The Contract (Third Party Rights) (Scotland) Bill was passed by the Scottish Parliament on 21 September 2017 and received Royal Assent on 30 October 2017. As yet, there is no confirmed date for the Act to come into force (although it’s likely to be early 2018).

Significant changes introduced by the Act

The Act introduces a number of changes to the law including, among others, the following:

  • The abolishment of “jus quaesitum tertio”. This is the common law position which enables rights (but not obligations) to be conferred upon a party, even if that party is not an original party to the contract. It is a historical legal principle which is largely considered to be uncommercial and inflexible as a result of (1) the requirement to show the contracting parties’ intention to confer a right on the third party and (2) the irrevocability of the right which is intended to be conferred. The Act, therefore, represents an attempt by the Scottish Parliament to modernise this outdated position.
  • A third party can now enforce a right under a contract, even though it is not an original contracting party.
  • The third party does not need to be in existence at the time the contract was entered into.
  • The original contracting parties may cancel or modify the terms of any rights under the contract, provided that the rights haven’t yet been conferred on the third party
  • Where the Third Party Rights have been conferred on a third party, the underlying undertakings relative to such rights can only be modified or cancelled by the original contracting parties in limited circumstances (for instance, with the assent of the third party).
  • The third party will have the same remedies for any breach of rights as would have been available to an original contracting party.

What contracts will the Act apply to?

The Act will apply to all contracts entered into after the Act comes into force. If parties do not wish the provisions of the Act to take effect, this will need to be expressly stated, as we regularly see in English governed contracts which expressly exclude the operation of the equivalent legislation in England & Wales (which is the Contracts (Rights of Third Parties) Act 1999). For the avoidance of doubt, the Act will not apply to contracts entered into prior to the date on which the Act comes into force.

Will the Act have an impact on the use of Collateral Warranties?

If embraced by the industry, the Act will provide an alternative to Collateral Warranties (agreements entered into directly between those who have carried out works and services and third parties).

In reality, there is not a great deal of difference between Collateral Warranties and Third Party Rights. As regards the latter, the underlying contract will contain provisions entitling the Employer to issue a notice to the Contractor or Consultant stating that the beneficiary of the notice will have the benefit of the Third Party Rights set out therein and a copy of the notice will be provided to the third party. The Rights will typically comprise a duty of care obligation, an obligation in relation to materials specified or authorised for use, a copyright licence and an obligation in relation to the holding and maintaining of professional indemnity insurance.

We would expect to see the Third Party Rights (and, possibly, the form of notice) appended to the contract. English contracts which contain Third Party Rights schedules tend to be for multi-tenanted developments such as shopping centres or large scale offices, but the general experience when dealing with English law governed contracts is that the use of Collateral Warranties has not disappeared and we would expect the same to apply in Scotland.

How are typical “Beneficiaries” likely to react?

While the introduction of the Act will no doubt be attractive in situations such as multi-tenanted developments, it’s likely that not all key players in a project will be enthusiastic about the uptake of Third Party Rights. Difficulties may arise in respect of Purchasers and Funders, who will generally prefer the tried and tested Collateral Warranties and who will, usually, expect to be granted step-in rights which are unlikely to be included in the general template Third Party Rights schedule. Further, it could be argued that step-in rights can only be validly granted via Collateral Warranties, on the basis that Third Party Rights confer only rights, and not obligations (which will require to be performed by the third party who is exercising the right of step-in). This is likely one of the reasons that projects in England and Wales continue to require Collateral Warranties to ensure their fundability and marketability.

The future

It will be interesting to see whether Third Party Rights overtake Collateral warranties in terms of popularity north of the border. However, their uptake will, we expect, largely boil down to what the various parties to a construction project feel comfortable using in the circumstances, but this alternative option is, no doubt, a welcome introduction for the construction industry.