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Adjudication under third-party rights – or not

Contractors’ views on collateral warranties vs third-party rights may swing following recent TCC decision.

A recent case in the Technology and Construction Court has considered the extent to which third-party rights can be subject to adjudication.

The decision makes it less likely for adjudication to apply to third-party rights and follows on from the Parkwood v LOR decision last year, which held that collateral warranties could provide a right to adjudicate.

Chilled dispute

In the case of Hurley Palmer Flatt Ltd v Barclays Bank plc, Barclays had appointed HPF as a mechanical and electrical engineering consultant for the design of a data centre.

The appointment included a third-party rights clause entitling any affiliate of Barclays with a direct interest in the project to enforce the terms of the appointment. The appointment also provided for adjudication pursuant the scheme.

“The TCC decided that the appointment contained no express provision requiring or entitling the third party to adjudicate”

A dispute arose relating to the chilled water system and a third-party affiliate of Barclays issued a notice of adjudication seeking damages.

HPF commenced proceedings seeking a declaration that the third party was not entitled to commence adjudication proceedings on the grounds that its rights under the appointment did not include a right to adjudicate.

The TCC decided that the appointment contained no express provision requiring or entitling the third party to adjudicate.

Neither was the third party able to rely on the statutory right of adjudication provided for by the Housing Grants Construction and Regeneration Act 1996, as it was not ‘a party’ to a construction contract (ie it was a mere third party).

No right to adjudicate

The TCC therefore considered whether the terms of the Contracts (Rights of Third Parties) Act 1999 (the ‘act’) entitled the third party to make use of the adjudication provisions.

It was held that the act did not provide such a right because:

  • While section 1(4) of the act requires that third-party rights be enforced subject to the terms of the contract, the adjudication provisions in the appointment were voluntary, not mandatory. The parties could choose whether to litigate or adjudicate.
  • Even if adjudication had formed a condition to the third-party rights under section 1(4), the Barclays’ affiliate would not have been a party to the adjudication agreement and would not have been able to commence an adjudication in its own name.

Collateral warranties more attractive

So what does this mean for the construction industry?

One possible consequence is that the decision may make collateral warranties more attractive to beneficiaries (subject to the future review of the decision in Parkwood) than third-party rights, particularly where the beneficiary may want to use adjudication proceedings.

“The decision may make collateral warranties more attractive to beneficiaries than third-party rights”

Interestingly, the decision does not state that adjudication may never be available under third-party rights, simply that the third-party rights need to expressly provide for it and include drafting to circumvent the arguments that the third party is not a party to the adjudication agreement.

Whether this is of concern to beneficiaries is unknown; the use of adjudication to enforce rights under collateral warranties and/or third-party rights has been very limited and, save the aforementioned case, untested to date. Time may tell.

Adrian Bell is a partner and Andrew Grudzinski is an associate at CMS Cameron McKenna

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