Third Party Rights Of Contracts In Scotland
Friday, July 01, 2005
by
Murray Shaw
In England the Contracts (Rights of Third Parties) Act 1999 created, in certain circumstances, rights in favour of third parties to enforce terms in a contract. The Act implemented the report of the Law Commission in England published in 1996 entitled “Privacy of Contract: Contracts for the Benefit of Third Parties”. Specifically the Act allows the third party to enforce a term in a contract to which they are otherwise not a party if (subject to provisions of the Act) the contract expressly provides that the third party should have such a right or a term in the contract purports to confer a benefit on a third party. The Act only extends to “England and Wales and Northern Ireland only”. From north of the border it appears that wherever possible the provisions of the Act are sought to be excluded by drafting expressly providing that a contract is not intended to create such rights.
Scots Law has different origins to English Law. Specifically Scots Law recognises a number of principles which have more in common with European legal systems than English Law. In Scotland, third party rights in relation to a contract do exist as a matter of principle rather than statute, the right being known as a jus quaesitum tertio (there is no escape from Latin for Scottish Lawyers!). While the right has been recognised for a considerable period and the criteria leading to the application of the principle are relatively clear the exact ambit of the doctrine in a commercial context is not always clear and much depends upon the judicial approach to its application. The Courts appear to be somewhat hesitant about applying the doctrine in a commercial context.
Given the plethora of contracts which exist in a normal construction scenario it might be thought that the jus quaesitum tertio might be of some significance in this area. Decisions generally suggest that is not really so – for example as far back as 1908 in a case Robertson v Jarvie the Court held that the contractor did not have a jus quaesitum tertio in relation to the contract between their employer and an architect. Recently however there have been a number of cases where the principle has been of significance.
Before looking at that case it is probably helpful to confirm the essentials for the right to come into existence. Firstly there must be a contract between two parties and not simply another relationship intended to create a benefit in favour of a third party. Secondly the contracting parties must have intended to create a benefit in favour of the third party. It is not enough that the third party should have only an interest in a contract or benefit from it – more is required. Rather the intention to benefit the third party must be clear either by an express term in the contract or by the clear implication. Thirdly the party to be benefited must be identified either specifically or as a member of a class. Next it is necessary show that the intention to benefit is irrevocable. To some extent this requirement mirrors Section 2 of the 1999 Act. Finally it appears that there must be some form of intimation (or the equivalent) of the Deed creating the right. This last requirement is somewhat controversial and has been the subject of much case law, little of it particularly recent. It should be noted that the third party in order to pursue the right must have title and interest to sue, though case law suggests this does not actually raise a particularly significant hurdle for the third party if the other criteria are met.
When the Courts are prepared to apply the principle in a commercial context it can be of considerable significance. A good recent example of this (in a non-construction context) involved Mercedes Benz Finance against Clydesdale Bank decided in 1996. In that particular case arrangements were entered into for the sale of motor vehicles in terms of which Clydesdale Bank agreed to make payment to Mercedes Benz Finance of funds paid into an account from the sale of vehicles subject to the overdraft made available to the dealer being kept within certain parameters. That happened but the dealer went into receivership and the Bank declined to make a payment to Mercedes Benz Finance of funds which had been deposited, no doubt intending that the sums consigned by the dealer with them (which the dealer intended should be paid to Mercedes Benz Finance in accordance with these arrangements) should be utilised to reduce the overdraft. Clydesdale Bank in that case sought to argue that there was no jus quaesitum tertio in the circumstances. Mercedes Benz Finance on the other hand argued that there were and equally argued that there were a number of other grounds upon which payment should be made. The matter only came before the Scottish Court on procedural matters (dealing with legal issues) but the Court decided that the basis of the attack by Clydesdale Bank on the existence of the jus quaesitum tertio was misconceived. Two of the other grounds upon which Mercedes Benz Finance sought payment were, however, held to be misconceived by the Court. So far as the fourth (and final ground) was concerned the Court did not strike it out but had considerable reservations about it. In effect therefore the Court were of the view that a jus quaesitum tertio was in existence and in the circumstances of that case it was likely to be the only basis upon which recovery of a substantial sum of money was possible. The case is a recent example where notwithstanding reasonably sophisticated commercial arrangements, the right to recover payment depended upon the application of an historic principle in Scots Law.
Turning now to the construction sphere there are fairly recent cases where the right has been argued for. One contentious area where there have been a number of recent cases is the application of the indemnity/insurance provisions in the JCT suite of contracts in the context of the insurance provisions. That issue was considered in a Scottish Case involving Aberdeen Harbour Board and Heating Enterprises (Aberdeen) Ltd decided by The Inner House (the equivalent to the Court of Appeal) in 1989. In that case the Defenders were sub-contractors who were sued by the heritable owners of a building which had been damaged when fire broke out. The Defenders (the sub-contractors) argued that to the extent they were liable to make payment they were entitled to be indemnified by the employer under the main contract (who was not the heritable owner) and brought them in as a third party. The Court held that the Defenders were not entitled to rely upon the indemnity and that, in particular, were not so entitled in the absence of any indication in the indemnity clause to the effect that the employer and main contractor intended to confer any benefit upon the sub-contractor. No jus quaesitum tertio was created. The Court making the decision observed that in the circumstances of the case the Defenders would have been under no liability to the third party (the employer under the building contract) in respect of any damage that third party incurred on the basis that there was no duty of care to the third party in light of the fact that the third party (the employer in the building contract) accepted the terms of the contract and the risk of damage by fire. That argument however did not avail itself against the owners who were not actually party to the building contract arrangements at all. That analysis mirrors other decisions notably Telecommunications plc v James Thompson & Sons (Engineers) Ltd decided in the House of Lords in 1998. In effect a duty having arisen to a party who was not involved in the contract the contractual provisions could not be relied upon to escape that liability, albeit these contractual provisions appear to be of relevance in deciding to whom a duty was owed.
One issue which has caused significant difficulties in England in the recent past is the so-called “black hole argument” - in other words when there is the possibility that a claim for damages disappears because the party suffering that loss may not have title to pursue a claim. The issues have been considered in England in a couple of notable cases, namely St Martins Property Corporation v Robert McAlpine (1994) and McAlpine Construction v Panatown (2000). Similar issues have been before the Courts in Scotland recently. In each case the existence of a jus quaesitum tertio has been referred to.
The first case decided in 1997 and involved a claim against a firm of architects (HLM Design) by a motor dealer, Strathford East Kilbride Ltd. The claim related to economic loss in relation to remedial works required in a new showroom. The contract in relation to the construction in the new showroom had been entered into by an associated company. The Court held that in the circumstances there was no duty of care owed to the Pursuers, Strathford East Kilbride and separately that no jus quaesitum tertio existed allowing the Pursuer to enforce the terms of the contract between the defender and the associated company for their benefit. The Court did not appear to consider in any great detail the consequences of his approach and the fact that prima facie it would appear that the significant loss was not recoverable. The case was decided before the Panatown case. The second case was decided in 2002 in Glasgow Sheriff Court and involved Clark Contracts v the Burrell Company (Construction Management) Ltd. The dispute appears to have raised a number of issues resulting in a number of decisions being issued. One of these concerned “black hole” type arguments. In this case the contractors sued their employer for payment and were met with a counterclaim relating to alleged damages resulting from defective works. The “twist” was that the heritable owners of the property to which the contract related were not the Defenders but an associated company and it was this associated company which had sold the properties and incurred the loss. The contractor therefore argued that the counterclaim was irrelevant as the employer in fact had suffered no loss. The representative of the Defenders made reference to the Panatown case in particular but conceded that the associated company, which actually suffered the loss, would have a jus quaesitum tertio against the Contractor (the Pursuer) in respect of that loss. On that basis the court came to the view that in respect of the counterclaim the Defenders were not entitled to recover anything other than nominal damages and certainly not the loss which was represented by the cost of repairs. Specifically the Sheriff declined to extend the underling rationale of Panatown (whether on what are termed the narrow or the wider ground) because there was an appropriate remedy under Scots Law. It is fair to record that that approach appears to be consistent with the views expressed by the Scottish Law Lords who are involved in the Panatown case.
At face value it is difficult to discern a logic between the two cases of Clark Contracts and Strathford East Kilbride. In neither case were the losses recoverable. In one case however a jus quaesitum tertio was relied upon (by concession) in the other it was held that no such right existed. It may be the concession made in the Clark Contract case was misconceived. Certainly if Panatown is not to be part of Scots Law in the absence of this right it appears likely that the relevant loss will fall into a black hole. One interesting issue is whether the Courts will more readily decide that the right exists to avoid losses falling into a black hole.
The requirements for existence of jus quaesitum tertio are clear in principle. What is difficult to determine is the judicial approach relevant to deciding whether or not the right exists. To some extent the Scottish Courts have been slow to apply the right in commercial situations though the Clydesdale Bank – Mercedes Benz case is a good example where it was applied recently. It will be interesting to see how the Scottish Courts approach this matter and in particular whether that approach changes by virtue of the fact that the third party rights are now recognised in England.
The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.