The first reform of third party contractual rights in almost 100 years

The Scottish Parliament passed the Contract (Third Party Rights) (Scotland) Bill (“the Bill”) on 21 September 2017, reflecting the first change in…

Contract (Third Party Rights) (Scotland) Act 2017

Introduction

The Scottish Parliament passed the Contract (Third Party Rights) (Scotland) Bill (“the Bill”) on 21 September 2017, reflecting the first change in this particular area of Scots law in almost 100 years. The Bill now awaits Royal Assent.

The Bill

Third party rights created under Scottish contract law have been in use and remained unchanged for a significant period of time (this being the reason why they are still referred to by their Latin name of jus quaesitum tertio or JQT for short). However, the developed common law is complex and restrictive, requiring certain criteria to be satisfied when granting third party contractual rights. There has long been an absence of any statutory guidance. As part of a package of Scottish reforms, a consultation was undertaken by the Scottish Law Commission (“SLC”) in 2016 which concluded that the existing common law provisions for contractual third party rights was no longer fit for purpose and required a new statutory platform. The main difficulties highlighted by the SLC with the common law provisions included inflexibility and uncertainty, matters which cause significant concern for parties engaged in commercial activities.

The Bill’s provisions

The Bill means that Scottish contract law on third party rights will now reflect English law by making provision for:

  • The express abolition of the common law rules (JQT). This provision is not retrospective, thereby maintaining the status quo of common law third party rights in existence before the commencement of the new Act unless otherwise provided for in contract.
  • Parties’ ability to create third party rights in favour of specific third parties or groups of third parties (but not duties).
  • The removal of the irrevocability rule, so that the parties to the contract will be able to modify and extinguish an existing third party right (subject to exceptions).
  • The identification of third parties and the creation of their rights in the absence of a written contract.
  • Clear intentions by the contracting parties to create third party rights, either expressly or implied.
  • The contract to contain an undertaking that one, or more, of the contracting parties will do or not do something for a third party’s benefit.
  • The renunciation, by the third party, of the rights granted as there is no obligation for the third party to accept the rights.
  • Third parties’ access to arbitration for dispute resolution together with all available remedies which a contracting party has under the contract to enforce their right.
  • The contracting parties being able to assert any defences against third parties that are available against other contracting parties.
  • Clarification of the standard rules on prescription, and the applicability of the Prescription and Limitation (Scotland) Act 1973 with third party rights prescribing after 5 years.

Comment   

The Bill, by virtue of its codification and amendment of the common law, provides clarification on the rights of third parties arising from contracts.

It should also assist Scottish law in becoming more commercially attractive as parties will no longer need to seek an alternative jurisdiction to determine their contractual disputes where third party rights are in issue.

Although the commencement date of the Act has still to be confirmed, businesses, insurers and organisations will want to review existing contracts to ensure they will remain suitable and fit for purpose under the new law.

Can we help?

Should you wish to discuss this in more detail, or would like assistance with any other matter, please do not hesitate to get in touch.

 

 

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