with the law, but the simplification of the construction contracting process is welcome.

[1] The act isn’t limited to construction contracts – it applies to any grant of contractual rights on third parties.


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