Contract (Third Party Rights) (Scotland) Bill

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Contract (Third Party Rights) (Scotland) Bill

Contract (Third Party Rights) (Scotland) Bill

At present, contract law in Scotland relating to third party rights is archaic and inflexible. Under the current Scots law of contract, limited third party rights can be created under the restricted common law doctrine of Jus Quaestium Tertio (meaning “the third party has acquired a right”) (JQT).

Under the common law, third party rights can be established by:

  1. the contract identifying the third party;
  2. the contract showing the contracting parties intention to create third party rights; and
  3. (more restrictively) the contract providing a benefit to the third party which the contracting parties cannot revoke or alter.

Fortunately, although still some time away from gaining Royal Assent, the Contract (Third Party Rights) (Scotland) Bill (“the new Bill”) was introduced in the Scottish Parliament at the beginning of this year to bring in statutory provisions allowing for third parties to enforce contractual terms.

The new Bill attempts to bring Scots contract law more in line with other legal systems (in particular in line with the English law of contract under the Contracts (Rights of Third Parties) Act 1999). Given the restrictive nature of the current Scots law doctrine of JQT it is not unusual, for clarity and more flexibility, for Scottish contracts to incorporate the English law under the Contract (Rights of Third Parties) Act 1999 (“the 1999 Act”).

Being ahead of the game in England, the 1999 Act was introduced to override the English contract law doctrine of “privity” (meaning only contracting parties may enforce the terms of the contract). The 1999 Act allows third parties who are not party to a contract the right to enforce particular contractual terms. Under the 1999 Act this right (amongst other regulatory mechanisms and limits) only applies if there is an express term providing for this in the contract and the contractual term confers a benefit on the third party.

Similar to the English law under the 1999 Act, some of the main reforms proposed under the new Bill are as follows:

  • The abolishment of Jus Quaestium Tertio
  • When the third party is not party to the contract, setting out the circumstances where a third party may benefit from third party rights
  • Creation of third party rights which may be cancelled or modified
  • In some circumstances, provide third parties with the same remedies as contracting parties
  • The introduction of arbitration for third parties when disputes arise

Annabelle Ewing, Scottish Minister for Legal Affairs has stated that “reform will remove a practical barrier for commercial transactions, and keep Scots law fit for purpose by making sure it is flexible enough for modern day expectations”. From a practitioner’s point of view, once the new Bill receives Royal Assent, it would allow parties to create enforceable rights in a single transaction rather than transfer rights to a third party by a second transaction. More importantly, the removal of the restriction of irrevocability as it currently stands under the JQT doctrine and the introduction of the ability to cancel or modify third party rights would allow more flexibility for contracting parties.

For more information, please contact Shabnam Hanif.