Thu 26 Apr 2018

Third Party Rights in Scotland

The Contract (Third Party Rights) (Scotland) Act 2017 (the  “2017 Act”) came into force on 26th February 2018. It is widely thought that it will bring a significant improvement to third party rights in Scotland, and will make the law in this area clearer and more flexible. 

Whilst it might bring clarity, it is often forgotten that third party rights have long been recognised in Scotland.

In England, the common law doctrine of Privity of Contract meant that only parties to a contract could acquire direct, enforceable rights or obligations under it. Anyone not ‘privy’ to the contract could not sue or be  sued  in  terms  of the contract. This doctrine received much criticism due to it preventing non-parties from enforcing contracts made for their benefit, and this criticism was instrumental in the passing of the Contracts (Rights of Third Parties) Act 1999 which allowed contracting parties to confer benefits on a non-contracting party, which could be enforced against the contracting parties.

In comparison, the Scottish legal system has never followed the doctrine of Privity of Contract and so there had not been the same need for legislative provisions to address  the  issues  faced in England. Third party rights have  long been recognised in Scotland by the common law doctrine of jus quaesitum tertio (“JQT”), which allowed contracting parties to confer rights, but not obligations, on non-contracting third parties. These third party rights can be especially useful for group companies who are able to rely on, and enforce their rights under one contract entered  into for the benefit of the group as a whole, rather than each group company having to enter into individual contracts with suppliers, for example.

The principle of JQT allowed third party rights to be formed when the contract fulfilled the following criteria:

  1. that the third party was identified in some way – either by identification of an individual or company, or by way of reference to members of a particular class of people;
  2.  that it had to be shown that the contracting parties had an intention to confer the third party right, so there had to be an express provision that the third party had a right to enforce the contract; and

  3. that the right which the contracting parties conferred on thethird parties had to be unalterable and irrevocable.

However, this third limb was often the cause for concern, as it meant that rights conferred on third parties could not be altered or changed, despite a subsequent change in commercial circumstances, which is a freedom that contracting parties would undoubtedly wish to retain. The irrevocability of third party rights created under JQT, and this inflexible approach was manifested by the fact that these rights were rarely used, and it was often considered an out of date and uncommercial doctrine.

Given   these   shortfalls,  the 2017 Act signals a welcome  change to the law  of third party rights in Scotland,  and will modernise Scots law, bringing it in line with other jurisdictions, including England who have been relying on statutory third party rights for almost two decades.

Some of the key provisions of the 2017 Act include:

Abolition of JQT (although this is not retrospective, so any JQT rights created prior to the coming into force of the  2017  Act  will  remain valid);

Contracting parties are permitted to confer rights upon identifiable third parties; the contracting parties must intend to confer rights on third parties, and this can be  done  either  expressly or impliedly;

Removal of the irrevocability requirement – contracting parties are now entitled to cancel or modify rights which they have conferred on third parties, although this is subject to certain caveats; and

Third parties are provided with access to all legal remedies, which would have been  available  to  them  if  they  were   a party to the contract, and likewise contracting parties have available to them all defences, against a claim by the third party, which a contracting party would have against the other party to  the contract.

Professor  Hector  MacQueen,  the  lead commissioner of the Scottish Law Commission’s consultation on third party rights in Scotland stated, “The common law in this area has been notoriously difficult to state and clearly out of line with current business and social needs. This  reform  should  bring  the  Scots law up to at least the highest modern standard in the area and, we hope, a bit beyond that too.”

In light of these changes, if you operate a business in Scotland, you should ensure that your documentation  is  brought into line with the new legislation – you may wish to add wording to exclude the operation of the Act (as is often done in England) in order to ensure third party rights aren’t inadvertently established.

First published as part of a series in Leasing World magazine, issues 123, 124 and 125.

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