Third Party rights arising from Scots law contracts to change

Scottish_Parliament_Exterior_Third_Party_Rights
david-menzies By David Menzies, Director of Practice

23 January 2018

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 21st September 2017. The Act received Royal Assent on 30 October 2017, and comes 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 will bring 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 existence or does not (yet) fall within the description when the contract is entered into, the third party right can still be conferred provided that party is identifiable as in 4, above.
  • The contracting parties need not take steps to make the third party right irrevocable (which was one of the downsides of the JQT Principle). They may provide in the contract for cancellation or modification of the third party’s rights, subject to certain limited exceptions (such as the third party's fulfilling any necessary conditions or relying upon the right).
  • The Act contains restrictions to protect the third party such as the inability of the original contracting parties subsequently to change those third party rights and to change those third party rights with retrospective effect.  Each of these may be a reason specifically to provide in the original contract that both of these changes may be made subsequently (if the Act is not excluded in its entirety).
  • Unless the contract says otherwise, the third party has available all the legal remedies (such as suing for breach etc.) which would be available to one of the contracting parties if that party had received the same undertaking. However, in return, the contracting parties are entitled to assert any relevant defence to the third party’s claim which they would be entitled to assert against any other contracting party.
  • Unless modified by the contract, a third party right in a contract will give the third party a range of rights which cannot later be modified or cancelled unless the contracting parties have provided for that in the original contract.  So, it will be essential to either contract out of the Act in its entirety or to modify the application of the Act to preserve the position of the contracting parties to avoid unintended consequences.
  • In certain circumstances, the third party may have recourse to arbitration in respect of any dispute.

Considerations for Insolvency Practitioners

The law is not retrospective so there is no impact on existing contracts.

Where an insolvency practitioner enters into a contract afterthe Act comes into force they can simply choose to exclude the Act by including a clause in the contract that no third party has any rights under it (as is routine in English law contracts). This will be prudent to avoid any implication that such a right has been created, where this is not intended.

Although insolvency practitioner contracts will contain the exclusion of personal liability wording and absence of warranties/indemnities, it would be sensible to also specifically exclude third party rights to avoid any future third party action against either the insolvent entity or the insolvency practitioner.

In other cases, insolvency practitioners may wish to take advantage of the new law. For example, where there are contracts between other parties which are relevant to the insolvency, the insolvency practitioner should consider whether any rights or obligations can be enforced on behalf of the insolvent entity (as a third party) in order to maximise recoveries to the estate.  In addition, relying on the Act may be helpful in relation to a situation where there is a dispute in connection with a group of companies and it is unclear which group company needs to have the benefit of a settlement of that dispute.

Insolvency practitioners will need to be aware of the terms of the Act in the course of any review of existing contracts (which are dated after the Act comes into force) and also in the drafting of any new contracts to which the insolvent entity and/or the insolvency practitioner are to be a party.

Topics

  • Business issues
  • Insolvency
  • Legislation

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