What is this Act all about?
Sometimes, the parties to a contract intend that a third party (for example, another company or an individual) will be entitled to certain rights under that contract, even though they are not a party to the contract itself. Scottish law dealing with such rights was based on case law. The absence of a clear set of rules meant that the law was ambiguous and inflexible.
The Act replaces the old regime with a new statutory set of rules, which provides greater certainty as to how third party rights can be created and enforced.
Will the Act apply to all existing contracts?
No. The Act will come into force on 26 February 2018.
The new rules will apply automatically to all contracts which are formed on or after this date.
They will not automatically apply to contracts created before that date. But it's open to contracting parties to agree otherwise by putting something to that effect in a pre-existing contract.
The new Scottish third party rights regime is similar to, but differs in certain key respects from, the English regime, particularly as regards cancelling or modifying third party rights. Specific wording will be required for Scots law contracts to reflect these differences.
When might I want to rely on the Act?
The Act will make it much easier for businesses to contract for goods and services on a group-wide basis under Scots law, simplifying contracts and reducing uncertainty around enforcement. One company will be able to enter into a contract that will benefit other companies within its group, rather than each company within the group ha ke its own agreement with the supplier.
It will also bring benefits for consumers in relation to, for example, the enforcement of insurance policies, by allowing beneficiaries to make a claim under a policy even if they are not a direct party to the insurance contract (for example, family members under a family travel insurance policy).
That sounds good. Can I amend my existing contracts so that the new rules apply?
Yes if all the parties to the contract agree to do that. You don't need to refer to the Act specifically as long as its conditions for creating a third party right are met.
What's required to create a third-party right under the Act?
A contract does not need to expressly refer to the Act create a third-party right. But three conditions must be met:
- The contract must contain an undertaking that one or more of the parties will do (or not do) something for the third-party's benefit.
- The person (or class of persons) whom the parties intend should be able to enforce the right must be identifiable from the contract – either by being named or described in
- The contracting parties must have intended the third-party to be able to enforce the undertaking.
Can third-party rights be excluded?
Yes. Usually contracting parties will know if they intend to confer a benefit on a third party and will word their contract appropriately if they do. No third party right will arise unless the three conditions above are met.
But if the contracting parties definitely do not want any third party rights to arise under their contract, a belt and braces approach is to add a one line clause which expressly excludes third party rights.
Can contracting parties amend the rights of third parties?
Yes. Unlike the old Scottish regime for third party rights, the new rules allow parties to amend or even revoke a third party right.
However, there are provisions to protect third parties from having their rights changed or modified in certain situations without their consent. Where the parties to the contract wish to retain flexibility and control, they will need to add wording to the contract to ensure that those default protections do not apply. The Scottish position on this differs from England.
Wording in English law contracts regarding variation or cancellation of third party rights will not necessarily achieve the same effect under Scots law.
What should I be doing to prepare?
It is important to review your template contracts to ensure that they are drafted to reflect the new Act. You might want all your templates to exclude the Act, or (conversely) to rely on it to create third party rights. Or you may prefer to include optional wording covering both scenarios.
You might also want to review some of your existing contracts to identify whether an should be amended to apply the new Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
