The Contracts (rights of Third Parties) Act 1990 (“the Act”) permits a third party who is not a party to a contract to enforce terms in that contract which will bring benefit to it. The Act also allows the parties to a contract to expressly exclude the benefits of the Act such that a third party is unable to rely on the contract to pursue its rights.
You may recall that I have previously written about Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd, a case heard in the Technology and Construction Court in August 2013. In that case the Court confirmed that an aggrieved beneficiary to a collateral warranty may well be able to adjudicate to recover its damages because the warranty may well be treated as a "construction contract" as defined by the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).
The position in relation to third parties using the Act to bring an adjudication has not, however, until now, been tested.
In Hurley Palmer Flatt Limited (“HPF”) v Barclays Bank PLC (“Barclays”), Mr Justice Ramsey decided that Barclays Bank, which was a "third party", was not entitled to commence adjudication proceedings. The notice of adjudication and referral notice were therefore ineffective and the adjudicator had no jurisdiction to determine the claims. The judgement affirms that a third party does not have a freestanding right to enforce the adjudication provision in a construction contract to which it is not a party.
HPF had commenced proceedings in the Technology and Construction Court, seeking declarations that Barclays was not entitled to commence adjudication proceedings against them and that the notice of adjudication and referral notice were ineffective and the adjudicator did not have jurisdiction.
The issue before the court was whether or not the rights given to Barclays in the appointment as a third party included the right to have liability under the contract decided by an adjudicator under the provisions of the contract.
HPF argued that under the Act the enforcement of Barclays' rights as a third party named in a contract must be by way of court proceedings. Whilst the Act makes express provision in relation to arbitration clauses, so that a third party would be treated for the purpose of the Arbitration Act 1996 as being a party to the arbitration agreement, there is no equivalent provision relating to adjudication. Adjudication, it was asserted, is a contractual dispute resolution procedure between the original contracting parties.
Barclays argued that it had a freestanding procedural right to adjudicate as part of the benefit given to it under the parties’ contract asserting that the position was analogous to the position on assignment. Barclays’ overriding argument was that it was entitled to adjudicate under the terms of the contract relying on Section 1(4) of the 1999 Act, which says:
"This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract".
Barclays claimed damages arising from breach of contract by HPF and to the right of adjudication under the contract, as well as the rights of commencing court proceedings, arguing that it could "stand in the shoes" of the Client under the contract and could therefore commence adjudication.
Mr Justice Ramsey found that Barclays did not have a freestanding right to enforce the adjudication provision in the contract. This was because the Act does not contain an equivalent of Section 8, relating to arbitration, for adjudication.
The court also referred to paragraph 1(1) of Part 1 of the Scheme For Construction Contracts (England & Wales) Regulations (“the Scheme”) which refers to any party to a construction contract being able to give written notice to refer disputes to adjudication and paragraph 1(2) which refers to the notice of adjudication being given to every other party to the contract. Mr Justice Ramsey decided these provisions in the Scheme and the Act confirmed that adjudication was inapplicable to the relationship between Barclays and HPF.
From a third party’s perspective, it is now clear that if a third party wants to be able to adjudicate then a collateral warranty is a more attractive proposition than relying on third party rights provided by the Act.