Review of Contract Law - Report on Third Party …

1 Review of Contract Law Report on Third Party rights Report (SCOT LAWCOM No 245) Review of Contract Law Report on Third Party rights Laid before the ScottishParliamentbythe Scottish Ministers under section3(2)oftheLawCommissionsAct 1965 July 2016 SCOTLAWCOM No 245 SG/2016/98 The Scottish Law Commission was set up by section 2 of the Law Commissions Act 1965 (as amended) for the purpose of promoting the reform of the law of Scotland. The Commissioners are: The Honourable Lord Pentland, Chairman Caroline Drummond David Johnston QC Professor Hector L MacQueen Dr Andrew J M Steven. The Chief Executive of the Commission is Malcolm McMillan. Its offices are at 140 Causewayside, Edinburgh EH9 1PR.

2 Tel: 0131 668 2131 Email: Or via our website at NOTES 1. Please note that, unless otherwise stated, all hyperlinks in this document were checked for accuracy at the time of final draft. 2. If you have any difficulty in reading this document, please contact us and we will do our best to assist. You may wish to note that the pdf version of this document available on our website has been tagged for accessibility. 3. Crown copyright 2016 You may re-use this publication (excluding logos and any photographs) free of charge in any format or medium, under the terms of the Open Government Licence To view this licence visit ; or write to the Information Policy Team, The National Archives, Kew, Richmond, Surrey, TW9 4DU; or email Where we have identified any Third Party copyright information you will need to obtain permission from the copyright holders concerned. This publication is also available on our website at Any enquiries regarding this publication should be sent to us at ISBN: 978-0-9935529-3-9 Produced for the Scottish Law Commission by APS Group Scotland, 21 Tennant Street, Edinburgh EH6 5NA.

3 Ii SCOTTISH LAW COMMISSION Item No 2 of our Ninth Programme of Law Reform Review of Contract Law Report on Third Party rights To: Michael Matheson MSP, Cabinet Secretary for Justice We have the honour to submit to the Scottish Ministers our Report on Third Party rights . (Signed) PAUL B CULLEN, Chairman C S DRUMMOND D E L JOHNSTON HECTOR L MACQUEEN ANDREW J M STEVEN Malcolm McMillan, Chief Executive 9 May 2016 iii iv Contents Click on any of the headings below to go to the relevant page v viii Chapter 1 INTRODUCTION .. 1 Scottish Law Commission s Review of Contract law.

4 1 What are Third - Party rights in Contract ?.. 2 Comparative material .. 3 Examples of Third - Party rights in Company groups .. 7 Construction projects and collateral 9 Other uses of Third - Party rights 12 Structure and summary of the 14 General approach taken by the draft Summary of recommended reforms .. 15 Legislative competence and relationship with specific rules .. 17 Effect of recommendations on specific Third - Party rights rules .. 17 Employment contracts ..18 Business and Regulatory Impact Assessment ( BRIA ).. 22 Acknowledgements .. 22 Chapter 2 SUMMARY OF CURRENT 23 Third - Party rights in Scots law .. 23 23 Identification of the Third Party .. 24 Contracting parties intention to create Third - Party No requirement of Third Party The requirement of irrevocability .. 28 Revocation of a Third - Party right: conditionality .. 31 Reconciling Carmichael with Love and Kelly .. 34 Third Party s rejection or refusal of the right or benefit.

5 37 Effect of invalidity, unenforceability or frustration of the Contract on the Third Party .. 37 Third Party remedies .. 38 Chapter 3 TERMINOLOGY .. 39 The parties .. 40 rights or benefits? .. 41 Juristic characterisation of the Third - Party right? .. 44 Enforcement or invocation of the Third - Party right .. 45 v Chapter 4 FORMATION: IDENTIFICATION AND Identification of the Third Party .. 47 (i) Third Party not yet in existence .. 49 (ii) Third Party in existence but not a member of the class in question .. 49 (iii) Third Party identified other than by or from the Contract .. 50 Intention of contracting parties to confer a right.

6 51 Should a Third - Party right taking the form of an exclusion of liability be competent?.. 54 No need for Third Party s acceptance .. 55 Two kinds of case?.. 55 Is formal writing necessary? .. 57 Conditional obligations .. 58 Chapter 5 IRREVOCABILITY .. 60 Abolition of irrevocability as a requirement of 60 May a Third - Party right become uncancellable or unmodifiable? .. 61 Fulfilment of conditions and other terms .. 61 Registration of the 66 Declarations of irrevocability by the contracting parties .. 67 Reliance and personal 68 Assignation of the Third - Party right .. 75 Third Party s acceptance .. 77 Other issues .. 77 Chapter 6 RENUNCIATION, REMEDIES AND DEFENCES .. 79 Renunciation or rejection of its right by the Third Party .. 79 Remedies available to the Third 81 82 Direct defences against the Third 86 Prescription .. 87 Liability of one contracting Party if the other defaults on the Contract .. 88 Contracting out of liabilities to Third parties.

7 89 Other points arising from the 1999 Act .. 90 (1) Concurrency between the Third Party and the contracting (2) Who is to sue and be served with the summons .. 90 (3) Double liability for contracting Party bound to perform to the Third Party ? .. 91 Chapter 7 93 section 8 of the 1999 Act .. 93 Some further comparative evidence .. 98 Non-commercial contexts for arbitration .. 100 Scots arbitration law ..101 Policy vi The scheme of our draft 105 (i) Third Party enforcing substantive Third - Party right by arbitration .. 105 (ii) Third - Party right to arbitration only .. 106 (iii) No duty on Third Party to 107 Difficulties with Article 6(1) ECHR? .. 109 113 Chapter 8 LIST OF RECOMMENDATIONS .. 114 APPENDIX A Draft 120 APPENDIX B Third - Party rights in private law .. 131 APPENDIX C Those who responded to the Discussion Paper (DP No 157) etc.

8 140 vii Abbreviations 1999 Act, The Contracts ( rights of Third Parties) Act 1999 ( ) Anderson, Assignation, R G Anderson, Assignation (2008) Beale, Review , H Beale, A Review of the Contracts ( rights of Third Parties) Act 1999 in A Burrows and E Peel (eds), Contract Formation and Parties (2010) CESL / Proposed CESL, Proposal for a Regulation on a Common European Sales Law, COM(2011) 635 final, available at: :2011:0635:FIN:en:PDF CISG, The United Nations Convention on Contracts for the International Sale of Goods (1980), available at: DCFR, C von Bar and E Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (2010) DP, Scottish Law Commission Discussion Paper No 157 on Third Party rights in Contract (March 2014), available at: Dundas and Bartos, Arbitration (Scotland) Act, H Dundas and D Bartos, The Arbitration (Scotland) Act 2010 (2nd edn, 2014) Gloag, Contract , W M Gloag, The Law of Contract : A Treatise on the Principles of Contract in the Law of Scotland (2nd edn, 1929) Gloag & Henderson, Lord Eassie and H L MacQueen (eds), Gloag and Henderson The Law of Scotland (13th edn, 2012) viii Hogg, Promises, M Hogg, Promises and Contract Law: Comparative Perspectives (2014) LC No 242, 1996, Law Commission of England & Wales, Report on Privity of Contract .

9 Contracts for the Benefit of Third Parties (LC No 242, 1996) Macgregor, Report on the Draft Common Frame of Reference, L J Macgregor, Report on the Draft Common Frame of Reference: a Report Prepared for the Scottish Government (March 2009) MacQueen, Third Party rights in Contract , H L MacQueen, Third Party rights in Contract : A Case Study on Codifying and not Codifying in L Chen and C H (Remco) van Rhee (eds), Towards a Chinese Civil Code: Comparative and Historical Perspectives (2012) MacQueen, Third Party rights in Contract : Jus Quaesitum Tertio , H L MacQueen, Third Party rights in Contract : Jus Quaesitum Tertio in K G C Reid and R Zimmermann (eds), A History of Private Law in Scotland, Volume II: Obligations (2000) MacQueen & Thomson, Contract , H L MacQueen and J Thomson, Contract Law in Scotland (3rd edn, 2012) McBryde, Contract , W W McBryde, The Law of Contract in Scotland (3rd edn, 2007) PECL, Principles of European Contract Law; Parts I and II (revised 1998) and Part III (2002) available at: PICC, The UNIDROIT Principles of International Commercial Contracts (3rd edn, 2010), available at: RoW(S)A, The Requirements of Writing (Scotland) Act 1995 (c.)

10 7) SME, The Laws of Scotland (Stair Memorial Encyclopaedia), 25 Volumes ix Sutherland, Third - Party Contracts , P Sutherland, Third - Party Contracts in H L MacQueen and R Zimmermann (eds), European Contract Law; Scots and South African Perspectives (2006) Sutherland and Johnston, Contracts for the Benefit of Third Parties , P Sutherland and D Johnston, Contracts for the Benefit of Third Parties in R Zimmermann, D Visser and K G C Reid (eds), Mixed Legal Systems in Comparative Perspective: Property and Obligations in Scotland and South Africa (2004) Vogenauer, PICC Commentary, S Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, 2015) Wilson, Scottish Law of Debt, W A Wilson, The Scottish Law of Debt (2nd edn, 1991 x Chapter 1 Introduction Scottish Law Commission s Review of Contract law We are currently undertaking a general Review of Scots Contract law in the light of the Draft Common Frame of Reference (DCFR).