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Contract Law Update: Third Party Rights

Jus quaesitum tertio is the Latin name for the legal doctrine governing third party rights under Scottish contract law. This extremely out-dated and inflexible law is now the subject of a much-needed review.

Under current Scots common law, parties to a contract can construct an enforceable right in favour of a third party, known as jus quaesitum tertio, however once created these rights are difficult to amend or terminate. The English law position, as established by the Contracts (Rights of Third Parties) Act 1999, is comparably more flexible, allowing contracting parties scope to revise and vary terms in response to new conditions or unforeseen circumstances.

The review of third party rights in Scotland was initiated by the Scottish Law Commission’s (SLC) discussion paper on the subject in 2014, forming part of the SLC’s overall review of Scots contract law. Following a consultation period in 2016 and a further report by the SLC identifying recommendations, a draft bill was presented to the Scottish Parliament. The Bill has now progressed through stage 2 of the parliamentary process and will now be passed or rejected by the debating chamber following its consideration of the amendments made at stage 2. In light of this proposed legislative change, what are the expected amendments to the current common law position and what impact will this have in practice?

The Importance of Third Party Rights

Third party rights can be extremely useful in circumstances where there is a contractual relationship involving a complex group structure or in instances where third parties are affected by the satisfaction or breach of the terms of a contract.

For example, where an unmarried couple wish to purchase a property together and financial support is offered by a relative, it may be of value to safeguard the relative’s rights through a contractual agreement between the couple with the relative as a third party beneficiary. In a commercial context, third party rights are useful in contractual relationships where one party is a group composed of multiple companies. For example, a telecoms business, existing as a group of several companies, may wish to enter into a catering services agreement. By drafting the contract to allow all the group companies the right to enforce the contract against the catering supplier, in other words by creating third party rights, in the event that the terms of the catering contract are not satisfied the supplier will be unable to argue in their defence that the contract was only between one member of the group. It prevents a situation arising where third parties experience a loss in the context of a contractual agreement yet have no legal recourse against the party responsible.

The Contract (Third Party Rights) (Scotland) Bill

The Contract (Third Party Rights) (Scotland) Bill will reconfigure this aspect of Scots contract law, presently contained in common law, revising it to address modern practice in line with the recommendations of the SLC.

At present, Scots law allows for some contractual rights in limited circumstances, but never duties, to be conferred on a person even if they’re not a party to a contract. These rights are utilised infrequently in commercial transactions by virtue of the requirement that the third party right can’t be terminated or altered. This rigidity precludes the possibility of revising the terms of the third party rights if circumstances change, it’s for this reason that third party rights have often been viewed as obstacles to effectual commercial transactions. 

The Contract (Third Party Rights) Bill will provide third parties with equivalent remedies as a contracting party subject to specified exceptions, allow for third party rights to be varied or terminated, and enable third parties to access arbitration to settle disputes in certain instances. The Bill proposes the following legislative content:

  • Common law jus quaesitum tertio will be abolished upon commencement of the Act. Third party rights created under the common law regime prior to commencement of the Act will remain valid.
  • Parties will be able to create statutory contractual rights but not duties for third parties, for these rights to be valid and enforceable they must be created in a written contract.
  • Third parties will be able to adopt arbitration as a means of resolving potential disputes arising from the contractual agreement, third parties will also be able to benefit from any of the alternative remedies available to contracting parties under the contract to ensure fulfilment of their rights.
  • For third party rights to be valid and enforceable, the contract must establish a correlative duty requiring one or more of the contracting parties to act upon or refrain from acting in some way for the benefit of the third party.
  • Third parties must be identified in the contract and further the contract parties must have the intention, either expressly or implied, to create such rights.
  • Most significantly, third party rights will no longer be irreversible and unalterable. What was often viewed as the greatest barrier to the inclusion of third party rights in commercial transactions has been removed and contracts will now be permitted to include provisions to terminate or vary third party rights.

Changes to Expect in Practice

The proposed modernisation of this historic branch of Scots contract law will be very much welcomed in practice. Practitioners may, however, be required to review and scrutinise existing contracts and possibly revise their terms in order to take advantage of this new legislation.

Although it was not uncommon for practitioners in Scotland to adopt English law when drafting particular contracts in order to utilise the English third party rights legislation established under the 1999 Act, Scottish practitioners will nevertheless be required to embrace a cautionary approach so as to avoid unintentionally creating third party rights in the drafting of contracts once the new legislation comes into force. Additional safeguarding clauses may be required to protect against such a situation arising.

Contact Miller Samuel Hill Brown for Legal Advice regarding Contract Law

Our corporate law team has expertise across a range of industry sectors and advises clients of all sizes, from start up businesses to large established companies. For legal advice regarding contract law or any other legal problems you may have, please complete our online enquiry form or call us on 0141 413 4240.

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