Third Party rights arising from Scots law contracts has changed

Third Party rights arising from Scots law contracts has changed

The Contract (Third Party Rights) (Scotland) Act 2017 (the ‘Act’) was passed by the Scottish Parliament last year and reforms third party contract rights in Scotland for the first time in over 100 years. Jennifer Antonelli and Graeme Bruce of CMS Cameron McKenna Nabarro Olswang LLP examine the impact for insolvency practitioners.

The Contract (Third Party Rights) (Scotland) Act 2017 (the ‘Act’) was passed by the Scottish Parliament on 21 September 2017. The Act received Royal Assent on 30 October 2017, and came into effect on 26 February 2018.

The Act implements the recommendations of the Scottish Law Commission and follows input from experts at committee stage at the Scottish Parliament. The Act codifies and removes uncommercial restrictions from the existing Scots common law principle of ‘jus quaesitum tertio’ (‘JQT Principle’) to allow parties to a contract to confer a right or immunity from liability on a person/entity who is not a party to the contract (a ‘third party').

To a great extent the Act brings Scots Law into alignment with English law, but with some extra sophistication.

The key points of the Act are:

  • a third party can be given a right under a contract where an actual party to the contract undertakes in it to do or not do something for that third party’s benefit and the contracting parties intend that the third party should be entitled to enforce the undertaking. That intention can be express or implied. The contract need not be in writing, nor need the third party accept the right, although they may renounce or reject it
  • an undertaking can include an undertaking to indemnify the third party and/or an undertaking not to hold the third party liable for something or not to enforce a liability. The undertaking can also be conferred conditionally – it may be one which depends on something happening or not happening
  • the Act does not change the law in relation to imposing a duty on the third party. So, the contracting parties cannot unilaterally impose an obligation on a third party. However, the contracting parties can make the exercise of the third party right conditional upon the third party complying with a specified condition
  • the third party must be identifiable from the contract either by name or by way of description (e.g. ‘the subsidiaries of [a named company]’)
  • if the party which is intended to benefit from the third party right has not yet come into exist

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.