How are third parties who are not parties to the construction contract – such as purchasers, tenants and lending banks providing finance towards the development – afforded protection and given rights against the original designers and contractors involved in the design and construction of the project?
Due to the lack of a contractual relationship between third parties (such as purchasers, tenants and lending banks) and the contractor, the rules of extra-contractual liability generally apply. These rules mean that no direct claims can be made by these parties against contracting parties, except where the conditions for extra-contractual liability are fulfilled in accordance with the rules of tort.
The Civil and Commercial Code provides for a general warranty of sustainability of the construction and adequacy for its intended use for purchasers and tenants. However, owners are also jointly and severally liable to tenants. Banks are entitled to general civil liabilities claim, but as they’re not party to the contract, they can pursue a claim against the borrower, who can then claim against the developer.
The construction process produces a built environment which has potentially adverse implications for future owners and occupiers. There are serious consequences for these parties, who have no control over the design and construction of their buildings, if the original building team gets it wrong.
Australian law recognizes that building owners who suffer loss because of defective building have a cause of action against negligent builders and others.
It is also possible for end-users to require the main construction parties to provide them with separate collateral warranty agreements or ‘third-party-rights. Such collateral warranties would contain exclusion and limitation clauses which restrict the damages which end-users could recover.
Due to a lack of a contractual relationship between third parties (such as purchasers, tenants and lending banks) and the contractor, the rules of extra-contractual liability generally apply. The parliamentary committee has recently proposed a draft bill to reform extra-contractual liability and introduce a new book 6 on extra-contractual liability in the Belgian Civil Code. It should be noted that at the timing of writing this article, this legislation has not yet been adopted.
The rules on extra-contractual liability imply that no direct claims can be made by these parties against contracting parties, except where the conditions for extra-contractual liability would be fulfilled (in accordance with the rules of tort). Parties are extra-contractually liable for any damage suffered by a third party, to the extent that (i) there is damage and (ii) it has been caused by their respective (iii) default or negligence.
In addition, related legislation provides for certain additional protection measures. For example, the 10-year liability of contractors and architects with respect to buildings and major works is considered to be a legal protection linked to the ownership rights of the building. This concerns any claim with respect to serious latent defects, which compromise the stability of the building or a major part of the building. According to Belgian public order law, any such claim can be brought before the court up to 10 years following the date of final acceptance of the works. Therefore, a claim under the 10-year liability of contractors and architects rule can be made by any of the right holders of the principal, including purchasers. The same is true for any claim for the guarantee of the principal against the contractor (eg indemnification for (hidden) deficiencies in the works), as that is considered a qualitative right accruing to any owner of the building, or a respective part of the building.
Rights and obligations are enforceable between contracting parties. Tenants and banks, as third parties, would not have claim against an original consultant or contractor, unless this is specifically provided for in the contractual relationship between the original purchaser and constructor or consultant. This is, however, not common practice.
These third parties may have the right to claim damages in tort from the contractor and/or designer even though they were not part of the contract. This is clear regarding purchasers and tenants, who are protected as consumers, but this right is not absolute in relation to tenants and banks who do not have a direct relationship with the contractors and designers. This will depend on the nature of the damage and the legal basis on which the claim is brought, but in general, banks will only have a right of action against the owner of the construction project with whom they have a contractual relationship.
Privity of contract is a fundamental component of Canadian law. Generally speaking, subject to limited exceptions a contract can neither confer rights nor impose obligations on non-parties to the contract.
Once such limited exception was pronounced in a 1992 Supreme Court of Canada decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd., wherein warehouse employees of London Drugs (who had started a fire) were held to be entitled to the protection of a limitation of liability clause in the contract between their employer, London Drugs and Kuehne & Nagel. In determining whether to apply this limited exception, Canadian courts take into account whether:
Another way in which third parties can enforce obligations in contracts to which they are not parties is to take an assignment of the rights of one of the contracting parties. Unless the contract prohibits assignment, a party receiving notice of the assignment must deal with the third party as if it was the original contracting party. That said, the party receiving notice of the assignment can also raise as against the assignee all the same defences as it could have raised against the original contracting party (the assignor).
A contract also may provide specific requirements with which the contractor must comply in order to afford protections to non-contracting third parties such as a purchaser, tenant, or lender. For example, the contractor may be required cooperate with a purchaser, not interfere with tenant's business, cooperate with lender, enter into an escrow if requested by lender, obey the landlord's rules and regulations, etc. However, generally speaking, the contractor’s compliance with these types of obligations can only be enforced by a party to the contract unless an assignment is given to the purchaser, tenant, lender or landlord in the above example.
Purchasers, tenants and lending banks do not have contractual privity against the original designers and contractors involved in the design and construction of the project and so have no contractual rights against them.
Under the law of the People's Republic of China, tortious liability in this case would only be by virtue of product liability rather than a liability based in a general duty of care. Accordingly, while purchasers may sue the original designers and contractors on the grounds that a defect in the building that was attributable to them caused physical damage or economic loss, tenants and lending banks would not be able to sue in tort.
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Any person carrying out construction works is liable to the investor as well as to any further person who acquires the building for any defect in the substantial parts of the building which appears within ten years from the completion of the construction and for any defect in other parts of the building which appears within two years from the completion of the construction. The same liability applies to the designer if the defect results from a defect in the project and to the supervisor if the defect results from a mistake in the supervision. This liability may not be excluded.
Third parties are not in a contractual relationship with the original designers and contractors. Therefore generally there is no protection that can be afforded to these persons, although a relationship between the designers and contractors involved in the project and the third party (eg purchasers, tenants and banks) may arise under the express provisions of the contract concluded between the parties to the project.
The purchasers, tenants and lending banks can only be protected in individual contracts with the developer. They are not protected by the construction contract.
If possible purchasers, tenants and lending banks will record their contractual rights at the Land Registry and thus be protected from third-party rights.
If the employer to the construction has appointed a designer, eg an architect, a third-party purchaser (the seller's buyer) can in certain circumstances have remedies, ie compensation as well as damages from respectively the employer and the designer.
If the employer is 'professional' later purchasers have wide-ranging claims for damages directly against the employer.
Furthermore, a later purchaser who is a consumer can claim damages towards a professional construction inspector for defects in the construction that should have been uncovered by the inspector.
Due to the lack of a contractual relationship between third parties (such as purchasers, tenants and lending banks) and the contractor, the rules of extra-contractual liability generally apply. These rules mean that no direct claims can be made by these parties against contracting parties, except where the conditions for extra-contractual liability are fulfilled (in accordance with the rules of tort). Parties are extra-contractually liable for any damage suffered by a third party, to the extent that (1) there is damage and (2) it has been caused by their default or negligence.
Under French law, the 10-year liability period which applies to structural damage caused to the building benefits successive owners of the building.
In principle, third parties who are not parties to the construction contract are not able to recover financial losses from the original designers and contractors involved in the construction project. However, the party, which enters into the contractual relationship with the designers and contractors, may in theory include rights and safeguards in the construction contract in favour of a third party. Though, the practical relevance of such agreements is in fact low to non-existent.
In addition, the contracting party may assign its rights under the construction contract to the financing bank, eg claims for damages or in respect of any warranty. Even where the claim for damages, which the contracting party may have against the constructor or designer, differs from the damages actually suffered by the financing bank or the purchaser, the bank or purchaser will nevertheless be provided with some security in this way.
A collateral warranty is an agreement which is related to another primary contract. It is entered into by the person engaged or appointed under the primary contract in favour of a third party beneficiary who is not a party to the primary contract but who has an interest in the construction project.
Collateral warranties are gaining popularity in today's construction industry to fix liability for third parties who otherwise have no legal standing to claim over the works in issue. Developers, financing institutions, employers, contractors and professional team members can all be increasingly involved in the giving or receiving of warranties.
In Hong Kong, the use of collateral warranties is still at an early stage of development. This may due to the different approach in the financing of construction projects and the bargaining powers of the ultimate purchasers or tenants of premises in Hong Kong and the other parts of the world.
Due to the lack of contract between the designer/contractor and the purchaser/tenant/bank as affected third party, the latter may enforce its claims against the designer/contractor for damages in accordance with the general tort liability rules, pursuant to which a person causing damage to another person in violation of the law shall be liable for such damage and may only be relieved of liability if he is able to prove that he has acted in a manner that can generally be expected in the given situation.
Additionally, developers tend to assign all rights under design/construction contracts to the end users, allowing them to sue the designers/contractors for breach of contract directly.
Purchasers, tenants and funding banks will generally require collateral warranties from all construction parties, including the professional consultants, the contractor and the sub-contractors.
Banks may also require other forms of security, in the forms of charges, bonds, personal guarantees or parent company guarantees.
With respect to the case of serious defects and risk of ruin and collapse, the successors in title of the employer are granted with the same rights granted in favour of the employer vis-à-vis the contractors and, to the extent applicable, the designers and other consultants. With respect to hidden defects, the successors in title of the employer can benefit of the rights granted in favour of the employer vis-à-vis the contractors, designers or other consultants provided that the relevant contract and/or warranties are assigned to the successor in title. It is worth noting that in such a case the successor in title will be entitled either to act against the employer, in its capacity as vendor of the completed building works under the sale and purchase contract, or against the contractor as successor to the employer.
With regards to the tenants, the law does not grant them with rights vis-à-vis either the contractor or the consultants. In such a case, the tenant will therefore have the right to file a claim against the landlord, should the latter be either the employer or the successor in title, on the basis of the lease contract’s provisions. The landlord will then be entitled to file a specific claim against the contractors and/or the consultants on the basis of the relevant contracts.
Finally, with respect to the lending banks, the law does not provide specific remedies. In consideration of the above the parties may agree a mechanism whereby the lender will have the right to step into the contractual relationship existing between the employer and the contractor, in case of certain events which may have an impact on the construction contract (such as, but not limited to, subcontracting, withdrawal, early termination and/or termination due to one party’s default) in order to preserve the lender’s interests and rights.
Due to lack of contractual relationship with the contractor, third parties may not seek the contractor's contractual liability. Tort liability of the contractor could be sought by a third party in some cases. Or, in some cases, subrogation by a third party could be an option.
In principle, parties must, by mutual consultation, cover the (financial) risks by means of guarantees, bank guarantees or certain security rights, etc. Such guarantees, and certain security rights, can be transferable. If, as implied in the question, the parties are not in a contractual relationship with one another, possible risks for them could be covered by the actual contractual party, or by transferring a certain guarantee or security rights that the actual contractual party might have against the contractor. Sub-contractors that supply certain materials to the contractor and assemble certain components of the works often do so providing a specific guarantee. As a rule, the contractor transfers this guarantee to the client on delivery of the works. A client can also transfer such a guarantee to the actual buyer.
In the case of bankruptcy, certain guarantee funds such as Stichting Waarborgfonds Koopwoningen (SWK) and Woningborg NV can take over the obligations of the contractor vis-à-vis private buyers. This fund can cover up to a maximum of 60% of the contract price.
In the context of residential development, a purchaser may have rights where there has been a breach of one of the implied warranties under the Building Act 2004 (even though the purchaser is not party to the original construction contract). This statutory liability cannot be excluded.
In a commercial development, a purchaser who is not party to the original construction contract would not have an ability to bring a claim in relation to the contract against original designers and contractors, unless a separate collateral warranty was in place.
New Zealand law does recognise that designers and builders may be liable to subsequent purchasers when buildings are defective under the law of negligence, subject to the elements of such a claim being made out.
In the absence of direct deeds or other representations, Tenants of buildings are unlikely to have rights against designers and contractors. Their main recourse is to the landlords of the buildings, who have an obligation to ensure that their rental properties are maintained in accordance with law.
Typically banks and financiers will have rights against the contractor under the terms of a direct agreement or if they have exercised their rights as security holder over the construction contract (typically banks and financiers will take security over the relevant construction contract).
Third parties and end-users such as subsequent purchasers, lessees and perhaps financial institutions have no contract and cannot seek legal redress for contractual breaches against the architects, engineers and contractors of the designs and construction of the development.
The options towards affording some measure of protection for third parties can be by the Employer insisting on the following provisions:
The starting point under Norwegian law is that third parties – who are not parties to the construction contract – do not have the right to bring claims directly against the original designers and contractors involved in the design and construction of the project.
Purchasers, tenants and lending banks must therefore bring their claims against their contracting party.
However, some acts and standard documents provide the right to make a claim directly against an underlying contractual party.
Third parties who are not parties to the construction contract – such as purchasers, tenants and lending banks providing finance towards the development – usually do not have protection and rights against the original designers and contractors involved in the design and construction of the project as there is no direct contractual relationship between those entities, unless such protection has been conferred to them in the construction contract. The parties may conclude a separate agreement with the contractor covering such liability, or acquire such rights pursuant to the building agreement with the employer on the assignment of the rights of the employer against a contractor.
Under Portuguese law, the contractor is liable not just for breach of contract but also for unlawfully and wrongfully 'offending the rights of third parties' (such as purchasers, tenants and banks) or 'any legal provision meant to protect the interests of others'.
Breach of the construction contract leads to contractual liability; offending the rights of third parties may give rise to a non-contractual or tortious liability.
The contractor will only be liable if it acted with guilt and the burden of proof lies with the offended party, the claimant.
Responsibility for the development and remediation of any defects in construction works throughout their entire existence lies with the original designers and contractors.
Under Romanian legislation, original designers and contractors are not contractually liable to third parties such as tenants and lending banks, but they are liable to purchasers.
In addition, even if the designers and the contractors are not contractually liable, they may be liable under general legislation or under the rules of civil liability.
Furthermore, the employer may be held liable under agreements which it has concluded with third parties. In such situations, the employer may go back to the designer or contractor in order to recover its loss.
The purchasers, tenants and banks are considered to be third parties therefore, they will not directly have any protection against the designer and contractors involved in the design and construction of the project, unless explicitly agreed in the agreement governing the legal relationship between the developer and these third parties.
Purchasers of a building, both the initial purchaser or any subsequent ones, are protected by the principle of objective liability for construction defects which is imposed on all parties involved in the construction process and in particular on the developer as the guarantor of this liability.
This protection is afforded to owners, but not to tenants or funders, who may only claim in respect of non contractual liability.
The seller is liable, for up to six months following the handover of the property, for ensuring that the purchaser receives legal and peaceful possession of the property and that there are no hidden defects. The parties can waive this liability contractually, but the waiver is ineffective if the seller acted in a dishonest manner.
Since May 2000, buyers of newly built property have benefited from a legal 10-year warranty, under which developers are liable in the event of a collapse or serious structural defects. The term of the warranty runs from the date on which the building is completed.
Security is most often dealt with through collateral agreements involving mortgage deeds or bank guarantees.
In principle, third parties who are not the parties under the construction contract are not entitled to directly claim against the original designers and contractors involved in the design and construction of the project. Nevertheless, the third parties are able to claim against the developers if the contract allows or under the law of tort/wrongful act for any damages incurred pursuant to section 420 and 434 of the Civil and Commercial Code. The developer may then have recourse against those who are directly liable to the developer.
Third party rights may be obtained through specific provisions in the UAE Civil Code. However, it is common practice for third parties to seek protection through collateral warranty agreements. A collateral warranty is an agreement which is related to another primary contract (the main building contract, sub-contract or consultant's appointment). It is entered into by the person engaged or appointed under the primary contract (ie the main building contractor, sub-contractor or consultant) in favour of a third party beneficiary who is not a party to the primary contract but who has an interest in the construction project – namely, a funder, purchaser or tenant.
There is no statute providing for third-party rights. Other than general Civil Code provisions, third parties may seek protection through collateral warranty agreements. A collateral warranty is an agreement which is related to another primary contract (the main building contract, sub-contract or consultant's appointment). It is entered into by the person engaged or appointed under the primary contract (ie the main building contractor, sub-contractor or consultant) in favour of a third-party beneficiary who is not a party to the primary contract but who has an interest in the construction project – namely, a funder, purchaser or tenant. These collateral warranties are also often referred to as duty of care deeds.
The construction process produces a built environment which has potentially adverse implications for future owners and occupiers. There are serious consequences for these parties, who have no control over the design and construction of their buildings, if the original building team gets it wrong.
Under English law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is not recoverable where there is no contract between parties. Accordingly, in England and Wales, the common method of affording third parties protection is through what are known as ‘collateral warranty agreements’.
A collateral warranty is an agreement which is related to another primary contract (the main building contract, sub-contract or consultant’s appointment). It is entered into by the person engaged or appointed under the primary contract (ie the main building contractor, subcontractor or consultant) in favour of a third party beneficiary who is not a party to the primary contract but who has an interest in the construction project – namely, a funder, purchaser or tenant. These collateral warranties are also often referred to as ‘duty of care deeds’.
An alternative approach to third-party rights (and one which is gaining popularity) is to use the Contracts (Rights of Third Parties) Act 1999. This Act enables a person who is not a party to a contract to enforce the terms of that contract if it expressly provides that he may do so, or purports to confer a benefit upon him. Accordingly, it is now possible, in building contracts and consultancy agreements, to confer benefits upon third parties who, traditionally, would have sought collateral warranties. The most common way to do this is to set out the benefits – or rights – to be conferred on the third party beneficiaries which are specified as applying to third parties in a third-party rights schedule.
The construction process produces a built environment which has potentially adverse implications for future owners and occupiers. There are serious consequences for these parties, who have no control over the design and construction of their buildings, if the original building team gets it wrong.
Under Scots law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is not recoverable where there is no contract between parties. Accordingly, in Scotland, the common method of affording third parties protection is through what are known as 'collateral warranty agreements' (creating strict liability).
A collateral warranty is an agreement which is related to another primary contract (the main building contract, sub‑contract or consultant's appointment). It is entered into by the person engaged or appointed under the primary contract (i.e. the main building contractor, subcontractor or consultant) in favour of a third party beneficiary who is not a party to the primary contract but who has an interest in the construction project – namely, a funder, purchaser or tenant. These collateral warranties are also referred to as 'duty of care deeds'. Since the coming into force of the Contract (Third Party Rights) (Scotland) Act 2017, it has been possible for parties to a contract to confer a right of action or immunity from liability on a person/entity who is not a party to the contract (in a similar manner to the position in England).
The measures which can be used by the third parties depend on the nature of their relationship with the developer. In particular, a wide range of contractual measures could be used: taking encumbrances (mortgages) over buildings being constructed or any other property of the developer, obtaining a guarantee or surety, a pledge of rights under construction agreements, stipulating fines or other penalties for the developer etc.
According to Ukrainian legislation, an architect, another designer, building contractor and any sub-contractor shall be liable to the developer and, thus, as a rule, shall not be liable to the end user (except in cases when agreements for the respective works are agreed by such contractors directly with the end user).
A contract may extend certain rights to third parties who are not parties to the contract. Such third parties are referred to as third-party beneficiaries, and both the third-party beneficiaries and the rights afforded the third-party beneficiaries must be provided for expressly in the contract. However, because third-party beneficiaries are not parties to the contract, they do not have corresponding obligations. Accordingly, third-party beneficiaries may enforce certain of the owner’s rights as expressly set forth in the contract, yet not be subject to claims.
A simple example is a right of the owner to audit contractor’s records. If the owner has the right to audit the contractor’s records under a contract, then a third-party beneficiary also has such right and could arrange directly with the contractor to exam the contractor’s records without first seeking permission from the owner.
A more significant example is the right of the third-party beneficiary to a warranty by the contractor; the third-party beneficiary could enforce a warranty against the contractor, even though the third-party beneficiary did not enter into the contract with the contractor and has no privity.
A contract also may provide specific requirements with which the contractor must comply in order to afford protections to a purchaser, tenant, or lender. For example, the contractor may be required to cooperate with a purchaser, not interfere with tenant’s business, cooperate with lender, enter into an escrow if requested by lender, and obey the landlord’s rules and regulations etc.
The parties that are not parties to the construction contract may be given security in different ways. Banks and other lenders ordinarily require to register some form of bond over the property itself, that is a Mortgage Bond or a Notarial General Covering Bond for movables. Tenants may likewise register their long leases in terms of the Deeds Registries Act [Chapter 20:05]. Purchasers would secure their interests possibly through a conditional cession by the owner. The security is generally captured in the agreements with the third parties and may at times be incorporated in the structure off the transaction such as by taking insurance.
