I am very pleased to open the debate on the Contract (Third Party Rights) (Scotland) Bill. The bill is the result of some solid law-reform work on the part of the Scottish Law Commission, so I thank the team at the Scottish Law Commission for their considerable hard work in producing their report and the draft bill. I also thank the Delegated Powers and Law Reform Committee for its thorough and considered deliberations on the bill. I particularly welcome its stage 1 report and am pleased to note that the committee welcomes the bill and recommends that its general principles be agreed to. I am glad also that the committee recognises support among stakeholders for the bill and that the changes that the bill will make to current law are widely welcomed.
In the stage 1 report, the committee highlights a number of issues on which it has invited the Scottish Government to reflect. I hope that the committee has had an opportunity to consider my response to it. I will return to the issues within it in more detail a bit later in my opening remarks.
The bill addresses some fundamental difficulties in the law as it stands, and will remove the barriers that prevent people from having confidence in and using the law. The ability to create third-party rights is important. There are many reasons for third-party rights to be created, and the reasons apply to individuals as much as to businesses. For example, when booking a family holiday it may be beneficial for family members other than the person who booked the holiday to be able to enforce rights under the contract, but at present that area is plagued with difficulty.
Another example is life insurance, the proceeds of which are payable to another person. It would be of value to the third-party beneficiary to be able to enforce terms of the insurance policy in their favour—but again, in current law, that area is plagued with difficulty.
Another example is a company in a group taking out an information technology contract under which it wants all the companies in the group to be covered. It may be helpful if group companies that are not party to the IT contract are able to sue—for example, in relation to losses that are suffered as a result of breach of the contract—but that is another area of economic life in which there is considerable difficulty under the current common law.
In everyday life and in business, it can therefore be very helpful to create third-party rights. They can provide entitlements and protections not just for businesses but, importantly, for individuals. For that reason, we need a legal system that is fit for purpose and which keeps up with the times. As the Faculty of Advocates’ representative, Dr Ross Anderson, said when he gave evidence to the committee, the bill will
“ensure that ... Scots law provides the tools”—[
Official Report, Delegated Powers and Law Reform Committee
, 21 March 2017; c 8.]
that practitioners and others need.
The bill is intended to address a number of problems with the law as it stands. For a third-party right to be in existence, the current law requires that the contracting parties intended to benefit the third party and that the right is constituted irrevocably. However, that common-law doctrine is rarely used in Scotland and has been the subject of some criticism on the basis that it is inflexible, that there are many uncertainties surrounding its application, and that it does not meet modern standards. I note that the committee welcomes the abolition of irrevocability and welcomes the flexibility that the bill provides.
“clearer rules in relation to third party rights under contract”.
The absence of confidence in the law as it stands among Scots law practitioners means that English law is sometimes chosen in place of Scots law to govern transactions that are otherwise Scottish in nature. The uncertainty over third-party rights and the lack of flexibility damage the reputation of Scots law by limiting its use.
Of course, it would be possible to allow the status quo to continue and, in effect, to leave it to the courts to improve the law through judicial reform. However, if that approach was taken, although some policy objectives might be achieved by the courts under the common law, that cannot be predicted or guaranteed and it would certainly take much longer than the statutory route that is offered by the bill.
I do not wish to engage in a law lecture—I see that there are some eminent jurists among us—but the leading case on irrevocability dates back to the 1920s. I am sure that members on the Tory front bench know that I am going to cite the case of Carmichael v Carmichael’s executrix, which is, of course, the seminal case on third-party rights and irrevocability. Even assuming that a suitable case might arise—which is doubtful if English law is used instead, as a workaround—there would be no guarantee that the policy objectives of the bill would be realised.
In addition, any court decision would examine only the relevant facts of the particular case and would be unlikely to look at the law in the round. It would therefore be unlikely to produce a comprehensive solution in the way that the bill does. Such uncertainty is unsatisfactory for practitioners and others who have to base advice to clients on the present law. We therefore see no benefits in the non-statutory approach. The law in Scotland on third-party rights would likely remain out of date and inflexible and would continue to constitute an unnecessary hindrance to business and individuals alike.
I therefore welcome the positive evidence that has been presented to the committee from a range of witnesses. Although, like the committee, we do not think that the bill will result in transformational change overnight, we are confident that placing third-party rights on a statutory footing will represent a significant improvement on what we have now, and that over time—not too long, we hope—we will see an increase in the use of Scots law. By that, I simply mean that, where Scottish solicitors are currently turning to alternatives and workarounds, including applying English law to a contract or to part of it, or having recourse to collateral warranties because of a lack of confidence in our law as it stands, and because of the current difficulties with which the committee is familiar, there will be the welcome option of using the new legislation. It seems to be clear that there are practitioners out there who are keen to make use of it.
More than once I have heard, as the Law Society of Scotland rightly pointed out in its briefing ahead of the debate, that although some people might be able to adopt expensive and complicated workarounds to the law as it stands, that facility is not available to everyone, but everyone deserves a legal framework that works. The bill will deliver that.
It is fair to say that any issues with the bill have focused on a few drafting matters. As I mentioned, the committee invited the Scottish Government to reflect on those. I will turn now to some of those issues. I am grateful to the committee for bringing them to my attention.
One issue that the committee raised is whether the bill inadvertently fails to preserve conditional undertakings that are constituted before the legislation comes into force and where the third-party right may, in fact, crystallise after commencement of the legislation. That point was noted in written evidence from Shepherd and Wedderburn LLP. The concerns relate to section 12, which will abolish the common-law rules on third-party rights, which are otherwise known as jus quaesitum tertio. We have considered carefully the points that Shepherd and Wedderburn raised and which were discussed in committee, as it clearly was not our intention to hinder the enforcement of such putative third-party rights. We therefore agree that the bill should be amended to address the issue, so I will lodge an amendment at stage 2 to do that.
Similarly, we have reflected on the provision in section 10, which relates to the renunciation of a third-party right. On the basis of the view that was offered by Professor Vogenauer on that section, and the Law Society’s evidence to the Scottish Government that the provision is superfluous, we have concluded that section 10(1) is not needed. Section 10(1) is simply a statement of what is already a matter of general principle, and we agree that there is no need to restate that in the bill.
We are also still considering whether a change should be made to the arbitration provisions at section 9 of the bill to address the concerns that were raised by the Faculty of Advocates. Officials have written to the faculty’s witnesses, Dr Ross Anderson and David Bartos, about the matter because I think that their concerns might be down to a small misunderstanding. Officials have suggested a meeting with those representatives of the faculty. I assure Parliament that, if there is a better way of implementing the Scottish Law Commission report, I will be happy to reflect further on that.
The Scottish Government is absolutely committed to the principle that legislation should be clear and accessible. However, it also needs to be effective. On section 1, as I have set out in my response to the stage 1 report, the Scottish Law Commission gave careful consideration to the use of the word “undertaking”, and concluded that it is the most suitable choice because the undertaking may be found expressed or implied in one or more terms of the contract.
Against the background of that careful consideration, we are not inclined to interfere lightly with the commission’s recommendation—number 5 in its report—that
“The provisions in a contract which are intended to comprise the third party’s rights thereunder should be referred to as the ‘undertaking’.”
On whether the section is unclear about what the benefit is to the third party, we think that the cumulative effect of sections 1 and 2 is that the undertaking in favour of the third party must be contained in the contract; that it must be clear that the contracting parties intended to confer an enforceable right upon the third party thereby, although their intention need not be stated as such expressly, but can be implied from other wording in the contract and admissible surrounding circumstances; and that the third party must be identified in or identifiable from the contract. I think that, from that, it is clear that a third party merely benefiting from a contract between others without any of the other requirements being in place is not enough to create any right for that third party, and we are therefore content with the effect of section 1.
As I explained in my response to the committee, the provisions at sections 4 to 6 need to be capable of dealing with a wide and sometimes complicated range of circumstances, and must be fit for all purposes. We are concerned that, in paring down the provisions to make them more streamlined, we might lose that capability, which would be highly undesirable.
However, in any case, I flag up the fact that there was no real consensus among witnesses about what the revised drafting should look like. It is fair to say that their views were mixed. Some found the drafting to be quite wordy, but others were content that the words reflect the product of some careful consideration by the Scottish Law Commission. Ultimately, everyone was, I think, of the view that the sections will achieve the right result. That is very encouraging, and I think that that is most important. For all those reasons, we do not intend to amend sections 4 to 6. I hope that the committee is reassured that we have thought carefully about what it said in its stage 1 report.
It seems to be clear that the bill has struck the right balance by providing an effective legal framework for third-party rights while preserving the rights of parties to decide whether they want to give third parties rights, and how they want to give them those rights. As Karen Fountain from Brodies LLP put it,
“people will have more confidence that what they’ve written down will work”.
That the Parliament agrees to the general principles of the Contract (Third Party Rights) (Scotland) Bill.
As the convener of the Delegated Powers and Law Reform Committee, I am delighted to speak on behalf of the committee on the Contract (Third Party Rights) (Scotland) Bill. I refer members to my entry in the register of members’ interests.
The bill proposes changes to the law in Scotland that allows parties to a contract to create rights for third parties. The main aim of the bill is to make the law clearer and more usable in this area.
Members will be aware that this is a Scottish Law Commission bill. The Scottish Law Commission bill process is a relatively new one that was created in order to improve the implementation rate of Scottish Law Commission reports.
This bill is the third Scottish Law Commission bill to be considered by the Delegated Powers and Law Reform Committee following changes to standing orders in 2013. The committee took evidence from law bodies, academics, arbitrators, representatives from the Scottish Government and, of course, the Scottish Law Commission. The committee endeavoured to capture a wide range of views on the bill. The committee heard evidence from legal practitioners representing the sectors that are most likely to be affected by the bill, including the finance and construction industries and less obviously affected areas such as the agricultural sector. We also considered the implications of the bill on small businesses and individuals.
By way of background, I now turn to the current law on third-party rights in Scotland, which is based on common law and which has existed for centuries. I will briefly explain what is currently required to create third-party rights in Scots law.
First, there needs to be a contract. Secondly, that contract must identify the third party in some way and the intention of the contract to confer a right on a third party, whether by implication or derived from an express provision in the contract. Lastly, the third-party right needs to be irrevocable, meaning that it needs to be clear to a third party that the contracting parties to the contract intended to give up their right to change their minds about granting a third-party right.
There are concerns about the lack of clarity and certainty and about the inflexibility in the current law, which has resulted in legal practitioners and their clients not using the Scots law of third-party rights and instead relying on English law or workarounds such as collateral warranties.
Further, a key problem with the current common law on third-party rights is that it has been developed on the basis of case law, but that development is itself dependent on cases being brought. As that is an area of law where no cases have been brought, there is continuing uncertainty as to the position of the law. Indeed, the current position was dramatically explained to the committee by David Christie of Robert Gordon University as a “death spiral” of third-party rights, as the lack of clarity in the law prevents their use, which therefore leads to a lack of case law, which in turn prevents the law from being developed, meaning that the uncertainty continues.
The uncertainty that the bill seeks to remedy stems from a House of Lords judgment that was made in the 1920s, to which the minister referred. It stated that, once someone had been given a third-party right, it was irrevocable. In other words, it could not be taken away, cancelled or modified. The committee heard that that judgment has created significant inflexibility in the law and, as a result, legal practitioners tend to shy away from using it, more recently favouring English law or workarounds instead. Therefore, the main proposal of the bill is to abolish the existing rule that third-party rights have to be irrevocable once created, thus making it easier to create and subsequently remove third-party rights in contracts.
To help the committee understand how the bill might be used in practice, the Scottish Law Commission helpfully provided some examples in its written evidence to the committee of when the bill might be used in practice. For example, the bill will make it easier for contracting parties to create third-party rights in their contract, even if a third party does not yet exist. That is often the case in relation to companies within a group structure that have not yet been formed at the time of creation of the third-party right.
I now turn to the committee’s key conclusions on the bill. First, it is clear that there is universal support for the bill, as moving from the current common-law position to a statutory footing will provide greater clarity for users of the law, namely legal practitioners and their clients. As well as greater clarity, the bill will provide greater flexibility for users of the law. As I have mentioned, it is currently the case in Scotland that third-party rights have to be irrevocable to be made. The proposed legislation will abolish that rule and make it easier to create and also subsequently remove third-party rights in contracts. The committee therefore welcomes the abolition of that rule.
Nonetheless, and while recognising that it was not appropriate for the bill, the committee’s report encouraged the Scottish Government to reflect further on the protections that are in place for smaller businesses. It is therefore pleasing to note the role highlighted in the Government’s response for the small business commissioner in affording those protections to smaller businesses.
The committee also recognises that protections and balances are required to protect third parties, particularly as the bill will allow those rights to be changed or cancelled altogether. The committee therefore welcomes the protections that are included in the bill at sections 4 to 6. However, I would like to highlight concerns that a variety of stakeholders have raised about the clarity and usability of the provisions in those sections. Although the committee welcomes the protections for third parties that are included in those sections, we invited the Government to reflect on the evidence received from stakeholders, particularly the Faculty of Advocates, on sections 4 to 6. I note from the response to the stage 1 report, and from what the minister has said today, that the Government does not intend to amend those sections. I recognise that there was no unanimity on how those sections should be amended, but it is perhaps a little disappointing that a revised form of words could not be found.
The committee also received evidence from stakeholders highlighting the need for greater drafting clarity in sections 9, 10 and 12. Although I do not intend to detail those drafting concerns, we welcome the Government’s commitment to lodge amendments to sections 10 and 12, and to reflect further on the drafting of section 9.
I have outlined some of the principal benefits that would be derived from passing the bill, but the committee is also aware that it may not be widely used in the short term. Indeed, the committee heard evidence that the equivalent new legislation in England and Wales, which has been in place since 1999, is only recently starting to be used. However, it is worth highlighting that the Scottish context with regard to third-party rights is different from the English one. As I have mentioned, there is already a legal tradition of third-party rights in Scotland under common law that did not exist in England and Wales prior to 1999. Therefore, the bill does not start from a blank sheet of paper on third-party rights. On that basis, the committee recognises that there is scope for the legislation to be used more quickly than has been the case in England and Wales.
There are both technical and financial difficulties associated with the continued use of workarounds such as collateral warranties, so the committee believes that there is good reason for greater use of the proposed legislation to avoid those difficulties in the future.
I highlighted at the start of this speech the importance of ensuring that Scots law is fit for purpose in order to remain modern and competitive alongside other legal systems across the world. Our committee is of the view that the introduction of the bill would be a useful tool for legal practitioners and their clients to have available to them when setting up third-party rights in contracts, and we encourage the Government to promote the advantages of the legislation should the bill be passed by the Parliament. The committee therefore has no hesitation in recommending to the Parliament that the general principles of the bill be agreed to.
I start by reminding members of the entry in my register of members’ interests, which states that I am a member of the Law Society of Scotland, although I note that I do not hold a current practising certificate.
I have faced many challenges in my career as a member of this Parliament. There are the complex constituency cases with which we are all so familiar, in which it seems that, no matter what effort is put in, it is almost impossible to get a resolution that satisfies the constituent; there are the lively chamber debates on a variety of divisive issues on which party positions have to be set out and defended; and there are the constant pressures of juggling workload with competing parliamentary, constituency and family demands. However, I can honestly say that I have faced few greater challenges in my parliamentary career than trying to craft a seven-minute speech to open this debate on the bill before us.
In saying that, I intend absolutely no slight on the diligent and hard-working members of the Parliament’s Delegated Powers and Law Reform Committee and its able convener, my colleague John Scott, who has just opened the debate for the committee. I enjoyed reading the committee’s report, which was a very fair and balanced summary of the issues that the bill faces and addresses. It is fair to say, however, that there is not a lot of controversy around what is proposed. The two and a half hours that had originally been allocated to debate this afternoon’s topic seemed rather overgenerous, and I am sure that I am not alone in being relieved that the time has been reduced to two hours. I suspect that many of us will end up making very similar points over the course of the afternoon, and I am refreshed by the fact that I am one of the earlier speakers in the debate.
To the bill, then, which has arisen from work done by the Scottish Law Commission. The commission is an excellent and probably undervalued body, whose members beaver away to address important, if sometimes seemingly minor, changes in the law, and I echo the minister’s remarks about its importance and its approach to legislative reform.
The bill deals with third-party rights, specifically allowing rights to be conferred by contracting parties upon a person who is not a party to the contract. In Scots law, this is known as the jus quaesitum tertio, if I remember the pronunciation correctly from my law lectures many years ago.
Thank you, Presiding Officer.
As we have heard, the issue identified by the commission was that third-party rights could be conferred only if they were deemed to be irrevocable. That created a problem for those dealing with commercial contracts, because if a third-party right was not deemed to be irrevocable, it could not be enforceable in the Scottish courts. In practice, there were many situations in which it did not suit the contracting parties to have those third-party rights deemed to have been granted on an irrevocable basis.
However, there is always a way around such problems. In practice, Scots lawyers have got round them by drafting collateral warranties, which are separate documents that convey a specific third-party right and which stand alongside the main contract document. I well remember from my own legal experience good practical examples of where the issue might arise. For example, when a new building is constructed, a developer will engage a range of professionals, including an architect, a structural engineer and a surveyor, in the construction contract, and the contract itself will be between the developer and those professionals. However, on completion the building will usually be sold on to a third party or leased, and the new owner—or the new tenant—has no direct contractual relationship with the architect or the other property professionals. As a result, if a fault with the building arises that leads to a claim being made—and if appropriate warranties are not in place or if the matter has not been addressed in another fashion—it will not be possible for the new owner or tenant to pursue the professionals involved in the event of any negligence on their part.
As I have said, under existing practice, people have got around such problems with collateral warranties from the professionals involved. Indeed, in a previous life, I made a reasonable living out of drafting and revising such documents. However, the changes in the bill will require at least a new approach to the issue and might well mean that such extensive warranties are no longer required in such situations; it might even make it easier to enter into commercial or construction contracts.
It might be interesting to draw members’ attention to recent reports that certain difficulties are appearing with regard to enforcement of collateral warranties. That is another trend that we should perhaps take into account.
As the committee said in its report, we have known about the third-party rights problem for a long time. Indeed, the issues go back to the second world war. In England and Wales, the problem was identified as far back as 1937 but was legislated for only in 1999. The gap in Scotland has been somewhat longer, but the good news is that the bill was introduced only three years after the date on which the Scottish Law Commission issued a discussion paper. We have therefore moved relatively quickly to resolve the issues since the commission brought the matter to people’s attention.
The bill has been widely welcomed by stakeholders on all sides. As the committee noted, a few minor concerns about the drafting have been raised, on which the Scottish Government has been asked to reflect. I welcome the minister’s comments about how the Government intends to respond to the points in the committee’s report. Overall, the bill seems to have universal support.
The committee considered how quickly the bill will be used, once it has been passed and implemented. Now, lawyers are, by their nature, conservative beasts—I stress that it is “conservative” with a small c, for the purposes of the
, although of course sometimes it is with a large C, too—and it is likely that it will take some time for working practices to adjust to the new legislation. As John Scott said, in England and Wales, the Contracts (Rights of Third Parties) Act 1999 took a long time to be used. However, there will be, in time, a new approach to the preparation of contracts, and perhaps there will be less paperwork than there is currently. In theory, less paperwork will mean quicker deals and lower costs for clients, although from my days in the legal profession I do not want to be overoptimistic about what can be achieved in that regard.
Presiding Officer, I have done my best to fill my time on the subject. This is a worthwhile bill and the Scottish Conservatives will be happy to support it at stage 1. I hand on to other members the challenge of continuing the excitement.
You are indeed lucky to have spoken so early in the debate. I am wondering what other members will manage to say, but I have no doubt that they will come up with something.
I associate myself with Murdo Fraser’s opening comments, and I thank the committee for its stage 1 report on the Contract (Third Party Rights) (Scotland) Bill.
The Delegated Powers and Law Reform Committee is a fairly recent creation of the Parliament, and I understand that this is the first bill that it has considered in this parliamentary session. The committee was established in recognition of the pressures on the Justice Committee, in particular, in previous sessions. It developed out of the Subordinate Legislation Committee and has the additional role of being the lead committee for bills that arise from Scottish Law Commission reports. Although it is recognised that the Scottish Parliament, as an institution, has facilitated a significant and necessary increase in law reform, it can still be difficult to secure parliamentary time for Scottish Law Commission bills. The appointment of a dedicated committee provides greater opportunity for scrutiny and legislation.
The Scottish Law Commission plays an important role in ensuring that our laws are relevant, easily understood and consistent. It was established more than 50 years ago and its task is to recommend laws that will improve, simplify and update the law of Scotland. As the bill that we are considering illustrates, the relationships that are governed by laws constantly develop and change as society changes, and it is important that the law keeps pace with changes in the way in which we live, work and do business.
The process in which we are engaged is therefore important. If our laws are outdated or unnecessarily complex they can lead to injustice as well as inefficiency. Law that is in need of reform can increase inequality and limit access to justice. The law must be relevant to how people live in society. It must facilitate good business relationships and support people’s personal decisions.
The bill enjoys a degree of consensus among committee members and the witnesses who gave evidence to the committee. That might suggest that law reform is easy, but a look at other recommendations that the Scottish Law Commission has made, including the abolition of feudal tenure of land and the protection of the rights and interests of adults who are incapable of managing their own affairs, demonstrates that changes can generate a great deal of debate and discussion—although that perhaps does not apply to the changes that we are considering this afternoon. The bill has been thoroughly discussed by the committee and I thank those who provided evidence over a number of weeks.
The bill was introduced following a long-established understanding that the existing common law governing third-party rights is no longer fit for purpose, and a growing confidence that it should be replaced with new statutory rules. A Scottish Law Commission discussion paper from 2014 identified the range of legal and practical problems arising from the current law on third-party rights—primarily, those are concerns around clarity, certainty and inflexibility within the current law. The absence of clarity, certainty and flexibility has meant that legal practitioners and their clients typically resort to the use of English law or workarounds such as collateral warranties rather than Scots law on third-party rights. In evidence, it was recognised that
“The law does not allow the flexibility that people need in today’s commercial or indeed personal legal transactions.”—[
Official Report, Delegated Powers and Law Reform Committee
, 14 March 2017; c 7.]
Although the bill is widely supported, a few issues were raised for further consideration as we look towards stage 2. The bill changes the rights of third parties by abolishing the irrevocability rule and introducing new flexibility, but the counter is the need to protect third parties, given that their rights could then be changed or cancelled altogether. Some improvements to the drafting have been suggested, and the Government should further reflect on them. One of the more interesting comments in that regard came from Craig Connal QC, who said in evidence:
“when I see sections that talk about ‘reliance’ and ‘to a material extent’ I wonder what that means and think to myself that we can litigate over that.”—[
Delegated Powers and Law Reform Committee
, 28 March 2017; c 22.]
In evidence, the Government said that it was reluctant to redraft but in a briefing for today’s debate, the Law Society of Scotland says that signposting of the content and effect of sections 4, 5 and 6 would improve the accessibility of the legislation—that suggestion underlines the purpose of the bill. There was also evidence of a need to redraft parts of section 9, on arbitration, but again the Government appeared inflexible about that in committee. However, I recognise the Government’s commitment to review those sections—the minister has commented on that this afternoon—so we will see what arrives at stage 2.
There was a discussion at the committee about arbitration as the only available dispute resolution mechanism. It was suggested that that might not best serve all contracts—particularly construction contracts—and that it might not provide flexibility. I note the comments from both the committee and the minister that they were not persuaded of that case, but I hope that there is an opportunity for further reflection.
The bill aims to provide a new statutory framework, with clearer, more usable rules on third-party rights and clarity in Scots law. However, there is at the outset a recognition that, while the bill seeks to address the use of workarounds or the deployment of English law, it is not expected to be widely adopted any time soon. Although there is undoubtedly evidence that supports the need for the bill, it is initially unlikely to be used very often, with a preference for the familiar and a tendency towards caution—or conservatism, as described by Murdo Fraser—to be anticipated from the legal profession. However, witnesses, including the Law Society and the Royal Incorporation of Architects in Scotland, suggest that the benefits offered by the bill may encourage legal practitioners and clients to use it, particularly in the pursuit of flexibility, which is currently offered by English law. Others identified difficulties with the use of collateral warranties.
The Faculty of Advocates makes an interesting point that the accessibility and clarity of the bill may be an advantage to people who are unable to access “expensive legal advice”. The Law Society of Scotland briefing states:
“It is important to bear in mind, that the legislation will significantly improve the position of parties who were always going to use Scots law, particularly those who cannot afford the legal advice necessary to set up an arrangement which uses foreign law or a complex alternative. Their interests should not be forgotten.”
If the bill can increase equality in good legal practice, that is to be welcomed. There is, however, no expectation that the bill will immediately make any difference to working practices, although it addresses an identified weakness in Scots law and provides an additional tool to be used alongside existing alternatives.
There is a role for the Scottish Government and partners in highlighting the potential benefits of the bill. Although challenges were identified, raising awareness will lead to the appropriate use of the bill, increasing confidence and familiarity. In advance of the bill being passed, the Government could reflect on the most appropriate way to achieve that.
I do not need to address the whole bill, as the minister and John Scott, the convener of the Delegated Powers and Law Reform Committee, have undertaken that role in their usual efficient and meticulous manner.
I was quite impressed by the contributions from Murdo Fraser and Claire Baker, which showed their understanding of what we discussed in committee as we went through the evidence. Murdo Fraser made a speech of seven minutes—although it felt as though he was struggling to manage that—and the whips will have watched and listened to him this afternoon and appreciated that that was his pitch to get a transfer to the Delegated Powers and Law Reform Committee so that he can undertake this piece of work and further SLC bills. He is not denying it, so it must be true.
I want to discuss a couple of points that have been touched on by previous speakers but which are worthy of further debate. However, before that, I want to address one issue. As members know, the bill has come about because of the work of the Scottish Law Commission. It is the third such bill and it is the first time in this parliamentary session that the SLC has sent a bill to the Delegated Powers and Law Reform Committee. In the previous parliamentary session, I was on that committee and we undertook a similar piece of legislation, which was the Legal Writings (Counterparts and Delivery) (Scotland) Bill. If memory serves me correctly, it was the minister’s brother, Fergus Ewing, who steered the bill through.
At that time, I thought that the Delegated Powers and Law Reform Committee was a useful tool to have in the armoury of the Parliament when it comes to law reform. I am genuinely delighted that the committee now has the power and responsibility to look at law reform, as it helps with the wider issue of law reform in Scotland.
The Delegated Powers and Law Reform Committee has been supportive of the bill, as those who have provided evidence have suggested. Paragraphs 27 to 40 of the committee report touch on the speed of law reform and the introduction of the bill, as others have said. As the evidence shows, there was not much concern about that. Nonetheless, given that SLC proposals are on smaller, focused legislative improvements, I asked the minister whether she and the Scottish Government, along with the SLC, would consider whether further SLC bills could incorporate more than one area of law reform. I am pleased that the minister provided a commitment to explore that issue in the future. Law reform does not take place regularly or in a vacuum and, as the bill and the area that it covers highlights, if it is possible to improve and update the law by more SLC bills covering multiple areas, we could make even more headway with law reform. However, we are not alone, as the bill highlights, and similar legislation was first mooted in Westminster in 1937, with a bill being presented to the UK Parliament in 1999.
In the bill, the codification of the law of third-party rights provides certainty for users of Scots law, which our report highlights in paragraphs 51 to 61. Law firms will be able to use that certainty in legislation instead of using expensive collateral warranties or law from other jurisdictions. Murdo Fraser touched on the area of collateral warranties, which was also touched on as we went through the evidence. Collateral warranties can be expensive and there was a hint that some organisations might prefer to still use them, because of the revenue that they can generate for those firms. The bill that is in front of us will help to deal with that and will help Scots law. In our case, it will ensure that cases that do not use English law can use Scots law.
Witnesses were clear that there will not be a rush to use the new legislation, because training will certainly be required once the bill has been enacted. Nonetheless, it will in time be used for a greater number of contracts, and that can only be of economic benefit for Scotland.
The evidence from Karen Fountain, who is a partner at Brodies LLP, was particularly useful. She said:
“The bill is effectively taking us back to the Ronseal moment: the contract should do what it says on the tin. At the moment, you cannot be confident that that is the case, and you need to be confident.”
That was a very strong argument to use.
Jonathan Gaskell of DLA Piper also provided positive evidence. He stated:
“For that reason, the bill is a good thing: it codifies the existing law and gives certainty.”—[
Official Report, Delegated Powers and Law Reform Committee
, 21 March 2017; c 17, 18.]
My final point concerns sections 4 to 6 of the bill. Witnesses presented their opinions on the clarity of those sections, and the evidence that we took as a committee was clear. The Faculty of Advocates suggested that they are not easy to follow, and the Law Society of Scotland shared that view. The Law Society of Scotland presented members with a useful briefing for the debate, which highlights those sections, and it has provided a suggestion to assist with making them clearer. I absolutely agree with the minister’s evidence to the committee—we touched on that in paragraph 90 of the stage 1 report—but, in paragraph 91, the committee invited the Scottish Government
“to continue to reflect on the clarity and usability of these provisions.”
As members will know, we received the Scottish Government’s response today. Having read it—I will read it again, as well as members’ contributions this afternoon—
I very much welcome the opportunity to participate in this debate on the Contract (Third Party Rights) (Scotland) Bill, and
I thank the Scottish Law Commission for its work, which led to the introduction of the bill, and for helping us to understand the importance of reform in this area of law.
As a member of the
Delegated Powers and Law Reform Committee,
I have been involved in the scrutiny of the bill and, with my fellow committee members, I have heard compelling evidence on why the general principles that it captures are the correct ones. I therefore support the bill at stage 1.
Let me turn first to the problems that have been consistently identified with the current approach in common law. We heard from the Scottish Law Commission that the common law was not fit for purpose and that waiting for the courts to change it could take decades. Lord Reed of the UK Supreme Court said that there was a need for
“clearer rules in relation to third party rights under contract”.
Indeed, the current law has remained unchanged since 1920. In our modern market economy, the requirement for reform is more pressing, and that is why it is up to us in the Parliament to embark on reform.
One of the main challenges that the current law presents is that it has contributed to significant legal uncertainty. The Law Society of Scotland has said that lawyers are really not comfortable with giving advice to clients in such areas, where the law is unclear. For example, it is not even clear at present what remedies are available to third parties in the event that their rights have been breached. The Scottish Law Commission highlighted that issue as one of the main benefits of codifying the law, and referred to
“the most significant uncertainty in the current Scots law of third party rights.”
The requirement for third party rights to be irrevocable is another serious issue with the existing legal position. Essentially, that means that, for a third-party right to even be created, the parties must intend to give up the right to change their minds about granting the right at any point in the future. The committee heard a lot of evidence that echoed the concerns of the Scottish Law Commission, which suggested that parties are deterred from creating third-party rights at all because of that requirement and lawyers are left looking for workarounds, such as using English law instead. That happens because the legislation in England—the Contracts (Rights of Third Parties) Act 1999—grants much greater flexibility to the contracting parties. It allows them to terminate or vary the terms of the contract without the consent of a third party. That kind of approach encourages the parties to create third-party rights in a way that Scots law deters them from doing.
Bringing the law in Scotland on to a statutory footing is beneficial. However, as the committee heard from Hew Dundas, who is the honorary vice-president of the Scottish Arbitration Centre, the bill will also be beneficial as it will bring some harmonisation between Scots and English law. He said—and I agree:
“it would be unfortunate if we tripped up on a difference in principle between English and Scottish legislation, given that there is such a high volume of common trade”—[
Official Report, Delegated Powers and Law Reform Committee
, 18 April 2017; c 5.]
The main principle that the bill promotes is the abolition of the existing rule that third-party rights have to be irrevocable in order to be created. Contracting parties are severely restricted because they cannot build flexibility into the contract at the outset, or respond in a flexible way to events as they unfold. The bill can also bring greater clarity to third parties about how they can enforce their rights, in a way that they cannot do currently.
It is essential that, when the Scottish Law Commission and practitioners tell us that the common law creates commercial barriers, we respond accordingly and pass legislation to remove those barriers. The committee’s stage 1 report highlighted the fact that the general principles of the bill had very broad support, but identified a few areas in which it could be strengthened. While the evidence that we heard suggested that the bill might not be widely used in the short term, I hope that the greater flexibility that it allows will encourage parties to make use of it in the future. I also welcome the Scottish Government’s commitment to reflect on the committee’s comments about the drafting of some of the provisions, and I hope that those concerns will be addressed as the bill proceeds. As we work to overcome those challenges, the general principles of the bill remain the correct ones, in my view.
The bill gives us the opportunity not only to bring greater clarity to the law, but to create a framework that will allow third-party rights to become usable. Third-party rights that are properly created and able to be revoked in certain circumstances will be positive for the parties to the contract as well as for third parties themselves. By building greater flexibility into our system of third-party rights in Scotland, we can offer the commercial environment that contracting parties and third parties need. I sincerely hope that the bill can achieve its objectives and that it will address the concerns that have been identified in the current law.
I thank members for listening as though they had not heard all this earlier on in today’s debate.
I refer members to my entry in the register of members’ interests as a non-practising member of the Law Society of Scotland, and also to my history of employment as a solicitor with Brodies LLP, some of my experience of which I will refer to during the debate.
I thank the Scottish Law Commission for carrying out the process that has brought us to debating the bill at stage 1. I thank members for their speeches. I also thank members of the Delegated Powers and Law Reform Committee for their arguments in committee and the committee’s witnesses for their evidence.
I warmly welcome the bill and the principles expressed in it, as a development to ensure that Scots law is fit for purpose in a modern commercial environment, that it is flexible and ready and, crucially, that it can provide contract security. The codification of third-party rights will be helpful for practitioners and their clients, as Murdo Fraser rightly said. It will remove a practical barrier to commercial transactions, so that they will be able to meet modern-day expectations.
As has been stated already, the codification and the principles of third-party rights relate to the ability of parties who are not directly party to the contract in question to have rights within that framework. Members have rightly alluded to a few different aspects of commercial law, and I will do the same.
In evidence given to the committee, and particularly in the report by the Scottish Parliament information centre, it was stated that the new provisions will have application in insurance and also in pensions, but in the debate the focus has been on construction law. In my experience as a trainee solicitor working on construction contracts, it is that aspect that will be of most practical use.
A funder, a buyer or a tenant can create a direct relationship with and claim losses from third parties. A common example that has been used is from construction and is, for instance, a subcontractor such as an architect, or other subcontractors to a commercial contract, such as electricians.
The ability to create that relationship within the contract itself will certainly be of use to practitioners and those who are seeking to take forward construction contracts. It will also be of use to those who are involved in commercial property transactions around previous construction projects.
For example, I worked on a transaction once that had multiple aspects to it. Elements of the construction were based in English law and other elements were based in Scots law. As third-party rights are available in English law, they were drafted into the substance of the contract, whereas the Scots law elements of the contract required collateral warranties. I remember thinking one evening during that deal that I was going to be able to go home after finishing the Scottish contracts and being told, “No, we have to do the collateral warranties now.”
For anyone working in construction, there are nuances about construction law and the inclusion of third-party rights. It may sometimes be advantageous to put the rights in collateral warranties, for example, and there are questions around when step-in rights are advantageous.
However, overall, for construction lawyers and those involved in the construction business, the bill will assist them by providing the legal frameworks that are necessary, thus creating an environment where construction projects can be developed with less legal work being required—although I appreciate Murdo Fraser’s point that that is not always the case.
The bill will also be useful in terms of financing projects. For example, for renewable energy projects, financiers will now be able to create third-party rights within the contract rather than having to rely on collateral warranties. That will be helpful for Scotland’s renewable energy industry.
I warmly welcome the element of flexibility. The removal of irrevocability and the ability to set up flexible contracts at the outset and to adjust contracts in response to events will be useful aspects in terms of developing the law.
I welcome the fact that arbitration is included in the bill. In my previous role as a lawyer, part of my work was on contracts that went to arbitration, and any mechanisms that can help to make it easier for parties to seek arbitration rather than go through litigation should be welcomed.
I also welcome the minister’s consideration of the points on drafting that have been raised by the committee and by stakeholders. I think that we can all work together to make the bill as user friendly as possible and, in the words of the Law Society of Scotland, something that helps to promote Scots law for the benefit of all, so that Scots law contracts can be used in Scotland where advantageous and required.
I am pleased to have the opportunity to speak in the debate to agree the general principles of the Contract (Third Party Rights) (Scotland) Bill. I am one of the members of the Delegated Powers and Law Reform Committee and, as members have heard, we have taken extensive evidence on this Scottish Law Commission bill in recent months. If anyone has been wondering what we do on a Tuesday morning, they now have some idea.
I echo our convener, John Scott’s, opening comments that there are a lot of people to thank. They have been thanked already—I will just add my thanks to them as well.
I am not a lawyer as, I know, many members are, and the matter is very technical, so from the outset I was keen to understand why the bill was required and who would benefit from it. We have had many weeks to consider those points, and as the process has moved forward I have been persuaded of the bill’s merits.
The minister, in her opening remarks, explained that third-party rights are helpful in everyday life and in business, and it is therefore important that Scots law is effective and keeps up with society. There is consensus that the current common-law arrangements do not achieve that, and that the bill will provide a welcome remedy; it is good that we all agree on that.
At the Delegated Powers and Law Reform Committee, we explored in written and oral evidence the question of what benefits would be derived in moving from the current common-law position to a statutory footing. We heard that case law is unlikely to develop fast enough to deal with the problems in the law that have been identified. Indeed, the bill team and the Scottish Law Commission have indicated that relying on the common-law position is unsustainable.
Many of the witnesses raised concerns about the legal uncertainty arising from the current common-law approach, and the underlying rationale for introducing the bill is that the current arrangements are simply not fit for purpose. A lack of certainty in the law prevents the use of third-party rights, which leads to a lack of case law, thereby preventing the law from being developed. John Scott quoted David Christie of the Robert Gordon University, who eloquently described that scenario as a “death spiral”.
The evidence overwhelmingly showed that the system needs an upgrade, and the bill therefore seeks to codify the existing law on third-party rights in one easily accessible place, which is a very welcome step.
I contemplated many times during the committee’s deliberations the question of how the bill will be used. If the bill is enacted, will it be a useful law that will be used in the face of competing and well-established workarounds and reliance on English law, as we have heard today?
One of the themes that emerged from our evidence sessions was that the bill’s purpose is to clarify the law in Scotland and, as the policy memorandum states, to
“promote the use of Scots law”.
Scottish Law Commission officials stated during evidence sessions and as part of the SLC’s investigation that lawyers in Scotland are currently applying English law to Scottish contracts, although it was not possible for that to be quantified in any way other than through anecdotal evidence.
In response to questioning on that particular point, Professor Hector MacQueen of the Scottish Law Commission said:
“It is certainly not that we have anything against the use of English law or, indeed, English law generally. It is more a case of where Scots law is not doing the job, it is up to Scottish lawyers, the Scottish Parliament and the Scottish courts, where possible, to do something about that. If one leaves a law in a state that means that nobody uses it, there is something amiss. Our attitude to such matters is just part of the mechanics of society, if you like. People will remain free to use English law if they prefer it, and they might do so. However, it is a pity if the legal system is not working for those who work in it.”—[
Official Report, Delegated Powers and Law Reform Committee,
14 March 2017; c 11.]
That captures exceptionally well the principles and the practical aims that underpin the bill.
At the same time, there has been a dose of realism about the bill’s implementation. As we have heard, the experience in England and Wales suggests that it takes time for such legislation to be adopted. It is therefore perhaps to be expected that the bill’s provisions will not necessarily be immediately adopted by the legal profession in Scotland. In fact, we heard that, although legislation on third-party rights has been in place in England and Wales for some time through the Contracts (Rights of Third Parties) Act 1999, there has only recently been an uptake in the use of the act, and even then it appears that, in most cases—in the construction sector, for example—people continue to rely on collateral warranties.
However, witnesses including the Law Society of Scotland and the Royal Incorporation of Architects in Scotland have suggested that the benefits offered by the bill may encourage legal practitioners and their clients to use newly codified legislation. Of course, we in Scotland are not beginning from a standing start.
In terms of fairness and equal access, Dr Ross Anderson of the Faculty of Advocates suggested that the bill might benefit people who do not have the resources to access expensive legal advice. He said:
“One of the great advantages of the bill is that it sets out, in modern language, what the law actually is.”—[
Official Report, Delegated Powers and Law Reform Committee,
21 March 2017; c 8.]
We also heard that the use of collateral warranties can be costly, so the bill will have practical benefits in that regard.
I did not think that I would have more to say than the time allows, but I am being encouraged to wrap up by the Deputy Presiding Officer.
The bill will be a useful tool for legal practitioners and their clients. No one expects a rapid uptake of the legislation in the short term, but it is important for the reputation of Scots law that it does a good job. I welcome the general principles of the bill.
This has obviously been a fascinating debate, because we are now over time. I ask the remaining speakers to be a bit more disciplined, please, with speeches of up to six minutes.
I had the privilege of being a member of the DPLR Committee in the previous parliamentary session. I told the whips last May, though, when I was re-elected to Parliament, that I did not want ever to be on it again. However, I accept that one attraction of the committee is its compact size—five members. Other committees that I am on have 11 members and are unwieldy.
I commend the committee for holding five evidence sessions and reassuring me that they have carried out their work very diligently, as always. I believe that Parliament can rely on the committee with regard to the bill; many of us in Parliament probably need to rely on the committee, because the bill deals with a technical area with which most of us are not familiar.
It was good to see the comment by James Rust of Morton Fraser LLP, who said that change in the area that the bill deals with had not been made in the past because of lack of parliamentary time, but now that we have the Scottish Parliament,
“the dam has burst and we have got on with it.”—[
Official Report, Delegated Powers and Law Reform Committee,
28 March 2017; c 37.]
Specifically having the DPLR Committee to handle this type of legislation is clearly good. I note the recommendation at paragraph 40 of the report that
“more than one area of law reform at the same time” might be considered. I certainly agree that it is worth exploring that, as long as lay members of the committee, which I was, do not get too confused by dealing with different issues at the same time. I note that the minister will consider the recommendation further.
The process of recommendations from the Scottish Law Commission leading to SLC bills is one that seems to be settling down well. I was a member of the committee when it considered the previous such bill—the Bankruptcy (Scotland) Bill. It is easier to speak on bills that deal with such subjects when one has been a member of the DPLR Committee. I was not a member of the committee when it dealt with the Legal Writings (Counterparts and Delivery) (Scotland) Bill, but I ended up speaking on it in the chamber, which was—as others have said—a bit of a challenge.
As I understand it, the DPLR Committee can consider only non-contentious bills, but I feel that we could relax that stipulation a bit and let the committee consider a slightly wider range of legislation. This is the second SLC bill dealing with contract law, with the Legal Writings (Counterparts and Delivery) (Scotland) Bill being the first. If I remember correctly, the purpose of that bill was to make it easier to sign contracts without all signatories being in the same place or having one piece of paper physically travel round all the signers.
On the bill that is before us, I am particularly attracted by the comment by the SLC, which said that it supports the policy to
“make arbitration in Scotland and under Scots law as attractive as possible to potential users from elsewhere as well as those already in the jurisdiction.”
That comment is to be welcomed. The fact is that we live in a competitive world and we want to win business for our legal system, just as we do for other sectors of our culture and economy. Scots law has long been distinct from law elsewhere; we want to harness that distinctiveness for our benefit. That is not to say that we want to make our system as cheap as possible or otherwise encourage a race to the bottom, as the saying goes. However, we want our law to be simple and straightforward, and if that requires moving from common law to statute, so be it.
I felt that the SLC submission put it clearly that case law can have the advantage of being more flexible but the downside of that is less certainty, which might put people off entering a contract at all or, at least, entering a contract under Scots law. I liked the comment by David Christie, to which others have referred, that uncertainty is effectively a “death spiral” that means a lack of case law, leading to the law not being developed.
However, in the specific case of third-party rights, it is actually the lack of flexibility in revising or amending a contract that is one of the key problems. Normally, a contract can be revised or amended by agreement, but the present situation makes that more difficult if a third party is involved. We have heard reference to the House of Lords judgment that enforced that inflexibility.
The report deals with the issue that increasing flexibility for the parties to a contract—that is, removing irrevocability—could reduce the rights of third parties. That is dealt with in paragraphs 62 to 73. However, the committee concluded at paragraph 74 that it supports abolition of the irrevocability rule and that sufficient protections have been provided.
I see from its report that the DPLR Committee has raised a number of issues with the minister. She agreed to consider them and has recently responded. The tone of that response seems to be very constructive, so I look forward to seeing what amendments might be lodged at stage 2.
However, today we are at stage 1 and we are considering the principles of the bill. I see that the committee spent some time on the question whether the bill will be used much in practice. That was a worthwhile question to ask. There is little point in our passing legislation for the sake of it or for the sake of appeasing Parliament’s detractors who measure our success by the number of bills that we pass.
The general feeling among witnesses seems to be that the bill will not have an immediate and dramatic impact, and nor will its provisions be widely used in the short term. However, it certainly moves us in the right direction. I note the comment of Professor Vogenauer—I am not sure whether I have pronounced that correctly—about which legal system provides the “law of choice”. I guess that in the longer term, many of us would want Scotland to be a small and flexible nation to which organisations and individuals might be attracted to do their business because of the legal and economic benefits.
I am always interested in the financial aspects of a bill, but I see that there were no responses at all to the Finance Committee’s call for evidence. That is reassuring.
I am happy to add my support for the bill, and I trust that members will allow it to proceed at decision time.
Being the 10th speaker in this debate is something of a challenge, even for me. [
.] I will not take an intervention just yet. Everyone is agreeing and making largely the same points—but here goes.
I contrast this debate with the debate earlier in the week on the Seat Belts on School Transport (Scotland) Bill at stage 1. That bill was unanimously supported, as this bill will be, but in that debate major contentious issues were discussed. It was argued that the bill could be improved, and there was an effective exchange of ideas in the chamber. Today, everybody is agreeing with me.
That was meant to be a joke, but it fell flat. There we are. If you are a Liberal Democrat, it is not usual to have everybody in the chamber agreeing with you. I am glad that everybody is agreeing with me. I notice that the Greens are not here—I would like to have included them in that remark.
For the Liberal Democrats, I start as other members have done by thanking the Delegated Powers and Law Reform Committee and Parliament staff for their work to date on this relatively small but important bill. I acknowledge all those who have given evidence to the committee—in particular, the Scottish Law Commission, the deliberations and recommendations of which have given rise to this welcome and much-needed codification of third-party rights in contracts. As the committee makes clear in its report and as members across the chamber have highlighted, the bill commands unanimous support among stakeholders.
To ease proceedings, I will stick to about 3 minutes, Deputy Presiding Officer. I have just removed the next two and half pages of my speech.
There we are: “Hear, hear.”
Notwithstanding the benefits that the bill is expected to deliver, all the evidence suggests that there is unlikely to be an immediate impact should the bill be passed. In the short term, take-up and use of the new law is unlikely to be high. Over time, however, there is every reason to expect that the newly created certainty and flexibility should prove attractive and encourage greater use of the law in the future. On that point, it would be helpful to know whether the minister believes that steps can be taken to raise awareness or perhaps even encourage take-up. Has that been discussed with the Law Society, for example, and, if so, can the minister update Parliament on the outcome of those discussions? Indeed, are there particular circumstances in which the change in the law may be expected to have a more immediate impact or where the advantages of the bill are likely to be most significantly felt?
Rare is the bill that reaches stage 1 without identification of the need for some form of amendment. I note that the committee has helpfully identified a number of areas in which the bill’s language would benefit from being tightened up. I welcome the fact that ministers have accepted the case that the committee has made about the need to tighten up the language and that work on that is already under way. That is very helpful and should ensure that, in due course, Parliament is able to pass a bill that will deliver the certainty and flexibility that are needed, so that contract law in Scotland around third-party rights is fit for purpose.
I have failed by 12 seconds to stick to three minutes.
As a member of the Justice Committee, I care deeply about access to justice and about demystifying the legal process so that it is better understood by the layperson. That is why I am happy to support the general principles of the Contract (Third Party Rights) (Scotland) Bill and the stage 1 report on it. The bill replaces the current law, which is causing uncertainty and confusion; in short, it is past its sell-by date. The proposed changes are based on recommendations by the Scottish Law Commission, which found that the existing law is no longer fit for purpose.
The bill provides a new statutory framework that incorporates clearer, more user-friendly rules on third-party rights. As we have heard, those rights can be of use in a wide range of both personal and commercial situations—for example, insurance contracts, company contracts, construction contracts and, last but not least, employers’ pension schemes, which might allow a third party to be nominated as the beneficiary if the employee dies while still in employment.
The difficulties with the current law include confusion over whether third parties have a right to claim damages for breach of a third-party right, and time limits for bringing claims under the current law are also unclear. The general rule is that most claims can no longer be made five years after the day on which loss, injury or damage first occurred. However, the Prescription and Limitation (Scotland) Act 1973 does not even mention third-party rights.
In addition, the rule of irrevocability is too inflexible. We know that, under Scots law, third-party rights have to be irrevocable, but there is uncertainty as to what that actually means. The SLC believes that the need for irrevocability is one of the main problems with the current law.
Scottish arbitration legislation under the Arbitration (Scotland) Act 2010 does not deal expressly with third-party rights, unlike legislation in England and Wales and some other countries, where the law enables third-party disputes, under certain circumstances, to be dealt with by arbitration.
It is clear that the law needs a new statutory framework, and that is why the bill has been universally welcomed by stakeholders such as the Royal Incorporation of Architects in Scotland, which says that it will clear up
“areas of ambiguity and doubt”.
The Law Society of Scotland states:
“The law on this issue is outdated compared to the approach of other modern legal systems”.
I note that the Delegated Powers and Law Reform Committee has raised concerns about the drafting of some provisions in the bill, and I am pleased that the Scottish Government will reflect on their clarity and usability, because that is, after all, the main purpose of the new statutory framework.
The good news is that the bill is not expected to result in any great costs and there is an argument that, in time, it could provide some savings to businesses and the legal profession.
I stated at the outset that I applaud anything that brings clarification to legal matters and enhances access to justice. For that reason, I am happy to support the general principles of the Contract (Third Party Rights) (Scotland) Bill and recommend it to the Parliament today.
W ho can say that Scottish law is not interesting after the contributions that we have had on this matter here today? I must say that, as a member of the Faculty of Advocates and a long-time student of the law—details are in my entry in the register of interests, to which I make reference in passing—the concept of “uptake” of a new law seems to be rather less than traditional Scots legal parlance. “Jus quaesitum tertio” rolls off the tongue more readily than the thought of someone going into the supermarket of law and choosing a nice juicy law such as the Contracts (Third Party Rights) (Scotland) Act 2017. That may come more easily to parliamentarians such as us.
It is, however, right to consider the background to where we find ourselves today. The case of Carmichael v Carmichael’s executrix, which was reported in the 1920 volume of
Session Cases at page 195 of the House of Lords reports, is seen as one touchstone of the current common law in Scotland on third-party rights. It is instructive to consider that the case was decided almost 100 years ago and that it arose out of events that took place more than a century since. I think that it is helpful to think briefly about the individuals in that case, because to do so brings us face to face with the reality of what most, if not all, law is about—fellow human beings like ourselves.
No doubt, Mr Hugh Fletcher Carmichael did not think that he would be making legal history when he accepted that proposal for insurance on 21 October 1903, and nor is it likely that he wished to ever see the policy that was taken out on the life of his son, Ian Carmichael, encashed on his son’s death. For many years, he paid the annual premium of 9 pounds, 10 shillings—but no pence—in
“lawful money of Great Britain”,
to use the words of the policy. His son, Ian, joined the new and fledgling air force during the first world war and tragically died in an air accident in the summer of 1916. Ian had left a will in favour of his aunt, Miss McColl, as his executrix. His father, however, had kept and retained the policy in his possession. Sadly, there followed a dispute between Mr Carmichael and Miss McColl about who was entitled to have the proceeds paid out to them. Out of that dispute arose the case of Carmichael v Carmichael’s executrix, which was eventually decided in the House of Lords in favour of Miss McColl.
I have outlined the background of the case and the individuals who were involved simply to bring to life the bill that we are debating. Among the dusty legal furniture of bills, sections and subsections, we need to remember that what we are dealing with is and will be important in the lives of the people of Scotland. That is one reason why it is important to have legal clarity, which is one of the driving purposes behind the bill.
With that in mind, and mindful that others have already made reference to the background, I would like to raise a number of points on drafting clarity in the bill. Most of them have already been presaged in the evidence before the Delegated Powers and Law Reform Committee and set out in its report. I note the letter from the minister to my colleague John Scott, as convener of the DPLR Committee, setting out the Scottish Government’s position on those matters, and I thank her for that. Notwithstanding that response, I will mention three matters in the hope that further thought might be given to them.
The first is the suggestion that was made in evidence to the committee that sections 1 and 2 could conveniently be made into a single section. That is not a bad idea, but I have a particular concern with section 2(1), which states that section 2
“makes provision elaborating on section 1”.
It is unclear to me why that is thought to be at all necessary, since the normal statutory practice—as indeed is done elsewhere in section 2—is simply to refer to the particular subsection that it is intended to modify. If one couples section 2(1) with section 2(7)—I can see people’s eyes glazing over as I go into the detail of this—the application of the normal rules of statutory interpretation may lead to undesired results. At best, section 2(1) appears unnecessary and superfluous but, at worst, and as is likely, it will be a source of difficulty that may result in litigation.
Secondly, sections 5 and 6 appear to depart from the normal mode of statutory drafting by putting a definitional subsection first followed by the subsection that it is meant to define and clarify. Contrast that with the immediately preceding section 4, which follows the usual order of a subsection that sets out a proposition and then a further definitional subsection. To a lawyer’s eye—at least mine—the approach in sections 5 and 6 looks like writing backwards. Although it may not alter the effect of the sections, it makes reading them awkward for the practitioner.
The third and final issue—here I commend the drafting of the bill rather than criticise it—is on section 10(1). My comment here is not meant as a criticism of the minister, because my understanding is that she has listened to and taken on board comment that section 10(1) is unneeded. However, my comment is that, in a bill that is meant to define and bring clarity to third-party rights and place them on a statutory footing, it is in fact probably helpful to have the definition that is contained in section 10(1). I simply raise that as another point.
For what they are worth, those are my humble comments on the bill at this stage.
I am pleased to speak in the debate, and I take the opportunity to thank the five members of the Delegated Powers and Law Reform Committee—John Scott, Stuart McMillan, Alison Harris, Monica Lennon and David Torrance—for their work. As is customary, as well as warranted, I thank the committee clerks who were involved in drawing together the report and everyone who gave evidence to the committee.
When I was elected, I was advised to participate in debates on subjects that I am not familiar with. That advice, which came from George Adam, the MSP for Paisley, was guid. I see that he is back in the chamber. Having listened to the minister’s opening speech and members’ speeches, I am already better prepared to explain some aspects of the law on third-party rights, and I look forward to supporting South Scotland constituents if the issue affects them.
Since coming to Parliament, I have attended many committee meetings, cross-party group meetings and events. Although my background is in healthcare, I have had to engage with many subject areas and learn a new language in order to assess and process information that is presented to me. I have adopted terms such as “Scottish statutory instruments”, “affirmative and negative instruments”, “process of annulment” and now—thanks to the Delegated Powers and Law Reform Committee—“collateral warranties”.
Learning about the various processes that are involved in running our country and developing knowledge in a range of areas and portfolios is something that I enjoy about an MSP’s job. Yesterday, I stumbled on colleagues having a conversation in the corridor about today’s debate. Although I am no expert on the law, I was interested to hear about the importance of the bill in bringing an area of Scots law into line with what happens internationally. Some reasons why the bill is important have been mentioned.
My goal today is to speak about the Scottish Law Commission’s report and convey to South Scotland constituents how the bill will positively affect them. I looked first for a definition of a third party. In simple and generic terms, a third party is any individual who does not have a direct connection with a legal transaction but who might be affected by it.
In 2014, the Scottish Law Commission examined Scots law on third-party rights and compared it with international benchmarks. The commission’s report, which was published last year, concluded that the existing law needed to be replaced. Its concerns were about a lack of clarity and inflexibility in the current law. The Law Society of Scotland highlighted that uncertainty and noted that lawyers do not like to give advice in areas where the law is unclear.
Scots law on third-party rights dates from a House of Lords decision in 1920, in the case of Carmichael v Carmichael’s executrix. Gordon Lindhurst described that case eloquently—if I had to repeat what he said, I would probably have to stop speaking after one minute.
In that case, the judges decided that it is not enough for contracting parties to convey an intention for a third party to have a right by saying so in their contract and stated that they must take additional formal steps to make that provision irrevocable. To establish the right under the current law, the contract must identify the third party; show an intention on the part of the contracting parties to confer a benefit; and provide a benefit that is unalterable and irrevocable. The current situation in Scotland is unfortunate, as contracts in favour of third parties are of great economic importance, particularly with regard to life insurance and contracts of annuity.
I understand that a further issue concerns the inability of groups of companies to rely on third-party rights to deal with group loss. That problem arises when a company operates using a complex group structure and suffers loss when problems are caused by a supplier’s failure to provide a particular service. In the absence of a clearly defined third-party right, the supplier can state by way of defence that it was contracting only with one member of the group. As a result of those complexities, the Scottish Law Commission found that legal practitioners and their clients are relying on English instead of Scots law in relation to third-party rights, as has been mentioned.
In evidence sessions, the committee was told that there has been an awareness of the problems that were created by the 1920 judgment since the period after the second world war. However, Professor Beale of the University of Warwick told the committee that there had been an equally long period between the identification of the problem and its resolution in England and Wales.
The bill was supported universally during the committee’s evidence sessions. It will implement the Scottish Law Commission’s recommendations and reform the common law on third-party rights.
Earlier, I thanked the witnesses for the evidence that they provided. I am aware that the minister, Annabelle Ewing, was extremely knowledgeable about the complexities of third-party law when giving evidence to committee. It is welcome news that our minister is well informed in her portfolio.
The bill has been welcomed by stakeholders including the Law Society of Scotland and the Royal Incorporation of Architects in Scotland. Third parties will benefit from the bill because how a third party may enforce his or her right will become clearer. For example, as has been mentioned, if a mother books a holiday for her spouse and her children and the holiday fails to deliver on promises that were made in the contract, the mother can claim damages for her disappointment, but her spouse and each child will also be able to claim, as third parties with rights under the contract.
In closing for Scottish Labour, I thank everyone for taking part in the debate. It is clear that we all agree that the bill makes a necessary change to our legal system that will benefit all parties that enter into contracts. I thank the Scottish Law Commission for undertaking the work and producing the resulting bill, and I thank the Delegated Powers and Law Reform Committee for producing an informative stage 1 report.
To ensure that our legal system is fair, balanced and just, Scottish Labour supports the changes that the Scottish Law Commission has proposed. By replacing the common-law third-party rights system with a statutory version, we can end the uncertainty and inflexibility of the current system. The committee report informs us that the bill is universally supported and welcomed by all stakeholders.
The lack of speed in law reform is not a new issue to politicians or to those in the legal profession, and the proposed changes to third-party rights in Scotland are not unique in their lack of progress to reform the law. Nearly a century after the House of Lords judgment in Carmichael v Carmichael’s executrix, it is right that we make the necessary changes soon. I was surprised to read the evidence from Professor Beale of the University of Warwick. He highlighted that, in England and Wales, the work to change third-party rights started in 1937, but legislation was produced only in 1999.
On the bill’s general principles, the creation of legal certainty and flexibility is an important and crucial benefit of replacing the common law with a statutory approach. The committee reports that
“the common law position is unsustainable as case law is unlikely to develop fast enough to deal with the problems identified”.
That view was shared by those who provided evidence.
On creating legal certainty, we read that David Christie of the Robert Gordon University described the current system as a “death spiral”. Those are strong words. Lawyers are by nature risk-averse creatures, and they have to be for obvious reasons. Businesses, investors and public bodies also fear uncertainty. We only have to consider the constitutional quagmire that grips the UK to know that. We read that, as a result of the uncertainty, lawyers are resorting to other jurisdictions for certainty. David Christie rightly referred to the bill as rebooting the common law.
I turn to the members who have spoken in the debate. They have illustrated the benefits that the bill will bring in areas such as insurance and finance. In her opening remarks, the minister spoke of the need for legislation that is “fit for purpose”. Ben Macpherson also referred to that.
Monica Lennon spoke about the savings that the bill may bring, which the Law Commission and the Royal Incorporation of Architects highlighted in evidence. Claire Baker spoke about the need for clarity and the uncertainty that exists, while highlighting the need to protect third parties. John Mason touched on the need to make arbitration more attractive. As one of the closing speakers in the debate, I whole-heartedly support Murdo Fraser’s opening remarks.
To return to the bill, the flexibility that it will bring is a key benefit that addresses an issue that has been raised by several members, including Stuart McMillan and Alison Harris. The abolition of the irrevocability rule is welcome in order to make it easier to create and remove third-party rights in contracts. The committee’s report and the bill’s explanatory notes give details about the inflexibility under the current common-law approach.
The Law Society of Scotland and the Faculty of Advocates support the abolition of the irrevocability rule. In supporting the abolition and welcoming increased flexibility, Kenneth Rose, a partner in CMS Cameron McKenna, said that the required flexibility
“would make our legal system more attractive and more user-friendly for individual parties.”—[
Official Report, Delegated Powers and Law Reform Committee
, 21 March 2017; c 20.]
It is right that we abolish the rule, to ensure the required protections and balances for third parties that are affected by contracts.
I recently criticised the Scottish Government during the stage 1 debate on the Railway Policing (Scotland) Bill for trying to fix something that was not broken. Here is an area of law that is broken and must be fixed. The Contract (Third Party Rights) (Scotland) Bill might not be on an issue that is as important to the public as policing is, but the bill is necessary for our businesses, investors, public bodies and any other users of Scots law to ensure legal certainty in contracts, and we in Scottish Labour are happy to support the principles of the bill.
When Murdo Fraser and I contracted with our whip not to have to speak in James Dornan’s earlier members’ debate on the Lisbon Lions, we had little idea that we would have to sign a collateral warranty to appear in this debate instead. As Rangers fans—that is, supporters of Scotland’s most successful club—it was nice to listen earlier today to memories of Celtic’s historic achievements.
My law school colleagues past and present would be both appalled and alarmed to know that I was speaking in a debate about the law of contract. Not only was the law of contract my worst paper at university, but I had the misfortune to study the English law of contract, not Scots law. The minister, Annabelle Ewing, referred to there being “eminent jurists” in the chamber this afternoon. I do not know whom she was referring to: I am sure that she was not referring to me because I am certainly not an eminent jurist in the law of contract. Constitutional law is my field.
There are some overlaps between contract law and constitutional law, and I was reminded of the great work by Sir Henry Maine, “Ancient Law”. The principal argument in that great work is that, over the centuries, law moved from status to contract and from a hierarchical order to a voluntary compact. Stanley Baldwin, the great interwar Conservative Prime Minister, said that Henry Maine had been his most influential tutor, although he confessed that he could not quite remember whether Maine’s argument had been that law had moved from status to contract or the other way round. It just goes to show, I suppose, that one can be a successful political leader without paying any attention in one’s law lectures.
Contracts allow people and companies to create rights and duties that can be enforced in court. In general, those rights and duties are enforceable only between parties to the contract, and no right or obligation can be created in respect of someone who is a stranger to the contract and is termed a “third party”. In some legal systems, the rule is strictly enforced. In Scots law, by contrast, it has long been recognised that, in certain limited circumstances, a contract can contain enforceable rights in favour of a third party. We have heard in numerous contributions, including that from the minister, how those third-party rights can be used in a wide range of personal and commercial situations, including in insurance contracts, in contracts involving company groups, in construction contracts, which Ben Macpherson and others mentioned, and in pensions law.
The current common law is widely criticised in Scotland, not least because of the rule of irrevocability, which insists that the third-party right, to be enforceable, must be clear to the third party from such circumstances as delivery or intimation or equivalent, and that the parties to the contract intended to give up the right to change their minds about granting the third-party right.
“stuck in the 17th century”,
which is an odd thing to say about an area of law that really dates from a case that was decided in 1920. However, it is widely regarded as being historical, inflexible and not fit for purpose. The irrevocability rule is, as I have said, particularly controversial and, as we have heard, representatives of the Law Society of Scotland and the Faculty of Advocates have welcomed the bill and its proposed removal of that rule.
It has been difficult to find very much politics in the bill, which is probably a good thing. However, I want to make one point that the minister might or might not wish to respond to when she winds up. It is very important for Scots law to retain its market competitiveness; there is competition in legal systems, and we have heard numerous members this afternoon talk about how Scots lawyers currently draft contracts that are enforceable under English law—in other words, in the English courts—rather than under Scots law, because of the antiquated nature of our rules on third-party contracts.
We have also heard how this area of law changed in England as long ago as 1999, and we are changing it in Scotland only now. I know that we are doing so because the Scottish Law Commission reported on it only relatively recently, but my question to the minister is this: if there are other areas of Scots law in which we are losing our market edge or our competitiveness because the statute book has not been kept up to date and the common law is falling behind, is it part of the Government’s thinking to encourage the Scottish Law Commission to identify such areas at an early opportunity and report on them so that we can update Scots law and ensure that it is able to compete effectively with other legal systems in Europe and, indeed, the United Kingdom? It seems odd that we are only now dealing with a problem that was created by a House of Lords judgment of nearly a century ago. I know that the law does not always move very quickly, but this seems to be particularly slow.
As Stuart McMillan and others pointed out in their speeches, the bill is an exercise in codification of an aspect of Scots contract law. That puts me in mind of the very first essay that I wrote as a very young law student a number of years ago. The subject that I was studying in the first year of my law degree was comparative legal systems, and my tutor asked me to write an essay comparing the strengths and limitations of codification as a means of law reform. No copy remains of the essay—
No—I am glad to say that no copy of that rather tiresome essay remains, but I remember that I took the French civil code as an example of what not to do when using codification as a means of legal reform. The first half of the essay was a series of arguments against codification; I started the second half with the phrase, “However, to be fair to be French” and then wrote about why we should codify things. However, my tutor took exception to that opening phrase; he underlined it and wrote in the margin, “Arrest this unhealthy tendency. Never be fair to the French”—the only bit of advice that I remember getting from that law tutor.
In closing, I want to make two quick comments about specific aspects of the bill that the Delegated Powers and Law Reform Committee has referred to and to which the minister responded in her letter, which I saw for the first time earlier this afternoon. I urge her to pause and think again about these issues, given the strength of the concerns that have been reported by the committee.
The first point is about the use of the word “undertaking” in section 1, which seems from the evidence that the committee has marshalled to be ripe for wholly unnecessary litigation. It might be worth taking another look to ensure that the word is being used appropriately and has been defined as carefully and as specifically as possible.
Secondly, with regard to the committee’s comments on sections 4 to 6, which have already been mentioned this afternoon, I note that the Faculty of Advocates was quite strong in its evidence that the provisions are not drafted appropriately. That view is shared by the Law Society of Scotland. Craig Connal said that he could see litigation written all over the provisions, and Professor Hugh Beale, who wrote the book on the law of contract from which I studied at university many years ago, said that the provisions are hard to understand—although so was his book. I urge the minister, gently and respectfully, to reconsider whether the provisions have been appropriately drafted. I know that she said in her letter to the committee yesterday that she is satisfied “On balance” that the bill is satisfactorily drafted, but I think that the issues merit further consideration.
I thank members for their speeches in what has been a worthwhile debate. There were important contributions from across the chamber, from lawyers—eminent or otherwise—and non-lawyers alike. I thank everyone for their consideration of the important issues that are the subject of this debate.
I am pleased that members share the aim of reforming the law in the area and that there is support across the chamber for the general principles of the bill. A clear, positive and readily accessible statement of law, in a short statute, will improve the standing and value of Scots law. Contracting parties to a contract and those who are provided with third-party rights in a contract should all benefit from the law being clearer, up to date and more flexible.
Where a third party has rights under a contract as a result of the bill, they will be able to take full advantage of the legal remedies for any breach of contract that will be available to a party to that contract, where they are undertaking in favour of that party. Also, the defences on the part of the contracting parties will be available in the context of any claims from the third party, to the extent that they are relevant—that is an important issue, although it was not much touched on in the debate.
I listened with interest to what members said and I will reflect on all the points that were made, including Gordon Lindhurst’s technical points and Adam Tomkins’s point about the meaning of “undertaking” in section 1.
In the time available, I will try to respond to at least some of the other points that members made. On the pace of law reform in general, Murdo Fraser and Mary Fee mentioned the 1999 act in England and Wales. As we see from the committee’s report, discussions on the matter first started in 1937. It is important to recall that the legislation in England and Wales introduced third-party rights into the law for the first time, because of course in that jurisdiction people had proceeded on the basis of privacy of contract. Therefore, we cannot make a direct comparison with what has been going on in Scotland, where third-party rights have been in existence for centuries. I think that the earliest case on record is the Moncur case, which dates from the 1590s—perhaps Mr Tomkins’s B+ would have been higher if he had made reference to it. Scotland has had the common law of third-party rights for centuries.
However, particular problems developed with regard to certainty and flexibility around 100 years ago, with the seminal case of Carmichael v Carmichael’s Executrix, to which many members referred—members are becoming quite relaxed about citing seminal legal cases, which I think is a positive development. We heard an eloquent overview of the facts of Carmichael v Carmichael’s Executrix from Gordon Lindhurst. Problems started to develop as a feature of that case, but it is not fair to say that there has been an on-going focus on third-party rights since the case, because it is only recently, as society and commerce and industry have developed, that the problems have been felt more acutely. It is important to place the issue in context.
Of course, we recognise that the 1920 case caused a lot of problems, which is why we are engaged in this important work to bring our law into the 21st century and fix the problems that have been identified. That is what the bill is designed to do.
More widely in the area of law reform, it is important not to react to particular decisions and developments overnight, because a one-off decision by a court can often be quickly overturned. In many instances, the law is capable of keeping itself in good order. However, that has not proven to be the case with regard to the importance of third-party rights in Scots law. At the same time, it is important to note that the law is often complex and needs careful thought and consideration. I agree with Stuart McMillan that the DPLRC plays an important role in Parliament to progress law reform; in that regard, Adam Tomkins suggested that we may seek to accelerate that process. We have regular meetings with the Scottish Law Commission and I am due to meet Lord Pentland in, I think, September, so that is an issue that we can discuss for the future. Reforms to the civil law of Scotland were a matter for the Westminster Parliament prior to the reconvening of this Parliament. In a crowded agenda, the focus was perhaps not on reforming Scots civil law.
Stuart McMillan asked whether it might be possible, in our approach to law reform via the DPLRC, for the Scottish Law Commission to consider bundling up—to use an ungainly word—what would otherwise be discrete issues. I am happy to take up with Lord Pentland the extent to which that would be possible when we next meet. We are all interested in ensuring that we keep our law up to date.
With regard to how quickly we feel this legislation will be taken up if passed by Parliament, we cannot be definitive. I stress that our starting point here is different from that in England and Wales, where the 1999 legislation introduced third-party rights in England and Wales for the first time. From a commercial perspective, it is clear to members of the legal profession and to those conducting business in Scotland that the law will be a route to save time and money—and legal fees—which are always attractive options, particularly for business. Therefore, it may be that recourse to the workarounds to which we have referred this afternoon, including collateral warranties, will become less attractive over time.
On the issue raised by Mike Rumbles and others of how to encourage use of the new legislation, reform of this kind often has a momentum of its own. Professor Hector MacQueen of the Scottish Law Commission, who is listening to our deliberations, has spoken at many law conferences about the bill, which I hope has encouraged others to consider making recourse to it once, I hope, it is passed by the Parliament. Members of the Law Society of Scotland and the Faculty of Advocates have also spoken about the role that they can play in raising the profile of the legislation. David Wedderburn of the Royal Incorporation of Architects in Scotland presented evidence to the effect that he would issue practice notes to members alerting them to when the bill will become an act. In my evidence at stage 1 in committee, I said that we will work with business and the legal profession to facilitate take-up and awareness. I will be happy to raise the matter with the Law Society of Scotland in our regular discussions.
I have heard members’ comments about sections 4 to 6, and I will reflect on them further. The Government is committed to the principle that legislation should be clear and accessible, and it needs to be effective. I stress that no-one who offered evidence suggested that sections 4 to 6 do not produce the right result. All that has been said is that the sections could, perhaps, be drafted differently. While it is always possible to draft provisions differently, there is no immediate consensus among witnesses on what might be a better formulation. I will reflect further, but I remain not entirely persuaded that such changes would be necessary to ensure that the bill is as effective as it can be.
On the question whether there should be dispute resolution mechanisms in the bill—for example, adjudication—I point to the evidence of Hew Dundas, honorary vice-president at the Scottish Arbitration Centre. He concluded by saying:
“In summary, adding adjudication is not necessary and could be confusing.”—[
Official Report, Delegated Powers and Law Reform Committee,
18 April 2017; c 10.]
We are minded to reflect the position of such an eminent witness, and that was also the conclusion that the committee itself reached.
This has been a comprehensive debate on an important bill and I thank all members for their contributions and their impressive diligence in considering the very technical issues that are raised by the bill. Their diligence is much appreciated and it has made for a much more interesting debate than some of us had initially foreseen.
I have indicated that I intend to lodge amendments to sections 10 and 12, and that I am still reflecting on the points that were raised on section 9, on arbitration. Although I believe that those might have arisen as a result of a misunderstanding, we will continue discussions with the SLC and the Faculty of Advocates.
With regard to other general points that were raised and that I have not had time to refer to in my winding-up comments, I will look carefully at all the contributions that were made. I look forward to progressing the bill through the next stages in the Parliament.