Scots law into the twenty-first century: Reforming third party rights in contract

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Written by: Obiora Godwin Ezike

On 18  November, 2015, the Glasgow Scots Law Forum welcomed Prof Hector MacQueen to discuss the ongoing project of the Scottish Law Commission to reform third-party rights in contract. The forum afforded participants the privilege of being the first group, outside the fall walls of the Commission, to see the draft bill on third-party rights in contract.

In his introductory remark, Prof MacQueen noted that the present position of Scots Law on third-party rights left much to be desired,  because of its inflexible and rigid nature and did not afford contracting parties the opportunity of redrafting terms to respond to new conditions. He stressed that the objective of the Commission’s project on third-party right was to achieve a ‘flexible outcome’ for contracting parties.  He further noted that at the inception of the project, the Commission had considered adopting the Draft Common Frame of Reference, but that in closely examining the Scots law principles, certain difficulties had been uncovered which are examined  in the Discussion Paper on third-party rights in contract.

Starting off the discussion, Prof MacQueen traced the history of third party rights under Scots Law from Stair to the rewrite and expansion of Stair’s views by Dunedin who put forward certain other requirements for the validity of a third-party right. Dunedin also made irrevocability a term, rather than a consequence, of third-party right. Prof MacQueen pointed out that the draft bill was prepared with the objective of getting rid of Dunedin’s principle which is inflexible and did not give contracting parties room to alter terms as to respond to new conditions. He noted that the Commission saw no reason why a contract in favour of a third-party cannot be recalled or revoked.

In discussing the reform agenda of the Commission, Prof MacQueen stressed that in preparing the draft bill, the Commission had paid attention to the doctrinal aspects and difficulties, particularly those relating to the creation of a third-party right in favour of a non-existent party, and whether prior to the coming into existence of the third party, it could be said that there was indeed a right. In looking at these problems, Prof MacQueen referred to Stair who holds the view that a third party right may accrue to a non-existent party. This position, according to Prof MacQueen, has been affirmed in several judicial authorities and appears not to be in doubt. Looking further, however, on how this is conceptually achievable, Prof MacQueen noted that applying analytical jurisprudence, a right is something that must be accredited. In effect, when a right is drawn up in favour of a third party who was not in existent at the time of the contract, this leads to two conclusions: the first is that at the point when the right was drawn up, there was, legally speaking, no right accruable to the non-existent third party; secondly, because there was no right at that point, the term was therefore revocable — there being no one to stop the contracting parties from revoking the term.

In further discussing the above issue, Prof MacQueen observed that if a third party right in favour of a non-existent third party could be said to simultaneously accrue with the coming into existence of the third party, then what was happens between the time when the term was drawn up and the coming into existence of the third party. In addressing this issue, Prof MacQueen pointed out that this conceptual difficulty dictates the operation of ‘suspensive conditions’ pursuant to which the third party right is suspended pending the coming into existence of the third party.

Prof MacQueen also commented on ‘resolutive conditions’ and irrevocability of third-party rights. He noted that resolutive conditions are conditions stipulating for the termination of a contract upon the occurrence of a future uncertain event. An effective operation of such a condition will appear to violate the irrevocability of third-party rights.

However, in examining the viability of such conditions within third-party rights, Prof MacQueen referred to the cases of Love v Amalgamated Lithograph Printers (1912) SC 1078 and Kelly v Cornhill Insurance Company (1964) 1 ALL ER 321.He noted that in these two cases, the courts gave validity to a third party clause even though the rights could be revoked by the contracting parties. In Kelly’s case, a father could withdraw the permission granted to the son to drive his car even after the third party right had arisen. This notwithstanding, the House of Lords upheld the third-party right in favour of the son to claim indemnity even though the third-party right was revocable.

Prof MacQueen noted that these cases support the Commission’s position of ensuring a flexible outcome in the arrangement of third-party rights. He said that the Commission, based on these cases, saw no reason why a contract in favour of a third party cannot be recalled. The Commission’s position is reflected in section 2 (4) (a) of the draft bill which provides that a person may acquire a third-party right despite the fact that the ‘undertaking may be cancelled’. Section 2(4) (b) of the draft bill also provides that a third-party right may be enforced despite the fact that there has been no delivery, intimation or communication of the undertaking to the person. Prof MacQueen noted that these two provisions are the ‘heart of the [bill] in terms of reforming the law on third-party right.’

After the talk, participants were given the opportunity to comment on the draft bill which has 13 sections. Prof MacQueen in conclusion hoped that the draft bill, if passed into law, will bring about ‘fundamental changes that will brighten and gladden the heart of commercial practitioners.’

We look forward to this happening soon!

 

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