The Scottish Law Commission (SLC) has published proposals for much-needed reform of the Scots law of third party rights.

Third party rights

It can be useful for contracts to create rights for third parties. For example, if one company within a group enters into a contract for IT services, it may wish that to benefit (and be enforceable by) all of the companies within the group which are not a party to the contract.

Scots law has long allowed the creation of third party rights in certain limited circumstances. However, the antiquity of the Scots law in this area (it is usually still known by its Latin name, jus quaesitum tertio) means that it is no longer suitable for modern commercial practice. The main problem is the requirement that the contract creating the third party rights must be irrevocable by the contracting parties. That makes the law inflexible and commercially unattractive.

The SLC recommends that the current law should be updated, and has published a Report and draft Contract (Third Party Rights) (Scotland) Bill. The SLC recommends:

  • That contracting parties should continue to be able to create a right (but not a duty) for a third party in their contract.
  • The third party will have to be identified in, or identifiable from, the terms of the contract. However, the third party need not be in existence at the time the contract is formed.
  • The third party could be either a specified person, or a person meeting certain conditions set out in the contract.
  • There should be no requirement that the third party accepts the right, or that the contract be in writing. The intention of the contracting parties to confer the right may be express or implied. The contracting parties may equally make clear that they do not intend to confer any third party rights.
  • Most significantly, it should not be necessary for the contracting parties to take steps to make the third party right irrevocable. They would instead generally be free to make provision in their contract for the cancellation or modification of the third party’s right, subject to certain limited exceptions (such as the third party fulfilling any necessary conditions, or relying upon the right).
  • The third party should be able to renounce or reject the right conferred upon them.
  • The third party should have available to them all of the usual remedies by which a personal right under a contract can be enforced.
  • The new rules will be the ‘default’ and should, with some limited exceptions, be subject to any express provision to the contrary made by the contracting parties in the contract.

Comment

The SLC has made sensible proposals for much-needed reform of the Scots law of third party rights. The proposed changes should remove the current inflexibility of the law and bring it in line with English law, where recent reform has recognised the utility of third party rights in a wide range of commercial contexts. For example, the changes could make it easier for group companies to sue a supplier for losses they have sustained, even if none of those companies have contracted directly with the supplier.

It is anticipated that the new Bill will form part of the Scottish Government’s Autumn 2016 legislative programme. If so, we can expect to see it begin its progress through the expedited parliamentary procedure for SLC Bills early next year.