A big change is coming '¨to the world of third '¨party rights

Almost all businesses face time and cost pressures. Opportunities to save minutes and money don't come along often but there is a very important opportunity on the horizon in Scotland via the Contract (Third Party Rights) (Scotland) Bill.

Burness Paull - Karen Fraser - picture by Donald MacLeod - 23.07.14  07702 319 738  [email protected]  www.donald-macleod.com

The Bill, if enacted, will enable parties to grant enforceable rights to third parties who are not a party to a contract and places the common law of third party rights on a statutory footing. It is widely accepted that the current common law position is inflexible and uncertain, so much so, that third party rights are rarely used in Scotland.

The Scottish Parliament is currently considering the Bill under a fast track parliamentary procedure and I appeared last week before the Law Reform and Delegated Powers Committee to give evidence on the Bill.

In short, the Bill has been very positively received as, if enacted, it will make the law on third party rights clear and remove the inflexibility of the current position on third party rights in Scotland. The Bill strikes a good balance between certainty on the one hand and adaptability on the other.

In the construction industry, a Scottish statute on third party rights could, if embraced by the property and construction industries, potentially eliminate the need for collateral warranties.

Collateral warranties have long been a feature of corporate, property and banking deals where the deals involve construction works recently carried out or to be carried out. They are the construction industry’s answer to the creation of third party rights where the law on third party rights is currently unsatisfactory but collateral warranties are by no means perfect. This Bill could change all that.

Collateral warranties are notoriously problematic; often poorly drafted, incorrectly signed or never delivered despite an agreement to produce the collateral warranty on demand.

As a collateral warranty is a separate contract with the third party, the procurement of collateral warranties places a huge administrative burden on parties to a construction-related deal.

The time and cost implications for getting these can be significant, particularly on large scale transactions where there are numerous tiers of contractors and construction professionals and numerous interested stakeholders.

I am currently engaged in a 
property sale which will involve procuring more than 200 collateral warranties for completion of the purchase.

Having the option to create those third party rights instead via statute would undoubtedly save a lot of time and money for all parties involved in the deal.

The Contract (Third Party Rights) (Scotland) Bill, if enacted and embraced, has the potential to general significant savings of time and cost across the property and construction industries.

Karen Manning is a Senior Associate at Burness Paull LLP