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Contract (Third Party Rights) (Scotland) Bill: the end of collateral warranties or business as usual?

Unlike in the rest of the UK, third party rights or jus quaesitum tertio exist at common law in Scotland. A third party identified (expressly or otherwise) in a contract may be granted enforceable and irrevocable rights by the contracting parties. This seventeenth century regime is widely viewed as uncertain and inflexible. As with the rest of the UK, the use of collateral warranties to create rights for third parties is commonplace in the construction industry.

However, reform of jus quaesitum tertio is now on the agenda, as the Scottish Government has introduced the draft Contract (Third Party Rights) (Scotland) Bill, which will replace the old common law system. 

The Bill was introduced in January 2017 and is expected to be put through the Scottish Parliament’s non-contentious law reform procedure, meaning it may become law relatively quickly. But will the new legislation curb the industry’s enthusiasm and reliance on collateral warranties, or will it be a case of better the devil you know?

The Bill sets out the proposed new rules for the creation of third party rights:

  • The contract is to contain an undertaking that at least one of the contracting parties will or will not do something for the benefit of a third party.
  • The granter must intend that the third party be legally entitled to enforce the undertaking

A number of the arguments for retaining the system of collateral warranties could be countered with provisions in the Bill, such as:

  • Once a collateral warranty has been granted it is usually irrevocable but, under the Bill, contracting parties will subsequently be entitled to cancel or otherwise alter any third party rights that they have previously created. However, there is a further provision in the Bill allowing parties to provide in the contract that such third party rights will not be cancelled or modified. This could provide the certainty required by beneficiaries of such rights.
  • The beneficiary of a collateral warranty can usually assign it to a party acquiring their interest in the project, such as a future purchaser or tenant. This means that the collateral warranty has an intrinsic value that can be passed on to a future – as yet unknown – entity. The Bill provides that third party rights can be created in a contract for a third party who is identifiable by name or description and that a third party right can be acquired by a person despite the fact that at the time the contract was entered into that person was not in existence. The concerns that third party rights cannot be created for as yet unknown entities can be addressed by ensuring that classes of persons seeking to rely on third party rights are sufficiently identified in the contracts. Third party rights could in theory be created for a class of person such as any party who purchases the property within a specific time period.
  • The Bill deals with remedies available to third parties and also defences available against third parties. While this may seem prescriptive, it is important to note that those provisions are subject to contrary provision made in the contract.

So, as the Bill stands, it is possible that carefully drafted and detailed provisions in the contract could provide a suitable alternative to a stand-alone collateral warranty, but are we too stuck in our ways to embrace this new approach? Time will tell.

BTO solicitors Claire Mills

One thought on “Contract (Third Party Rights) (Scotland) Bill: the end of collateral warranties or business as usual?

  1. The Bill passed its third stage on 21 September 2017. This means it should be ready to be presented by the Presiding Officer for Royal Assent.

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