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Third option

20 March 17

Corporate briefing: the restatement of the law relating to the creation of third party rights under a contract, now in a Scottish Parliament bill, offers new possibilities in the commercial context

by Emma Arcari

The 31 January 2017 saw the introduction to the Scottish Parliament of the Contract (Third Party Rights) (Scotland) Bill, relating to the replacement and reform of the existing common law of jus quaesitum tertio, which allows parties to a contract to create an enforceable right in favour of a third party.

At the moment, third-party rights can arise where contracting parties provide that at least one of the parties grants an irrevocable benefit in favour of an identified third party or category of such third parties (i.e. a person who is not one of the original contracting parties).

Goodbye jus quaesitum tertio... and irrevocability

The existing law has been criticised by the Scottish Law Commission as unfit both for business purposes and certain non-commercial situations. The Commission lists examples where third parties are non-existent, unidentified, or are otherwise legally incapable at the time of contracting, and where certain drafting detours such as collateral warranties and multi-party contracts are not available. Though other means can be used to create a third-party right where that third party is not yet in existence, these are seen as cumbersome and out of date in comparison with other jurisdictions.

One of the main criticisms of the current law is the requirement of irrevocability, which can cause all sorts of headaches. The policy memorandum to the bill lists a case in point: Carmichael v Carmichael’s Executrix 1920 SC (HL) 195. Here, an insurance policy was taken out by a father for his son, and until the son’s age of majority the premiums were to be paid by the father. After the son died, both the father and the sole beneficiary (an aunt and the executrix of the son’s will) claimed the proceeds of the policy. The House of Lords held that there was an enforceable right, under an irrevocable contract, in favour of the executrix.

The bill proposes to remove the requirement of irrevocability but to create certain safeguards, so that contracting parties will lose the ability to remove or change a third party right if:

  • a condition which requires to be fulfilled before the right may be enforced has been fulfilled;
  • the third party has received notice of the undertaking from a contracting party; or
  • the third party has acted in reliance on the right and the contracting parties knew or could have foreseen that the third party might do so.

There is provision for the contracting parties to maintain their contractual freedom to alter or cancel a right, unless this would retrospectively affect a claim under the contract existing before the change was made. The bill is likely to be especially useful from a corporate and commercial point of view, including where contractors and subcontractors are used and where projects involve complex risk allocation arrangements.

New possibilities

The bill has been introduced under an expedited parliamentary procedure and promoters of the proposed legislation believe the greater flexibility the bill brings will improve the commerciality and attractiveness of using Scots law. Parties can, for example, contract for the provision of a service to companies within a group without the need for irrevocability, and subsequently can change the right granted (provided none of the triggers for losing the right to amend or remove are engaged).

With the Latin left behind, the bill provides a modern approach to dealing with third-party rights. New queries in this area will begin over time, and some potential issues have already been highlighted by the Faculty of Advocates in its response to the bill.

It is also worth noting that the bill currently states, at s 13 (in relation to its application), that the majority of the Act (ss 1-10) will not apply to an undertaking constituted before the day on which s 1 (referring to the creation of a third-party right) comes into force “unless the contract containing the undertaking provides otherwise”. In short, existing contracts could expressly provide for an enforceable third-party right (of the reformed type) to arise on the bill’s implementation. If this bill passes in its present form, third-party rights will be easier to create, and both existing and new contracts in every sector will require careful review and new drafting to ensure no inadvertent third-party rights are created once the legislation is in force and an existing contract is varied or a new one negotiated.

Emma Arcari, associate, CCW Business Lawyers Ltd 

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