Third Party Agreement Clauses: Getting back to back

Parties entering into development agreements or construction contracts will wish to achieve a “back to back” position in relation to other agreements relating to the works. For example, a main contractor will want to step down obligations assumed under the main contract into his sub-contracts. A developer will want to step down construction obligations assumed under an agreement for lease into his building contract and professional appointments.

The temptation is to look for a magic bullet which will automatically step down all obligations, for example:

[Party 1] shall perform its obligations under this agreement so that no act, omission or default of [Party 1] shall constitute, cause or contribute to any breach of the documents entered into or to be entered into by [Party 2] and any third party in relation to the works.

Such “third party agreement” clauses are becoming ubiquitous, and not just in construction contracts, but do they work?

In Imtech Inviron Ltd v Loppingdale Plant Ltd [2014] EWHC 4006 (TCC) the court had to consider whether the adjudication provisions of a framework agreement were incorporated into a sub-contract. The sub-contract included a term that “the Subcontractor shall perform and assume, as part of its obligations under this contract, LPL’s obligations, liabilities and risks contained within the Principal Contract that relate to the carrying out of the Task Order and/or Purchase Order as if they were expressly referred to in the subcontract as obligations, liabilities and risks of the subcontractor”. The court declined to apply the adjudication procedure in the framework agreement, as it was “far from evident” that the parties intended it to be incorporated into the sub-contract.

In the Scottish case of Watson Building Services Limited [2001] ScotCS 60, the sub-contract obliged the sub-contractor to “observe, perform, and comply with all the provisions of the Main Contract in so far as they may relate to the sub-contract works and are not inconsistent with any express provisions of the sub-contract”. Again, the court declined to apply the adjudication provisions of the main contract, but went even further in accepting the sub-contractor’s argument that it was completely inappropriate to seek to transpose the provisions of the main contract into the sub-contract, as they were completely different in nature:

The standard form was designed for the “employer” and “contractor”. A main contractor was responsible for design; the sub-contractor was not. The obligations imposed on the sub-contractor were completely different from those imposed on the main contractor. It made no sense to try to read the standard terms applicable to the main contract into the sub-contract. There were uncompleted blanks in the SBCC standard form – for example, in relation to the contract drawings. In any event, scarcely one clause seemed to fit the sub-contractor’s circumstances. It was therefore a failed attempt to incorporate a standard form which was wholly inapplicable to the main contractor/sub-contractor relationship.

Given the difficulties, it is unsurprising that a court would be reluctant to undertake the task of sifting through the third party agreement to identify which parts might be relevant. The comments in Watson may also reflect an instinctive disposition to discourage such clauses in view of their potentially onerous effects.

The recent case of Lendlease Construction (Europe) Limited v Aecom Limited [2023] EWHC 2620 (TCC) illustrates this. The consultancy agreement between Lendlease and Aecom obliged Aecom to “ensure that no act, default or omission of the Consultant shall cause or contribute to any breach by the Contractor of any of its obligations contained in the Employer’s Requirements and/or the Project Agreement and/or the Principal Agreement.” Nevertheless, the court was able to conclude that the consultancy Agreement did not operate to step down Lendlease’s obligations under the building contract. This was because another term of the consultancy agreement stated that notwithstanding any other clause in the consultancy agreement “the Consultant shall not be construed to owing [sic] any greater duty in relation to this Agreement than the use of necessary reasonable skill, care and diligence.” However, the building contract was still relevant in setting the context for what reasonable care, skill, and diligence actually required.

So, the risk for a party relying on a “third party agreement” clause is that it might not be effective. The risk for the party on the receiving end, on the other hand, is that it might be effective. In that event, the party on the receiving end would be required to review lengthy and complex legal documents which it may not be well placed to understand and which may have only tangential relevance to its contract.

The better, and fairer, way to step down provisions of other agreements is to decide on what it is relevant and to copy the relevant provisions with appropriate changes so that they fit the circumstances of the contract. That may involve more work initially, but is likely to be more successful in the end.

To contact Alan, or read more about his practice, click here.