In its Discussion Paper on Third Party Rights under Contracts (DP No 157, 2014) the Scottish Law Commission makes use of the Draft Common Frame of Reference (DCFR) and the proposed Common European Sales Law (CESL) along with two other “comparator texts” – the Unidroit Principles of International Commercial Contracts (PICC) and the (English) Contracts (Rights of Third Parties) Act 1999.
Throughout the paper relevant excerpts from these texts are set out very helpfully in tabular form. The most immediately striking feature of this process is the long-winded nature of the 1999 Act.
The paper takes full account of the areas where the law on third party rights under contracts is important in practice. It notes that, although Scottish law has recognised the possibility of third party rights under contracts since the 16th century, its rules are perceived as archaic and, in some respects, confused, uncertain and inflexible. Some practitioners in Scotland therefore prefer to use the modern English law.
The key question in this area is “When is the normal freedom of the contracting parties to modify their contract by agreement limited by the right which they are conferring on the third party?” Once that is decided, many other issues are resolved by the general background law on obligations. There are at least three candidate answers.
It could be provided by the law that the parties’ normal freedom to modify their contract is limited by the third party’s right as soon as the contract is concluded (assuming the third party is identifiable) even if the third party knows nothing of the term providing the right. This is not an attractive solution. It pays too little respect to the principle of party autonomy. The only reason to limit the parties’ normal freedom of contract in this situation is the legitimate expectation interest of the third party. The third party has no expectation interest at all at this stage.
Secondly, it could be provided that the parties’ freedom to modify their contract is limited by the third party’s right as soon as either of them has given the third party notice that the right has been conferred. This is the solution of the DCFR and the CESL and it seems a good one. It reflects the notion that the legitimate expectation interest of the third party is deserving of protection and it generally protects that interest as soon as it arises. The only question is whether there might be other ways in which the contracting parties might be regarded as responsible for creating an expectation interest, or a potential one, in the third party – e.g. by registering a document containing the contract in a public register or otherwise putting it into the public domain. Might there be equivalents of intimation which should be recognised? This question is addressed in the Discussion Paper.
Thirdly, it could be provided that the parties’ freedom to modify their contract is limited by the third party’s right only when the third party accepts the right. In its pure form this solution would be likely to give rise to arguments about implied or deemed acceptance. Third parties might not know of the requirement of express acceptance and might just proceed to rely on the right. To get over this difficulty a requirement of acceptance can be supplemented by rules giving such reliance the same effect as acceptance. Different versions of this solution can be found in the PICC and the 1999 Act. A basic objection to this sort of approach is that it disregards the source of the third party’s information about the right. An expectation interest based on something which the contracting parties have done deliberately to make the third party aware or potentially aware of the right (e.g. intimation or registration) can be regarded as a legitimate expectation interest. An interest based on industrial espionage, or an office leak, or office gossip should not be regarded as a legitimate expectation interest. The PICC may be thought to cover this to some extent because it says “has reasonably acted in reliance” (art. 5.2.2) but the question is not so much the reasonableness of the actings as the source of the knowledge. The 1999 Act does not even have this possible escape route.
One of the questions asked in the paper is “Do consultees agree that a third party right should not become irrevocable simply because the third party has informally acquired knowledge of the existence of the right?” and it is plain that the Commission is expecting a positive answer to that question.
All in all this is an excellent Discussion Paper, much more practical in its orientation and much more comprehensive in its coverage than the above would suggest. May it lead rapidly to a report with recommendations for reform.