The Scottish Parliament has passed the Contract (Rights of Third Parties) (Scotland) Bill.

As has been noted in previous blogs, reform of third party rights under Scottish contract law is long overdue. The Bill addresses a lack of clarity about the scope of third party rights in relation to contracts.

These rights were unclear and inflexible and meant that Scots law wasn’t seen as a particularly friendly law under which to enter into contracts and other commercial arrangements. In contrast, English law (which was reformed in 1999), provided a much clearer framework and meant that many Scottish organisations opted to contract under English law rather than Scots law.

The reforms will be welcomed by businesses and lawyers alike and it is hoped that it will enhance the commercial attractiveness of Scots contract law for commercial transactions. The reforms implement recommendations from the Scottish Law Commission.

What is changing in relation to third party rights in Scotland?

The current rules will be replaced with a new, more flexible system of regulating third party rights under contracts, on a par with that introduced in England and Wales nearly 20 years ago.

These reforms will make it much easier for businesses to contract for goods and services on a group-wide basis under Scots law, simplifying contracts and reducing uncertainty around enforcement. The Act will remove uncertainty and help ensure that contracts do what the parties intend them to do, and it will also bring benefits for consumers in relation to, for example, the enforcement of insurance policies.

The new laws will clarify the rights of individuals or organisations that are not the contracting parties to a contract, but are intended to benefit from it. It makes doing business easier because third party rights, put simply, provide a mechanism by which businesses with large corporate structures can contract more simply by entering into one contract that benefits several companies within their group, rather than having to strike many separate agreements.

Third party rights can be created where there is an undertaking by a contracting party, and the intention of the contracting parties (whether expressly or implicitly) is to confer rights in respect of that undertaking on a third party. As in England, parties in Scotland will be able to create rights in favour of specific third parties or groups of third parties.

What should I be doing to prepare?

In preparation for the new laws coming into force, organisations should update their template contracts to reflect the new rules. Organisations will also want to look at their existing contractual arrangements to consider how the new rules will impact on those and whether they should be updated.

For future contracts, understanding the new law will be critical to ensure that the drafting meets the requirements of the legislation where third party rights are to be created, and that such rights are not created unintentionally. Those drafting contracts will also need to take care in determining what rights the contracting parties are to have to cancel or modify any third party rights created once they have been notified to the third party who is to benefit from them.

When will the new laws come into force?

The Bill is expected to receive Royal Assent in the coming weeks. The Scottish Government has not yet provided an anticipated commencement date for the Act coming into force, but it is expected that it will come into force later this year.

Where can I find a copy of the new Act?

You can download the final Bill from the Scottish Parliament website.