Following a recent consultation by the Scottish Law Commission (SLC), the Scottish Government today introduced a bill to the Scottish Parliament to reform the laws on third party rights under Scottish contract law.

Why is the law being reformed?

Third party rights under Scottish contract law have been around for a long time. They pre-date third party rights under English law and are so old that the doctrine has a Latin name (jus quaesitum tertio (JQT))!

However, JQT is not without its faults. In particular, JQT is quite inflexible as it is difficult to amend or terminate a third party right once it has been created.

The position under English law (set out in the Contracts (Rights of Third Parties) Act 1999) is more much more flexible. That’s attractive to large corporate groups, who might want to enter into one contract for the benefit of the whole group (eg an outsourcing contract or a software licence) that can then be used and enforced by group companies and ensure that group losses are properly recoverable.

This is one reason that such entities sometimes choose to contract under English law rather than Scots law, even when both parties are located in Scotland.

As part of its contract law modernisation programme, the Scottish Law Commission looked at areas of Scottish contract law that could be improved. The SLC’s consultation and recommendations led to today’s bill.

What does the bill say?

The bill will bring Scottish contract law on third party rights into line with English law, adopting a similar (familiar?) approach.

In particular:

  • JQT will be abolished
  • parties will be able to create third party rights in favour of specific third parties or groups of third parties (e.g. all subsidiaries from time to time in a company group)
  • those rights will be the same rights that would have applied had the third party been a direct party to the contract
  • the parties to the contract will be able to modify and extinguish those third party rights

The new bill is to be welcomed and as with recent reforms on execution in counterparts and electronic execution will help to ensure that Scots law remains commercially attractive.

Preparing for the new law

As with contracts under English law, it will be important to ensure that third party rights are not unwittingly created and (from a service provider perspective) that appropriate controls are included on conducting group claims. This will require new clauses to be included in Scots law contracts.

Organisations will also want to review their existing contracts to check that they work properly under the new law, and allow them to take advantage of the new law.