Third Party Rights – Scots Law Stuck in the 17th Century

The Problem

Imagine you are a bank with a complex group structure, i.e. multiple companies in your group. A core computer system has gone wrong and most of the group companies have suffered loss as a result. So you sue the supplier.

The supplier’s defence is that it only has a contract with one member of the group, and while that group member can recover its loss, the supplier isn’t liable for loss suffered by the other group companies.

This is a fairly valid legal argument.

Third Party Rights as a Solution

There are various ways to reduce this “group loss v. single group contracting entity” problem. One way is to give all the group companies the right to enforce the contract against the supplier, so each of them can “kick” the supplier. These are called third party rights, because they give legal rights to a person who didn’t “sign” the contract (in legal terms a third party).

Since 1999 this has been fairly easy to do in English Law Agreements as a result of the Contacts (Rights of Third Parties) Act 1998 . (I say “easy”, but with my CYA head on I should note that there are some drafting traps for the unwary).

It has been possible to create such third party rights under Scots Law for quite a bit longer than that using the legal right “ius quaesitum tertio”, or “IQT”.  You can tell its really old because it has a Latin name! 

Moving Contracts between Scotland and England

As a lawyer working in England in the mid nineties I sometimes “moved” contracts to Scots Law in order to create third party rights using IQT.

However, since the English Act came into force I find myself doing the opposite, i.e. moving contracts to English Law in order to use the English third party rights legislation. 

Why?

Well because the IQT is massively inflexible when compared to the position under the English Act. For example, once you create a third party right under an IQT it can be very difficult to amend it or kill it. In contrast that is possible under the English Act (if you draft the clause correctly).

Recently I had a contract that had to be Scots law, but also needed to create flexible third party rights. The solution was to expressly apply the English Act to the third party rights clause, but have the rest of the Agreement subject to Scots law.  Very ugly – So ugly in fact that it prompted me to blog about it.

Let’s Update Scots Law

So I think the Scottish Law Commission  should look into updating the law in Scotland in order to mirror (or better) the English Act.

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