Scottish Law Commission Updates Third Party Rights in Contract Law
August 3, 2016
BY Sebastian Ennnis
The Scottish Law Commission recently released its report on third party rights in contract law. In jurisdictions such as England and Canada, strangers to a contract (termed “third parties”) are generally not permitted rights under it, but exceptions exist. This rule is known as privity of contract. By contrast, Scots law allows a contract, in certain circumstances, to contain enforceable rights in favour of a third party. In other words, one may give a right to someone outside of the contracting parties. This doctrine is known as jus quaesitum tertio (a third party right).
What about third party rights needs reform in Scotland? The Commission notes,
The principal difficulty appears to be, not the recognition of third-party rights, but the requirements for their creation laid down by the House of Lords in its judicial capacity in 1920, namely that the contract in question must be irrevocable by the contracting parties before the third-party right can exist, with the corollary that the third-party right cannot be altered or cancelled in response to changing circumstances. This is the inflexibility which commercial parties in particular find so unattractive.
The Commission recommends that the common law relating to third party contractual rights be replaced by “a modern, updated statute which would put Scotland back on the map in this area.” Over the years, the Commission says, the common law rules have not kept pace with contemporary demands.
The Commission’s law reform work in this area is meant to clarify and improve third party rights through draft legislation. “The central aim of this Report”, says the Commission, “is to make recommendations for the reform of the rules governing third-party rights in Scots law so that they are easy to find, are clear to use, and suitable to meet the needs of those who wish to use them.”
For instance, a cohabiting couple may wish to enter an agreement as to their respective shares in their house, if they were later to split up. However, they may have relied on family or friends to meet the deposit. Under Scots law, their agreement can also set out the rights of these third parties who contributed financially. The draft legislation, says the Commission, provides “a quick and efficient way of securing those rights, leading to practical benefits for all concerned.”