What Is A Tripartite Agreement?
A tripartite agreement is a legal document that includes three different parties. These parties will be three people or three different organizations that are involved in a business transaction or ongoing matter. The third party is a direct participant in the activities of this matter, so the agreement really does involve all three parties directly.
One of the basic understandings of a tripartite agreement is that one or more of the parties is likely to have a type of contractual relationship with at least one of the other parties. So you don’t just have three independent people with no pre-existing relationship agreeing to something. There may be overlap between or among the three personalities in these agreements.
Typically what happens is that one of the parties , often referred to as the "copromisor," has a contract with the "obligee." Then under the terms of the tripartite agreement, the copromisor also agrees with the third party, known as the "copromis," to assume primary liability for the performance of the agreement. These obligations can sometimes overlap between or among the parties so working with a legal professional familiar with these agreements can help to ensure that the terms of the tripartite agreement actually match the intentions of the parties.
What The Parties Do
The three parties in a tripartite agreement each have specific roles and responsibilities, which are set out in further detail below.
Client
The client is the developer or owner of the project, whether private or public. It will have overall responsibility for the project and will appoint appropriate consultants and contractors. It will usually provide the project brief to the contract administrator after consideration and agreement with the contractor. It is not ordinarily a party to the building contract (although it may enter into a separate agreement with the contractor giving it certain rights under the building contract), but it will nevertheless be a party to the a service agreement or management agreement with the contract administrator, as the consultant providing contract administration services on behalf of the client. The client will set out its requirements in the service agreement / management agreement, including specifying the consultant’s obligations, its role in respect of the architect’s certifier, and the level of service to be provided by the contract administrator.
Contract Administrator
The contract administrator will be a consultant either employed directly by the client (noting that the contract administrator’s role is independent from the role of the architect), or employed by the contractor, or employed jointly by both the client and the contractor.
The contract administrator will:
In addition, the contract administrator will be the contract administrator under the building contract itself, with the roles and responsibilities set out therein.
Architect
The architect will be the relevant consultant, and will have overall responsibility for the design of the project, subject to any novation or assignment of the contract to the contractor, in which case the contractor will hold overall responsibility for the design to the extent of the works undertaken by the contractor. Where the contract administrator is employed by the client, the architect should advise the contract administrator if advice from other persons is needed in relation to the interface and coordination of the design and construction of the project, and the program for the completion of the works as necessary to enable the contract administrator to perform its function in connection with the building contract.
Common Uses of Tripartite Agreements
Common scenarios associated with tripartite agreements include transactions and arrangements between a developer, funder and purchaser in residential and commercial real estate developments, medical professionals entering into joint venture arrangements to develop new systems, protocols or services, corporate group arrangements between a corporate parent, its subsidiary and the entity acquiring control of the subsidiary, and the provision of banking and cash management facilities, generally in favour of the set of lenders providing the facilities.
In real estate, a tripartite agreement is commonly used in a transaction where the purchaser of real estate has made a deposit and before completion the vendor and purchaser agree to develop the property (for example as a joint venture) and the land is on-sold to the developer who is then permitted to complete the development and on-sell the individual properties to third party purchasers. A tripartite agreement can also be used to structurally deal with any arrangements amongst the landowner, developer and any third party purchasers, such as the allocation of costs and profits and internal arrangements between the landowner and developer (such as licensing the right to conduct construction in consideration of a share or other payment, usually on a cost plus basis). The purchaser of the property will not necessarily have any input in respect of the terms of the agreement between the landowner and developer or in respect of the relationship between them (unless it is made a party thereto).
Parties may also enter into a tripartite agreement between a funder, a lender and a borrower. A tripartite agreement may be required in situations where a lender will only lend funds to a borrower if a tripartite agreement between a funder, lender and borrower has been executed by the parties. The tripartite agreement may set out the rights and obligations of the parties under the applicable loan facilities and any funders deed and the tripartite relationship between the parties involved. There are generally two types of tripartite agreements of this kind. One where a lender is agreeing to provide funds to a borrower and the borrower is in turn agreeing to let the funder provide those funds to the borrower. The funder has been found to have a direct resort to the borrower in addition to the lender and this form of agreement is common in the construction industry. The second type of tripartite agreement is one that deters a borrower’s directors or related entities from providing funds to a borrower and in the absence of which the borrower would otherwise be able to do by virtue of a related company relationship. In this type of agreement, the funder is merely reinforcing the obligation to the borrower not to divert funds provided by the lender elsewhere in the absence of the consent of the lender. Generally this form of tripartite agreement can stand alone as a distinct agreement.
Advantages to Using a Tripartite Agreement
Tripartite agreements offer several significant benefits to the parties involved. Through careful drafting and consideration, parties can maximize the enforceability of an agreement while adding a layer of security and clarity to the transaction. For lenders, tripartite agreements provide a degree of protection when a borrower defaults and the lender chooses to foreclose on the real property. In many ways, these protections are similar to those extending to the buyer and seller in a typical transaction. However, the protections can be more extensive. The seller may be held harmless for the actions of the buyer, who has caused the damage to the property. The seller may also gain the right to any funds remaining after the sale to satisfy any debts owed. For lenders, tripartite agreements are also important because they allow the lender to protect its interests in its loan to the borrower. A construction lender has more options available than one who simply offers a commercial loan. In the event of default, the lender can directly notify the borrower, or the party to whom the borrower is responsible. Depending on the circumstances, the lender may be able to immediately sell the property or force the borrower into bankruptcy to avoid lengthy legal challenges concerning the sale of the property. Tripartite agreements also remove some of the uncertainty that can plague a party to a construction contract. Unlike a vendor contract between a supplier or subcontractor, a tripartite agreement outlines explicit rights, responsibilities, and obligations for all of the involved parties. A party can usually expect the other two parties to make an appropriate effort to collaborate during the course of the project. This collaboration can ultimately lead to fewer disputes and a more successful project overall.
Limitations to Using a Tripartite Agreement
When undertaking a tripartite transaction, all parties must be satisfied that the intended structure will meet their respective needs and address any complexities in the relationship. Failure to do so can result in disputes at a later stage, to the detriment of all the parties. As a general rule, the parent of the group should not provide a guarantee for the liabilities of its joint venture subsidiary as this would negate the limited liability of the joint venture incorporated company and could result in an unfair allocation of risk and cost. If the parent does wish to provide a guarantee, it would be preferable to provide a limited guarantee in relation to certain obligations only where the risk is appropriate and should ensure that guarantees are given in such a manner as not to crystallise any liability under certain types of debt (e.g. an environmental liability). Any limitation of liability and indemnity provisions should ensure that they are reciprocal so they apply equally to all parties. Limiting liability to the parent or a holding company can result in unfairness if one party is in a superior bargaining position , particularly where the obligation is of mutual benefit. Where an existing parent company is acquiring the remaining shares, it should be advised against paying any excessive capital payment up front. This is because where there is a need for additional funding by means of a capital injection, it may not be possible to procure further capital from the shareholders (due to the limitations of Section 561 of the Companies Act 2006) and the parent may be obliged to loan money to the acquired entity, which may be repayable at short notice and placed the enterprise in a precarious financial position. Given the relatively high number of tripartite arrangements that have failed in recent years due to commercial or market changes, care should be taken when considering whether a tripartite arrangement is suitable for a proposed transaction.
Creating a Tripartite Agreement
Drafting a tripartite agreement involves a series of strategic steps to ensure it meets the needs of all parties. The drafting process typically begins with a meeting between the two parties and the lawyer to discuss the specifics of the agreement, including each party’s roles and responsibilities, the subject of the agreement, and any potential risks that may need to be addressed.
Once the objectives are clear, a legal professional will draft a tripartite agreement with specific clauses that ensure all parties are protected and their interests are safeguarded. The agreement will often include a detailed description of roles for both parties, a provision that allows for termination (either by mutual agreement or unilateral decision), confidentiality agreements, indemnity provisions, dispute resolution procedures, and an affidavit of identity. The draft agreement should work to promote efficient, clear communication in order to allow the parties to manage compliance through clear reporting.
After the initial draft is completed, it is important to ensure each party has independent legal advice. A tripartite agreement is a negotiated contract, and to be valid (in most jurisdictions) each party must have their own lawyer. Each party should consider their needs carefully before committing to the agreement. Once the lawyers have been consulted and any suggested changes to the tripartite agreement are incorporated into the final version, the agreement may be signed.
Final Considerations
Our exploration of tripartite agreements has offered a comprehensive look at this multifaceted legal instrument. As we have seen, such agreements are distinguished by their three-party structure which gives rise to a unique set of obligations and benefits for the signatories. In this article, we have touched upon their fundamental definition, the variation in types and names across different industries, their potential benefits, the necessity for clear and logical syndication clauses, and the critical importance of consulting an experienced attorney.
To recap, tripartite agreements can be differentiated into three main types: corporate tripartite agreements (also known as mutual release agreements), contractual tripartite agreements (which usually involve corporations), and public-private partnership tripartite agreements (which are used by government agencies). Each type has its own nuances, yet all serve the purpose of solidifying an arrangement between three different parties . Additionally, with roots that extend deep into lawful history, tripartite agreements can be traced back to the Romans who used a set of contracts that they enforced by carving them into stone tablets. This vast history notwithstanding, the agreements are still pertinent in modern law today.
As to their significance in the business world, it is compelling to note that in real estate alone, tripartite agreements are used in contexts ranging from simple developments to intricate constructions. Given the potential complexity involved, it is of the utmost importance to work with a lawyer who is knowledgeable about the intricacies of these agreements.
In conclusion, tripartite agreements are powerful assets to have in your legal arsenal. If you are involved in a business transaction or have any type of contractual agreement with two other parties, it is worth speaking to a lawyer familiar with tripartite agreements.