Bill passed to reform third party contract rights in Scotland
The Scottish Parliament today passed a bill 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. In fact, they pre-date third party rights under English law and are so old that the doctrine has a Latin name “jus quaesitum tertio”, or “JQT” for short! This rather grand-sounding phrase, literally translated as “right accruing to a third party”, is used to describe those situations where the law does permit a third party to enforce a contract in his own right.
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 (e.g. outsourcing agreements or licensing) that can then be used and enforced by group companies and ensure that group losses are properly recoverable).
What does the bill say?
The bill will bring Scottish contract law on third party rights into line with English law, adopting a similar 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
As with recent reforms on execution in counterparts and electronic execution, the new bill is to be welcomed as it 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.
If you would like to discuss how the new law will work, or would like to review your contracts and draft appropriate third party rights clauses please get in touch.
Tidman Legal is a firm of business and intellectual property lawyers based in Edinburgh.
