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On 26 February 2018, the Contract (Third Party Rights) (Scotland) Act 2017 (the “Act”) came into force which provides a statutory basis for third parties to be granted rights under a contract governed by Scots law.

The position prior to 26 February 2018

The granting of third party rights under a contract in Scotland was previously governed by the common law principle of jus quaesitum tertio. The elements that required to be satisfied in order to create a jus quaesitum tertio right were as follows:

1. there must be a contract between two or more parties;
2. the contract must contain an intention to confer a benefit on a third party, such intention may be express or implied;
3. the third party must be identifiable but does not need to be named (e.g. it could be in favour of a member of a class of persons) and the third party does not require to be in existence at the time the contract conferring the third party right is entered into; and
4. the third party right must be irrevocable i.e. the contracting parties cannot amend or revoke the third party right.

The effect of jus quaesitum tertio was to provide the third party with the ability to enforce the right as if they were a party to the contract.

The Scottish Law Commission’s recommendations following a 2016 consultation on third party rights lead to the introduction of the Act. The main criticisms of the jus quaesitum tertio principle identified by the Scottish Law Commission was the uncertainty in its application and the inflexibility of the irrevocability requirement.

In the context of corporate transactions it is often the case that contracting parties would want to include provisions in their contracts for the benefit of their affiliates/group companies. One example of this is in relation to indemnity provisions where an indemnity is being provided to the contracting party and to the members of its group. As the common law regime in Scotland prevented parties from amending or revoking third party rights once created, parties sometimes decided for English law to govern the contract. The alternative option was to make those group companies a party to the contract which may, particularly in the case of large group structures, have presented a logistical nightmare at the time of executing the contract. Under English law, the Contract (Rights of Third Parties) Act 1999 permits the parties to give rights but to expressly state in the contract that the third party right can be amended or revoked without the consent of the third party. The new Act, which is outlined below, brings Scots law in line with the English position.

Contract (Third Party Rights) (Scotland) Act 2017

How to create a third party right under the Act

In order for a third party right to be created under a Scottish contract on or after 26 February 2018 the following is required:

1. The contract must contain an undertaking that a party to the contract will do (or not do) something for the third party’s benefit. Such an undertaking may include an undertaking to indemnify the third party, not to hold the third party liable or not to enforce (in full or in part) a third party’s liability. The undertaking may also be conditional on something happening or not happening and it does not need to be certain that the condition will be met.

2. It must be the intention of the parties that the third party should be entitled to enforce or invoke the undertaking. As was previously the case, this intention may be either express or implied. However, in order to prevent disagreement over contractual interpretation at a later date, it would be prudent for the parties to expressly state such intention in the contract.

3. The third party who will acquire the right must be identifiable in the contract by either being named in it or described in it. The third party does not require to be in existence or fall within the description of the persons entitled to the third party right at the time that the contract was entered into.

Can the third party right be cancelled or modified?

Unlike the common law position, the undertaking which creates the third party right can be modified or revoked by the parties unless:

1. The terms of the contract provide that the undertaking cannot be cancelled or modified.

2. The enforcement of the undertaking is conditional and that condition is satisfied prior to the undertaking being cancelled or modified, except where the contract states that the cancellation or modification may be made retroactively.

3. Notice of the undertaking has been given to the third party, except where:

  • the undertaking is conditional and it remained uncertain whether that condition would be met at the time when the notice was given;
  • at the time that the notice was given, the third party was told by the parties to the contract that the undertaking may be modified or cancelled; or
  • the third party consented to the cancellation or modification.

4. The third party relied on the undertaking which affected their position to a material extent and (i) the contracting parties acquiesced in the third party’s reliance on the undertaking or the third party’s reliance could reasonably have been foreseen by the contracting parties; (ii) the undertaking was cancelled or modified after the third party relied on the undertaking; and (iii) as a result of the cancellation or modification of the undertaking the third party’s position would be adversely affected to a material extent, except where:

  • the third party consented to the cancellation or modification of the undertaking; or
  • the contract states that the undertaking may be cancelled or modified regardless of any reliance by the third party on the undertaking, provided that the third party knew or ought to have known about the provision before they relied on the undertaking.

As noted above, the ability under the Act to amend or cancel a third party right corrects one of the major defects of the jus quaesitum tertio principle. Parties in Scotland can now therefore grant third party rights but retain the ability to change those rights in the future (provided that they comply with sections 3 to 6 of the Act).

What remedies and defences are available under the act?

The Act provides the third party with any remedy for breach which a contracting party would be entitled to for breach of the undertaking. This is however subject to any provision to the contrary in the contract.

Where a claim for breach of the undertaking has been made by the third party, a contracting party has available to it any defence which they would have against any other contracting party, provided that the defence is relevant to the undertaking. Again, this is subject to any express provision in the contract which provides otherwise.

What about the common law rule?

The Act only applies in relation to contracts created on or after 26 February 2018 and has the effect of abolishing the application of jus quaesitum tertio to such contracts. However, jus quaesitum tertio will continue to apply to contracts entered into before this date.

Can I exclude the Act from my contract?

A third party right under the Act is only created where the requirements noted above have been met. However, the parties may still wish to include an express provision in the contract which states that no third party rights are created under the Act.

If you have any further queries in relation to third party rights or would like assistance in drafting a third party rights clause please contact a member of the Stronachs Energy Team or Corporate Team.

Laura Bisset, Senior Solicitor

 

 

Chambers UK 2018

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