The Contract (Third Party Rights) (Scotland) Act 2017 was passed by the Scottish Parliament on 21 September 2017 and received Royal Assent on the 30th October. It is likely to be imminently brought into full force by the Scottish Ministers.
This Act follows a consultation by the Scottish Law Commission (SLC) and implements many of their broadly supported recommendations. It was ushered through parliament under an expedited parliamentary procedure and represents the first change in the law in relation to third party rights in almost a decade.
What are third party rights?
Third party rights are created where a contracting party undertakes, in a contract, to do or not do something for that third party’s benefit. Such rights are especially useful in group company situations where, for example, one contract could be entered into for the benefit of the group as a whole (e.g. software licence or IT fit out agreement).
The current law
Until this Act is brought into full force, third party rights will continue to be governed by the common law doctrine of jus quaesitum tertio (JQT). Under JQT, for a third party right to be created, the contract must:
- Identify the third party;
- Show that the contracting parties intend to create third party rights; and
- Provide a benefit to a third party which cannot be revoked or altered.
These requirements, particularly irrevocability, have led to the JQT doctrine being rather inflexible and third party rights therefore rarely appear in conventional Scottish contracts. Professor Hector MacQueen, the lead Commissioner for the SLC project, described this doctrine as “notoriously difficult to state and clearly out of line with current business and social needs”. It is clear that the irrevocability requirement is a significant barrier to the utility of third party rights in Scotland. The position in other jurisdictions (such as England) is much more flexible meaning that it can make commercial sense for large corporate groups to operate elsewhere.
The imminent changes
The new Act will provide much needed reform of this area of Scottish law. The key reforms are as follows:
- The abolition of JQT;
- The removal of the irrevocability requirement - third party rights will be able to be modified and/ or extinguished;
- Third parties can renounce any rights conferred upon them;
- Third party access to arbitration in certain circumstances;
- Third party access to all the legal remedies which would have been available to them if they were a party to the contract; and
- Contracting parties have available to them all relevant defences to that third party’s claim which they would have had against any other contracting party.
It is important to note that these changes are not retrospective meaning that there will be no immediate impact on existing contracts. The provisions of this Act will only be relevant for contracts entered into after the date it has been brought into force.
This Act will provide welcome reform in relation to this inflexible and archaic area of Scottish law. Whilst the JQT doctrine should be praised for its longevity, it was undoubtedly time for change. The introduction of this Act adds a level of much needed flexibility and will help to ensure that Scotland remains an attractive and commercially sensible destination for large corporate groups.
It is important that banks and other businesses who operate in Scotland are fully aware of these changes so that they can ensure their legal documentation remains fit for purpose. It may be prudent, in certain circumstances, to simply insert a further clause which excludes the operation of this new Act. This is an approach which is commonly adopted in England and would ensure that no third party rights are inadvertently created.