Scottish Parliament Passes Reforms Of Third Party Rights Under Scots Contract Law

The Scottish Parliament has passed the Contract (Rights of Third Parties) (Scotland) Bill.

As has been noted in previous blogs, reform of third party rights under Scottish contract law is long overdue. The Bill addresses a lack of clarity about the scope of third party rights in relation to contracts.

These rights were unclear and inflexible and meant that Scots law wasn't seen as a particularly friendly law under which to enter into contracts and other commercial arrangements. In contrast, English law was reformed in 1999 and has provided a much clearer framework. As a consequence, a number of Scottish organisations opt to contract under English law rather than Scots law.

The reforms will be welcomed by businesses and lawyers alike and it is hoped that it will enhance the commercial attractiveness of Scots contract law for commercial transactions. The reforms implement recommendations from the Scottish Law Commission.

What is changing in relation to third party rights in Scotland?

The current rules will be replaced with a new, more flexible system of regulating third party rights under contracts, on a par with that introduced in England and Wales nearly 20 years ago.

These reforms 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. The Act will remove uncertainty and help ensure that contracts do what the parties intend them to do, and it will also bring benefits for consumers in relation to, for example, the enforcement of insurance policies.

The new laws will clarify the rights of individuals or organisations that are not the contracting parties to a contract, but are intended to benefit from it. It makes doing business easier because third party rights, put simply, provide a mechanism by which businesses with large corporate structures can contract more simply by entering into one contract that benefits several companies within their group, rather than having to strike many separate agreements.

Third party rights can be created where there is an undertaking by a...