New law on contractual rights of third parties in Scotland
The Contract (Third Party Rights) (Scotland) Act 2017 (the Act) came into force on 26 February 2018. It modernises the previous common law rules governing the creation of contractual rights of third parties in Scotland and places it on a statutory footing, which is similar to that already in place in England and Wales pursuant to the Contracts (Rights of Third Parties) Act 1999.
Prior to the Act, third party rights in Scotland were governed by the common law doctrine of Jus Quaesitum Tertio (JQT), which was widely regarded as uncertain, inflexible and in desperate need of reform. For third party rights to be created, that is to say, where contracting parties undertake in a contract to do (or not do) something for the benefit of a third party, the doctrine required:
- identification of the third party in the contract;
- demonstration of the intention of the contracting parties to create third party rights; and
- provision of a benefit to the third party which the contracting parties cannot revoke or alter.
These onerous and inflexible requirements, especially the inability to revoke or alter the third party rights after the contract was entered into, meant that JQT was problematic and rarely used in practice.
The new regime
You can read our detailed briefing paper here, but the key changes implemented by the Act are as follows:
- JQT is abolished for contracts entered into on or after 26 February 2018, but the Act is not retrospective and existing third party rights will be dealt with under the old JQT doctrine.
- To create a third party right under the new regime, as with JQT before, the third party must be identified and there must be an intention to create enforceable third party rights, and an undertaking that one or more of the contracting parties will do (or not do) something for the benefit of the identified third party.
- The Act allows for more flexibility in identification of third parties, who can be named or described in the contract, including as a certain class of parties. Further, the third parties need not be in existence or fall within the particular description contained in the contract at the time of the contract being entered into.
- The Act provides further flexibility by removing the previously onerous prohibition on revoking or altering the third party rights. Revocation or alteration is allowed at any time before the third party does, or refrains from doing, something in reliance on their right, unless the underlying contract expressly prohibits revocation or alteration. Importantly, the Act also provides statutory safeguards for third parties where rights conferred are subsequently revoked or altered, having already been relied upon.
- A third party has a right to renounce a third party right conferred upon them, either expressly or implicitly, which will extinguish the right. This right cannot be excluded by the contracting parties.
- The Act removes the previous doubt under JQT as to whether or not a third party has a right to claim damages under the contract by expressly confirming that the third party is entitled to any legal remedy to which a contracting party would be entitled under the contract.
The removal of the prohibition on the revocation or alteration of third party rights will make Scots law more commercially attractive in this setting and third party rights will undoubtedly be able to be conferred in a simpler and more flexible manner than under the previous law.
Going forward, an understanding of the new law will be required to ensure that drafting meets the legislative requirements and clients should update their template contracts where necessary to include standard wording (as is already common place in England and Wales) that ensures that third party rights are not created, unless expressly provided for. Consideration will also need to be given to the scope of any third party rights to be granted and the process for cancelling or changing those rights.