Third Party Rights – Have We Seen the Last of Collateral Warranties?

The Contract (Third Party Rights) (Scotland) Act 2017 comes into force on 26 February 2018. The 2017 Act provides some much needed reform of this area of Scots law, which has until now been based on the common law doctrine of jus quaesitum tertio, which enables rights to be conferred upon a third party even if that third party is not an original party to the contract.

The current law has been considered for some time to be archaic, inflexible and in need of a revamp. The result of the Scottish Law Commission consultation on the matter is the 2017 Act which finally brings Scotland into line with the law in the rest of the UK, where the Contracts (Rights of Third Parties) Act 1999 has been in place for some time.

The 2017 Act introduces a number of changes to the current law, including:-

• The abolition of the jus quaesitum tertio.
• Third party ability to enforce rights under a contract where (i) they were not an original party to the contract and/or (ii) they were not in existence at the date of the contract.
• Third party rights will be capable of modification/cancellation by the parties to the contract where the rights haven’t yet been conferred on a third party.
• Remedies equivalent to those available to a contracting party will be available to the third party in the event of breach of the third party rights.
• A contracting party will have available, in defence of a third party rights claim, all defences which it would have had against the other contracting party.

As the changes introduced by the 2017 Act are not retrospective the Act will not apply to any contracts entered into prior to 26 February 2018, but it will apply to all contracts entered into after that date. Contracting parties will therefore need to give consideration as to whether they wish the 2017 Act to apply to their contract and, if not, it will be necessary to amend the contract by excluding the operation of the Act. This is the approach commonly adopted in the rest of the UK to ensure that third party rights are not inadvertently created.

The 2017 Act is of particular interest for the construction industry as the creation of third party rights may lead to the decline in use of the collateral warranty. Building contracts and appointments will now be able to contain provisions entitling the developer/employer to issue notices to the contractor/consultants notifying them that the third party identified in the notice has been afforded the benefit of the third party rights provided for in the contract/appointment (which rights will likely be akin to those currently contained in collateral warranties). A similar notice would simultaneously be given to the third party. A clear advantage of this method of conferring rights on third parties is that the developer/employer is in control of the process, being the party issuing the notices, and the need for contractor/consultants to sign collateral warranties is removed. However, despite the fact that the law in the rest of the UK has provided for third party rights for almost twenty years, it is still the norm there for collateral warranties to be procured, parties preferring the comfort of the tried and tested option, so we may well not have seen the last of collateral warranties quite yet! 

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.