The Contract (Third-Party Rights) (Scotland) Act 2017 was passed by the Scottish Parliament on 21 September 2017, it received Royal Assent on 20 October 2017 and it comes fully into force today, 26 February 2018, bringing Scottish contract law into line with the approach adopted in the rest of the UK vis-a-vis third party rights. The 2017 Act is not retrospective, so while the common law rule of jus quaesitum tertio does not now apply to contracts entered into in Scotland from 26 February 2018, it may still apply to contracts entered into before this date unless the contracting parties now contract otherwise.
Reform of contract third party rights has been widely seen as necessary to bring the law, here in Scotland, up to date and introduce greater clarity and flexibility. At a glance the 2017 Act establishes the creation of third party rights by parties who are named or described in a contract (even if that party was not in existence at the relevant time) and enables such third parties to renounce any rights conferred upon them. The 2017 Act clarifies a number of points that were uncertain under the common law rule of jus quaesitum tertio, including the contracting parties’ ability to modify or alter third party rights, the third party’s ability to renounce its rights, the remedies available to the third party and the defences available to contracting parties against a third party claim. A key reform to note is that the 2017 Act also entitles a third party to access arbitration in certain circumstances.
Creating third party rights
Contracting parties who wish to create third party rights should use clear drafting to do this. The contract has to contain an undertaking that a contracting party will do (or will not do) something for a third party’s benefit and it must be clear that it is the contracting parties’ intention that such a third party can enforce that undertaking. The third party also needs to be sufficiently identified in the contract. If contracting parties wish to ensure that third party rights are not unwittingly created the contract has to contain a clause specifically excluding the 2017 Act. We see these clauses often in English Contracts where the Contracts (Rights of Third Parties) Act 1999 is disapplied.
Issues for the construction industry
In construction law the interests of third parties are significant. The preferred option to create third party rights under construction contracts to date has been procuring a collateral warranty package in favour of the third party rather than relying on the common law rule of jus quesitum tertio. This approach is not without its difficulties. Negotiating and collating a number of collateral warranty packages containing numerous agreements for projects can be time consuming and costly, and in practice difficulties often arise when professionals are reluctant to sign and deliver collateral warranty agreements.
In her Blog post, Contract (Third Party Rights) (Scotland) Bill: the end of collateral warranties or business as usual?, Claire Mills addressed a number of concerns in relation to third party rights before the Bill was passed by the Scottish Parliament and discussed whether our industry would now embrace third party rights created by statute rather than by collateral warranty agreements. With the coming into force of the 2017 Act there are clearly issues regarding third party rights within a construction context that we need to think about now. Certainly some of the concerns that have been expressed in connection with third party rights under the Act can be addressed by careful drafting. For example, drafting to address uncertainty due to the contracting parties’ ability to cancel or modify third party rights. The doubts about assignability of third party rights may also be addressed by specific drafting and/or the use of effectively drafted descriptions which include future interested parties.
Other issues like concerns about the enforceability of third party rights by adjudication and how step in rights, all important to funders, sit within the context of third party rights are uncertain and more controversial and will need to be considered further.
Collateral warranties still have a place
For many, the provision of a full collateral warranty agreement package will remain the preferred option and I think what we will see with immediate effect is the inclusion of clauses in contracts which specifically disapply the 2017 Act. Certainly this reform in the law provides us with an alternative to collateral warranty agreements that many in our industry may now be more receptive to the idea of exploring, but I do not think the coming into force of the 2017 Act will sound the death knell for collateral warranty agreements …at least for the foreseeable future.