Third Party Rights Bill awaits Royal Assent

It is well established under Scots law that there are circumstances in which a contract can contain rights that are enforceable by a third party who is not one of the parties to the contract – the jus quaesitum tertio (JQT). However, the rules for creation of JQTs are poorly understood, and generally regarded as inflexible and archaic.

Following consideration of this issue by the Scottish Law Commission, the outcome is the Contract (Third Party Rights) (Scotland) Bill which was passed on 21 September 2017. The bill replaces and abolishes the existing common law JQT rules, and sets out a statutory code for creation, modification and termination of such rights and for remedies available to third parties.

One of the main difficulties with the current law is that the third party right cannot exist unless the contract is irrevocable. Neither can the third party right itself be amended or rescinded, resulting in a rigidity that is unappealing to commercial parties. The bill reverses this position, and modification or cancellation of the right by the contracting parties will be permitted at any time before the third party does, or refrains from doing, something in reliance on that right. This position can be overridden if the third party knew that the contracting parties were entitled to modify or cancel the right, or if they have agreed to such modification or cancellation.

Although the bill abolishes the JQT for any contracts entered into after it comes into force, existing JQT rights will continue to be affected by the old rules. For contracts entered into after the bill is enacted, only statutory third party rights can be acquired. However, a contract entered into before these provisions come into effect can expressly provide that the bill’s third party rights will apply. To avoid a third party having parallel statutory and common law rights, if a pre-commencement contract provides for a statutory third party right, the common law right will not be enforceable.

Once the bill becomes law, it will be a lot easier for third party rights to be created, with the removal of the irrevocability requirement. While most such rights are likely to be expressly provided for, it is possible that parties may unintentionally create rights, and so care is required. We are already looking at including default wording in Scottish contracts that will exclude third party rights from arising, unless expressed provided for. Such exclusions are common in contracts south of the border, where statutory third party rights have been available since the introduction of the Contracts (Rights of Third Parties) Act 1999. They are likely to become standard in Scottish contracts too.