Third party rights under Scots common law

The landscape of third party rights in Scots law has changed significantly since the Contract (Third Party Rights) (Scotland) Act 2017 came into force. However, that legislation is not retrospective and applies only to contracts entered into after on or after 26 February 2018. This means that there are still residual contracts to which the common law will apply.

One such case, The Engine Yard Edinburgh Limited and Allenbuild Limited v Bayne Stevenson Associates Limited [2024] CSOH 13, sheds some light on the nuances of third party rights under common law in the context of a claim for delivery of a collateral warranty under a construction contract.

Understanding third party rights

At common law, third party rights are rights conferred by contracting parties upon a person who is not a party to the contract. They arise only where the parties to the contract intend to create such rights, not where there is a merely incidental benefit to a third party. Such rights are recognised under the common law doctrine of jus quaesitum tertio.

In this recent case, the Court of Session examined whether a jus quaesitum tertio was established in favour of the pursuer, The Engine Yard Edinburgh Limited, under a construction contract between two other parties, Allenbuild Limited and Bayne Stevenson Associates Limited.

Key issues in dispute

The key issue was whether the pursuer, The Engine Yard, could demand the execution and delivery of a collateral warranty from the defender, Bayne Stevenson, despite not being a direct party to their contract of appointment.

The pursuer argued that because the appointment required the defender to produce a collateral warranty in its favour, the pursuer had a third party right giving it title and interest to sue the defender to enforce this obligation directly.

The defender submitted that only the other party to the contract, Allenbuild Limited, could enforce the obligations under the appointment and that, in any event, the obligation to produce a warranty had prescribed because there had been no written request for one within five years from the date of the contract.

The parties’ intentions

The core question for the Court was whether it was the contracting parties’ intention, discerned by considering the words used in the contract, to secure a benefit for a third party, or whether such benefit was the incidental result of a stipulation conceived primarily for some other purpose.

Ultimately, the Court rejected the proposition that the contract created a jus quaesitum tertio in favour of the pursuer for two main reasons: first, Allenbuild Limited had its own substantive interest in being able to demand the execution and delivery of a collateral warranty from the defender because this was necessary to fulfil its obligations under the main building contract. Secondly, the contract was only one part of a range of linked contractual rights and obligations, amongst various parties, and the implication of a jus quaesitum tertio could undermine the essential structure of the contractual arrangements which those parties had decided to put in place.

The Court therefore rejected the proposition that the contract conferred any jus quaesitum tertio on The Engine Yard, and found that Engine Yard had no right to demand the execution and delivery of a collateral warranty from Bayne Stevenson directly.

Prescription and the obligation to produce a collateral warranty

Additionally, the Court addressed whether the right to sue for delivery of the collateral warranty had prescribed having regard to the operation of the five year period of positive prescription under section 6 of the Prescription and Limitation (Scotland) Act 1973.

The defender argued that its obligation to deliver a warranty on request commenced when it signed the contract in May 2017. As no request was made within 5 years, the obligation had lapsed.

The pursuers argued that the obligation to produce a warranty only arose when a written demand was made for it. As the demand was only made in August 2022 (being five years and three months after the contract was entered into), the defender’s obligation was triggered at that point, and the five-year period of prescription only began then.

The Court found in favour of the defender. The defender could have been called upon at any point from May 2017 to perform the obligation to execute and deliver a warranty. This indicated that the underlying obligation existed from the outset of the contract. The language of the relevant clause of the appointment letter did not suggest that the obligation only became enforceable on the making of a written request.

The defender’s obligation to execute and deliver a warranty had therefore subsisted from 22 May 2017. No relevant claim or acknowledgement having been made in relation to it within a five-year period, the obligation had accordingly prescribed.

Implications and future considerations

This decision will have practical implications for those involved in construction contracts executed before the enactment of the Contract (Third Party Rights) (Scotland) Act 2017. It would be wise to follow up on the delivery of any outstanding collateral warranties sooner rather than later and to bear in mind that any action for enforcement may not be against the consultant or contractor who is to deliver the warranty, but against the main contractor who has committed to securing the delivery of a warranty package.

The judgment may also affect the interpretation of third party rights in contracts in contexts other than construction. Please contact a member of our team to help you to determine what third party rights have been created under common law in respect of contracts entered into before 26 February 2018, and ensure that your current contracts achieve the third party rights position that you require under the 2017 Act.