Construction law update - reform of Third Party Rights in Scotland

Michael Conroy | 03 Feb 2017

INSIGHTS

Scots law has long recognised the principle of third party rights in contracts (“the ius quaesitum tertio”) whereby a non-contracting party can have rights to enforce contracts entered into by others. The rights of third parties are particularly relevant for construction contracts where often the interests of third parties funding, purchasing or leasing completed projects require to be provided for.

Following a review of the existing law by the Scottish Law Commission it is expected that the Contract (Third Party Rights) (Scotland) Bill will shortly be enacted to provide a modern clear statement of the law which will bring Scotland into line with England and Wales.

This will bring in much needed reform in an area where Scots law was no longer adequate for modern requirements.

The New Provisions

The main provisions of the draft Bill can be summarised as follows:

A third party will have a right to enforce an undertaking in a contract between contracting parties where that undertaking is to do or not do something for the third party’s benefit.
The third party must be identifiable from the contract terms either by name or by description (e.g. first tenant of a new building)
The third party does not need to be in existence at the time the contract was entered into.
The contracting parties may cancel or modify the undertaking giving rise to a third party right but not:
– following any enforcement or invoking of the right by the third party (save where expressly permitted by the contract); or
– where there has been reliance by the third party on the undertaking with the knowledge of the contracting parties and any cancellation or modification would adversely affect the position of the third party to a material extent.
The third party will have the same remedies for any breach of the undertaking as would have been available to a contracting party
A contracting party shall have available any defence to a claim by a third party as would be available against the other contracting party or as relevant to the undertaking.
A third party right may be renounced by a third party either expressly or by implication.
If the contracting parties have an agreement for resolution of disputes by arbitration then the third party will be regarded as a party to that agreement.

Comments

When similar legislation was enacted for England & Wales it was pondered whether this would remove the need for collateral warranties (separate written contracts to acknowledge duties of care to third parties in respect of works or services carried out under principal contracts or appointments).

However collateral warranties have continued to be required to ensure the fundability and marketability of projects in England and Wales and it is anticipated that this will also continue in Scotland.

As mentioned above, the legislation is considered to be much needed reform in an area where Scots law was insufficiently clear and/or flexible for modern commercial requirements.