A new Act which changes how contracts are formed under Scots law will affect third parties who expect to have benefits or rights under that contract. A third party can be an individual, company or other body who has not entered into the contract by signing on the dotted line.
The Contract (Third Party Rights) (Scotland) Act 2017 (“the Act”) came into force on 26 February 2018 and it sets out clear rules as to how contracting parties can create rights for third parties.
Previously, contracting parties could create rights for third parties using the common law doctrine known as jus quaesitum tertio. This inflexible and infrequently used doctrine set out how valid third party rights could be created but its principles were too restrictive, unclear and it wasn't considered fit for purpose.
Third party rights are particularly relevant in group structures. For example, contracting parties might wish to confer rights on all group companies but it may not be practical for each group company to sign the contract. The Act allows one company in the group to enter into the contract and create rights and benefits for the other group companies.
There is no need to explicitly refer to the Act in the contract. Instead, the Act will apply automatically where:
- there is an undertaking by one or more of the contracting parties to do or refrain from doing something, and
- the undertaking is for the benefit of a clearly identified third party, and
- the contracting parties intend that the third party can enforce such undertaking.
The key will be to ensure that the third party is expressly named in the contract or caught within a defined category of intended beneficiaries. The third party does not need to give any formal acceptance for the rights to be created. The third party has the right to reject the rights at any point.
Unlike the old doctrine, the new Act allows contracting parties to cancel or modify the rights or benefits granted to third parties. In order to override the protections for third parties contained in the Act, the contract should contain express provisions which allow the contracting parties to amend any third party rights.
If the contracting parties decide that they do not want the Act to apply at all, it can be expressly excluded. This type of exclusion clause is already commonly seen in English law contracts. We would expect this approach to be adopted in contracts signed in Scotland from now on.
The Act does not have retroactive effect. This means it does not affect contracts formed before 26 February 2018, only new contracts entered into on or after this date. That said, if parties do decide they want it to apply to existing contracts, they can agree to vary the contract to incorporate the Act.
It is also worth reviewing current terms and conditions to ensure inadvertent rights are not conferred to third parties.
The Act brings Scots Law in line with other jurisdictions, including England, Wales and Northern Ireland, which already have laws in place to deal with third party rights.
If you would like more information on third party rights and how the Act might affect your contracts, please get in touch with our corporate and technology team who would be happy to help you.
