The AGS Loss Prevention Working Group undertook a survey of members in 2024 requesting comments on their recent and current commercial, contractual and legal issues which have affected their organisations in the previous 12 months.  17 comments were received which covered a variety of topics.  One of the most significant areas of concern for responding members related to third party reliance on reports and collateral warranties.

The main concerns were regarding the requests for rights to unlimited reliance letters or collateral warranties, the ability to charge for reliance letters and collateral warranties, and the lack of understanding clients have about what they are asking for and why it might not be acceptable.

Over the years the AGS has published a number of documents which are relevant to this issue, namely

Loss Prevention Guidance 011 – The Contract (Rights of Third Parties) Act (updated 2022),

Loss Prevention Guidance 024 – Collateral warranties (updated 2022),

Loss Prevention Alert 11 – Confusion about Assignments (2000) (updated 2026),

Loss Prevention Alert 45 – Assignment of Reports (2011) (updated 2026),

Loss Prevention Alert 68 – Duty of Care arising from Third Party Reliance on a geotechnical report (2018), and

Loss Prevention Alert 76 – Reliance on another company’s Report (2023).

The information in these documents can help AGS members navigate their way through the issues around collateral warranties and third party reliance, and to help them inform their clients about these issues.  This article summarises the main points in relation to AGS members’ concerns, but it is strongly recommended that members review the guidance mentioned above produced by the AGS LPWG.

How third parties can be given rights in a contract

1. Under the Contract (Rights of Third Parties) Act 1999 any third party may enforce a contractual term in a contract if that contract expressly gives them the right to do so, or if the contractual term purports to confer a benefit on the third party. Further information on the Act is given in LPG 011.
2. Another way rights (for example the benefit of a report, ie the right to rely on it) can be assigned to a third party is by formal assignment. Depending on the terms of the report author’s appointment, this assignment may, or may not, be subject to notification to the report author. See LPA 11 and LPA 45.
3. A third way is by way of a letter of reliance. Reliance letters typically relate to named report(s) that the third party can rely on. See LPA 68 and LPA 76.
4. A fourth way is by using collateral warranties, or duty of care agreements, which are contracts ancillary to an appointment or building contract. Collateral warranties relate to all the professional services and advice provided under the appointment, not only the formal reports issued as part of the services. LPG 024 explains collateral warranties.

Formal assignments, reliance letters and collateral warranties create direct contractual links between third parties (such as future occupiers of buildings and funders of projects) and the consultants or contractors with whom such third parties would ordinarily have no contractual link.

Considerations associated with giving third party rights

One should avoid providing third party rights without carefully considering the business risks and the commercial implications. There is a multiplication of these risks to the warrantor if numerous warranties (or ‘letters of reliance’) are given. There is also a considerable burden of administration in providing and keeping track of the warranties, and dealing with insurance.  The period of risk could be extended by the warranty.  The beneficiary of the warranty or reliance letter, or assignee under an assignment contract, may not be a party to the primary works contract, and indeed may have requirements and business attitudes different to the original client.  Attention should be paid to the proposed development and any changes that may have occurred to plans since your work.

The level of professional indemnity cover should be considered.  Losses suffered by the third party may be of a type and extent that the original client may not have suffered and may include substantial consequential losses, such as business interruption losses and so forth.  The rights acquired by the third party are valuable and include the right to sue if the report contains errors which cause them to suffer loss.  With multiple collateral warranties or third party reliance letters there could be multiple actions, cumulatively exceeding the level of professional indemnity insurance cover, and hence exposing the insured’s own financial resources.

As well as the level of PI cover, insurance policy wording may include specific conditions relating to third party reliance.  Members should ensure they carefully review any obligations to provide these prior to signing a contract, with careful consideration of how those obligations might interact with their insurance policy exclusions.

The AGS member should consider giving the third party a copy of the AGS Client Guide to Professional Indemnity Insurance which aims to assist clients to better understand PI insurance issues and the need for agreement with their advisors and designers on the most sensible allocation of financial risk.

The contract of assignment, reliance letter or collateral warranty must have more than a nominal value to those requesting them, as otherwise why would it be required?  AGS members should consider all aspects relating to the increase in risk associated with entering in to an assignment or warranty or issuing a letter of reliance, and look to making a realistic charge for doing so, particularly if requested after the primary contract has been signed.  LPA 45 gives some guidance on matters to consider when determining what to charge.

Article provided by David Hutchinson (AGS Honorary member)