Contracts Act - four years down the track

It is four years since the Contracts (Rights of Third Parties) Act 1999 became fully operational. The Act enables parties to a contract to overrule the privity doctrine by conferring enforceable rights on people who are not party to the contract.

Its intended application in the construction arena was to render collateral warranties obsolete. As a result, engineers, contractors and architects would no longer have to enter a number of different warranties with developers, funders and tenants of a property. Instead, the intended beneficiaries could be named in the main contract and would then have the right to sue upon it in the event of defects being subsequently discovered.

The Act was not universally welcomed and much was made of the dangers that it could pose. Rights might be inadvertently conferred on third parties and an application to court might be needed to amend a principal contract.

Industry drafting bodies, such as the Joint Contracts Tribunal, excluded the operation of the Act and insurers amended their policies to exclude cover in respect of liabilities it created.

Four years down the line, it is perhaps time to reflect. The potential benefits of the Act still hold good. Instead of separate contracts, a single contract can be produced. It is flexible, as parties can choose precisely what rights they wish to confer and underwriters can rate risks accordingly.

Around 5% of contracts use an Act solution. However, there are signs that the industry is warming to it - the JCT's most recent contract includes the Act as its default solution.