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Contract law in flux

15 January 18

Scots contract law is changing rapidly, and further reforms are on the way. This article outlines some key developments to keep up with

by John Paul Sheridan

The impeding exit of the UK from the EU has not lessened in any way the need to ensure that Scots contract law is kept up-to-date and in line with (or ahead of) international standards.” (Scottish Law Commission, Discussion Paper on Remedies for Breach of Contract, Discussion Paper no 163 (July 2017), 2.)

For those of us who still regularly refer to Gloag on Contract (last edition 1929) it can be difficult to keep up with the pace of change in contract law. It remains a fast-moving area of law, and the quotation above demonstrates that this will continue to be the case. This article is a brief overview of recent and proposed changes in Scots contract law. 

1. Contract (Formation) (Scotland) Bill

The Scottish Law Commission (SLC) recently consulted on a working draft bill on the formation of contracts, prior to publishing a final draft bill and report in 2018. (The draft can be found on the Commission’s website).

The general aim of the bill is to allow greater autonomy and flexibility between contracting parties in terms of precisely how and when they form legal relations. The bill seeks to modernise the current law, first by abolishing the now outdated postal acceptance rule. Secondly, proposals are made as to when “notification” takes place, specifically when this is sent electronically (under the proposals, this becomes effective when it is available to be accessed by the recipient).

On a practical level, consideration ought to be given to the wording of any offers in order to stipulate clearly how acceptance is to be communicated. There are currently some unanswered questions, which may be addressed through the consultation, such as whether an automated out-of-office response (where the recipient may still have access) could really become the point at which a contract is concluded.

2. Remedies for breach of contract

Eighteen years have passed since the last review (Report on Remedies for Breach of Contract, Scot Law Com no 174 (1999)), but this year the SLC published a discussion paper on legal remedies available to parties when there is a breach of contract. The review has been carried out in light of the Draft Common Frame of Reference (click here for House of Lords committee report), and provides a comparative discussion of Scotland with other European legal systems.

The focus of the paper is to modernise both substance and terminology in this area of the law. At the outset, the paper considers how the current terminology could be made clearer and more comprehensible for individuals and businesses. There are proposals to abolish terminology such as “specific implement”.

Some of the proposals are fairly radical. As well as restating the current law, consideration is given to new remedies such as rights of the creditor or debtor to “cure” defective performance, a statutory price reduction mechanism and the abolition of the longstanding rule in White & Carter (Councils) Ltd v McGregor 1962 SC (HL) 1, where it was held that unwanted performance could be insisted upon.

The consultation period closed in October 2017 and the final report is expected next year.

3. Discussion Paper on Penalty Clauses 

Penalty clauses have long been unenforceable under Scots law, since the decision in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79. Around 100 years later the law was re-evaluated in Cavendish Square Holding BV v El Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67, which set out the current test for enforceability of “penalty” clauses, i.e. whether the clause is a secondary obligation that imposes a detriment that is disproportionate to the legitimate interest of the innocent party.

The SLC has taken interest in the Supreme Court’s approach and opened discussion on further reform. It presents three options in its November 2016 discussion paper for the future of the law relating to penalty clauses: 

(i) leaving the law to develop in light of the Cavendish/ParkingEye decision;

(ii) abolishing the present common law on penalty clauses altogether;

(iii) abolishing the present common law against penalties and replacing it with a new regime.

It remains to be seen whether the penalty rule will survive and if so, in what form. The final report should be issued in 2018.

4. Contract (Third-Party Rights) (Scotland) Act 2017

The Contract (Third-Party Rights) (Scotland) Act 2017 received Royal Assent in October. This modernises and codifies the law. It is important to note that a number of the restrictions under the law of jus quaesitum tertio are removed.

A third-party right can be created where a party to a contract undertakes to do (or not do) something for the benefit of a third party and they intend that to be enforceable. This can be express or implied and does not need to be in writing, although the third party needs to be identifiable from the contract (by name or description). The undertaking can include an indemnity and can be conditional. The law on imposing duties on a third party is not changed.

The Act largely brings Scotland in line with other legal systems, particularly England which operates under the Contracts (Rights of Third Parties) Act 1999.

I won’t be throwing out Gloag on Contract, but perhaps I’ll refer to it less.

John Paul Sheridan is convener of the Law Society of Scotland’s Law Reform Committee for Obligations, and a partner with TLT LLP

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