The Contract (Third Party Rights) (Scotland) Bill was passed by the Scottish Parliament last week. We do not know yet when the Act will come into force, but it seems likely that it will commence shortly after Royal Assent in a matter of weeks. Updates will follow.

The Act implements the recommendations of the Scottish Law Commission (click http://www.cms-lawnow.com/ealerts/2016/08/third-party-rights-in-scotland?cc_lang=en for more detail) and follows input from experts, including CMS, at committee stage at the Scottish Parliament. The Act codifies and removes uncommercial restrictions from the existing Scots common law ‘jus quaesitum tertio’ to allow parties to a contract to confer a right or immunity from liability on a person/entity who is not a party to the contract (a ‘third party').

The key points are:

  1. A third party can be given a right under a contract where an actual party to the contract undertakes in it to do or not do something for that third party’s benefit and the contracting parties intend that the third party should be entitled to enforce the undertaking. That intention can be express or implied. The contract need not be in writing, nor need the third party accept the right, although they may renounce or reject it.
  2. An undertaking can include an undertaking to indemnify the third party and/or an undertaking not to hold the third party liable for something or not to enforce its liability. The undertaking can also be conferred conditionally – it may be one which depends on something happening or not happening.
  3. The Act does not change the law in relation to imposing a duty on the third party to do/not do something – as before, contracts cannot impose duties on others without the consent of those others.
  4. The third party must be identifiable from the contract either by name or by way of description (e.g. "the subsidiaries of [a named company]”, or "the spouse or civil partner of a member of the [named] pension scheme").
  5. If the party which is intended to benefit from the third party right has not come into existence or does not (yet) fall within the description when the contract is entered into, the third party right can still be conferred provided that party is identifiable as in 4 above.
  6. The contracting parties need not take steps to make the third party right irrevocable. They may provide for cancellation or modification of the third party’s rights, subject to certain limited exceptions (such as the third party's fulfilling any necessary conditions or relying upon the right).
  7. Unless the contract says otherwise, the third party has available all the legal remedies (such as suing for breach etc.) which would be available to one of the contracting parties if that party had received the same undertaking. However, in return, the contracting parties are entitled to assert any relevant defence to the third party’s claim which they would be entitled to assert against any other contracting party.
  8. In certain circumstances, the third party may have recourse to arbitration in respect of any dispute.

Action required?

The law is not retrospective so there is no impact on existing contracts.

Drafters of contracts after the Act comes into force will in many cases simply choose to exclude the Act by including a clause in the contract that no third party has any rights under it (as is routine in English law contracts). This will be prudent to avoid any implication that such a right has been created, where this is not intended.

In other cases, parties will wish to take advantage of the new law. For example:

  • as a practical time-saving alternative to a multi-partite agreement where, in addition to the ‘key’ players, there are several other individuals/entities requiring contractual rights or protections (e.g. in a corporate group structure, one member only of the group might contract with a supplier but the other companies in the group can be given rights too, such that any member of the group could seek to recover the losses incurred by it on a breach of the contract);
  • where it is desirable to confer rights/immunity on parties whose existence can be anticipated but who are not yet in existence or whose precise identity is currently unknown but which can still be identified in some way when the contract is entered into (perhaps as forming part of a distinct group or class of persons (e.g. in the example above, companies which will in the future form part of the group but which have not yet been formed, or which may be acquired and brought into the corporate group structure could also benefit from the contractual protection; another example would be the protection of future purchasers of property in construction contracts));
  • (similarly to above) where parties to a dispute are entering into a settlement agreement but it is unclear which company in a group is the correct defender or where it is possible that several different defenders contributed to the wrong, the settlement could be expressed for the benefit of all the possible defenders.

There are numerous other potential uses of the legislation.