Contract (Third Party Rights) ( Scotland) Bill

The Convener

Agenda item 3 is the consideration of evidence on the Contract (Third Party Rights) (Scotland) Bill at stage 1. This is our first evidence session on the bill.

I welcome Graham Crombie and Hector MacQueen from the Scottish Law Commission; and Catriona Marshall and Jill Clark from the Scottish Government.

We now move to questions from the committee. I will ask the first one. In general terms, what is the rationale for moving from a common-law position to a statutory footing?

Jill Clark (Scottish Government)

I think that the Scottish Law Commission’s submission of written evidence to the committee helpfully sets out the benefits of the move from the common law to a statutory footing. I am sure that Professor MacQueen will be able to elaborate on that.

Of course, we considered this issue ahead of settling on our preferred policy approach. It seemed to us that the law is uncertain and is not fit for purpose at the moment, because it has been left to develop in this way. Court decisions have resulted in a reluctance to use the existing law, which, in turn, means that there is little, if any, opportunity for the courts to resolve the current issues with the law.

That is why, when we considered alternative approaches, we thought that the only alternative to our approach would probably be to leave the courts to improve the law through judicial reform. However, the outcome of that could not be guaranteed and, on past experience, it could take a long time to reform the law in that way. Therefore, placing the law on a statutory footing seemed to be the only effective way of making the necessary reforms.

The Convener

Does anyone want to add anything to that?

Hector MacQueen (Scottish Law Commission)

The main thing that one can say is that common law is based on the judges’ decisions and that the judges’ decisions depend on someone putting a question to them for a decision. Occasionally, judges do not get things absolutely right. In this particular regard, that happened in 1920 in the House of Lords. Sometimes, it takes time to realise where and how something is wrong. If you look back at the history, you can see that people realised in the immediate post-war period that that decision in 1920 was unhelpful but, in current commercial conditions, it has become particularly obviously unsuitable as a basis for legal development.

The problem is that you would have to go all the way to the top of the judicial tree—that is, to the Supreme Court—to determine a matter, and in order to do that, you would have to find a litigant who is prepared to pay, because a litigant who loses pays for everything. Understandably, therefore, solicitors and advocates are reluctant to advise their clients to take a chance on these things unless there is an absolute cast-iron guaranteed result. Legislation is the only way in which you can meet the difficulties that exist right now. We might get a case 100 years from now that meets the difficulties of the 22nd century but, meanwhile, the people of the 21st century will just have to struggle on, unless we pass this legislation. That is the major reason for shifting from common law to statute in this area.

It has to be said that, in many ways, the proposed statute expresses what is the existing common law, except for the fact that that particular wrinkle from 1920 is removed or ironed out.

The Convener

Would you be kind enough to cite the particular case, so that it is on the record? That would enable us to see the basis on which we are proceeding.

Hector MacQueen

Yes. The case in question is called Carmichael v Carmichael’s executrix. It was dealt with in the House of Lords and it is in the 1920 Session Cases. I am confident about that, but I am not sure which page it is on. I think that it is on page 191.

Graham Crombie (Scottish Law Commission)

Page 195.

Hector MacQueen

Page 195, sorry.

The Convener

Excellent—page 195. That judgment was found wanting.

Hector MacQueen

Yes.

The Convener

And by “post-war”, I presume that you mean the second world war.

Hector MacQueen

Yes.

The Convener

Notwithstanding the fact that the judgment was in 1920.

Hector MacQueen

Yes. The case in question arose out of an air accident in the first world war. It is an interesting story in itself, but it is not relevant to today’s proceedings.

The Convener

If no one wants to add anything in response to the initial question, we will move on to questions from Alison Harris.

Alison Harris (Central Scotland) (Con)

I appreciate that there is uncertainty about the scope of the law, but could you explain what the level of uncertainty in the current law is?

Jill Clark

I will probably defer to Hector MacQueen on that. He has already said that quite a lot of the bill restates what people think the law is at the moment. However, there is probably a degree of uncertainty in what people think is the case. We think that there can be third-party rights for someone who is not in existence at the moment—someone who is yet to be born—or for a company that is yet to be formed, but that is not absolutely certain. That uncertainty, and similar ones, are what the bill addresses. It also rectifies the issue of irrevocability, which is the main difficulty with the common law.

Hector MacQueen

The other aspect of the common law, as I said earlier, is that, if you do not get a judicial decision, you do not necessarily get an absolutely clear rule. Quite a number of the sections—particularly the remedies and defences parts—are there because they answer questions that have been asked in writings on the subject but never answered, because no case that squarely presented the issue has come before the courts.

One of the problems with the common law is that there are gaps. We can say, “In principle, it ought to be this,” but having a legal rule stated in the statutes creates much more certainty. On one or two aspects—notably, the defences—we cast it in slightly narrower terms than most of the books did. We talk about how the defence must be relevant to the third-party right and, in our written evidence, we give the example—I think that it is example 1—of a case in which the contract from which the third-party right sprang was illegal at the time, although it would not be illegal now. The illegality in question did not apply to the third-party right; there was nothing illegal about giving benefits to the families of the members of that particular association. [Interruption.] It was example 2—thank you again, Graham. I am not doing too well on my numbers this morning.

You need a case that directly raises the issue to get it clearly resolved, and we have tried to provide a clear and certain rule on that point.

Alison Harris

Thank you for that answer. In order to help me further, could you expand on some specific areas of uncertainty? You mentioned remedies, but what remedies are available to third parties in the current law? To what degree do defences to carrying out a contract, such as error and misrepresentation, apply to third-party rights? Thirdly, could you expand on the time limits for bringing claims under third-party rights?

Hector MacQueen

Sure. Shall I take the remedies point first?

Alison Harris

Yes, please.

Hector MacQueen

The very specific uncertainty is about whether a third party can claim damages if the performance that is rendered to that third party is defective in some way. There has been almost no case law that raises that point. In principle, it should be clear that the third party does have such a right, but text writers have cast doubt on that, thanks to various 19th century cases. They say that those cases are relevant; others—myself included—say that they are not relevant, so there is a degree of dispute and doubt as to what the law is, hence the wish to be clear.

To give a principled answer, if I breach my contract with you, you are entitled to damages. Likewise, if you were a third party to a contract between Graham Crombie and me, you would be entitled to damages if our performance was not up to the level that you reasonably expected from the way in which we expressed your third-party rights.

When we talk about error and misrepresentation, we start getting into the possible defences that would be available. The question of error and misrepresentation starts when, in entering a contract, one of the two contracting parties makes a representation to the other that brings the other into the contract and that representation turns out to be untrue. That is a misrepresentation and there is an error on the part of the person who is the victim, so to speak. In general contract law, that would make the contract void or voidable, although there is some degree of uncertainty in that area.

The question is about the third-party right that springs from that contract: is it void or voidable in exactly the same way as the main contract? Does the voidness of the main contract impact on the third party? In general, the answer is probably yes, but we need a clear position that says that the misrepresentation impacts as much on the third-party right as it does on the original contracting parties to the basic contract. It might well be the case that it does not apply—that the third party knows nothing of any misrepresentation and is merely receiving a benefit, and that the misrepresentation was not about the third-party right in the first place. Why should that affect the third-party right? If that is what the contracting parties intended, the third-party right is independent of the contract in that sense. The provision on defences tries to allow for that kind of analysis to be made by the courts.

10:15  

On the time limit, under section 11, “Prescription”, we noticed in the course of our work that the Prescription and Limitation (Scotland) Act 1973 has a long list of the obligations to which its prescriptive period applies, but there is no specific mention of third-party rights. We could see that as a possible gap, in that some clever lawyer somewhere might say, “Well, there is no prescription in relation to a third party’s right,” and the third party could claim any time indefinitely into the future.

In principle, we did not think that that was correct. The correct principle is that five years is the period that a party has in which to bring a claim. The provision in section 11 of the bill is to make that clear. It also has a slightly retrospective element: we want the position to be clear for the law as it has been in this area.

Those are the specifics of the lack of clarity. What we are driving at is often about what the law as yet does not say, but now will say.

David Torrance (Kirkcaldy) (SNP)

I wish to focus on the irrevocability rule. Will you expand on the problems with the current irrevocability rule? Why would it be useful for contracts that grant third-party rights to be cancelled or modified?

Jill Clark

Hector MacQueen will have more to say on this, but the case that he spoke about—the Carmichael case—set the bar. It said that once someone has been given a third-party right, it cannot be taken away, cancelled or modified. That seems to be a complete nonsense when we think that the two main parties to a contract can decide at any time to cancel or modify their obligations. The fact that that cannot be done with a third party has created a significant inflexibility in the law, and most people shy away from our existing law on third-party rights because of their concerns about that. The law does not allow the flexibility that people need in today’s commercial or indeed personal legal transactions.

Hector MacQueen

That is the essential key. What we received from the legal profession that led us in the commission to investigate this topic was the message that the jus quaesitum tertio was perceived as inflexible. Because of the irrevocability rule, you had created a right that you could not change, and that was unacceptable, particularly from a commercial point of view.

Circumstances change and things move on. You may wish to cancel the right altogether. More typically, perhaps, you might wish to adjust it slightly in order to meet new circumstances, in which less resource is available. It is even conceivable that you might want to modify it in favour of the third party and increase the benefit that they will get. However, you cannot do that if you have created an effective third-party right—at least not without the third party’s consent, which will not necessarily be forthcoming without cost.

We are trying to create a regime that is flexible rather than inflexible, but that nonetheless lets the third party’s right crystallise at certain points in time, so that it can no longer be changed. That is essentially what sections 4 to 6 do. They set out the circumstances in which the third-party right crystallises and can no longer be changed.

We are trying to remove irrevocability as a precondition and instead make it a consequence of the agreement, plus certain other things having happened in three different sets of circumstances, as set out in sections 4 to 6 of the bill.

David Torrance

Does the bill provide the right balance between the rights of the contracting parties to change their minds and the rights of third parties?

Hector MacQueen

I think that it does. The starting point must be that it is the contracting parties who create the situation in the first place, and it is therefore not unreasonable, shall we say, to allow them to remain in control of it up to the points that are set down in sections 4 to 6. If they make their third-party right conditional on something, as in example 2 in our written evidence, it will, when that condition is fulfilled and the third-party right has not been changed in any way, be enforceable. That seems fairly straightforward.

Section 5 deals with a situation in which the third-party right is either unconditional and could therefore be enforced immediately, or is what is known technically as a “futures” contract, whereby payment is to take place on a date in the future—for example, you would have to wait until 30 March and then the right would be enforceable. If the contracting parties notify the third party today that that right will exist and will be enforceable on 31 March, they cannot change their minds—and why should they be able to do so? They have notified the person and made them think that they are going to get that right, payment or whatever it is on that date.

The final, and longest, section involves a right that might be conditional in some sense, going forward into the future, which might have led the third party to change their position on the basis that they were going to get the third-party right eventually. In that case, of course, the third party is not entitled to rely, because the conditions in which the right comes into existence are not yet fulfilled. However, if the third party’s reliance is known to the contracting parties and they do not stop it—they acquiesce, in the technical language of the law—or if the reliance is reasonably foreseeable, that right, despite its conditionality, becomes irrevocable, provided that there was reliance that was damaging to the third party, and that, if the contract was cancelled or changed, there would be further damage to the third party.

We gave an instance of that in example 6 in our written submission, in which the dear daughter Tara has her expensive course in the United States paid for by the firm of partners of which her parent is a member. In that example, there is reliance before the cancellation, and Tara spends money on flying to the United States. The partners want to cancel the right because the firm is no longer making enough money, as they see it. If the firm is allowed to pull out, Tara will not only have wasted her money, as it were, in flying over to the States, but she will lose out on the opportunity to complete her degree study, so there will be an adverse consequence, as the bill puts it.

There is a twin-headed approach, so it is quite a tough test to pass. We have borrowed it from other legislation on which there has been relatively little case law over the past 20 years, either because the statute is wonderfully clear and no one therefore needs to get into dispute, or because the hurdle is too high for the party who is reliant to cross it and get a successful claim in. Personally, I think that it is more the former. Although the legislation is quite long, it is quite clear if you take it step by step and work your way through the requirements.

We provide for third-party protection in circumstances in which it was clearly fairer to the third party to say, “Yes, you now have an irrevocable right,” and before that point, we give the contracting parties the freedom to change the situation to meet their own requirements. I am content that the bill provides a balance.

David Torrance

Thank you for that answer.

Could you explain in more detail how the exceptions in sections 4 to 6 of the bill, which stop the contracting parties modifying or cancelling a third-party right, will operate in practice?

Hector MacQueen

We have given some examples in our submission. A particularly good example in relation to section 4 is example 2. It is a nice illustration of a conditional third-party right, which is what section 4 is intended to apply to.

I will run the committee through the example. It involves a professional association that was formed by contract. At the time at which the case in question—which I mentioned earlier—was decided, the association was, in effect, a trade union, which is where the illegality came from under the law as it stood at the time. The contract between the members said that the association would

“provide benefits to the families of members who become unable to work through death or illness.”

In the original case, reference was made to “insanity”. I do not think that we would do that today. That is what happened—the member fell insane, and his spouse claimed the benefits that were provided for in the contract.

That is an example of a conditional obligation: the third party has no rights until a certain event occurs, which in this case was the death or illness of the member to whom the lady in question happened to be married. At that point, the right crystallised and she was entitled to it. The rules of the association allowed it to change the rules—they could do so because it was a voluntary association of members—but they could not change the rule in relation to the family member who was making the claim at a time when the rules had not been changed. The association might have thought, “Oh my goodness—this will be very expensive, so we had better change the rules so that we give them a bit less,” or it might have said, “This is absolutely miserable,” and decided to change the rules to give them more. It could do whatever it liked, but as far as the pursuer in question was concerned, it was committed. She had an irrevocable right at that point, and we think that that is the correct analysis of that particular fact scenario.

That covers section 4. Would you like me to give another example?

David Torrance

That should be sufficient, thank you.

Hector MacQueen

Okay. I already gave the example that relates to section 6—it is example 6 in the submission, which involves the lovely Tara. It goes through the different stages of reliance by the third party that produce the effect that, in fairness, she ought to be allowed the right in question, even though the conditions of it have not yet been completely fulfilled.

The Convener

We move on to practical problems with the current law. Monica, will you give that a blast, please?

Monica Lennon (Central Scotland) (Lab)

Good morning. In your answer to the first question, you helpfully set out the rationale for the bill, which is that the current arrangements are not fit for purpose. The policy memorandum indicates that the bill will promote the use of Scots law. You mentioned that your investigation showed that lawyers in Scotland are applying English law to Scottish contracts. Do you have any feel for the extent to which that is happening? Can you quantify that?

Jill Clark

I do not think that we can quantify it. There is a lot of anecdotal evidence. Recently, a lot of articles have been written about third-party rights, because of where we are with the Scottish Law Commission’s report and the bill, which all refer to the Contracts (Rights of Third Parties) Act 1999 being used as a workaround. Therefore, we think that English law is probably used quite regularly, but we could not quantify the extent to which that happens.

That is one of the workarounds at the moment, and the other, which is used in certain sectors, is something called collateral warranties. The law does not work as it stands, so Scots lawyers are looking at other ways of making things fit for their purpose.

10:30  

Monica Lennon

Can you explain a bit further why that is a negative consequence? Why are the workarounds and applying English law a negative?

Jill Clark

Because we want our Scots law to be fit for purpose and to be used. We want it to be used in the courts and we want it to facilitate transactions. We do not want it to be a hindrance to people. If someone has trained in Scots law, the last thing that they will want to do is to have to apply a different jurisdiction’s laws to something that is, in essence, a Scottish transaction. Hector MacQueen might want to add something on that.

Hector MacQueen

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 the 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.

One of my colleagues in the Scottish Law Commission provided a useful metaphor a few years ago that involves looking at the legal system as plumbing. In the world in which we live—our country and society—we have a legal system that is different but not necessarily the best legal system in the world, and some bits of it are not working so well. So, just as we would not leave deficiencies in our plumbing for too long once we knew about them, we adjust the legal system in order to meet today’s requirements. Fitness for purpose is a bit of a cliché, but it is actually a very important point for a legal system, which ought to work for those who are living under it.

Monica Lennon

I just wanted to get a sense of whether people are missing out because of the current limitations and whether there are practical difficulties for the legal profession in terms of being able to apply the law. If Scots law is inadequate and you are having to apply English law, does that present difficulties for the profession?

Hector MacQueen

Solicitors are always very good at finding solutions or workarounds. To me, the major point here is that if we have a client who is sufficiently well-heeled to be able to afford the Rolls-Royce service, solicitors will produce results that work. They will bear the liability for that, which sometimes involves very large sums indeed. In some ways, my concern is more about the kind of people who cannot afford that sort of bespoke service. To my way of thinking it is rather important that the law in its default mode, which we talk about a bit on page 1 of our written evidence, should give a satisfactory outcome for such people.

With regard to the case where the lady’s husband was sick, she had no opportunity to find workarounds. In a sense, the provision by the association was her lifebelt. What was important was that the law produced a result that got her the benefit that she was intended to have all the time. However, under the current law, she might well have been in difficulty because the right was not irrevocable from the outset; in fact, it was always revocable because the association could always cancel the provision in question.

The default rule has to be a good working rule because not everyone is in a position to get to workarounds to achieve what the third-party right could give them.

Monica Lennon

Sticking with workarounds, are you able to explain in a bit more detail how the collateral warranties will work in practice? Why are the proposals an improvement?

Hector MacQueen

We have a diagram in our report that we did not include in our written submission, in order to keep it within eight pages, but we will happily send it to the committee. It shows the bewildering maze that can emerge, usually at the end of construction projects.

The usual contractual framework will have a funder, who provides the money and has a contract with a developer. The developer has a contract with a builder and probably also with professional advisers, architects, engineers and so on. The main contractor will have subcontracts with suppliers and people doing bits and pieces of the work on the great project. Out in the distant future is the prospect that someone will actually buy the development or, perhaps more typically, enter into leases, whether commercial, residential or whatever.

Basically, collateral warranties are provided by the people who are doing the work: the professionals, the designers, the main contractor, the subcontractors and the suppliers. They are issued, for example, in favour of the funder, who is way up at the top of the contractual tree, or for the future purchaser or lessee of the development in question. That is a good example of the non-existent or unknown third party at the time of contracting.

What normally happens is that, when the project is completed and tenants are identified and so on, the process of going out and getting collateral warranties begins. That is completely separate from and subsequent to the successful completion of the project. Solicitors have given us graphic stories of that process. Often, it is the young solicitors who are sent out in the pouring rain to knock on doors and get people to sign the collateral warranties. Sometimes people do not want to sign. There are lots of difficulties. The particular or major difficulty is where the person you want to sign the warranty has gone out of business or has been taken over by someone else. There are an infinite range of possibilities.

It is a bit of a nightmare, in purely practical terms. Our thinking is that much of that could be removed if parties wrote third-party rights in favour of funders, purchasers, tenants and so on into the contracts, which are still the frame or spine of the thing. That would be there from the start, and we would not have to go through what is an extraordinarily cumbersome and difficult process at the end.

However, again, we are not abolishing collateral warranties.

Monica Lennon

Does the proposal provide any extra safeguard in the event of people going out of business and so on?

Hector MacQueen

Not really, no—not against the going out of business. There might be some sort of protection against the party that is taken over, because the takeover might involve carrying on the liabilities of the previous business and so on, or the previous business can be resurrected in order to make it liable.

Monica Lennon

On liabilities, can you explain for my benefit what you mean by the “black hole of non-liability” in relation to company groups?

Hector MacQueen

Do you want me to try that one, Jill?

Jill Clark

Yes—go on.

Hector MacQueen

The term “black hole” is obviously a metaphor. It was first used by a judge in about 1980 in a Scottish case, so it is a Scottish invention. The idea is essentially about a situation in which a party suffers a loss as a result of a breach of a contract to which the person suffering the loss is not a party. The basic starting principle in contract law is that someone can sue for damages for a loss only if they are the victim of that loss. That is a fairly obvious general principle right across the law. If the loss happens to fall on a third person—tough. That is where there is a black hole.

In other words, we might have a situation in which, if there is a contract between A and B, and A breaks the contract, B has no loss and a third person has it instead. How do such situations arise? Construction is the classic example. It typically involves groups of companies. A is a contractor to do work—repair, maintain, build or whatever—for B, who is a member of a company group. During the project—a repair and maintenance contract, let us say—B transfers the ownership of the property in question to another company in the group for entirely unconnected reasons. Therefore, when the breach works out in loss, the third person—the one to whom the property was transferred—suffers the loss but has no contract and the person who has the contract suffers no loss. Does that make the position clear?

With third-party rights, we can provide in A and B’s contract that the other companies in the group will be entitled to enforce the contract. That is a common solution, as I understand it, but it raises the difficulties, on which we have touched, of companies that do not exist, for example. However, most of the time, that does not happen because, at the time that the contract is made, the parties do not think about third-party rights at all. A and B just carry on and then the company group takes a decision to move the property from B to C. It might even wind up B—who knows?

Our bill does not provide an answer to that scenario. It provides a solution that people could use at the time of drafting a contract but, if they have not thought of it and there is no provision, the bill does not apply. It applies only to provisions in favour of third parties. Therefore, there is a black hole of non-liability, but we are addressing that further question in a discussion paper that is currently in draft and out with an advisory group of solicitors, because we have some ideas about how the problem might be solved. However, it would be premature to go into the detail of that and it might cloud the issue that the bill addresses. We have the problem in mind.

The black hole is simply that it is surely not right that someone should be able to breach a contract and escape liability because the loss is suffered by someone else for reasons that have nothing to do with the contract position. Therefore, we might bring you another bill in two or three years’ time to deal with that.

Monica Lennon

Watch this space. Are there any other problems that we should be aware of or any practical issues that have come up from your investigation?

Hector MacQueen

The major issue was the arbitration one, which we did not identify initially but which became clear as we considered the consultation responses that we received. We then proceeded to address it with fairly extensive consultation with the arbitration community in Scotland, which is not large but is quite good. There was a need to make a provision on that, which is what we have done in the relevant section of the bill.

George Adam (Paisley) (SNP)

Good morning. You have already given us examples of how the construction industry may benefit from the bill. However, the oil and gas, financial services, information technology and pension sectors are mentioned in the SLC report as industries that could benefit from the bill as well. Will you expand on what the benefits are for those sectors and how the bill will make a difference to them?

Jill Clark

It is mainly because of the complexity of their contract structures. There is lots of subcontracting and there are lots of people who subcontract to subcontractors, so many third-party rights are created that way. Those people probably have the most to benefit.

In addition to the benefits for particular sectors, certain company structures will find the bill very beneficial. As Hector MacQueen discussed, in a group company structure, the main company may contract for something but, if it has not given third-party rights to the rest of the companies in the group, it may not be able to benefit if something goes wrong. Hector may want to add to what I have said.

10:45  

Hector MacQueen

I can add one or two points. George Adam mentioned a number of specific sectors. We have gathered the most information on the oil and gas sector and the position in the North Sea. As Jill Clark said, there are two massively complicated structures of operation in the industry, and many subcontractors. There are also very high levels of risk; we saw those risks clearly with Piper Alpha all those years ago, and they are on-going all the time.

In North Sea contracts, there are provisions for indemnity—there are cross-indemnities with knock-for-knock arrangements between the parties. That arrangement is designed for overall efficiency, and third-party rights to those indemnities are created, but a fairly critical point is that those contracts are all made under English law. From the point of view of Scots law, the North Sea oil industry was a missed opportunity, as business was lost.

If you read the contracts, you will see that they are subject to English law and invoke the Contracts (Rights of Third Parties) Act 1999 to establish those third-party indemnity agreements. Cases have tended to come to the Scottish courts only in extreme scenarios in which the contracts do not apply. That is in fact what happened at the beginning of this century with the great Piper Alpha litigation, which went to the Scottish courts because all the liabilities that we have talked about lay outside the scope of the contracts altogether. That is a very good illustration of the use of third-party rights. The problem that we have in Scotland is that people do not think that our third-party rights system is going to do the business.

With regard to the financial sector, pensions are a good example. For instance, the process of nominating a person to take your pension in the event of your death in service is a third-party right. Insurance provides an example of third-party rights—for example, I might take out a life assurance policy in favour of my spouse or my children. Another example would be if I took out a motor insurance policy that covered other drivers of the vehicle that I was insuring. There are plenty of examples. In fact, last summer I exercised a third-party right myself, in a sense, as I was allowed to drive my father’s car when he was not feeling very well. Being a careful lawyer, I checked his policy, which said that other drivers could drive with his permission, so he kindly permitted me—from his prostrate position—to drive him to hospital.

Those are important examples of third-party rights that are created by contracts right now. They are very rarely tested in court under the application of our Scots law rules. The key example is the North Sea oil industry, in which the contracts are all under English law and refer to the third-party rights provision in the 1999 act.

George Adam

I want to follow up on Hector MacQueen’s earlier comment that some of the individuals that may be involved in such matters could, if they had an open cheque book, effectively get a workaround and get the answer that they wanted. Is the construction industry an example of where that might happen, given that there are so many subcontractors? Smaller companies may not have access to legal information in dealing with larger companies, so that sector is a perfect example of where the bill would probably help those smaller businesses. Am I getting that right?

Hector MacQueen

I think that that is right—provided that we are talking about those companies being in the position of third parties, claiming rights against others. The measures give them some protection. A small organisation in business will always be under pressure, and the bill does not attempt to alleviate that pressure in any direct sense. There may well be circumstances in which smaller organisations will be able to make use of the provisions as regards rights for themselves, although they will depend on contracts that have not been drawn in great depth or detail, rather than the souped-up versions that big contractors will get. Those big contractors will also probably be able to use standard forms and so on.

Regarding the collateral warranty scenario, a draft contract is available from the Scottish Building Contract Committee, which incorporates provisions of collateral warranty in the main contract. It couches that in terms of the third-party right. Last November, I went to a Scottish Building Contract Committee conference, and I asked its members whether people were using that, but they did not know. It is not the job of that committee to know how its forms are used—it just puts the forms out there, and it is up to people to use them. The anecdotal evidence that came back on that occasion was that collateral warranties are generally used because funders prefer them. They are what the funders know, and they were established in legal practice in England in the 1990s as a way round the lack of third-party rights there at that time.

The 1999 act did not change the minds of funders. The attitude was, “We’ll just go on doing what we’re doing,” and that applied equally to projects in Scotland. They said, “This is what we know and we think it works,” which is fair enough.

George Adam

Are there any sectors other than the ones that I have mentioned that the proposed legislation could help or benefit?

Hector MacQueen

There is no sector that the bill definitely could never benefit. Any person or sector that uses contracts and that has any complexity in its arrangements may well find that the bill provides an answer. It is very much a facility, I would say. Part of what will be necessary after the bill process—the after-sales service, as we call it in the commission—is to promote the bill to lawyers and others and say what it does or could do for them. The Scottish Building Contract Committee is a prime example of that. I view that as part of the Scottish Law Commission’s job. We have made something to be used, and we certainly do not want it just to lie on the shelf once it has gone through the legislative process.

The Convener

How will the bill affect the use of collateral warranties in future?

Hector MacQueen

It may not affect it at all. By and large, solicitors hate collateral warranties, because they are awkward and difficult things to gather in. For any major project, there are usually a very large number of collateral warranties, not just three or four, as in our simple diagram in our report. There may be scores of collateral warranties, or even more, in a major commercial development. They are disliked from that point of view. There is a sort of time-consuming and almost self-defeating element in their collection.

If solicitors wish to eliminate the collateral warranty, they will have to point to our bill as providing an efficient solution and persuade the funders, developers and so on that it is a valuable alternative. To an extent, it will be part of the commission’s job, and I would hope that of others who support the bill, to make the case that it offers a better solution to the particular problem.

The Convener

In England and other jurisdictions, statutory rules on third-party rights have been in existence since 1999. Can you provide further information about the impact of that legislation? You spoke about the North Sea oil industry, but do you have other examples?

Jill Clark

Unfortunately, there is not a lot of research or analysis about how effective the 1999 act has been in changing the way that people treat third-party rights. However, some articles have been written and they all talk about there having been a change. It has been a fairly slow change and there is still the issue about people being familiar with collateral warranties and sticking with what they know. In various articles, there is a lot of evidence that Scots lawyers are using the 1999 act.

The one difference is that our starting points are different. When the 1999 act came into force in England and Wales, they did not already have third-party rights, so it was quite a fundamental change in their law. That will not be the case here in Scotland. We have third-party rights; they just do not work very well. It would not be such a significant step for people and it would be an improvement to what already exists, so there might be a greater readiness for people to throw themselves into third-party rights and to use them more than was the experience down in England and Wales. It seems that third-party rights are being used and that people are getting more familiar with them, but people are still using other options.

Hector MacQueen

Perhaps another example from our report would be helpful. We discovered that Network Rail’s contracts with the railway companies—they are called station access agreements and track access agreements—all provide for third-party rights, which are in favour of the UK Government south of the border and the Scottish ministers north of the border, to enforce those contracts.

Why did that happen? The answer is that Network Rail’s predecessor, Railtrack—the name might conjure up certain images from 2001 or 2002—crashed and burned, and Network Rail replaced it. The crashing and burning of Railtrack exposed the issue of how to keep those agreements going and, south of the border, the 1999 act was a huge boon. All that had to be done to enforce those contracts against the railway companies was to write in that the UK Government had third-party rights. In the English context, the contracts could go on, regardless of what happened with the new company, Network Rail—the UK Government could simply say that it had rights under the 1999 act. However, in Scotland, there was a slight difficulty. The contract had to refer to jus quaesitum tertio and to say that it was all irrevocable—a distinguished law firm worked very hard to produce that clause. When the bill is in place, it will be simple to refer to the act under its statute short title and say that the Scottish ministers have those rights.

As far as the experience in England is concerned, I think that, next week, the committee is speaking to Professor Hugh Beale, who has carried out the only piece of research that I know of about the actual use of the 1999 act. That research, which was published in about 2010, is very interesting, because it covers a wide range of examples. His research was based on contacting friends and other contacts in the legal profession and asking them how they used the 1999 act. He was surprised to find that the use of it was increasing gently—lawyers do not like to do anything in a great rush—and that things are moving gently forward.

Our research in Scotland tends to confirm that. We do not expect an instant transformation and, in the construction context in particular, the attitude of funders is key. Funders do not want change to the arrangements that seem to work, and that will probably be a dominant factor for some time to come.

11:00  

The Convener

You touched a little on arbitration. Will you expand on the need for Scottish arbitration legislation to deal expressly with third-party rights? Would you like to discuss that further?

Hector MacQueen

I will give that one a go. The starting point for Scotland is the Arbitration (Scotland) Act 2010, which is a successful act of this Parliament. It modernised arbitration and was designed to bring business into Scotland. It is being used, albeit slowly and gently. There is plenty of evidence that the act is successful. However, it does not provide for third parties to have rights to join arbitrations or to invoke arbitration clauses. In a sense, it is not surprising that that should be so.

The English included a provision in their act in 1999 ultimately because they had been approached by the arbitration community in London, which had said that that act would be more useful if it included provisions about arbitration. That took place after the Law Commission there had reported and decided that nothing could be done. What happened then was that the relevant commissioner worked with the arbitration industry to produce solutions to two problems, which we can assume that the arbitration community thought were real or potential issues for arbitration.

We have given examples of such issues in our submission. Example 4 is the first case, and it is relatively easy. The relevant provision in the 1999 act, and a similar one in our present bill, concerns a situation where the contracting parties create a third-party right to payment or performance of some kind, such as supply of goods or whatever it might be. However, they make that third-party right dependent on enforcement by arbitration. That will usually be in some sort of general clause in the contract that says, for example, that all disputes that arise from the contract—or the agreement—will be subject to arbitration. People want to avoid the courts, and the law allows them to do that through arbitration clauses.

The question really is, given that the Arbitration Act 1996 for England, like the 2010 act for Scotland, does not allow third parties to join an arbitration, how can such a clause work? The solution that was provided for in the English act of 1999 and which our bill provides for is that, when there is a substantive third-party right—as we sometimes call it—that is subject to arbitral enforcement, that is the enforcement.

It is perfectly consistent with the policy of third-party rights to say that they can be conditional. If they are conditional on arbitral enforcement, the third party should be allowed to submit any dispute or claim that it has to an arbitration. I think and hope that that is an easy example. There is no real difficulty with that.

The second case is more tricky. In essence, it is about claims by or against the third party that lie outside the contract altogether. Perhaps the simplest way to explain that is through example 5 in our submission. I add that that example was suggested to us by the family law arbitration group Scotland, which is a body of family law practitioners who promote the use of arbitration in family disputes—largely, I think, because it is in the interests of less well-off clients.

The case that was put to us is one of cohabitants who have entered into a pre-purchase agreement. They have definitely decided that they do not want to get married or enter into a civil partnership; they wish just to cohabit, but they wish to buy a house together. Apparently, it is perfectly common for there to be an arbitration provision in such transactions. The point of the pre-purchase agreement is that, if the relationship breaks down, the parties will resolve a dispute about the proceeds from the sale of the house by arbitration rather than going through the courts. The great advantage is privacy—arbitration is, in essence, a private process, whereas what happens in court is public. Therefore, there are certain win-wins.

The scenario that we developed out of that case was based on my experience not as a party but as a seller to persons who could not afford the price without a relative’s financial assistance. When we transferred our house to those people, we included in the title the third-party relative who had funded or supported the acquisition of the property. They became a joint owner with the happy couple.

It can happen that the relationship breaks down, although that did not happen in our case, and the third party—the relative—is involved. However, their involvement is not based on anything in the contract. The pre-purchase agreement does not say anything about them, but they have an independent right of property. They have a share in the property that belongs to the two now-disputing persons.

The second provision on arbitration allows a person who is asserting a right that is relevant to a dispute that is otherwise being arbitrated between other parties—the cohabitants, in this case—to join that arbitration and have their claim considered in that context. Why do we have that? The basic point is that if—as under the present law—the funding relative cannot join the arbitration because they are a third party to it, they have to go to court. In that scenario, the risk is that the arbitration will decide one thing about how the proceeds of the house sale are to be distributed and the court will decide another. It makes sense for all issues that relate to the case to be considered in one forum or tribunal, and the obvious one is the arbitration. Therefore, we provide for a third party to be able to join an arbitration between two others because their dispute or claim is relevant to the matter that is being arbitrated between the arbitrating parties, even if they do not have a third-party right in the substantive sense that is available in example 4.

I understand from the English experience that no one could figure an example of that sort and that a case has never been decided under the equivalent provision in England. We are proud of the example that we have thought of, because it seems to be real. It is of a scenario that we know could occur, and we know that arbitration is being used between cohabitants as a way of resolving disputes when their relationship breaks down. We also know that third-party funders frequently take title along with cohabitants, and the relationship breakdown may involve them as well, as we said in the hypothetical example in our submission.

We have advanced one step beyond where the English were in recognising a practical example of where the provision might work or be useful. We will just have to see how that goes once it is available.

The Convener

Given your fertile mind, do you think that arbitration might be used in agricultural law, particularly with regard to limited partnerships, to settle any number of imaginable and unimaginable difficulties that arise?

Hector MacQueen

The agriculture sector is undoubtedly one in which arbitration is used, often quite effectively. I have not been able to think of an example that might involve a third party in that sense. In Scotland, such an arbitration would simply take place under the 2010 act. I think that there are provisions on statutory arbitrations in agricultural holdings legislation, but I am not completely sure.

The Convener

The policy memorandum states that the bill will encourage greater use of Scots law, which is similar to one of the intended objectives of the Legal Writings (Counterparts and Delivery) (Scotland) Act 2015. Has that act led to greater use of Scots law, as trailed and promised at the time?

Jill Clark

The short answer is probably yes. We surveyed the bigger legal firms in Scotland—ones that are likely to have departments that deal with lots of property leases and commercial transactions—and asked them to make inquiries in their organisations. We received generally very positive comments about that act—comments such as, “It has certainly made the decision to use Scots law easier,” and “It has been a boon with regard to international transactions and things that were tight on time.”

Of course, that was not a formal statistical or analytical follow-up on the act, which has been in force for only 18 months. It is still early days, but there has been uptake and an improvement, and people think that that will continue. We hope that the bill that we are discussing today will have the same sort of impact.

The Convener

That will benefit the Scottish legal fraternity by bringing in work in Scots law.

Jill Clark

Yes.

The Convener

That is excellent. As members have no further questions for our distinguished panel, I thank everyone for taking the time to come to talk to us and giving us such elegant evidence. I dare say that we will be in touch at a later date.

11:13 Meeting suspended.  

11:15 On resuming—  

The Convener

Agenda item 3 is our second oral evidence session on the Contract (Third Party Rights) (Scotland) Bill at stage 1. We welcome our first panel: Ross Anderson, who is from the Faculty of Advocates, and John MacLeod, who is a lecturer in commercial law at the University of Glasgow and is representing the Law Society of Scotland today.

I invite questions from members—and I will ask the first question myself. As you know, the Scottish rules on third-party rights are currently based on the common law. The bill team and the Scottish Law Commission have argued that case law is unlikely to develop quickly enough to deal with the problems in the law that have been identified, and that statutory rules are needed. Do you agree?

Ross Anderson (Faculty of Advocates)

Let me begin to answer that. The short answer is yes, we agree. The reason is that the existing authority on the subject is a House of Lords decision from 1920, which makes development of the law very difficult unless a litigant is willing and able to take matters to the equivalent of the House of Lords today, which is the United Kingdom Supreme Court.

The Convener

Do you have anything to add to that, Mr MacLeod?

John MacLeod (University of Glasgow)

Not a great deal—merely that, as the Scottish Law Commission suggested in its report, there has been a tendency to choose English law as a way of getting round the problems or to choose other workarounds. In so far as parties continue to do that, the core law relating to third-party rights is not being used. Therefore there will be very little opportunity for litigation, even were there parties with deep enough pockets to deal with the matter. I do not see any prospect of a Supreme Court case on these issues.

The Convener

Great—thank you. Our next group of questions is from Alison Harris.

Alison Harris (Central Scotland) (Con)

Good morning. One of the main criticisms of relying on the common law is that there is uncertainty about the scope of the law. Do you agree with that criticism? To what extent do you think that the law needs to be clarified in legislation?

Ross Anderson

In short, I agree with that criticism. There is a lack of clarity on a number of levels. The first difficulty is a lack of clarity as to what the law actually is. There is difficulty in interpreting what the existing case law requires in practice. The committee will be aware of the Scottish Law Commission’s report, in which it sets out one of the difficulties: the conflation of ideas between creating a right and rendering it irrevocable. In practice, that causes innumerable difficulties.

There is a lack of clarity in understanding what the law is, and there is therefore a lack of clarity in providing solutions in practice.

Alison Harris

Noting that the bill seeks to provide greater clarity, do you think that its provisions are clear, and do they resolve some of the uncertainty associated with the current law?

Ross Anderson

In broad terms, yes. At this juncture it might be most useful if, on the points of detail, I simply refer to some of the written comments that the Faculty of Advocates has made on particular points of detail in response to the committee’s consultation. In broad terms, we welcome the bill, and we think that it is a positive development. We think that, as a matter of policy and of achieving its aims, it is successful.

John MacLeod

I largely echo those comments. When it comes to accessibility of the law, there is value in the rules being set out in statute, because statutory material is often much easier to handle compared with the present position, where we have to read a case from the 1920s and think about how a writer from the 17th century was commented on in that case. That is not accessible. You can see that in the doubts that have been expressed in the major texts that practitioners rely on in this area.

In section 1, the bill deals very clearly with the core issue of the requirement that a right be irrevocable in order to be created. That is a massive step forward. I agree that there are some points of detail where the signalling within the bill might make the rules a little bit more accessible but, on the whole, it represents a vast step forward in terms of clarity and accessibility.

The Convener

It is also a vast step forward in terms of uncertainty. Are there any other areas of uncertainty that you or Mr Anderson would like to discuss so that they are in the Official Report?

10:15  

John MacLeod

In relation to the current law?

The Convener

Yes.

John MacLeod

The main issue, to my mind, is twofold—as Dr Anderson said, two things are tied together. First, there is the question of whether a right needs to be irrevocable, and thus fixed and unchangeable, in order to be created. That causes problems at the outset, because people are not sure what they need to do in order to create third-party rights. There is also the potential of problems being caused later, when people wonder whether it is possible to vary a right and they have questions about what steps to follow to change it. It is clear that things would be much better were the bill to become law.

The Convener

Okay; thank you very much. We move to the next group of questions.

Stuart McMillan (Greenock and Inverclyde) (SNP)

On the point about a right being irrevocable, section 2 abolishes the irrevocability rule such that contracts that grant third-party rights can be “cancelled or modified”. Given what you said a few moments ago, do you support the abolition of that rule?

John MacLeod

Yes. It is important to bear in mind that the ability to revoke rights is restricted; there are protections for the third parties later in the bill. However, as a matter of general law in Scotland, outside the third-party context, I can for instance make a unilateral promise to you that is binding. At that point you have a right. However, it is also possible for me to make that promise in such terms as to make it subject to revocation or modification in certain circumstances.

The bill moves the law of third-party rights to bring it in line with the law that generally applies to voluntarily created rights. To my mind, it improves the consistency and coherence of the law.

Ross Anderson

I agree with everything that has been said. Also, although the rule of irrevocability in relation to constitution of a third-party right is abolished by section 2, the bill will not prevent parties from creating irrevocable rights, if that is what they choose to do. The bill removes the tie of creation to irrevocability, which was the problem with the law. It addresses the problem without going too far.

Stuart McMillan

Do you think that the bill could be strengthened in that regard, or are you content with what it states?

Ross Anderson

On that point, we are content with what the bill states.

Stuart McMillan

Okay. The provisions in the bill set out in general terms the default position. The contracting parties are free to make express provisions to the contrary. Do you agree with that approach?

Ross Anderson

We do, yes. The whole law of third-party rights, to use that general expression, is fundamentally based on party autonomy. The bill provides a framework for the parties to use, and it is for the parties to decide whether to use it. There is no obligation to use the framework, but in so far as the framework is engaged, it is for the parties to formulate the rights that they wish to create.

John MacLeod

I would add to that only that it is important to bear in mind that you cannot impose a third-party obligation using the bill. Anything that the third party gets is in some sense a windfall. All that the contracting parties can do is give the third party something that it did not have before. Therefore, we are pretty relaxed about the contracting parties being able to restrict that. Provided that the terms of potential modification are clear at the outset, we do not see problems with the power of modification. At the end of the whole process, whatever happens, the third party will be no worse off than it was in the first place.

Stuart McMillan

Sections 4 to 6 stop the contracting parties modifying or cancelling a third-party right. Do those sections provide the right balance between the rights of contracting parties to change their mind and the rights of third parties?

Ross Anderson

Yes—in short, they do. To a large extent, those provisions mirror the existing law, which is contained in section 1 of the Requirements of Writing (Scotland) Act 1995, in relation to situations in which reliance has been placed on rights that have been granted but which have not complied with formalities. Therefore, there is an element of continuity in the provisions. In addition, in any event, and going back to the general principle of party autonomy, as I have already indicated, the parties are free to contract out of the provisions themselves. As far as we are concerned, we are content that the correct balance has been struck.

The Convener

Excellent. Many thanks. That is very clear, and I am grateful to you for that. We move to the next group of questions.

Monica Lennon (Central Scotland) (Lab)

The policy memorandum states that the bill will promote the greater use of Scots law, but I understand that people will remain free to use English law if they wish or if they prefer. Based on your experience, will the bill promote greater use of Scots law?

John MacLeod

I think so; yes, in short. It is always difficult to predict the future, and my colleagues from the solicitors profession who will give evidence next will probably be able to comment more specifically on any changes in practice that they envisage in their sectors.

The brief that I have from the Law Society of Scotland is to talk in general terms. However, we can look at, for instance, the Legal Writings (Counterparts and Delivery) (Scotland) Act 2015, which clarified a point of law on which it could have been argued that the law was what the act provided anyway. However, the evidence that the Law Society of Scotland has received is that there has been an increase in usage, just as a result of placing the law on a clear statutory basis. It would increase solicitors’ confidence in advising clients if they were to use Scots law, because they would be able to find all the rules in an easily accessible place.

Also, the lack of flexibility that the irrevocability rule was perceived as creating—and probably did create—meant that some parties had a strong incentive not to use Scots law because of that problem, or not to use the most efficient and simple technique in Scots law. Taking those barriers away makes it easier for people to contract using Scots law, therefore one would expect there to be an increase in the use of Scots law.

Monica Lennon

I ask Ross Anderson the same question, and also whether he can think of circumstances in which it would be preferable to use English law rather than the bill, if it comes forward.

Ross Anderson

I will address the initial question first, and then I will come back to that supplementary point. I agree with what is being said. The general principle in relation to choice of law is party autonomy and freedom of choice. The parties are free to choose English law in the same way that, ultimately, they are free to choose German law, French law or the law of New York state or of anywhere else. If they have an arbitration clause, they can choose a non-state law.

The key point in relation to the bill has been not so much to try to attract other people from around the world to choose Scots law as it has been to ensure that, for those who wish to use Scots law because they are businesses that are based here and their contracts will be performed here, Scots law provides the tools within itself to allow them to achieve what they wish to achieve without, in an artificial sense, having to use some foreign law—whether that is English law or any other law.

The other point that it is important to make is that, whereas sophisticated parties who have the benefit of sophisticated advice—perhaps from some of the lawyers sitting behind me in the public gallery—will always be able to come up with some sort of workaround to any lacuna in the law, those who do not have the benefit of such advice are in a difficult position at the moment because the law is so unclear. One of the great advantages of the bill is that it sets out, in modern language, what the law actually is.

Forgive me, was your supplementary question in relation to English law asking for particular examples?

Monica Lennon

Yes, I wanted to identify the circumstances in which people who were trying to access law would use English law instead of Scots law.

Ross Anderson

If the bill is passed in substantially the form that it is in, the incentive to use English law simply to deal with the difficulties with third-party rights will disappear. There may be other reasons why parties choose English law: a particular project might be UK-wide and, at the end of the day, England is bigger than Scotland; or we may not be aware of reasons to do with the requirements of a funder or something else. However, in so far as the sole incentive at the moment for choosing English law in a practical situation is a desire to ensure that one has enforceable third-party rights, one of the beneficial effects of the bill will be to remove that incentive.

Monica Lennon

You mentioned workarounds, particularly in the context of people who can perhaps afford more sophisticated advice. Will there continue to be a reliance on workarounds, or is it realistic to think that we will see a shift away from that?

Ross Anderson

As John MacLeod said, it is difficult to predict the future. To some extent, where parties involved in, let us say, construction projects, are used to taking collateral warranties, there is a standard document and a practice that has grown up around using them, and they may continue to use them for some time. However, if there are additional transaction costs and inconvenience from having to sign those additional documents, one would expect rational economic operators to change their practice. Based on anecdotal evidence from colleagues in the legal profession, it is fair to say that such parties would envisage making use of the bill to avoid some of those workarounds.

Beyond that, it is difficult to say much. You will hear later from Professor Beale, from the University of Warwick, who undertook some research in England after the Contracts (Rights of Third Parties) Act 1999 was introduced there, to see what the lag time was for practice altering to reflect the remedies that were the substantive content of that act.

Monica Lennon

It sounds as if you agree with the Scottish Law Commission that third-party rights are preferable to collateral warranties. Can you explain the problems with collateral warranties? Is it the cost?

Ross Anderson

That is one of the difficulties. Wherever one has extra documents to sign at different times, particularly where the signatory of that document may have come into existence some years after the initial project documents were concluded, it may be difficult to get people to sign up to them, as there may not be a huge monetary incentive to do so. It is to do with the general transaction costs and inconvenience. That is the easiest way to explain it, and I think that the same would be true of other sectors that use different workarounds. Wherever you need an additional document or an additional step, there is a cost.

The Convener

Mr MacLeod, is that a view that you would share?

John MacLeod

Yes, it is better to do something directly than indirectly.

The Convener

I note that the Scottish Law Commission has indicated that the bill will make it easier for business to avoid what it calls the “black hole of non-liability”, which currently reduces protection for company groups. Do you agree with that?

John MacLeod

Yes, absolutely. Would you like me to talk about what the black hole is?

The Convener

Yes, please expand on that.

John MacLeod

An example might be a construction project where one company within a group concludes a contract with contractors to do works for properties held by a number of other companies within that group. Unless you use collateral warranties or some other device to set up additional contractual rights, the issue is that, if the contractors do not do their job properly and breach their contract, the contractual right is held by the head company—the first company that concluded the contract—but the losses will be suffered by different legal persons, that is, by other companies within that group.

There is therefore a mismatch, if you like, between the person suffering the loss and the person with the right to enforce. Typically, when you are suing for breach of contract, you seek damages that reflect the loss that you yourself have suffered, rather than the losses that someone else has suffered.

10:30  

The term “black hole” refers to the loss going somewhere that is not covered by the contractual right. If you used the new, shiny, exciting third-party rights in the bill, you would, at the outset, create rights in favour of all the companies in the group with respect to their relevant properties. That would enable them to enforce a claim for breach of contract and thus to recover the full damages. That is how it would work. The Scottish Law Commission is right that the bill would make things much easier in that regard.

The Convener

The proposed approach would be progress.

John MacLeod

Yes. You could do some of that already if you were willing to use the jus quaesitum tertio, but people will—we hope—be more willing to use the new approach because, once you take away an automatic irrevocability rule, you can create those rights but still leave it open to the initially instructing company to modify the contract with the contractor if that is appropriate. You will get the best of both worlds: the right to cover the damages and flexibility between the constructor and the head company in the group.

The Convener

One of the things that we are seeking to establish is whether the bill as it is drafted strikes the right balance, so we are, I suppose, seeking your endorsement that we have managed to achieve that. Have we struck the right balance?

John MacLeod

Yes. As Dr Anderson said, this all ultimately comes back to party autonomy. Almost every section is subject to the parties’ agreement, so ultimately it will be for the parties themselves to strike the balance, which is appropriate. If we believe in an economy that is driven by freely negotiated contracts, the parties’ balance is the right balance unless we have reason to doubt that in a specific situation. We are dealing with the general law, rather than consumer or labour law, so there is no reason to fiddle with the balance between the parties.

The Convener

Dr Anderson, do you wish to add anything or are you happy?

Ross Anderson

I do not have much to add. I endorse the balance that the bill seeks to strike. The only caveat to black-hole liability—which, believe you me, is as unpleasant in practice as it sounds—is that third-party rights will not solve all liability issues. There will be situations in which the parties have not envisaged something that will happen subsequently. The classic example is where one of the parties—a bank, for example—is restructured, whether voluntarily or involuntarily, and the contract, when it was concluded in year 1, may not have made provision for that particular eventuality in which a completely different party comes to hold the contractual rights.

However, the bill cannot achieve everything. In so far as there is a problem with black-hole liability in relation to third-party rights, the bill will go some way towards solving that.

The Convener

Notwithstanding what you have just said, we are here to try to make the bill as good as it possibly can be. If you have suggestions for improvements, we would be pleased to hear from you now in that regard—or subsequently, if you have an elegant improvement to make to the bill, as we will amend it at stage 2.

Ross Anderson

We are very grateful for that opportunity. To be clear, however, I am not seeking in what I have just said to criticise the bill in any way. Notwithstanding what the bill can achieve under the law of third-party rights, the point about black-hole liability is that it is not just about third-party rights; there are other situations that the bill could never address without opening up wider areas of the law with which it is not concerned.

Again, I simply emphasise that the bill strikes the right balance in seeking to address the particular problem of third-party rights.

The Convener

Mr MacLeod, are you content?

John MacLeod

What was said is correct. The other types of black-hole situations are beyond the scope of the bill, and the bill would be spoiled if it sought to deal with them. I believe that Professor MacQueen stated in evidence that the Scottish Law Commission is considering the broader issues as part of another project, so you would be best advised to wait for the commission to report on that matter, and to deal with it once it has been properly considered.

The Convener

That is very helpful; thank you very much.

George Adam (Paisley) (SNP)

The Scottish Law Commission report refers to the new rules having the biggest impact in the construction industry—you have already given a couple of examples—and the oil and gas, financial services, information technology and pension sectors. Are there any other sectors or industries where the legislation could be important?

John MacLeod

I do not have specific data to hand; I could seek it from the Law Society if you wish.

This is general contract law so, in principle, it could be useful at any time where we have two parties agreeing and a third party that they want to be able to enforce. That could potentially happen in certain agricultural contexts, if we have a contractor and an estate, and a tenant farmer. The commission gave the main examples where we tend to have a complex relationship, with multiparty contracts.

George Adam

Is that why construction is such an easy example? I ask just to get it right in my own head. There are so many subcontractors and other people involved.

John MacLeod

Absolutely—and similarly with finance contracts, there are lots of parties with slightly different sets of interest; lots of different legal persons are used. We could have that in any number of contexts; what matters is to get the general principles correct.

George Adam

Could the bill benefit individuals as well? I know that I am asking you to look in a crystal ball, but there could be cases where individuals could benefit.

John MacLeod

The example that the Scottish Law Commission gave about pensions seems to be the core example. It gave another example, if I recall correctly, about a caregiver procuring services for somebody who is mentally impaired and does not have active capacity. That example is off the top of my head, but there are a couple of other examples of situations where one person needs to contract on behalf of another—those are the most obvious that come to mind.

Ross Anderson

I do not have much to add. For presentational purposes, one talks about the particular problems that arise in particular sectors. The construction industry is a good example to use, because it is relatively easy to explain the different contractual matrices. In broad terms, the bill applies to all persons natural and legal, in whatever context they are entering into contracts. It would apply equally to a construction contract as it would to a domestic arrangement in which people were buying a house that was being funded by a third party, which is another of the examples in the commission’s report.

In my experience of practising before the courts, it is very often individuals who have not had the benefit of detailed or sophisticated advice who have assumed that it is quite easy to confer a third-party right and, perhaps to their cost, have found that they have not complied with the detail of Lord Dunedin’s speech in the case that is referred to in the commission’s report. For those ordinary citizens, there is a benefit to this bill in recording what the law is in simple and modern language.

George Adam

Thank you.

The Convener

Given that it is impossible to envisage every situation to which the bill might apply, it is important that we establish the general principles. If I have understood you correctly, I am, I hope, reassured that you believe that we have managed to do that in the bill as proposed.

Ross Anderson

That is correct.

The Convener

Thank you. I have a couple more questions, including one about arbitration. Do you have any comments on section 9, which allows arbitration agreements between contracting parties to operate in respect of third-party rights?

Ross Anderson

That was a matter about which our faculty response made some comments, which were more about drafting details than they were about major points of principle. The issues that arise can be somewhat complex to explain, but I am happy to do so.

The particular drafting issue that arises is in section 9(3). Rather than give the committee a long explanation of why it arose, I will simply observe that paragraph 38 of the explanatory notes points out correctly that the provision in section 9(3) is designed to deal with a particular situation where the third party does not have a substantive right under the contract but might otherwise have a procedural right to invoke the arbitration agreement. The drafting point is very short and relates to the use of the term “third-party right” in section 9(3)(c). We referred to that in our written evidence, which is available to the committee for more detailed deliberations.

More broadly, if we stand back from the detail and look at the policy and what section 9(3) seeks to achieve, the approach is broadly consistent with the international trend in relation to moving away from privity for the purposes of arbitration. It confers the option to a third party who wishes and needs to enforce a third-party right; that party thereby becomes a party to the arbitration agreement and can enforce it. Similarly, if that party enforces the arbitration agreement or seeks to sue the party who is due to render performance, the arbitration agreement can be invoked against the third party. Again, that is consistent with the international trend. Indeed, it is consistent with the Arbitration (Scotland) Act 2010, which the Scottish Parliament passed in accordance with the general international trend.

Again, subject to the small drafting point in relation to section 9(3)(c), to which we referred in our written evidence to the committee, we are broadly in favour of the approach that has been taken to the arbitration provision.

The Convener

Thank you. Do you wish to add anything, Mr MacLeod?

John MacLeod

I have nothing to add.

The Convener

Fine. Finally, I have a question on the speed of law reform. From the evidence that we have received, it seems that some of the problems in the Scots law of third-party rights have been in existence since at least the second world war and possibly before then. On that basis, do you think that there is an argument—or would you adhere to the view—that the pace of law reform in this area has been a little too slow?

John MacLeod

We have to be careful to strike a balance between trying to go faster and ensuring that we get it right. It is true that law reform in these areas has been slow, but it is also true that although the position is suboptimal, the defects in law have not crippled the Scottish economy. I therefore think that it is better for those involved in law reform to take their time and ensure that they have thought carefully about the full implications of what they are doing, so that we do not end up having to return to the matter in 10 or 20 years’ time. That is particularly the case for areas of law that deal with big general principles, where there is value in stability as well as in modernity. We should therefore be careful about criticising those involved in law reform for being too slow, because that is liable to make them rush and we could end up doing something twice, quite slowly, instead of taking a long time but getting it right.

The Convener

Thank you. What is your view, Mr Anderson?

Ross Anderson

I broadly agree with what Mr MacLeod said. In preparation for coming to the committee, I looked at some passages in Hansard on the passage of the 1999 act in England, and it was interesting to note that one of the justifications for the legislation that the Government gave at that juncture was that it was to bring English law into line with what was perceived to be Scots law. The point about law reform more generally though, which John MacLeod touched on, is that it is important to get it right rather than reform for the sake of reform.

10:45  

The other interesting contemporary circumstance is that, in the past 10 to 20 years, there has been considerable international development—that is to say, collaborative work on international benchmark instruments—which has allowed bodies such as the Scottish Law Commission to consider particular aspects of Scottish contract law in quite a focused way and see how we measure up.

I observe that, in so far as the Parliament is considering reforming the law, it is not alone in that regard. One can look, for example, to France, where the famous wee red book, the “Code civil”, which has been in force for 200 years, had one of its most fundamental reforms in October. All that reform was in contract law. Scots law is not alone in considering such matters right now.

The faculty broadly welcomes the fact that the Parliament is now seriously considering the good work that the Scottish Law Commission has done on those focused areas. We encourage the Parliament and the committee in that consideration.

Stuart McMillan

Are you aware of any other countries that are considering the SLC’s recommendations to the Parliament and whether to adopt the measures that are being introduced in Scotland?

Ross Anderson

The UNIDROIT principles of international commercial contracts are one of the standard benchmark instruments—UNIDROIT is an international body for the unification of private law and is based in Rome. The last edition of the commentary on the third-party rights principles made interesting reference to the reforms that were proposed. At that stage, the reference was to the discussion paper that the Scottish Law Commission had produced.

We are fortunate that the quality of the work that the commission has done in recent years is such that it is internationally recognised. Whether the bill will influence developments elsewhere is difficult to say. There are always local differences of approach to the formulation of legislation. The continental approach is normally to have much shorter, concise provisions, for example. However, the development that one sees in the Scottish Law Commission’s work and the bill is a more collaborative one of developing measures in tandem with international consensus.

The Convener

Gentlemen, thank you for your evidence and for placing the bill in the context of Napoleonic law and other law in your final comments. We are grateful to you both for taking the trouble to come through to the Parliament and we wish you a safe journey home. If, on your way home or subsequently, anything occurs to you that you wish to add, please feel free to let us know. In the meantime, I express our grateful thanks for your help.

I suspend the meeting briefly to allow the witnesses to leave.

10:48 Meeting suspended.  

10:50 On resuming—  

The Convener

The next panel of witnesses to provide evidence on the Contract (Third Party Rights) (Scotland) Bill are representatives of legal firms. I welcome Kenneth Rose, a partner at CMS Cameron McKenna LLP; Karen Fountain, a partner at Brodies LLP; Jonathan Gaskell, a legal director at DLA Piper; and Karen Manning, a senior associate at Burness Paull.

My first question is about alternative approaches and putting the common law on a statutory footing. The bill team and the Scottish Law Commission have indicated that case law is unlikely to develop quickly enough to deal with the problems that have been identified with the law and that statutory rules are needed. Do you agree with that statement?

Karen Fountain (Brodies LLP)

I agree that that is unlikely. When we advise a client, we cannot recommend that they take a course of action that will only become certain if they follow it through to the Supreme Court. That is not a credible proposition. If we are trying to achieve, with confidence, a third-party right with some flexibility in it, which is where we have a problem with the current law, we tend to use a workaround. With a workaround, in the event of a dispute, there will not be case law on third-party rights; there will be case law on something else. Therefore, case law will simply not develop.

Jonathan Gaskell (DLA Piper)

Lawyers tend to be quite risk-averse creatures and we do not like to advise clients in areas of law that are not particularly certain. There is no recent case law in this particular area of common law, so there is a lot of uncertainty. Institutions and businesses do not like uncertainty and that is one of the reasons why there is no reliance—in general terms and certainly not in construction, which is my sector—on third-party rights under the common law. For that reason, the bill is a good thing: it codifies the existing law and gives certainty. Businesses and individuals who work in industry like certainty.

The Convener

Excellent. Does everyone share that view?

Kenneth Rose (CMS Cameron McKenna LLP)

The challenge for Scots law as a whole is that, with a common-law system, we are very dependent on people having an inclination to take a case to court and pursuing that case right up to the Supreme Court, as Karen Fountain touched on. Given the size of our jurisdiction, there are challenges in how quickly that process can move the law. I speak as a corporate commercial lawyer, rather than one who specialises in construction, and a lot of the relationships are governed by extraneous English law—even in Scotland, between two Scottish parties. That is nothing to do with third-party rights as such, but it means that there is even less potential for case law and common law to develop the law.

Approaching the issue through a legislative process, which would be a step change, seems to be a logical way of doing things, bearing in mind that it is almost 100 years since the previous step towards change in third-party rights.

Karen Manning (Burness Paull)

I whole-heartedly agree with everything that has been said. I am also a construction expert and I have never come across the use of the JQT principle to confer third-party rights on a person. Although my experience is specific to construction, I am pretty confident that that position is not unusual for lawyers in Scotland today. It seems to be generally accepted that JQT is not fit for purpose.

The Convener

Thank you. That is clear and conclusive, which is welcome.

Alison Harris

My questions are similar to the ones that I asked the witnesses from the Law Society and the Faculty of Advocates. You touched on common law, but I want to clarify something. One of the main criticisms of relying on common law is that it creates uncertainty about the scope of the law. Do you, as legal practitioners, agree with that criticism, and to what extent do you think that the position needs to be clarified in the legislation?

Karen Fountain

If we are talking about third-party rights specifically, the answer is yes. The case law got itself into a bit of confusion in the 1920s, and there has not been a throughput of cases looking at the issue to resolve that. Had there been, we might not be in this position, and the law in this area might have reintegrated itself into the general conceptual stream of contract law. However, that has not happened and it has got itself into a bit of a dead end. The way to take it out most quickly and certainly would be to put it on a statutory footing. That seems to be the way that people have gone in other jurisdictions.

The legislation helpfully codifies the law and takes it back to the basic principle that people should be able to enter into whichever contractual and promissory rights they want to enter into, as long as they write it down. 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. If it is important enough to draft the contract, it is important enough to be confident that that will work. There is a general practice of workaround, which is not helpful, because if you try to achieve something indirectly, rather than simply writing down that “X, Y and Z will be the case,” there will usually be additional ramifications that you do not necessarily want. One way of dealing with third-party rights in the types of contracts that I deal with is to interpose a trust for the benefit of third parties, but that is not always exactly what you want to achieve. It brings in fiduciary entitlements that you might not wish to be there, and it muddies some of the conflict positions. It is much better to take it back to the original, basic principles of party autonomy.

Alison Harris

Does everyone agree? I see that the other witnesses are nodding.

Given that the bill seeks to provide greater clarity, do you think that its provisions are clear and that they resolve some of the uncertainty associated with the current law?

Jonathan Gaskell

Yes.

Karen Manning

Yes.

Kenneth Rose

Yes.

Alison Harris

Thank you.

The Convener

That is the collective view. If there is anything that the witnesses would like to discuss, now is the opportunity, otherwise I will take it that you are all happy with that.

Kenneth Rose

You have to be careful with the expectations of any legal reform. You need to guide it through a sensible mid-course. The bill represents a step change. You are doing something quite fundamental, but that is not a reason not to make the change or to explore the reactions. When the 1999 act came in in England, people did not know quite how they would react to it—I know that the committee is to hear evidence on that. You have to take a decision and choose a sensible mid-course that is not overly complex, although that is always in the eye of the beholder. What looks relatively simple to us lawyers can appear quite complex to people who are not lawyers, but to me the bill looks like a sensible course to take. It is relatively straightforward, compared with what we have at the moment.

Stuart McMillan

The provisions in the bill set out the default position in general terms, and contracting parties are free to make express provisions to the contrary. Do you agree with that approach?

Jonathan Gaskell

I completely agree with that position. It is important that we do not undermine the essential freedom of parties to contract in such manner as they would like, provided that they are not doing it in an illegal way. An example that I raised in the Scottish Law Commission paper was the ability to raise defences, so that the counterparty that is being sued by the third party can raise any defence that it has against the other party to the contract, provided that it is relevant to the claim by the third party. The point that I made was that, as far as collateral warranties are concerned, certainly in the construction industry, that would not be sufficient. You would generally want the ability to exclude any commercial issues between the contracting parties, in so far as a third-party claim is concerned.

Such commercial issues would generally be relevant to a claim by a third party, but because market practice is to exclude them—certainly in relation to collateral warranties—you would want to do something similar on third-party rights, so you would need that basic reservation to do as you saw fit in the contract, provided that it was sensible and not illegal. I therefore agree entirely with the approach in the bill.

11:00  

Karen Fountain

I agree. In our initial submissions, we said that it is quite important that there is an ability to contract out of the right to rely provisions, as regards amendments. I often deal with very long-term contracts that might run for 10 or 12 years, and the parties’ ability to make on-going finessing changes as they go along is very important.

For some types of clause, it is just not viable for the parties to grant a third-party right where they cannot then amend the agreement if someone has relied on it. It could give rise to difficult questions—for example, “What is reliance?” If the provision is something like an exclusion of liability or an indemnity, a difficult question arises, which is, “At what point did you rely?” Would it be at the point when someone did the thing and it went wrong, or at the point when the claim arose? It is too uncertain. In those situations, you would often want to provide in the contract that any amendments would simply require the consent of one person, who perhaps represents a constituency, and that the others would have to go with that. As long as it is clear on the face of it that that is the position, people should be able to contract on that basis.

Karen Manning

I too agree that the bill provides a good balance between flexibility on the one hand and certainty on the other. Party autonomy is key, and there should be an ability to contract out of that flexibility to alter third-party rights—for example, under sections 4 to 6—if the commercial circumstances require that.

Stuart McMillan

Section 2 of the bill abolishes the irrevocability rule so that contracts granting third-party rights can be cancelled or modified. Do you support the abolition of that rule?

Kenneth Rose

Yes—I cannot speak for everyone, but I support its abolition. The approach that was taken in the 1920 Carmichael case was unfortunate. It may well have applied to the equities of that particular case, but the long-term effect was to create—contrary to what some of my colleagues have said—an inflexibility that has prevented or hindered the use of the JQT principle. Anything that makes the approach more flexible and goes back to the basic principle of two or more parties contracting with each other and voluntarily agreeing a set of obligations and rights would make our legal system more attractive and more user-friendly for individual parties.

Stuart McMillan

Sections 4 to 6 of the bill prevent the contracting parties from modifying or cancelling a third-party right. Do those sections provide the right balance between the rights of contracting parties to change their mind and the rights of third parties?

Karen Fountain

The legislation provides scope for contracting parties to contract out of those reliance provisions, provided that that is made clear to the third party, and that will ultimately give sufficient flexibility. It will likely mean the development of standard form clauses that indicate which bits of the legislation will apply and which bits will be contracted out of, which should give everyone the certainty that they are getting the mix that they want.

The Convener

I declare that I have an interest.

John MacLeod touched on aspects of agricultural law earlier. Given that you are in front of us, I ask you to say how the bill might have a bearing on agricultural law. As I said, we want to make the best law possible, and agricultural law has been the area in which this Parliament has fallen short. Karen Fountain talked about 10 to 12-year contracts, but in agricultural law many contracts go on for generations. Do you have any comments to make on that?

Karen Fountain

I speak from a position of having no expertise in agricultural law, but, as the owner of a field, some interest. [Laughter.] I would say that the bill takes the concept of contract law back to its roots in the expression of intent and agreement. That is a helpful tool, and it should be a helpful tool across any industry. It is helpful to have the ability to write down what one wants to happen, and to have it happen without having to comply with a particular technical requirement that we might not naturally assume would be required.

In any industry where there is a tendency to disaggregate relationships and subcontract—we see that happening in agriculture; there is a lot of agribusiness and a lot of subcontracting on farms between different service providers—there seems to be a bit of a natural home for multiparty relationships, so the bill could be a useful tool in that regard.

The Convener

Thank you. Does anyone else want to venture into that area of law?

Jonathan Gaskell

Sorry, convener. We all have our areas of expertise and it is difficult to step outside them.

The Convener

I understand that perfectly. Thank you. Let us move on.

Monica Lennon

Thank you. We have talked a bit about the practical problems with the current law. The witnesses heard me ask the previous panel about the proposition in the policy memorandum that

“The Bill will promote the use of Scots law”.

You all seem on board with that; there seems to be a united approach. As legal practitioners, are you confident that you and your colleagues will use the law? Can you think of a situation with a client in which you would continue to use English law or other workarounds?

Kenneth Rose

May I comment first, given that I touched on the issue earlier? There is a specific point about this particular reform, but there is also the mood music around Scots law. Legal systems are in competition with one another. The position has moved on—I think that your previous panel touched on the issue—so Scots law has to win the right to be relevant to a particular agreement or situation. That is particularly the case with contractual law. We can choose English law, Delaware law, New York law and all the rest of it; there is a lot of choice, particularly in more significant commercial relationships.

The mood music is not just important in relation to specific reform—the Legal Writings (Counterparts and Delivery) (Scotland) Act 2015 has been discussed, and there are other reforms to do with requirements of writing, electronic signatures and so on. The mood music around moving the legal system forward is very important in the context of presenting Scots law as a modern form of law that people will readily use.

I would be a brave lawyer if I sat here and said that the reason for using Scots law is that we want more work for Scottish lawyers. That is not really the point. The point is that we want contracting parties in a jurisdiction to be comfortable using the natural law of that jurisdiction. There are general advantages to doing so. If we consider the advantage of using Scots law versus English law, which is the most obvious example, we find that—I would say this—the accessibility of Scots law is much greater and the cost is much less. If we encourage—not necessarily intentionally, but de facto, by not having a modern legal system that is responsive to change—the mindset that we need to default to another legal system, whether it is English law, New York law or anything else, that is the mindset that people will have.

There is a longer-term aspect to this. This is a step change in one particular area, but other changes need to be made on a progressive basis in order to present Scots law in a modern and progressive way.

Monica Lennon

How do you encourage people to behave in that way and go in the direction that you have set out?

Kenneth Rose

We practitioners need to be helped by a legislature and a reform process for Scots law that support that sort of thing. If it looks like the legal system that we are representing is behind the times, that is more difficult.

I have a bit more perspective in some respects. Some have said this half-jokingly, but it is true that, before the 1999 act, people in England compared Scots law quite favourably with English law because we had the jus quaesitum tertio principle. However, that advantage was probably more than levelled out by what happened to English law in 1999.

It is a question of reacting to change and bringing law forward in a sensible manner and in steps to help larger commercial parties, which is probably my particular focus. I should say that everyone is affected, but the issue is more relevant at the level that I have highlighted, because for those parties the choice is easier to make and it is easier for them to say that they will use English law or that they will take their disputes to the English courts, or to some form of international arbitration or whatever. There is a need to present Scots law as a viable alternative in such situations and to ensure that it is not just locked into the non-commercial situations to which it might be more immediately relevant.

Monica Lennon

Perhaps I can open the discussion up to the rest of the panel.

Karen Fountain

I agree with Mr Rose. Having practised in England until relatively recently—I have now come back here—I can tell you that if something had a Scottish dimension it would inexorably find its way to my desk in the same way that Irish questions would inexorably find their way to my Irish colleagues. People would often come to me and say, “If this gets done under Scots law, will it work or will it be a problem?” With more multijurisdictional situations, you could say, “Yes, it’s fine. There are some differences, but it will come out in broadly the same place.” With that approach, you are able to take the decision on which law should be applied on the basis of more rational questions such as, “Where do I want to enforce?” or, “Where is the natural locus?”, instead of saying, “That would be fine, but we need to do this little bit here, and that bit’s not going to work”, which artificially skews the decision.

Karen Manning

I do not think that we in the construction industry have as much of an issue in that respect. It seems to be generally accepted that if the construction project is in Scotland, the law will be that of Scotland, even without the third-party rights legislation, and that is probably because we have very established workarounds for collateral warranties. I therefore do not think that the issue is as relevant to the construction and engineering industries.

Monica Lennon

I will pick up on that point. If the position is very established and people are very much wedded to collateral warranties in the construction sector, will it be difficult to get clients to move from that?

Karen Manning

I think that it will be a challenge. I work on quite a lot of English projects, and I know that the 1999 third-party rights legislation is not used very often. Indeed, such rights are not used as often as collateral warranties are.

Our sector has had numerous discussions about why that is, and a number of issues have emerged. There are, for example, issues south of the border with the 1999 act, and I am glad to see that the bill is different in some respects. That is positive. In general, any change is difficult, and when you have such an established approach in which the standard position or market norm is to have a suite of collateral warranties, which create third-party rights, it is very difficult to say, “We don’t need those now. We’ll just have this statute instead.” It will be a challenge, but I do not think that it will be impossible, and I whole-heartedly support the bill.

It will be key to raise awareness about the legislation, if it is passed. We need to get construction parties comfortable with using something that might look different, but which essentially creates the same protections, and to make them aware of that.

11:15  

Monica Lennon

I do not want to put words in anyone’s mouth, but is it your view that, broadly speaking, legal practitioners will make use of the legislation and that, over time, there will be a reduced reliance on workarounds?

Jonathan Gaskell

That is right. If you consider the experience of England—Professor Hugh Beale will talk about this in due course—you will note that it took quite a long time for practitioners and parties to take up the 1999 act. I do a lot of work in England, too. I am English qualified as well as Scots qualified. I find that the 1999 act is becoming much more prevalent and is being used a lot more for certain types of third parties, for example purchasers and tenants in the context of a construction project.

The issue around the use of third-party rights in England comes from their use with funders, who typically want to be able to step into a building contract or appointment if the project becomes distressed. Because third-party rights only confer rights, a contractor or consultant will also want the funder in effect to take over the payment obligations under the contract. It is not easy to do that using third-party rights. Funders are very nervous about using third-party rights at all.

I have been involved in large shopping centre projects, where there are dozens of tenants, and there might be about 10 people involved in the construction project. We end up with dozens and dozens of collateral warranties, which are an administrative nightmare for solicitors. They are a management distraction, they incur unnecessary legal costs and their use is bad for the environment.

The use of third-party rights in the context of this area of legislation is to be applauded and promoted. Speaking as a practitioner, if the bill were to be passed in Parliament, I would have no hesitation in recommending to clients that it should be used wherever it could be.

Monica Lennon

What could be done to speed things up if the bill is enacted? Will it be down to you to be strong advocates for it?

Jonathan Gaskell

I think that it will be. It has to be practitioners who take it on board and recommend its use to clients. Practitioners have to be in the driving seat. As Karen Manning mentioned, it is incumbent on us to raise the profile of the legislation, if the bill is passed, and to bring it to people’s attention and recommend its use. We have to be in the driving seat.

Monica Lennon

That is helpful.

I return to a point that we raised last week with the Scottish Law Commission, and which the convener raised earlier—about the “black hole of non-liability”, which sounds rather scary. The Scottish Law Commission indicated that the bill would make it easier for businesses to avoid that “black hole of non-liability”, which reduces protection for company groups. Do you agree with that position?

Kenneth Rose

That is a big point. I do not know whether it should be called a “black hole”, but the whole idea of recognising that people often contract on a group basis, although not all the group companies are necessarily parties to the agreement, is a big one. Something that is more efficient in allowing individual group companies rights under such agreements is a good thing commercially. It will help to simplify agreements rather than making them more complex, although there are workarounds, using agency agreements and other routes.

Speaking as a corporate practitioner, I emphasise that many of the contracts that are entered into are not just binary between supplier and recipient of supplies; they can very much involve group contracting. New companies may come into a group, they may be formed from scratch, they may be acquired or they may be disposed of. Anything that is flexible and acknowledges that other companies in the group can enforce rights in certain circumstances, as negotiated between the parties, is a good thing.

Karen Fountain

Yes, I agree. As the Faculty of Advocates said, the legislation will not necessarily resolve every problem—it will resolve only those that we are able to anticipate and legislate for—but there is a current category of obvious problems with group arrangements that it will at least enable us to work with.

Monica Lennon

While I have you all here, I have a final question. In looking at this piece of work, I think that one of the challenges is that it is difficult to quantify the extent to which all that we have spoken about is a problem and who it affects. However, given that we have here people who work in construction and in the finance sector, I would like to ask what impact the “black hole of non-liability” has on your clients.

Karen Manning

We have the very established workaround of collateral warranties, which covers the “black hole” issue. Where there are collateral warranties, there is not as much of a problem. However, the bill will certainly be welcome in instances where there may be provision for collateral warranties to be granted but they do not materialise, which is relatively common.

Monica Lennon

Thank you.

Alison Harris

The Scottish Law Commission has indicated that the bill will benefit the financial services sector—for example, in relation to pensions and insurance contracts. Do you agree with that view? Are there other areas of financial services that might also benefit?

Karen Fountain

Financial products and financial services arrangements are often quite complicated. There tend to be multiple parties in them. Even for the internal mechanisms of organisations, the third-party right is a useful additional flexibility. For customer-facing products, we often have a position in which a party who enters into a financial arrangement does so in part with a view to benefiting their successors, their family and so on. Having something that we can use over and above the trust mechanism, which is a common workaround, is helpful, so I think that the bill will benefit the sector.

Kenneth Rose

The financial services sector has a lot of different aspects to it. Many of those that I come across are not customer facing but are industry-to-industry ones. At the moment, many of the commercial relationships in the financial services industry are not governed by Scots law—even those between different Scottish entities. Therefore, anything that makes the Scottish legal system appear more flexible and more modern will mean that it is more likely to be used. What the direct benefit of that is probably goes back to the question of the forum for any disputes and access to resolution. Clearly, it is easier if parties use a local system rather than one from somewhere else. It is not a very binary change: that one suggested change will not make a massive amount of difference, but it is part of what we might call a journey and a process.

Alison Harris

Thank you.

The Convener

If everyone is happy with that, we will move on to George Adam, who has questions on the bill’s benefits for individuals.

George Adam

I asked this question of the previous panel as well. I know that most of you are in construction. We have mentioned all the sectors that the bill could benefit. How do you see it benefiting individuals?

Karen Fountain

Probably the biggest benefit is that it takes the law back to the concept that, if we want to write down that someone will benefit a third party in a particular way, we can do that without having to go through conceptual loopholes as to whether that is irrevocable or not. It should reinstate the concept of party autonomy. If we look at the situation of private individuals, we can see that private contracts are often put together without the benefit of a lawyer or with limited advice; they may be family arrangements. People can have more confidence that what they have written down will work, which has to be a good thing.

Jonathan Gaskell

Anything that sets out the law in clear terms that individuals and businesses can understand is to be applauded. As we have said, the bill strikes the right balance between protecting the rights of individuals and protecting the rights of counterparties. It is good that it is clear and easily understandable, which is the ideal position to achieve.

George Adam

I have a totally random supplementary question. Mr Rose, you have mentioned New York law twice, and it was also mentioned by the previous panel. Is there a particular reason why you mentioned it?

Kenneth Rose

I do not have the statistics, but I suspect that New York law is one of the most widely used legal systems in the world. New York law and English law are the two most recognised international commercial legal systems—they are not really international, but they are used internationally for large funding commercial contracts and arrangements. I would not overemphasise the use of New York law in the context of Scotland, but it is used. It is very much more relevant to international situations, where there might not be a natural legal system, so a system must be picked from among a number of systems. The New York system is the most obvious US system and it is probably the centre of legal activity in the US, which is why I picked it as an example. New York and English law are probably the two most obvious examples in that category. Scots law is not in that category—it is occasionally used internationally but, for a variety of reasons, it is not seen in the same way as those other jurisdictions.

The Convener

I have a question on arbitration. The previous panel had specific comments on section 9, which allows arbitration agreements between contracting parties to operate in respect of third-party rights. Do you have any specific comments on arbitration and in particular section 9?

Karen Fountain

It is a good idea. Ultimately, if you introduce a third party into a contract, you do not want to introduce a possibility for different dispute resolution mechanisms. When something goes wrong, it often goes wrong in a complicated way. Potentially, the parties to the contract, as well as the third party, will be involved in a dispute. You do not want to have different forums for dealing with that. If you have chosen arbitration, you really want to know that you can pull everything into the same arbitration, for confidentiality, cost and case management reasons.

The Convener

Is that view shared universally by the witnesses?

Karen Manning

Yes.

Jonathan Gaskell

Yes.

Kenneth Rose

Yes.

The Convener

Finally, I have a question on the speed of law reform. From the evidence that we have received, it seems that some problems in Scots law relating to third-party rights have been in existence since the second world war. On that basis, is there an argument that the pace of law reform in this area has been too slow? You have heard the question before, so what do you think?

Kenneth Rose

As with a lot of things, expectations are changed. People now expect the law to change. As someone said earlier, most lawyers are very conservative in many ways. We do not necessarily want change, which means that things are less predictable. However, expectations have changed. A common-law system based on case law will progress slowly in certain areas if there are not many cases in those areas. That is part of the reason for the slow progress on what is a very finite point of law. However, I do not think that the Scots legal system as a whole should beat itself up about its lack of reform. The right way to address the issue is for the Law Commission to look at it and to develop modern legislation along the lines that it has done. That seems to me to be the right thing to do.

Karen Fountain

I agree that the bare bones of the system are fine. Over time, friction points periodically emerge where things have either not moved fast enough or moved too fast in the wrong direction. Addressing those in a measured way is probably the best approach. It is best done in the round, with careful consideration. I agree with Kenneth Rose that choosing the right legal system is a competitive business, so it is important to keep an eye on what everybody else is doing.

That is a question that we are asked. If an international organisation is coming to Scotland and replicating its business model, it will get out all its old contracts, whether they were written under New York law, English law or French law, and ask, “Can we be confident that we can do exactly the same thing?” That is what they want to do, because they are replicating their business model. You want to look at what people can do elsewhere and make sure that you are allowing people the right tools to do those things.

The Convener

Excellent. If there is nothing further that anyone wishes to add, I thank Kenneth Rose, Karen Fountain, Jonathan Gaskell and Karen Manning for giving of their time to give evidence to the committee today. We are grateful to you for doing so. As I said previously, if anything occurs to you subsequently, please let us know, and we will be very grateful for any further views or advice that you can give us. I wish you a safe journey home on this snowy day, and thank you for coming to help us today.

11:31 Meeting suspended.  

11:33 On resuming—  

The Convener

The final witness today is Professor Hugh Beale from the University of Warwick. He reviewed the effectiveness of the equivalent legislation in England and Wales and therefore brings an interesting perspective to today’s evidence.

Professor Beale, welcome to the Scottish Parliament. Thank you very much for taking the trouble to come and talk to us. I will begin by questioning you, and after that we will move to other committee members. Will you explain the background to the 1999 act and the reasons why it was introduced in England and Wales?

Professor Hugh Beale (University of Warwick)

Thank you very much, convener. It is an honour to be invited to talk to the committee.

In England, we had no jus quaesitum tertio, which meant that someone could not acquire rights under a contract to which they were not a party. Sometimes, there were simple cases in which people did not realise that there was a problem. That goes back to the question that we just had about the benefit to individuals.

The committee might have heard of an English case called Beswick v Beswick. It was a simple case in which a man who owned a coal business wanted to retire and sell it to his nephew. The nephew could not afford to pay cash, so the agreement was that he would pay his uncle the princely sum of £6 and 10 shillings a week for the rest of the uncle’s life and, thereafter, £5 a week to his widowed aunt. However, after the uncle’s death, the nephew stopped paying and it was held that the widow had acquired no rights under the contract because she was not a party to it.

I suspect that the answer might have been different in Scots law, because it might have been arguable that the widow had some kind of right. However, that illustrates how people got into difficulties because they simply did not realise that there was a problem. In that case, the House of Lords was able to find a solution. Although the aunt had no rights, she was the administratrix of her late husband’s estate and, in her capacity as administratrix, she was able to get an order of specific performance—the English equivalent of an order of specific implement—against her nephew that ordered him to pay her £5 a week in her other capacity as the widow. It all ended happily ever after, except that they had to go to the House of Lords to achieve that. That is the sort of situation that arose.

So far, we have been talking mainly about contracts that are made between sophisticated parties with legal advice, in relation to which English law developed many workarounds to achieve third-party rights. However, that involved a lot of difficulty in many cases, and the devices were not always reliable. There was therefore a long-term move to get our law changed. Back in 1937, the Law Reform Committee recommended that the doctrine of privity of contract should be abolished, and I believe that legislation was beginning to go through Parliament when the second world war broke out, and nothing was done thereafter.

For many years, judges in particular called on Parliament to do something. At one stage, they even threatened to do something themselves if Parliament would not get on with it. However, as members will know, the matter was referred to the Law Commission, and the 1999 act was an attempt to address a long-standing complaint that English law was seriously defective—much more defective than Scots law is at the moment.

The Convener

Are you saying that the problem was identified before the second world war and that it took until 1999 to resolve it?

Professor Beale

That is correct, convener. It is embarrassing, but that is what happened.

The Convener

Thank you for those introductory comments. If no one else wants to ask Professor Beale about that, I invite Mr Adam to ask his question on the impact of the 1999 act.

George Adam

Professor Beale, in 2010, you carried out a review of the operation of the 1999 act. How did you do that? What did you go through and what were your conclusions?

Professor Beale

I am afraid that the review was very informal, because it is difficult to establish what use is being made of legislation—I think that Jill Clark made that point to the committee last week. It is difficult to put figures to anything, because that would require an enormous survey of every law firm to find out how many clients had ever asked for contracts that were to benefit third parties and so on. Although that could in theory be done, it would be extremely time consuming and costly, and it might run into problems with client confidentiality.

All that I did—at the request of my colleague Andrew Burrows, who was the law commissioner responsible for producing the report for the Law Commission and seeing the legislation through—was a 10-year review of the act, and it seemed sensible to try to find out the extent to which it was being used. I contacted people with whom I had had dealings when I was at the commission and asked for their opinions, and I got a certain amount of useful information. Nevertheless, the process was difficult.

Let me start with construction law. The committee has been told about the use of collateral warranties and the problem of the black hole of non-liability. When I looked at the standard forms of building contract—we have the Joint Contracts Tribunal standard forms of building contract, which are equivalent to the Scottish forms—I found that they are being redrafted so that there is provision for the client to demand either that the contractor give collateral warranties, which you have discussed, or that the contractor agree that third-party rights will come into existence.

That is on paper, but we do not know how often the collateral warranty approach is used and how often the third-party rights approach is used, or whether parties sometimes go for both at the same time, which would be theoretically possible. It is quite hard to establish how often the third-party rights approach is used in practice in construction, but I am told that it is very much used in other areas.

I will give the committee a couple of examples. One of the big problems has been protecting third parties from potential liability in tort. For example, if there was a contract between company A and company B, and if company B was afraid that its individual officers or its employees might be sued by company A if something went wrong and it therefore wanted to exclude the liability of those officers or employees, it was possible to do that through rather elaborate schemes that used agency or circles of indemnities. However, it is now easy and—I am told—common simply to provide in contract that one party shall have no right of action against named individuals.

Another context in which very much the same sort of thing happens is where contracts are made, in effect, on behalf of a group of companies. For example, someone might contract for services to be provided and want to protect the different groups in the companies that are providing the services through the work being subcontracted out to them. That confers a negative benefit of protection on a third party but, equally, it might be preferred to confer positive benefits. For example, indemnities might be offered to officers or employees of a company or to other members of the same group of companies, which is all much easier to do now. I am told that that is done fairly regularly, but I am afraid that I cannot give the committee chapter and verse on that, because my inquiries were simply answered by, “We do this regularly.”

George Adam

You referred to the use in some cases of both collateral warranties and third-party rights. Is that peculiar to the construction sector?

Professor Beale

I think that collateral warranties are most used in the construction sector, but I suspect that they are being used in other fields as well, such as the oil and gas sector, which the committee discussed last week. There is the problem of multiple actors in that industry, but I am afraid that I cannot say whether collateral warranties were or are used because of that. However, I am pretty sure that third-party rights are being used in that sector when a contract is subject to English law.

George Adam

I got the distinct impression earlier from Karen Manning, who spoke for the construction sector, that it works around things by using collateral warranties. At last week’s meeting, I asked whether the big corporate legal firms will just continue with their workarounds.

Professor Beale

I am sure that they will. As one of the earlier witnesses said, lawyers tend to be rather conservative and stick with the things that they know. Some clients are rather conservative, too, and like the piece of paper that they have always had. However, I have discovered that more and more standard forms are allowing third-party rights as an alternative to collateral warranties. I suspect that that would not be happening if there was no take-up, which means that some people are using third-party rights. However, we have no litigation on that and it is difficult to establish figures.

I have no idea whether collateral warranties and third-party rights are being used at the same time, but I suspect that that might be the case. The forms provide for one or the other, and I imagine that using one or the other is more usual.

George Adam

Thank you.

Monica Lennon

Good morning, Professor Beale. I am interested in what you have said so far. The Scottish Law Commission’s report indicates that there have been few cases on the 1999 act and that there has been a lot of academic criticism of the act. Will you expand on the reasons for the lack of case law and the academic criticism and on why lawyers are excluding application of the act from commercial contracts?

11:45  

Professor Beale

The criticism of the act is that it ignores the doctrine of consideration, which you in Scotland are fortunate never to have been cursed with. In English law, there are two reasons for saying that somebody who is not a party to a contract cannot sue on it. One is the argument that, if there is a contract between A and B where A promises that they will do something for C, the promise is made to B, so why should C be able to sue on it? The other reason is that, for there to be a contract in English law, there has to be some kind of exchange—in other words, B has to provide something in exchange for what A promises. Normally, it is B who provides that, not C, who is the third party.

Most of the academic criticism has been that the reforms ignore the problem of consideration. I have to say that many of us do not agree with that criticism, because there is always a contract for good consideration between A and B. If the parties intended to confer rights on C, the fact that C is not providing any consideration seems irrelevant. In any event, that would not arise under Scots law, because it has no doctrine of consideration. Be grateful for that; I would not preserve that doctrine if it were my world.

Monica Lennon

It is useful to get that clarity. In last week’s meeting, which you might have listened to or read about in our Official Report, the Scottish Law Commission indicated that use of the 1999 act has increased only slowly. Do you agree?

Professor Beale

There has not been much litigation on the act. There have been a number of cases but, as Professor MacQueen said last week, it is hard to know whether that is because everything is so clear that there is no problem or whether everybody is so scared of the act that they do not want to litigate over it. My impression is that there have been no major problems so far and that people are coming round to using the act.

There are examples from IT. I am told that it is common for an IT contract to be made between the IT provider and one company in a group, but the service is to be provided to all the other companies in the group. I have not seen any litigation arising from such a situation, which makes me hope that it is all relatively clear.

Of course, a problem arises only if something goes seriously wrong with a contract. It might just be that, by good fortune, nothing has yet gone wrong. I am not aware of any major problems being thrown up by litigation and I am not aware of any other major problems with the act.

Monica Lennon

We raised with the two previous panels the point that the policy memorandum expresses hope that there will be a shift to using Scots law. We have heard from a number of legal practitioners today. Are you confident that such a shift will happen in time or do you think that there will still be a reliance on and a preference for using English law, other law or collateral warranties?

Professor Beale

I have certainly heard that English law is sometimes being used when it would be more natural to use Scots law, simply because of the third-party rights issue, but that is only anecdotal evidence and I do not know how frequently that is happening. It seems to me that it can only help the position of Scots law if it is kept up to date. I am not a Scots lawyer, but my reading of the Scottish Law Commission’s discussion paper and report is that there are quite serious problems at the moment—particularly problems of uncertainty. It can do no harm—it can only do good—to get rid of them. The bill seems to do a very good job of that.

Monica Lennon

That is helpful. Thank you.

Alison Harris

Good morning, Professor Beale. Can any general lessons be learned from the implementation of the 1999 act and are there any ways in which the Scottish legal establishment can ensure that the uptake of the new rules happens more quickly than seems to have occurred in England and Wales?

Professor Beale

I find that hard to answer. It is a good question but it is difficult to answer, because one does not really know whether the uptake has been slow or what one might expect.

I was told immediately after the act was passed that its only effect would be that people would go through their bank of standard forms and include a clause in every one that said, “The Contracts (Rights of Third Parties) Act 1999 shall not apply.” Most standard-form contracts still contain such a clause but go on to say, “except for the following provisions,” when they want to create third-party rights.

It is interesting that people are making the position absolutely clear by excluding the operation of the act but with specific rights in favour of third parties. When, after 10 years, I found that that was beginning to happen, I was relatively relieved.

I am not sure that 10 years is a long time for uptake by practitioners, for the reasons that were given earlier. Having found a device that works, practitioners tend to stick with it even if it is inconvenient. There is no doubt that the collateral warranty in construction is inconvenient for all the reasons that other witnesses explained, such as the fact that one may have to chase around after the event to issue collateral warranties to new purchasers or tenants of the building, whereas that could all be done at once. Forgive me, but I am not sure that 10 years—or even longer now—demonstrates a slow uptake. Uptake is gradual.

You asked what the Government could do to encourage uptake. In England, the need to educate legal practitioners was perhaps greater than the need will be in Scotland, because the legal community in Scotland is much smaller and probably more cohesive. I imagine that everybody knows what is going on, whereas that is not always true in England and Wales.

Alison Harris

What is your general view of the bill? Based on your experience of the 1999 act, do you think that the bill will improve the law on third-party rights in Scotland?

Professor Beale

The bill is definitely an improvement and I support it whole-heartedly. The only slight point that I noted as I read it on the train coming up yesterday was that, in some places, it is more sophisticated than I would have made it, but English lawyers are rather crude compared with Scots lawyers. For example, some of the provisions about when the right remains revocable even though the parties did not say that it would be form a neatly graduated system. We have a simpler system that says that, once the right has been accepted, it cannot be changed unless a provision in the contract allows that.

We have adopted a cruder system, but there is nothing wrong with having a sophisticated system, provided that it is clear and understood. By and large, the bill is pretty clear. I am sure that everybody can make slight tweaks of improvement, but it is a good bill.

Alison Harris

That is good. Are there any areas in which the 1999 act provides a better solution to the problem of third-party rights than the bill does? Alternatively, are there any areas in which the bill is an improvement on the 1999 act?

Professor Beale

That is difficult to answer. Despite the differences in wording, the differences in substance are small. Just occasionally, I prefer the English wording because it is a bit clearer.

The principal example is in the opening provision, in section 1(1)(a) of the bill, which states:

“A person who is not a party to a contract acquires a third-party right under it where—

(a) the contract contains an undertaking that one or more of the contracting parties will do, or not do, something for the person’s benefit”.

I gather from the explanatory notes that that is meant to be read as saying that the contract—in most cases, the document—will indicate that something is for the benefit of the person, but I am not quite clear whether one might say that a provision does in fact benefit somebody, although they are not mentioned in the contract. It is that level of minor wording that I am talking about. Otherwise, the bill does an excellent job.

I see no major differences from the law that applies in England, although there are one or two differences. For example, in England we have prevented a third party from relying on the Unfair Contract Terms Act 1977. If party A promised the third party that it would take reasonable care and then limited its liability for having done bad work to repairing or replacing the work, that might fall within section 16(1)(b) of the 1977 act—I think that that is the section that applies to Scotland, though I am never quite sure of my numbers. In England, we simply said that such a term cannot be challenged by a third party.

It is six of one and half a dozen of the other. My initial reaction is that I prefer the English solution, but it is arguable either way and I do not care to second guess what Professor MacQueen and his colleagues have recommended. They are very good lawyers and I have no reason to doubt their judgment.

Alison Harris

Thank you. I appreciate your answers.

The Convener

Notwithstanding your deference to Professor MacQueen, which we share, since we are endeavouring to make absolutely the best law that we can, and given your review of the 1999 act and some of the shortcomings that you have acknowledged and pointed out, are there any errors that you foresee us making? We want to produce the best possible bill.

Professor Beale

No, I certainly would not say that there are any mistakes. There are one or two places where I think that the drafting could be clarified a little, but that is very much at the level of detailed drafting. I think that it would be better to feed in suggestions in writing later on, if I may.

The Convener

Would you?

Professor Beale

It is just a question of how easy it is for somebody to read the act and understand what it is saying. That is always a problem in legislation. I am sure that you are aware of the Consumer Rights Act 2015; it was supposed to make the law much more accessible to consumers, but I find it very hard to read. It is not an easy task.

The Convener

We will leave the Consumer Rights Act 2015 to one side for the moment. We would, nonetheless, be grateful if you were to correspond with us on any area where you think that we could benefit from your experience and wisdom.

Stuart McMillan

Do you agree with the general policy in the bill that the rules should normally be default in nature, so that they can be contracted out of?

Professor Beale

Yes, I do. It is important that the rules should be default rules in both directions, so that on one hand the parties should be able to reserve the right to vary or even cancel the third party’s rights, but on the other hand they should be able to create rights that cannot be cancelled. Although I do not have any concrete examples from real life, there might be situations where the third party needs to know from the outset that a right is totally irrevocable and unvariable, so that it can plan its own affairs. For example, if it is to have a right under an insurance policy taken out by another company in the group, it should not have to worry about whether it has relied on it; it should simply be able to say, “That is irrevocable; that is fine.” It is very important that there should be default rules in both directions.

12:00  

Of course, it is just possible that sometimes a contract involving third-party rights might be made in favour of a consumer. Then, of course, the unfair terms in consumer contract legislation—now part of the Consumer Rights Act 2015—would cut in. A clause that seemed to be unfair, in allowing the third party to have their rights taken away, could be challenged.

My only concern is that the clauses that allow a party to vary the third-party rights might not always be understood by someone who is not a consumer but who is rather consumer-like, that is, the very small business. That is part of a much broader problem, which you could not possibly tackle in this bill, about the need to protect very small businesses. I still believe that we need legislation to protect very small businesses from unfair terms, as the joint report of the English commission and the Scottish Law Commission recommended back in 2005. Such legislation does not exist at the moment. However, that is a much more general problem; the answer to your question is that it is absolutely right that the rules should be only default rules.

Stuart McMillan

On a point of clarification, you said that the very small business is not a consumer but is “consumer-like”. I am not a lawyer, so will you explain that?

Professor Beale

Let me give an example. We have had quite a lot of problems in England—and I believe also north of the border—with corner shops making contracts, for example to lease a photocopier so that customers can go to the shop to make photocopies. Some terms of those leases have been very harsh. However, because small businesses are not technically consumers and the contracts are technically for the purposes of the business, they are not protected by the unfair terms directive or the legislation that implements it. However, they have no better understanding of what they are doing and no greater bargaining power, as it were, than an individual consumer has. That is what I mean by “consumer-like”—they are so small that, in effect, they do not have any expertise and they are probably making relatively low-value contracts; they are not able to take legal advice each time, as the cost is disproportionate. I hope that that is clear enough.

Stuart McMillan

It is. Thank you for that.

Sections 4 to 6 prevent the contracting parties from modifying or cancelling a third-party right. Based on your experience of the operation of the legislation in England and Wales, do those sections provide the right balance between the rights of contracting parties to change their minds and the rights of third parties?

Professor Beale

Yes, I think that they achieve a very sophisticated balance. This is the area where our provision is a bit cruder—it is possibly easier to understand but it is not as sophisticated. Whether you care to be sophisticated, or clearer but cruder, is a matter of judgment. That was one of the areas that I put pencil marks against during my train journey, but by the time I got to Carlisle I realised that there was nothing wrong with the bill—it was just that my approach is slightly different. I support those sections.

Stuart McMillan

Have you had discussions with other legal professors about the Scottish bill, to gauge whether they feel that the bill is positive?

Professor Beale

I am afraid that I have to declare an interest. I spent last night having dinner and staying with Professor MacQueen, so I have been thoroughly briefed. [Laughter.] I have not heard recently from any professor other than him.

Stuart McMillan

No problem; thank you very much.

George Adam

Did Professor MacQueen give you the money for your pencil eraser? [Laughter.]

The Convener

We will assume that you have had the bill fully explained to you in that regard.

In your answer a moment ago to Stuart McMillan, you spoke about the need to protect small businesses following the 2005 joint review. Would such provision fit more elegantly into another piece of legislation, or should it be a stand-alone piece of legislation? Given that you have generously undertaken to correspond with us about the improvements that we might make, will you add a note on why that issue should be addressed, from a small business perspective? In the meantime, will you say why the matter needs to be addressed?

Professor Beale

It is simply that, whenever there are default rules that can be varied by the parties, and there is a situation where a contract appears to confer a benefit on the third party but is subject to a variation section, there is always a danger that the third party will observe the good bits and not be aware of the sections that cut down its rights. That danger exists for small businesses in particular, because they are not likely—or are less likely than larger businesses—to read and understand the contracts that they are signing. That is part of a more general problem; it is not a problem that could be addressed in the bill.

That was the only concern that I wanted to express in response to Mr McMillan’s question, because he was asking me whether I thought that it was correct that there should be default rights. My response is that I absolutely think that there should be default rights, but I hope that contracts will be drafted in such a way as to make clear to the third party when their rights are subject to variation. As I said, that is a bigger question; it is not a matter that could be sensibly dealt with in the bill. It would be possible to say, “Every section allowing variation should be prominent”, or something along those lines, but it would be rather odd to try to do that in this bill alone.

The Convener

I was not suggesting that. Nonetheless, thank you for your considered view on the issue.

We will move on to arbitration. What is your view on section 9, which allows arbitration agreements between contracting parties to operate in respect of third-party rights?

Professor Beale

I am afraid that I must apologise to the committee, because I do not have any information about the application of section 9. I am not aware that it would give rise to problems. It seems to be a perfectly sensible arrangement. However, as I am sure that you know, it was all drafted after the Scottish Law Commission had produced its report. I was a little bit involved—I was a consultant of sorts—at the report stage, but I was not involved in the discussion of arbitration and I do not have any information about its use. I am not aware of any problems, but that is as far as I can go.

The Convener

The final question is about the speed of law reform. Your answer to my initial question rather gave away the game, in that you think that reform has been a little too slow. Do you have anything further to add in that regard? How should we proceed from here?

Professor Beale

It is time to put this bill through Parliament. Doing so would give you a much more creditable record than we have in England. We started work in this area in 1937 but did not achieve anything until 1999. Arguably, it is true that Scotland has had problems since 1920 but, in reality, the problems have emerged only much more recently. That it has taken a few years to get things done is nothing to be ashamed of, but now is the time to bring Scots law up to date.

We have, to some extent, copied the Scottish approach; maybe you are now going to follow us. However, in doing that, you would be very much following a model that has been adopted in many jurisdictions, in one form or another. The bill is an excellent proposal and I support it whole-heartedly.

The Convener

Thank you very much for those supportive comments. We are hugely indebted to you for coming today to give us evidence on the topic. I wish you a safe journey home.

Professor Beale

It has been a privilege and a pleasure.

The Convener

We look forward to receiving your further reflections on what we have discussed—and, indeed, reflections on any other matters that we have not discussed and that would enhance our scrutiny of the bill.

I suspend the meeting briefly to allow Professor Beale and others to leave.

12:10 Meeting suspended.  

12:13 On resuming—  

The Convener

Agenda item 4 is our third day of consideration of oral evidence on the Contract (Third Party Rights) (Scotland) Bill. Today we are delighted to welcome James Rust, who is a partner at Morton Fraser specialising in agricultural law.

I have the first question for Mr Rust, which is about whether there is a need for a statutory approach. The bill team and the Scottish Law Commission have indicated that case law is unlikely to develop quickly enough to deal with the problems that have been identified in the law and that statutory rules are needed. Will you outline your views on the need for statutory rules for third-party rights?

James Rust (Morton Fraser)

Yes, and I will be brief. It is necessary to ensure that the law changes in an appropriate way. I am a practitioner rather than an academic lawyer in any sense, and I had to remind myself of the difficulties with the jus quaesitum tertio position, because it has become a backwater in the approach of practitioners to contract law. There are one or two specialist areas that deal with it a lot but, otherwise, it has fallen into a state of disuse because of its difficulties and uncertainty and therefore legislation is a good idea.

The Convener

Excellent. I turn now to default rules. The provisions in the bill set out the default position and contracting parties are free to make express provisions to the contrary. Will you outline to the committee to what extent you agree with that approach and why?

James Rust

I agree with the approach. It is important to give as much flexibility as possible to contracting parties to adjust and come to their own basis of understanding and so the introduction of a default position is good because it allows the necessary flexibility that parties may be seeking.

The Convener

Thank you very much.

Alison Harris (Central Scotland) (Con)

Good morning. As you will be aware, there are a range of third parties in the agriculture sector—such as spouses—who benefit financially from partnership agreements that are used to run farms but who are not party to the agreements. Will you explain in more detail what kinds of third-party rights exist in the agriculture sector? What are the most important examples?

James Rust

I will try. I have given that some thought. The agriculture sector is a business sector like any other. It is typified by contracts between A and B—it is not often that you come across a C in such contracts, in whatever context that might be. That might be possible where farmland is owned by an individual, the farm is worked by a partnership and there is a contract farming arrangement that hangs off that. Consequently, we see some situations in which there are three parties with different rights attaching to them. However, more typically, it is a matter of a relationship between A and B and therefore there is no particular issue that I have come across that would mean that the change in the law would have a significant impact on farming.

Your comment about spouses who are not engaged in the partnership but who are involved in the farming enterprise is interesting. To that extent, there may well be some impact on family law situations—there have been some particularly difficult cases involving such situations.

The Convener

Before we go any further, I should declare an interest in the matter, being a farmer myself. I apologise to the committee for not having declared an interest earlier in the proceedings. Do you have any further questions, Alison?

Alison Harris

Yes, I would like to look at the impact of the current law. One of the main criticisms of the common law on third-party rights is that its scope is uncertain and another is that the irrevocability rule makes it difficult to amend or cancel third-party rights. What is your view of those general criticisms and what is the impact of those problems, if any, on the agriculture sector?

James Rust

Those problems make the law almost unworkable, because it does not give any opportunity for flexibility if circumstances change before a third party has an entitlement to operate the right that may be granted. That largely explains why it is an area that is ripe for legislative change.

Alison Harris

Thank you.

The Convener

It is potentially a problem in a growing area of the agriculture sector. You mentioned contractors and other parties in and around agricultural law. Can you expand on that point in relation to agricultural contractors and the use of contract farming instead of tenancies?

James Rust

Yes. I do not want to stray into agricultural holdings, which is a topic in itself, but the law on agricultural holdings is in a constant state of flux and uncertainty and therefore, convener, you are correct in your presumption that other forms of farming have become more popular as an alternative to agricultural holdings per se. Consequently, there are a number of contracting arrangements that can be entered into between the farmer, landowner and a contractor or a partner for a particular season, to farm the land and get a profit off it. The agriculture sector has a number of different arrangements for working the land beyond the traditional landlord and tenant approach of agricultural holdings.

The Convener

Yes. The more one thinks about it the more areas there are, such as seasonal lets and grass-park lets.

James Rust

Yes, grass-park lets are very popular, but they have a seasonal aspect, so investment in the land is pretty minimal unless a landlord chooses to invest for whatever reason. There are several different contracts that allow the land to be worked by someone other than the landowner.

The Convener

Indeed. Is there a limit on the number of third—or perhaps you would call them fourth—parties? I am thinking of a situation in which someone who has taken a seasonal let has contracted someone to, for example, put fertiliser on that land via an arrangement that has absolutely nothing to do with the person who let the land.

10:45  

James Rust

In that example, the connection between the landowner and the fertiliser spreader is quite detached. Equally, the landowner would want to know whether fertiliser is to be spread. Commonly, that would have been a matter for discussion between the landowner and the grazier, and a basis for the commercial arrangement arising from that would have been reached, with either the grazier being on a softer rent to account for the investment that he was putting into the land or the landowner making a contribution.

The Convener

Thank you. I think that we have exhausted that line of questioning.

Monica Lennon (Central Scotland) (Lab)

Good morning. Unlike the convener, I do not have any specialist knowledge of agriculture or fertiliser. Nevertheless, I will ask my question.

In previous evidence sessions, the committee has heard that in many sectors—including construction, for example—legal workarounds seem to be used to get around the problems in the current law on third-party rights. Are there any workarounds that are used in the agriculture sector to grant rights to third parties? If so, what are they and what benefits and disadvantages do they offer?

James Rust

I have given that some thought—indeed, I have racked my brains—and I can honestly say that I have not come across any such workarounds that are particularly relevant to agriculture. For example, there is no standard collateral warranty that we pull out of the drawer every time that we deal with some form of new tenancy arrangement or contract arrangement. In the old days, when limited partnership agreements were much more popular than they are now, there would occasionally be a back letter of some sort, but it was usually just between the parties—in other words, there was not necessarily a third-party involvement.

Clearly, some of the bigger farming operations might well be involved in significant construction contracts. I am aware that construction has a number of collateral warranty approaches to subcontracting and that sort of thing, and, to that extent, farmers might become involved in such warranty arrangements. However, I have not been able to think of any such workarounds that are particular to agriculture and the practice of that.

Monica Lennon

That is helpful—it is a clear answer. In previous evidence sessions, we have heard that, in areas such as the construction sector, where collateral warranties are quite commonly used, clients and practitioners might be quite wedded to that approach, and we wondered to what extent the new law might be used.

The Scottish Law Commission has indicated that the bill will make it easier for businesses to avoid what it calls the black hole of non-liability, which currently reduces protection for company groups. Do you agree and, if so, will you explain what the impact of the change will be in relation to agriculture?

James Rust

I agree with that as a proposition, because I understand it. I do not think that it will have a particular resonance in agriculture, because we do not tend to operate with group companies. There are one or two substantial operations with two or three linked companies that might find themselves in that situation, but most farming operations are pretty straightforward. They are either individuals or they are partnerships although, occasionally, there might be a limited company and I suppose that you might have a trading company as a sub-company of the limited company, such as a farm shop or something of that order. You can see that there might be a relevance in those circumstances. However, for the vast majority of agriculture businesses, it is not an issue.

David Torrance (Kirkcaldy) (SNP)

The bill seeks to provide greater clarity. Are the provisions in the bill clear and will they resolve some of the uncertainty that is associated with the current law?

James Rust

Yes—the bill is clear and it will resolve uncertainty. It will be interesting to see how practitioners receive it, because they have got used to the state of uncertainty and have factored that into their practices. The bill will provide an opportunity for significant rethinking of their approaches. It will take a little time to get people to move away from something with which they feel familiar and a regime with which they are comfortable, albeit one that has its difficulties, to something new. One hopes, however, that the advantages will be perceived fairly quickly.

David Torrance

Can you give examples from the agriculture sector?

James Rust

Again, I gave that some thought, but I am afraid that I cannot think of anything that would have me rushing to the act and saying that I am going to change my styles here, there and everywhere. We are constantly reviewing and updating things, and we will have the bill as enacted in front of us when we examine our standard-form offer and standard-form leases to see whether we want to stick any reference to it into them. The act will apply across the board, in any event. The common law is to be done away with, so we will be in a new regime, come what may.

David Torrance

Will the bill improve the law on agriculture? If so, how?

James Rust

It will do so in the sense that agriculture is a commercial operation and the bill clarifies an area of law that affects commercial contracts, so there will be benefits to be had in particular circumstances. The answer is yes, in the right circumstances.

Stuart McMillan (Greenock and Inverclyde) (SNP)

You said that

“the bill is clear and it will resolve uncertainty.”

That being the case, could the costs of entering into contracts be cheaper in the future?

James Rust

The legislation will not have a material effect on cost because many more factors bear on cost than simply the change in the law that the bill proposes. If the legislation reduces the side documentation that is introduced in some circumstances—I come back to the construction industry as an example—through necessary rights being built into contracts, that might speed things up, which may reduce costs, because so much cost is incurred simply in the time that is taken to get things done. I hope that simplifying the process will take some cost out of the procedure.

The Convener

There has been a suggestion that the new legislation might not be taken up in other sectors. Will parties in the agricultural sector use the new rules in the bill or is there a risk that they will continue to use existing legal structures, such as they are, to set up third-party rights?

James Rust

That is a risk that I have probably touched on already. It might, therefore, not be a bad thing to have some fairly clear direction from academics and, possibly, the Law Society of Scotland on the positive applications of the bill and its benefits. As practitioners, we are always hugely busy and it is a constant challenge to open our minds to something new, such as the bill. Therefore, the more encouragement we can get that there is benefit to it and that it is not just more legislation for legislation’s sake, the better.

The Convener

Thank you very much.

Mr McMillan—over to you.

Stuart McMillan

On the latter point about the benefits of the bill, obviously much, but not all, of the focus has been on the sectors that will certainly benefit from the bill. Earlier, you touched on the point that many contracts are between two individuals, notwithstanding the odd contract with the larger agricultural providers. Will the bill benefit individuals as well as businesses? If so, can you provide more detail about those benefits?

James Rust

I think that every business has an individual behind it. To that extent, there will be benefit to individuals to be had from the bill. In the agriculture industry, there are many businesses, great and small—some of them are sole-trader businesses. One would hope that there will, through a process of evolution, be increasing utilisation of the third-party provisions in the bill, which will allow individuals to benefit. I am sorry—it is crystal-ball stuff, really.

Stuart McMillan

Sections 4 to 6 of the bill will stop contracting parties modifying or cancelling a third-party right. Do those sections strike the right balance between the rights of contracting parties to change their minds and the rights of third parties?

James Rust

Yes. Those rights have been thought through reasonably carefully and sections 4 to 6 strike the right balance. One of the difficulties with the law as it is at present is its lack of flexibility. Those sections will introduce the necessary balance.

Stuart McMillan

Will you comment on section 9, which allows arbitration agreements between contracting parties to operate in respect of third-party rights? What impact will the new rules on arbitration have on the agricultural sector?

James Rust

The introduction of an arbitration section is sensible, and I think that it is right to extend it to third parties, as it does. Section 9 also integrates quite neatly with the existing legislation; it will all work quite well. Disputes are not unknown in agriculture, and there are various ways in which those disputes can be settled. Arbitration is one, mediation is another and the Scottish Land Court is another, for disputes between landlords and tenants. Various routes can be taken in disputes in the agricultural context. The section 9 proposals will simply enhance the current arbitration arrangements.

The Convener

This is probably an unfair question. You have mentioned that agriculture is not unknown for its disputes and for not fulfilling European convention on human rights requirements. Parliament has spent much time considering ECHR compliance and fairness. Are the arbitration proposals in the bill ECHR compliant as regards fairness?

James Rust

Yes—I would say that they are. Nothing I read in the bill is unfair or unreasonable for anybody. I am well aware of the sensitivities of the situation, but I think that it is correct to allow a third-party locus within an arbitration procedure. That is only right—not to do it might well lead to greater difficulty.

11:00  

The Convener

Our final question will come from Monica Lennon.

Monica Lennon

In our other sessions we have been taking cognisance of the speed of law reform. We have heard from witnesses that some of the problems in the Scots law of third-party rights have been around since at least the second world war, so has the pace of law reform been too slow?

James Rust

That must be the case, in the sense that changes to Scots law always played second fiddle to United Kingdom legislative change when we had to work through Westminster, which was a well-known set of circumstances. A lot of very good legislative change has been spoken about in the Scottish Law Commission, but there was no parliamentary time to deal with it. Since we have had the Scottish Parliament, the dam has burst and we have got on with it. Practitioners have, in the past, just got on with the job of life and made do with the law with all its imperfections. We are catching up with this particular imperfection.

My personal view is that it would not be fair to characterise the issue in the bill as one that has been particularly noteworthy for being slow to change; rather it is part of a wider problem that we are in the process of dealing with.

Monica Lennon

The Scottish Law Commission has set you the aim to increase use of Scots law. The Contracts (Rights of Third Parties) Act 1999, which applies to England and Wales, is being relied on in Scotland. If we get this right and get an act in Scotland that is fit for purpose, will there be less use of other forms of law?

James Rust

I am absolutely sure that that will be the case. I am sure that people will, when we provide our own solution to the issue, as we will do with the bill, turn to it. My only caveat—I come back to this point—is that people are familiar with what they know. If what they know works, albeit that it is English legislation, they will need to be educated that a new act exists and persuaded about the intention that they utilise it rather than an English act.

The Convener

Does anyone have final questions?

Stuart McMillan

When the bill is enacted and its provisions are in operation, if there is the perception—and the reality—that it could save money and time for legal firms, will that be one of the main drivers for legal firms to use it, as opposed to doing what they currently do?

James Rust

Yes. If the legislation eases the process, people will obviously want to make use of it. Once that is recognised, the benefit of cost savings should ensue.

Sometimes the driver is not just cost—utility, practicality and speed of process also all have a bearing. You have to look at the situation in a slightly broader sense.

The Convener

I thank James Rust for his evidence. If, in the dark hours of the night, or subsequently, you or any of your colleagues at Morton Fraser—or any other law firms that deal in agricultural law—having reflected on the issue and your evidence, decide that you can tell us anything else that would help us to produce the best bill that we can, I would be pleased to hear from you. In the meantime, thank you for your help.

I suspend the meeting to allow for a change of witnesses.

11:04 Meeting suspended.  

11:06 On resuming—  

The Convener

It is my great pleasure to welcome our next witness to provide evidence on the Contract (Third Party Rights) (Scotland) Bill. David Wedderburn is a forensic architect representing the Royal Incorporation of Architects in Scotland.

The first question is on whether there is a need for a statutory approach. The bill team and the Scottish Law Commission have indicated that case law is unlikely to develop quickly enough to deal with the problems identified in the law, and that statutory rules are needed. What is your view on whether there is a need for statutory rules for third-party rights?

David Wedderburn (Royal Incorporation of Architects in Scotland)

We feel that there is a need for such rules because, with the common-law approach, first of all the law is uncertain. The development of the law is also uncertain because it depends on which cases come before the courts and how the courts deal with them.

I notice that you have referred to the construction industry. The problem there is that the approach to third-party rights has been through a lot of separate contracts, or collateral warranties. The kind of people who need those assurances, because they are exposed, either because they have lent money or are occupying properties constructed and designed under other contracts, and are liable for the maintenance or are buying properties for investment, need certainty because they are hazarding quite a lot of money, both capital and expenditure. At the moment, therefore, even though there is the common-law right, both Scotland and England tend to use collateral warranties.

Another driver is that a lot of third parties that want third-party rights have headquarters in London and tend to have English solutions. I was in practice until about five or 10 years ago and, even in England, notwithstanding the Contracts (Rights of Third Parties) Act 1999, institutions were still using collateral warranties. It will take a lot of persuading for them to move over.

As well as being a representative of the RIAS I am on the drafting committee of the Scottish Building Contract Committee. That committee has actually drafted third-party rights into standard-form building contracts with the assistance of Professor Hector MacQueen. They have not been used very much and are a bit cumbersome, because of the problem of irrevocability. There is a requirement to lodge the rights in books of council and session or some other kind of delivery, to make them enforceable. The new law will assist in getting rid of some of the cumbersome aspects of the present attempts to use third-party rights.

The Convener

We have heard a little about the 1999 act in England, and that there has not been a huge uptake of what that offers to contracting parties. Do you have any comments on that?

David Wedderburn

I am not an English lawyer and I do not have extensive experience of operations in England, but we have been involved in projects that included English developers. They still think in terms of using collateral warranties rather than third-party rights.

The Convener

Is that even now?

David Wedderburn

That is even now.

The Convener

It is almost 20 years since the 1999 act came into force.

David Wedderburn

Yes. Commercial law moves slowly.

The Convener

That is certainly consistent with what we have been hearing from others.

The provisions in the bill set out the default position. Contracting parties are free to make express provisions to the contrary. To what extent do you agree with that approach, and why?

David Wedderburn

We at the RIAS agree with that approach, because we want to have those third-party rights established clearly and to have non-applicability as an exception to the rule. There are benefits to architects in having all their legal obligations set up under the one document. Anything that makes it uncertain that those rights have been established will encourage other third parties to insist upon extra contractual arrangements. Anything that can establish all those third-party rights under the architect’s appointment would be to the benefit of everyone.

The Convener

Thank you. That is clear cut.

Alison Harris

Good morning. In your written evidence, you explained that third-party rights are needed in commercial developments to protect the position of funders, purchasers and tenants. Will you expand on why third-party rights are so important to commercial developments? Are there other areas of construction where third-party rights are important?

David Wedderburn

The rights in relation to funders, purchasers and tenants are important. The funder is extending a large amount of money as a loan to somebody, and the only security is the property. That security is damaged if the property is defective in any manner. Therefore, funders need recourse against those that they think may have caused the damage to the property.

Funders have special kinds of third-party rights. In addition to having recourse in relation to defects, they also usually insist on what are called step-in rights, which mean that if the contractor or the developer goes bust, for example, the funders can step in, take over the construction from the developer and finish it so that, again, they protect their investment.

Purchasers need to know what they are buying. The problem with buildings is the latent defects. It is often not patently obvious that there is a problem with a building, and a forward purchaser can purchase what they think is a perfectly good building, then find that there are loads of defects.

Normally, commercial tenants are let on a full repairing and insuring lease. Therefore, if there is something wrong with the building, they are liable, so they need to protect their position.

11:15  

Alison Harris

Are there any other areas of construction involving third-party rights that you can think of?

David Wedderburn

Those are the main ones. The other area is what I would call the Panatown type of situation. It is quite common for developers to have a group arrangement, whereby they transfer the ownership of their property to one member of the group company, while another member of the group company enters into the contracts to have them built. That is a situation of contract with no loss and somebody suffering a loss with no contract. That is an ideal situation for having third-party rights, so that that person would be protected.

The Convener

We will now explore the subject of collateral warranties.

Monica Lennon

Good morning, Mr Wedderburn. I have had a look at your written evidence, in which you explain that the uncertainty in the current law means that parties in the construction sector normally use collateral warranties, and I listened to your earlier comments—you touched on that in your first response to the convener. Is it simply that commercial lawyers are creatures of habit? Is that what is going on?

David Wedderburn

Lenders and banks in particular like to have a piece of paper with which they can show that they can pursue or raise an action. It will be an educational task, once the bill becomes an act, to persuade them that they can point to provisions in the contract that they can rely on.

Monica Lennon

It sounds like the use of collateral warranties is very well established, in the light of the uncertainty around the common law. In your evidence, however, it appears that collateral warranties are quite difficult to arrange logistically. It is perhaps not an easy option. Will you explain what some of the practical problems are?

David Wedderburn

I have been in circumstances where one of the parties to a deal that was about to be signed was on holiday in a cottage in the far north, so we had to dash off to the Highlands. We had to send two solicitors up there to stand at his door until he signed the document and then take it back so that we could do the deal the next day. Those things can happen.

Monica Lennon

Is that a typical example? Are there others?

David Wedderburn

No, that one was unusual. Usually, we manage to get everyone lined up and all together, and everyone signs, but it is like herding cats sometimes.

Monica Lennon

In your written evidence, you indicate a technical problem with collateral warranties: that sometimes the rights and benefits in the warranty are not aligned with the initial contract terms. Will you expand on that point?

David Wedderburn

Yes, that is a problem. Collateral warranties are independent legal documents, and they can be drafted in any way that parties like. The danger comes if people take them off the shelf from one development and apply them to another. The advantage with the third-party rights approach is that those rights are aligned with the contract, as they are written into it. With a separate document, however, the parties could enter into all sorts of things that do not align with the underlying contract.

Monica Lennon

Other witnesses have made similar points to yours and have said that, in the short term, collateral warranties, rather than the new rules, will probably still be used for some time. Do you agree with that view? You have touched on the need for education. How do you go about educating practitioners?

David Wedderburn

The first thing that we will be doing as an incorporation is to issue practice notes to members, alerting them to when the bill becomes an act. Of course, the problem is that developers often approach their architect when they are thinking about a development, so that is the point at which these approaches should be brought to their attention. However, if they go to a bank for funding, the bank will go to its own lawyers and will not involve anyone in the development team. That is where lawyers need to be educated, too.

Monica Lennon

How will the banking sector address that issue?

David Wedderburn

I am not sure. That is not my area of expertise.

Monica Lennon

Thank you.

The Convener

We now move to Alison Harris, who has questions on another subject.

Alison Harris

The Scottish Law Commission has indicated that the bill will make it easier for businesses to avoid what it calls the “black hole of non-liability”, which currently reduces protection for company groups. Do you agree? If so, what will be the impact of that change on the construction sector?

David Wedderburn

I touched on that in relation to the Panatown type of situation, in which one member of the group contracts to get the thing built and, as soon as it is finished, it is passed on to another part of the group that holds all the property. A number of parties, including the House of Lords, have used fancy footwork to try to bridge the gap in the present law, but the creation of third-party rights is a nicer legal approach that allows all the members of the group to benefit from the original contract.

Alison Harris

So it is cleaner.

David Wedderburn

Yes.

The Convener

Over to you, Mr McMillan.

Stuart McMillan

Sections 4 to 6 stop the contracting parties modifying or cancelling the third-party right. Do those sections strike the right balance between the rights of contracting parties to change their minds and the rights of third parties?

David Wedderburn

Yes, I think so. As I have indicated before with regard to the kind of people in the construction industry who are looking for warranties, the important thing is to make sure that the underlying contract cannot change under people’s feet; they must be able to rely on it. The provisions that make it quite clear when things can be cancelled—and, indeed, those that still allow them to rely on the underlying contract, even though it might have subsequently changed—are very useful for those in the construction industry who rely on third-party rights.

Stuart McMillan

In the discussions that we have had this morning and in previous evidence sessions, much but not all of the focus has been on the various business sectors that will benefit from the bill. Will the bill benefit individuals as well as businesses? If so, can you provide further examples of, or more detail about, those who you think will benefit?

David Wedderburn

My main experience with third parties is with organisations such as companies and business partnerships. However, they are all made up of individuals. To the extent that a lot of our members are sole traders and, therefore, individuals, they will benefit from having less paperwork and from having third-party rights established right at the beginning with their appointment. At the moment, what often happens is that, towards the end of a job and after an individual has already entered into their appointment, somebody will come along and say, “By the way, you need to sign this great sheaf of collateral warranties.” Hopefully, such a situation will be less likely to occur.

Stuart McMillan

Given that collateral warranties have been used for some time and, as Monica Lennon suggested, lawyers are creatures of habit, will those protections continue to be used, even though they are an expensive route for legal practice? When the bill is passed—in whatever shape or form—will that be a cheaper method than collateral warranties?

David Wedderburn

It will certainly be cheaper, although given the scale of some of the large commercial operations, the percentage of saving will be quite small. However, more important, there will be less hassle doing it this way because it is neater and causes less disruption to the parties involved.

Stuart McMillan

I have a final question. Earlier, you gave the example of two solicitors being sent up to the Highlands to stand at the door, but was that before the Scottish Parliament passed the Legal Writings (Counterparts and Delivery) (Scotland) Act 2015?

David Wedderburn

Yes, it was years ago.

Stuart McMillan

Thank you very much.

David Torrance

My question is on arbitration and the impact on the construction sector. In your written evidence, you explain that it is currently difficult for third parties to join in arbitrations dealing with collateral warranties and that section 9 of the bill will make it easier for multiparty arbitrations to take place. Could you expand on that point and explain the advantages of multiparty arbitrations in the construction sector?

David Wedderburn

Over the past few years, arbitration has been a varying thing in the construction industry. When I was first practising as an architect back in the 1970s, the standard form had the default of arbitration. However, that fell into disrepute because arbitration relied on articles of 1695—or sometime around then—so it was rather antiquated and could go on and on. In later years, there was a move towards court proceedings but, since the Arbitration (Scotland) Act 2010, the Scottish Building Contract Committee, which is the major drafter of Scottish building contracts, has moved back to arbitration as the default position for dispute resolution. Therefore it is very likely that any underlying contracts will have arbitration as the means of dispute resolution. That creates problems for third parties, who are not party to the underlying construction contract, being involved in any arbitration. That is why we welcome the approach in the Contract (Third Party Rights) (Scotland) Bill, which will allow third parties to join in any such proceedings.

There is a further point, which I just thought of this morning. I have not thought it fully through, but as you may be aware, construction contracts are subject to the Housing Grants, Construction and Regeneration Act 1996, which gives a right to adjudication on disputes. We are already in an interesting position regarding the interaction between the two acts, but that interaction needs to be borne in mind in respect of the bill.

David Torrance

On the speed of law reform, from the evidence that we have received, it seems that some of the problems in third-party rights in Scots law are of long standing. Do you think that law reform has been too slow?

David Wedderburn

No. It is good to see it happening and the fact that we have a Scottish Parliament has allowed many issues that have lain unresolved for a long time to be addressed. I welcome that. It is interesting that, when the third-party issue was addressed in England in 1999, the legislators were coming from a different position, as they had privity of contract and therefore no third-party rights to begin with. I am glad that we are now legislating so that we have a proper statutory basis for Scottish third-party rights.

The Convener

Excellent. If there are no more questions for Mr Wedderburn, it is my pleasant duty to thank him for taking the time to come and give us the benefit of his advice. As I have said to other witnesses, Mr Wedderburn, if matters occur to you following the meeting that you think would be of benefit to us in making good, or better, law that you have not managed to convey to us today, please do so subsequently, should you wish. In the meantime, thank you very much for your help today.

11:30 Meeting suspended.  

11:33 On resuming—  

The Convener

The final witnesses today are Craig Connal QC, who is a partner at Pinsent Masons, and David Christie, who is a senior lecturer in law at Robert Gordon University. I welcome both of you, and thank you for joining us.

My first question is on moving third-party rights from common law to a statutory footing. The bill team and the Scottish Law Commission have indicated that case law is unlikely to develop quickly enough to deal with the problems identified in the law, and that statutory rules are needed. Can you outline your own views on the need for statutory rules for third-party rights?

Craig Connal QC (Pinsent Masons)

I thank the committee for its courtesy in allowing me to rearrange my appointment to appear at last week’s meeting so that I could attend my colleague’s funeral—in Ayr, as it happens. It is very much appreciated.

I will let Mr Christie chip in in a second, but my view is that this is quite a tricky balance for the Parliament to maintain. Although the common law is, in a sense, cumbersome, it has the advantage that it develops over time as things change and different types of case emerge. Third-party rights would not have been discussed in the context of collateral warranties 20 years ago; they would have been discussed in the context of title conditions on people’s houses, which is where they were largely to be found. The common law shifts along in a slightly cumbersome way. Of course, as soon as you put legislation in place you are faced with detailed statutory provisions that may or may not all turn out to be ideal. I suspect that I am rather more ambivalent about the pros and cons of legislating, although I acknowledge that the revocability point that the Law Commission identified, which I realise is another question, is not easily resolved by case law.

David Christie (Robert Gordon University)

I set out some of the reasons for my position in my paper for the committee, but it might be helpful if I briefly summarise them. On the broad policy, the codification of the common law in this situation is probably necessary if there is a recognised need to have third-party rights. The general consensus seems to be that there is a benefit in having third-party rights. In the construction sector, where a value is put on pragmatism and flexibility, at least having the option of third-party rights would be useful.

Perhaps slightly poetically, I called the position of third-party rights in Scots law a “death spiral” because no cases are coming before the courts to help to clarify the existing law. In the absence of clarity in the existing law, nobody is using third-party rights, which means that no cases are coming before the courts to clarify it and so nothing is happening with third-party rights. If codification occurs, as has happened in England and Wales, there is the possibility—I would not necessarily put it any higher than that at the moment—of a virtuous cycle whereby use of third-party rights increases, it becomes perpetuating to the extent that the more people use it, the more it becomes accepted and the more useful it is. That is not to say that collateral warranties in the construction context, which is what I am most knowledgeable about, would go away, but there may be changes in the extent to which they are emphasised and used.

The Convener

Thank you. We will get you to explain the term “primordial soup”, which is in your submission, later in your evidence. In the meantime, I ask Monica Lennon to take up the uncertainties about the scope of the law.

Monica Lennon

One of the main criticisms of the common law is that its scope is uncertain. Do you agree with that criticism and, if so, why? Will you give us some examples of the extent to which the law needs to be clarified in legislation?

David Christie

Partly, there is a general perception of lack of clarity, which, as I said, is self-perpetuating. I think that you have heard about irrevocability as the particular issue, and the lack of clarity around exactly how third-party rights are constituted in a way that can be binding. The danger with third-party rights is that if there is uncertainty as to constitution, there is always the risk, if you are entering a contract, that some third party might crawl out of the woodwork and raise a claim against you. That makes third-party rights quite scary, because there is a lot of uncertainty about where a claim might come from. As a result, parties will simply exclude third-party rights from contracts altogether, so that there are never any questions about it. The inherent uncertainty is the real problem here. The Law Commission has plotted a route through how you could interpret the law in one way, but that probably requires more work, and the need to argue these cases before court in order to achieve that. The best way to short-circuit the problem, if we think that third-party rights are a good idea, which I think they probably are, is to codify them in legislation—essentially, we reboot the common law.

I was thinking on the train down that it is a bit like what happens when someone has a technical problem with their computer. Often, they just continue to use it and find a way to get along with the problem. That is in some ways like collateral warranties in the construction industry—it is not necessarily easy but it does the job. What we really need is for somebody to upgrade the system and get rid of the problem altogether. At least that would give a choice about how to keep going.

Monica Lennon

Is the proposed upgrade a step in the right direction?

David Christie

Yes.

Monica Lennon

Given that the bill seeks to provide greater clarity, are its provisions clear enough and do they resolve some of the uncertainty linked to the current law?

David Christie

I have reflected on the supplementary evidence given by the Faculty of Advocates, which was interesting. That picked out a number of difficulties with the bill; or, rather, not necessarily difficulties but areas where it is inelegant. Certainly, there are sections that are very wordy.

The conceptual difficulty is that with third-party rights there is a distinction between the right and where that right comes from. A contract contains rights, and the way that we work out what those rights are is by reading the contract. With third-party rights, the rights have to come from somewhere. In the bill, that is what is termed the “undertaking”.

The interpretation of the undertaking gives us the scope and the parameters of the third-party right. The bill is trying to take account of that duality, because so much of what it is doing seems to be facilitating the intention of the parties in giving the third-party right. I do not know whether I am making sense now.

Monica Lennon

I am just about with you. Does Mr Connal want to add to that?

Craig Connal

It is interesting. It probably goes back to the point that I made at the outset. Taking revocability as an example, if the law says that the right must be irrevocable to work, that is pretty clear. Whether it is a good rule or a bad rule, it is clear and everybody knows the rule. It did not cause any problem in the previous regime for third-party rights in relation to titles, because it was always in the title deeds, so it was there.

As soon as we say that we want to change the rule, we then get into some of the provisions in the bill, which are probably quite well designed to create a lot of dispute: take for example sections 4 to 6, which have been commented on by other contributors and which I know we will come to later.

As soon as we take away the simple position, we find ourselves possibly having to create quite a complicated answer in order to cope with the issue that we are addressing. I was trying to think of another issue about clarity, because I realised that this question might arise. Mr Christie will tell me that I am attacking the coherence of the law, but the one that occurred to me was that, if we want to make things very simple, we just say that third-party rights can only be created expressly; if we want them we write them down, they are in the contract and everybody can look them up and see what they are. We do not allow the rights to be implied, because as soon as we allow that, we open up a whole range of questions such as, if they are not there in express terms, under what circumstances they can be implied. There are degrees of certainty. Mr Christie pointed out to me this morning that if we remove “implied” then we create a different position to that in other areas of the law. It is quite an interesting trade-off between clarity and progress.

Monica Lennon

Sticking with the approach in the bill, Professor Hugh Beale and the Law Society have touched on the complexity of sections 4 to 6. Do you share some of those concerns?

Craig Connal

Absolutely. I make it clear to the members of this committee that I am a contentious lawyer—I deal with problems—although for the purposes of giving this evidence I have spoken to people who work in other areas, such as drafting documents, so I may be able to assist on some of those points as well. However, 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.

Monica Lennon

Does that mean that the language is too woolly?

11:45  

Craig Connal

The bill covers a lot of areas in which it would be difficult to find a simple fix, but it provides quite a complex fix. That may not matter if there are not many cases, but it creates a number of areas of complexity. I am not a parliamentary draftsperson, so I am afraid that I have not come here with a nice, neat, one-sentence solution, but there is something to be said for wondering whether the provisions in the bill are too complicated.

David Christie

On the point about implied rights—which Mr Connal and I have discussed previously—the Scottish Law Commission has considered whether rights should be allowed by implication, because that is different from the approach that is taken in some other jurisdictions. I do not have a particular view either way, but I made the point to Mr Connal that the legislation treats third-party rights partly by interpreting them essentially as if they were other provisions of a contract that just happened to give the rights to a third party. To allow implied rights therefore brings them within the broad sphere of how we interpret contractual provisions, which involves looking at the words in their surrounding circumstances—Mr Connal knows all this—and working out what the parties’ intention was.

Monica Lennon

I am not so sure—he is shaking his head.

David Christie

If you start to differentiate third-party rights from the broader sphere of contract interpretation, you may find yourself in difficulties, because you are not allowed to use the broader suite of rules to understand how the third-party rights work. If you do not have access to that broader suite of rules, it is harder to work out what the meaning of the rules and the third-party rights terms are, which increases the uncertainty.

Monica Lennon

I might pick that up again in some later questions—I will digest it first.

Craig Connal

I am sorry—the secret that we are not letting out is that Mr Christie and I used to work in the same office, so we know each other from long ago, hence some of the discussion.

Monica Lennon

We like to bring people together in this committee.

The Convener

Professor Beale implied—if my memory serves me correctly—that the English legislation is more straightforward and clear-cut, and indeed almost binary. Do you believe that the bill does not provide sufficient clarity? Do you agree with the response from the Faculty of Advocates, which you may or may not have seen—

Craig Connal

I confess that I have seen only sections of the faculty’s response. I dipped into Professor Beale’s evidence, but I regret that I did not have time to read it all.

Although I am qualified in England too, I am not sure that I can offer a definitive view as to whether the 1999 act and the bill are the same, when one compares them precisely, or whether there are material differences.

David Christie

As I am not a practitioner, I would not want to hazard a view, especially on the interpretation of specific provisions. However, I looked at the faculty’s further response and thought that it seemed to be an elegant way of dealing with the matter. From a pragmatic point of view, if the people in the Faculty of Advocates, who are the ones who will argue about the legislation, are already picking up issues in the drafting, we should probably take that into account.

A possible issue with sections 4 to 6 is that they are aimed at addressing specific problems that exist in the current common law. It is almost as if a problem has been identified and the bill presents a drafting fix to sort that problem out, whereas the Faculty of Advocates is taking a more holistic approach to all the issues.

The Convener

We should move on—to a question from me, it appears, on default rules. The policy memorandum states:

“the provisions in the Bill set out ... the default position. Contracting parties are free to make express provisions to the contrary.”

To what extent do you agree with that approach, and why? You may already have touched on that subject, but you might like to put on record some further views on the issue.

Craig Connal

The phrase “party autonomy” is usually used to describe the general principle that, as far as possible, parties should be free to put into a contract what they want to, and the other party to the contract should be free to accept or reject that, leading to a conclusion, and those provisions ought not to be restricted in any unnecessary way. That is the general principle that is widely applied, and which should apply in the bill. The answer is, therefore, that party autonomy is provided for.

David Christie

I agree with that. It is important that parties have the choice, and I think that this legislation helps give them a choice where they might not have a full range of choices just now, compared with other jurisdictions. That said, I certainly foresee situations in which collateral warranties would still be highly useful, even if this bill were to be passed. It might take out of the frame some of the more basic situations where collateral warranties are used and allow you to focus your efforts on more complex situations. However, that is a matter of choice, and this will help give flexibility in what are relatively complex contractual situations.

The Convener

Thank you very much. I call Alison Harris.

Alison Harris

Section 2 abolishes the irrevocability rule to allow contracts that grant third-party rights to be cancelled or modified. Do you support the rule’s abolition? If so, why?

Craig Connal

I think that I will defer to Mr Christie on this issue. I will say, though, that this would not have been an issue in many of the situations in which third-party rights might have been envisaged in the past. I come back to the title deed example that I cited earlier: if something is included in a title deed, it is in the deed, and the issue of the deed itself being revoked or changed just does not arise. If the construction industry, for example, wanted a more nuanced ability to shift and change, that is not provided for under current common law, and the position can be changed only through statute.

David Christie

There is a benefit in allowing the parties to agree on and construct third-party rights that suit their particular situation, and if that limits or restricts the extent to which you have to hit certain pre-set criteria, that can be only a good thing.

I am slightly conscious of the fact that most of the evidence that you will have heard will have come from lawyers involved in setting up collateral warranties and such arrangements, and we need to reflect on the extent to which the beneficiaries of third-party rights and of collateral warranties will often be those buying property and construction sets, the funders and so on. Obviously, they have an interest in certainty, and an important issue is the extent to which there is certainty with regard to the third-party right that they get.

There is therefore a balance to be struck between revocability and the ability of funders and the beneficiaries of third-party rights to rely upon those rights. That is what the bill sets out to achieve, and perhaps the wording that we have been discussing is fiddly because it is trying to strike that balance between flexibility in constitution and certainty in execution.

The Convener

I will be the first to admit that I am not a lawyer, but how might renunciation impact on the situation that you have just set out? Would it have an impact at all? I am aware that the issue was raised in the Faculty of Advocates evidence, but is it relevant or not to irrevocability? If not, please just say so.

David Christie

I think that we would all like to confess to not being lawyers, if the option was open to us.

I have no particular view on renunciation, apart from within the general framework of not being able to force someone to have a right that they do not want. However, I have not really engaged any further than that with the reasoning of the Faculty of Advocates.

Craig Connal

I must confess that I have not engaged at all with the faculty’s reasoning. One of the complications is, I think, that the bill is dealing with the granting of rights alone, as that is what the previous law dealt with, and in many of the situations that arise in practice, there might be an attempt to impose obligations. For example, one of your previous witnesses talked about documents going beyond simply saying, “You have the right to do X”. Of course, as soon as you go there, you find yourself in much more complicated territory. If all that we are talking about is simply the granting of a right, the person to whom the right is given can say, “No, thank you. I give it up.” That is reasonably straightforward.

The Convener

Thank you very much. We now move to Mr McMillan’s questions.

Stuart McMillan

Some of this has already been touched on. Sections 4 to 6 stop the contracting parties modifying or cancelling a third-party right. Do those sections provide the right balance between the rights of contracting parties to change their mind and the rights of third parties?

Craig Connal

I will not reiterate the general comments about the nature of some of these points. To make an educated guess, I suspect that, if you need provisions of this kind, a fair attempt has been made to create a balance between the right of the original contracting parties to say no and the right of the person who has received the option to insist on it in certain circumstances, which are specified.

In a sense, that rather elaborate answer to your simple question gives a clue as to why the provisions are quite complicated.

David Christie

I would not add much beyond what Mr Connal has just said and what I have said already. The issue partly concerns the conceptual difficulty of separating out the underlying instrument that creates the right and the right itself. I do not feel qualified to look at the drafting for dealing with that, but the Faculty of Advocates has had a good think about it, and it might be a matter for further reflection.

Stuart McMillan

The policy memorandum states that the bill

“will promote the use of Scots law”.

Based on your experience, do you think that that is correct?

Craig Connal

I think that there is a prospect of it. Other witnesses have spoken about what you might call the London weighting—in other words, the fact that many transactions are dealt with by people who have originally been advised by lawyers in London and so on. Therefore, there is a natural inclination to assume that nothing outside London matters.

The bill is bound to help. As other witnesses have said, it is worth remembering that the English changed their law partly because they thought that the Scots law was better than the rigid privity of contract rules that the English had, while the Scots had third-party rights, albeit with some difficulties.

I suspect that the reality is that, as with all changes, these changes may come out and people will prick up their ears. They may well have forgotten jus quaesitum tertio, which they learned when they were at university, because they have not seen it since. When there is a new act, people will ask what it does and they may well then consider whether they can use it and whether it advantages their clients. On balance, the answer is that there is a reasonable prospect of some greater use of Scots law.

David Christie

I agree, based on the literature that I have looked at and on my own experiences. I do not necessarily think that the bill represents a radical change that will cause an explosion in its use but, in itself, it closes a gap between Scots law and its main competitor, English law, and aligns Scots law more closely with broader European law. It is also useful as a way of demonstrating—along with the legislation on counterparts to which Mr McMillan referred earlier—that Scots law is moving forward and of recognising where there are relevant areas, with the ability to start sorting out those issues.

Stuart McMillan

Indeed—I was going to refer back to the Legal Writings (Counterparts and Delivery) (Scotland) Bill, which went through this committee. The minister who introduced the bill highlighted numerous times that it was about trying to modernise Scots law. As we have heard this morning regarding the Scottish Law Commission bills that have come to the Scottish Parliament, it is about modernising Scots law and making it more competitive internationally.

Craig Connal

To stick with the construction example, if we have a project in this jurisdiction, the logic of putting anything in with the law of another jurisdiction is silly. As the committee is probably aware from other evidence, the classic example is the North Sea. Contracting has been conducted largely, although not entirely, under Scottish jurisdiction, and yet the suites of contracts into which the industry has entered have been dominated largely—almost by default—by English law provisions. In fact, a lot of the disputes disappear elsewhere. There is now an opportunity at least to edge something forward in that respect.

12:00  

David Christie

The construction industry often uses standard forms of contract, and the main suites use English law, albeit that the Joint Contracts Tribunal has a version with a kilt on. If Scots law was aligned more closely, it would be easier to tweak the standard forms to apply it, and less consequential drafting would be needed. If there were other good reasons—logistics and so on—why Scottish jurisdiction might be preferred, closer alignment would make it easier to use the standard forms, and Scots law would therefore be more appealing.

Stuart McMillan

We have heard evidence today on the workarounds. When the bill passes through the parliamentary process and becomes an act, an education process will be necessary. I accept that this is a crystal-ball exercise, but how much effort do you think would need to go into such a process to encourage practitioners to consider the effects of the bill in relation to future contracts?

Craig Connal

My guess—for which I have no evidence—is that something would need to be done after the initial activity. Assuming that the bill becomes an act, the royal assent date will be announced and people will prick up their ears and think about it. However, a year later everybody will have forgotten about it unless there is some effort among the professional organisations to reiterate the new scheme.

With regard to the reality of the workarounds—the collateral warranties—I had a long chat with a colleague of mine who does little else but draft construction contracts. He told me that the drafting will still need to be done exactly as it is now: one will still need to work out who is to get the right, who is to give the right, what the terms of the right are and whether there is any additional material. However, the bill could enable people to avoid the paper chase, as my colleague puts it, as it may be possible to put everything in one contract that is provisioned to grant rights in favour of various parties, rather than having a number of collateral warranties.

In a recent contract, we had 120 collateral warranties, because each of the specialist participants in the building process had to grant warranties in favour of each of the parties—tenants, funders and so on—who had an interest. Each of those warranties requires another piece of paper. Some people like to have their own little piece of paper, as we have heard, but I suspect that, in principle, it is always a good idea to avoid a paper chase. The professional bodies can take up the mantle after the Parliament has given them the opportunity, as a bit of consistent education will be required.

David Christie

With regard to the education process, the ideas that go into third-party rights, to the extent that collateral warranties are used in construction contracts, show that the thinking is already there. The bill will not introduce a whole range of foreign terms to the industry. People understand what collateral warranties do, and that third-party rights can do some of the same things. They will also understand third-party rights if they have had experience of operating in England and Wales, as most of the large, complex construction companies that engage in the large projects that require collateral warranties will have had. There will be some familiarity with Scots law, because we have all studied jus quaesitum tertio at university. The bill is a reminder and is bringing the process up to date, rather than introducing a brand-new concept that we will all have to get our heads around.

Stuart McMillan

The SLC indicated that the bill will make it easier for businesses to avoid what it calls the “black hole of non-liability”, which currently reduces protection for company groups. Do you agree with that view? If so, can you outline your reasons?

Craig Connal

I am a bit cynical about the prospects, to be frank, speaking as a contentious lawyer. The black-hole cases tend to arise because somebody has not thought the matter through. Things have happened and, as the previous witness—Mr Wedderburn—said, it turns out that the loss is in one place, but the right is in another and the two are not matching up. Of course, if someone has not thought about the issue, it does not matter what the bill provides because they will not have written it in. If they have thought about it in advance, there is already a suite of mechanisms for dealing with it and the bill will just add another one.

There are not that many black-hole cases. The witness from the RIAS said that the courts sometimes use what he described as fancy footwork to get round them, because the courts do not like the idea of a black hole—it is abhorrent. If there is a loss caused by somebody’s failure, why should that fall into a black hole as opposed to landing on the appropriate person? Footwork can be done and I am not convinced that the bill will make much difference to those relatively rare cases in which a black hole arises.

David Christie

Similarly, there might be scope to pick off some of those if we have a third-party rights act. In its submission, the SLC used the example of a group of companies, in which it might be possible to construe the third-party right quite widely to cover companies in the group. However, the overall problem with the black holes defies a simple solution. The number of dissertations that I see on the masters course in construction law that look at the issue and try to solve it testifies to that. I was glad to see that the SLC is looking at ways to progress that, and I wait with interest to see that progress.

The Convener

That was quite long on analysis, in terms of defining the problem. Do you have any solutions, particularly from an academic perspective, given the benefit of advice that you have had from many students as well?

David Christie

No. It is not something that I have yet dared to grapple with. Conceptually, it opens up a gap between various classifications of law—between contract law, the law of delict and things like that. I am aware that there is a gap that might be interesting, but I would want to delve deep into the literature to come to any view. In that particular area, the prospect is too daunting. I have decided to go for some other areas at the moment.

The thought of an interesting point of law reminds me of a colleague of Mr Connal and former colleague of mine, who said that if you go to the doctor and are told that you have an interesting condition, that is the worst possible diagnosis that you can hear. Having an interesting problem, such as the transferred loss of black holes, is not a great thing. I look forward to other people taking forward some work on that; I will keep an eye out for that and think about it in the future.

The Convener

It is currently in the “too difficult” box, then. Thank you very much. We will now go into yet more detail about collateral warranties, if you have any information left to give us.

Monica Lennon

We like to hear about collateral warranties. Sticking with construction, the sector is diverse. There are very large companies, as we touched on earlier, some of which are headquartered in London. Can you give us some examples of how collateral warranties are used, bearing in mind that there is a range of players within the sector?

David Christie

The growth of collateral warranties was a response not to the gap in relation to third-party rights, but to a change or evolution in the law of delict in the late 1980s and early 1990s—the extent to which people who were not parties to a contract could recover for pure economic loss, which is the loss caused by defect rather than physical damage.

That is a complicated area in itself, but suffice to say for the present purposes that there are a number of reasons why we have collateral warranties as a way of giving parties control over their liability. Such warranties will be used by parties almost as a comfort that there is a route to recover losses, for which recovery might otherwise be cut off through the insolvency of other parties or for a host of other reasons.

The funders and insurers—the people who have a financial stake—are generally the driver for having those warranties because it is a way to control the finances. Craig Connal might have more to add.

Craig Connal

I have had some discussion with my colleagues, who have pointed out that, in past eras, if someone wanted a building built they went to a builder who did the building. However, in the more complex times in which we now live, in many cases, the person who you think is the builder will be little more than a manager who will organise under his umbrella a raft of highly specialised people, dealing with electrical equipment, heating and so on. Therefore, the real expertise lies not in the hands of the builder, with whom you have a contract, but with those very specialist contractors. Part of the reason for the rise of the collateral warranty is that it enables those who want to know who to blame and who to recover from to go direct to the party who is responsible for the particular defect—it is usually something very technical, not something simple like bricks and mortar. I suspect that that is why there has been a tendency towards having lots of people with legal obligations.

David Christie

In terms of the interests of the funders, step-in rights are often used in collateral warranties, which is where the funder can take on control over the contractor. That has been identified in the literature in England as a gap in the legislation, because it would mean transferring not just a benefit, but to some extent an obligation. Having said that, the discussion in England suggests that that gap can be filled by drafting the contracts appropriately, rather than by requiring a fix in the legislation, and that it would occur only in complex commercial situations where it is worth putting in the resources to ensure that the provisions are appropriately contained within the contract.

Monica Lennon

It strikes me that, in those very complex commercial examples, the collateral warranty is a bit like a comfort blanket that people will not want to let go too easily. How will the investors—those who are putting in the big money—be persuaded over time to detach from that comfort blanket?

David Christie

It is interesting that you use the metaphor of the comfort blanket, because I was about to use it myself. A possible gap is opening up in England—I would say no more than that. When Mr Connal referred to chasing after collateral warranties, my face was darkening at the memory of having to do that when I was in practice. The logistical problems of collateral warranties are well known; you will have heard of them many times, and we have all had experience of chasing after collateral warranties.

From case law in England and Scotland, issues have emerged about enforcing parties’ obligations to provide collateral warranties. There was the case of Liberty Mercian v Cuddy Civil Engineering in England and a case involving Kier Construction in Scotland in which the court had to make an order to force a party to produce the warranty. It can be difficult to procure the collateral warranties. Those decisions that have come in the past couple of years have brought the problem to light.

A number of decisions have been surprising in respect of the interpretation of collateral warranties; for example, in the Parkwood case, it was held that the Housing Grants, Construction and Regeneration Act 1996 applied to collateral warranties. Some commentators have remarked that perhaps there is some shaking of the faith in collateral warranties as—to mix metaphors—the foundation of the comfort blanket. As third-party rights become established—Professor Beale’s research has confirmed that they are becoming more recognised in England—it might be that we will have the opposite of the death spiral, which is the virtuous cycle, in which people think that collateral warranties are not as much of a security blanket as they had hoped, so they start to think about whether third-party rights can be used instead.

The Joint Contracts Tribunal has produced, as part of its standard form, a schedule that sets out detailed provisions for third-party rights, so there is support from one of the standard forms. I am conscious that I am going on a bit. The standard forms are drafted by commercial bodies, which would not go to the time and effort of pulling together those documents if there was no demand for them or if they offered no benefit.

12:15  

As I mentioned in my submission, the NEC3 suite also uses a standard form contract. It might have a schedule too—I could not find that when I was looking for it, but nevertheless there is provision in the other standard forms for third-party rights. Those bodies are looking to sell their standard forms to parties to use in their construction projects, so they must think that it is worthwhile to include third-party rights. There is a growing baseline of support in England for third-party rights, which will help parties that operate in both England and Scotland to be more comfortable with those rights as a way of protecting their interests.

Monica Lennon

Why is that shift happening in England and Wales now, some 18 years after the 1999 act came into force?

David Christie

There are three possible factors that contribute to the growing zeitgeist. Sometimes one is not quite sure how legal reforms emerge—they need to fill a gap, for a start. After 2007, the general growth in litigation and arguments may have involved people using points to promote cases that they may not have used in previous years.

Monica Lennon

What is the significance of 2007?

David Christie

The financial crash in 2007 led to a significant downturn in the construction industry, and it may be—I cannot recall the statistics just now—that certain arguments were run as a means of promoting a dispute where they might not have been run in the past. That may have put more stress on the legal system’s rules, which have now allowed certain points to be taken. The more those points are taken, the more people think, “Maybe there is something in that argument—let’s try it.”

Craig Connal

It will be a slow burn—nothing will change overnight. People are accustomed to working in the way that they have been doing. My guess is that it will take an example of a third-party right in a construction contract being successfully relied on, either in what could be described as a public dispute or in a dispute that happens behind the scenes under one of the dispute resolution procedures for the construction industry. The news will spread that contractor X successfully used remedy Y, and somebody else will think, “Oh—that sounds as if it might save us some paperwork.”

Monica Lennon

If the bill is enacted and people continue to rely on collateral warranties, should we be troubled by that? We have heard mixed reports about collateral warranties. They are a bit of a safety net and a comfort blanket as they are familiar, but I am picturing a sea of paperwork and difficult transactions. To what extent would it be a problem if people continued to turn to warranties?

Craig Connal

It would be difficult to describe that as a problem—the issue is just a little bit of unnecessary paperwork. People still have to do all the negotiation detail—it is only in the last bit of the process that there is a difference between putting down the terms in a contract, and creating a series of different contracts and then persuading all the parties to agree to give them. I am not sure that I would necessarily describe it as a problem, but if one option requires more admin than is necessary, it is better to remove it.

The Convener

Mr Connal, do you agree with your colleague Mr Christie that collateral warranties are “a sub-optimal solution”, as he colourfully describes them in his submission?

Craig Connal

They can be a suboptimal solution in some straightforward circumstances. I am conscious that we are talking about replacing a general principle of law, rather than creating an ideal structure for contract X. I suspect that a fair number of what we are calling collateral warranties, as if they were all the same, contain much more detailed provisions that will not be replicated in the new process, and I imagine that those warranties will continue. For example, Mr Christie referred to step-in rights. It may be quite difficult to structure things to create all the different obligations and rights that would then flow.

David Christie

I agree with that interpretation of my remarks. On the coexistence of third-party rights and collateral warranties, I am not aware of a particular unhappiness with the 1999 act in England, where collateral warranties and third-party rights are used. I do not think there is a suggestion that that legislation is not of some use, although it may be of only limited use. There are some indications that it may be of growing use, although that is not altogether clear, because it is difficult to get hold of detail.

The Convener

The position that we seek, notwithstanding your reservations, is that the bill will represent progress, rather than the alternative to progress.

David Christie

Yes. My opening point was that people should have options. Third-party rights are recognised in Scots law today, but not as usefully as they could be for people who are involved in construction projects. Clarification of the law is a good idea because that will provide parties in construction contracts with another option in respect of how they go about protecting their interests, and with options that are available in other jurisdictions.

The Convener

I am not sure that there is much left to say about that.

Finally, I turn to arbitration. What are your comments on section 9 of the bill, which provides for arbitration agreements between contracting parties to operate in respect of third-party rights? The Faculty of Advocates was less than flattering about the section.

Craig Connal

Mr Christie and I had a lengthy—one and a half minutes—conversation about this before we started our evidence. I suspect that my answer depends on what the point of the provision is. If the idea is, in a general sense, that all disputes that may arise from a contract should be handled in the same type of way, the logic of saying that the third party should also deploy arbitration is compelling.

Many disputes might involve construction contracts, which do not generally have arbitration as their first port of call. Such contracts use what is called adjudication as a dispute resolution mechanism. They have other dispute resolution mechanisms—in particular, a thing called expert determination, which is simply an agreement to refer a particular matter to a skilled person whose decision will be binding. There may be other dispute resolution mechanisms within a contract. If the logic that drives that provision is that third parties should use the same suite of options, I would have expected a wider provision than one that focuses just on arbitration because it happened to be a statutory scheme that recently came into force.

Arbitration was the dispute resolution mechanism of choice for construction when I was a lad, but it is now not much used in construction. It is almost always adjudication that is used, either with a contractual set of provisions or with an overlay by statute, which Mr Christie mentioned earlier.

I see the logic of everybody using the same system, but I was a little surprised to see that it is restricted to arbitration. I think that if the logic is that the third party should use the same mechanism, all the mechanisms should be available.

The Convener

If the logic of the bill is to offer more choice, it stands to reason that it would be reasonable to offer more choice. Would the bill do that with dispute resolution?

David Christie

It is interesting that Mr Connal and I were considering the same question independently. I left the topic of arbitration for my train journey down here. A colleague who is expert in arbitration had a look at the bill and did not have much on which to fault the drafting on arbitration, but I was interested in it and reflected on the difference, in this context, between arbitration and alternative—that is, non-court—dispute resolution.

There is a particular issue with construction adjudication. In England and Wales, there was a decision that the statutory scheme was held not to apply by default to third-party rights, but there would be nothing to prevent that being included by contract, if the parties agreed to it. Adjudication is intensive: it lasts 28 days, so bringing in a third party adds an extra layer of complexity. That might be a policy reason not to include adjudication in the bill. However, there might be reasons why adjudication and other alternative dispute resolution might be brought in as options.

I was not able to satisfy myself that there is a good reason not to include adjudication in the bill, but at the same time I was not able to work out exactly how we could do it. The only reason why arbitration is to some extent different is that there is a role for the state in enforcement of arbitration awards that does not necessarily exist in other forms of dispute resolution, which are purely contractual. There is also a possible issue in that the borderlines between arbitration and forms of alternative dispute resolution are not altogether clear in law; the definitions are not necessarily fixed.

There is scope to consider introducing other forms of dispute resolution. For the reasons that Mr Connal outlined, there would be sense in reflecting on that.

The Convener

Thanks. That is helpful and allows us to take the matter up with subsequent witnesses.

Stuart McMillan

Two sessions ago, Parliament updated legislation on arbitration. Notwithstanding earlier questions and comments about updating Scots law to make it more competitive, could one of the reasons why the bill’s focus is on arbitration—as opposed to a wider suite of options—be to allow the updated legislation to be the focus for dispute resolution? I do not know what the thinking is, which is why I am posing the question.

Craig Connal

I am not sure, to be honest. I suspect that arbitration is in the bill because the reform that you mentioned moved arbitration out of a collection of case-law led material and some very old statutory provisions to a single suite of all-encompassing statutory controls. Therefore, it is in everybody’s mind that we need to ensure that nothing in the bill cuts across or fails to fit with that relatively recent legislation.

My question is whether there is a broader point to the provision. Is it the intention that third parties, in exercising their rights, should do so in accordance with the suite of provisions that other parties to the contract would exercise? I confess that I have not studied the matter in sufficient detail to know the answer. It just seems to me to be a question that might be worth pondering before anything is finalised.

David Christie

There is no reason not to include arbitration in the way that it is included in the bill; the question is more whether the principle ought to be adopted more broadly, as Mr Connal said. The interest in aligning arbitration in Scotland with arbitration in other jurisdictions is useful and, from what my colleague said, seems to have been achieved in the basic drafting, notwithstanding the comments of the Faculty of Advocates, which I have not gone into in detail.

Craig Connal

Parliament, the Scottish Government and a range of other bodies are currently actively promoting arbitration in Scotland as a dispute resolution mechanism. It may be that parties had in mind that anything that could be done to assist that would be useful.

Monica Lennon

We have spoken a lot about the speed of law reform in this area and we heard that some problems with third-party rights in Scots law have been around since the second world war, at least. What are your reflections on that? Is that a fair assessment? Has reform been too slow? I invite final comments on that.

12:30  

Craig Connal

The difficulty with law reform lies in achieving agreement on what the reform should be. You will often find, to be blunt, that one party’s real problem is another party’s real advantage. There may be very conflicting views on whether there should be a change in the law. Other changes might attract a wide range of views. I suspect that one of the real challenges in any law reform is to achieve consensus.

It is probably a legitimate criticism that no one has quite cracked how to move swiftly to make change in an ideal way where there is pretty broad consensus that there should be change. Other witnesses have spoken about the situation in that respect being better now than it was, which must undoubtedly be correct. The Parliament has been working to find ways of making such things easier and swifter, which is a good thing, although I am not sure that we are quite there yet.

I was instancing to Mr Christie an example in which I found an error in a piece of Scots law involving time limits. It was clearly an error—there was no dubiety about that. I raised the matter with the Scottish Law Commission, which said, “We can’t deal with it. It’s not in our programme of activities at the moment. Sorry.” The commission then told us that we would need to take up the matter with a division in the Scottish Government, with which I then communicated. I never heard any more about it, and that was the end of it. It so happens that the issue is now being dealt with by the Law Commission in a process to deal with the law of prescription more generally. The commission has tagged the matter on at the end, because it can now do that.

I suspect that other people spot things that could be done faster. We are probably all constantly thinking about ways to achieve that.

Monica Lennon

Now that the matter is on the radar and there is a commitment to reform, what, in general terms, are the expectations within the legal profession? We have spoken about limitations and challenges. Ultimately, it is about improving the situation. Are people in the profession optimistic? Do they take a close interest in how the policy develops?

Craig Connal

I suspect that the matter is not on most people’s radar at all—it is too esoteric a topic. In the world of the legal profession now, people are becoming increasingly devoted to working in little boxes; they do personal injury cases, or construction cases or whatever. If whatever is going on is not sitting in their box, they are probably not putting their heads up.

I am perhaps an exception in that I am old enough to come from an era when most of us did everything. Some of the bar is the same and academia as a whole is the same, because there is usually someone in academia studying a particular area, but it can be difficult to raise interest in anything that is not landing on people’s desks every day of the week.

David Christie

Monica Lennon’s first question was on the speed of law reform generally.

As I mentioned earlier, collateral warranties became a thing only in the early 1990s, and legislation in England followed in 1999, with the position in Scotland following that. In England, which has been a testing ground for third-party rights, practice has not necessarily changed, which demonstrates that there was not a burning issue that needed to be resolved.

In order for law reform to be successful, it has to fill a gap. Clear identification of a gap and urgency in fixing it are probably necessary. It is interesting to compare the impact of the 1999 act with the impact of the Housing Grants, Construction and Regeneration Act 1996, which introduced adjudication, among other things. The provisions in the 1996 act are mandatory, so the legislation is of a very different character, but it took off immediately and has had a massive impact on construction law. However, I do not think that one would suggest, as a way of promoting them, that third-party rights should become mandatory. Not only was the 1996 act mandatory, but it captured a moment in the zeitgeist; people were ready for the change and there was a lot of industry consultation and publicity around it.

The reform in the bill is more technocratic. It is necessary, for the reasons that I have outlined, but people are not crying out on the streets of Aberdeen, Glasgow or Edinburgh for a particular solution. I will leave it there.

Monica Lennon

That is very helpful.

The Convener

Thank you very much, gentlemen—Mr Christie and Mr Connal—for taking the time to come along and give us your elegant thoughts on these matters. We are very much in your debt, as we are in the debt of other witnesses. As I have said to other witnesses, please let us know if any other matters occur to you on reflection—perhaps in your discussion on the train back home, or subsequently. We would be grateful for your further considerations.

12:35 Meeting continued in private until 12:49.  

The Convener

Agenda item 3 is our final evidence-taking session on the Contract (Third Party Rights) (Scotland) Bill at stage 1. It is a very real pleasure to welcome to the meeting Annabelle Ewing, Minister for Community Safety and Legal Affairs; Catriona Marshall, solicitor, Scottish Government legal directorate; and Jill Clark, bill team leader, civil law reform unit, Scottish Government. Welcome back, Jill.

We will move to questions. First, what are the general benefits of the bill? We have heard from various witnesses that it will clarify uncertainty in the current law and give parties the flexibility to amend or cancel third-party rights. Can you explain why that is important, and can you outline any other benefits that you think are relevant?

The Minister for Community Safety and Legal Affairs (Annabelle Ewing)

Thank you, convener, and good morning to you and members of the committee. I am pleased to be here to answer your questions about the bill.

I have read the reports of all the committee’s evidence-taking sessions and it is clear that there is a lack of clarity in the common law and significant concern about predictability and flexibility. If one reads all the documentation, including the Scottish Law Commission’s discussion paper of 2014, its report of 2016, and the submissions that you and the committee have received, it is quite clear that what we have in Scotland is a situation in which, although we have long-standing law on third-party rights, people are finding it increasingly difficult to invoke the benefit of Scots law as far as the third-party rights regime is concerned. Indeed, I believe that the SLC’s 2014 discussion paper starts with the Moncur case, which dates back to 1590 or thereabouts, and I suggest that, if we are having to look back to a case from 1590, we might want to have a wee think about whether there are better ways of doing this.

What has grown up in Scotland is a body of law driven by case law that has presented very serious difficulties with regard to the key issues of clarity and flexibility. In short, those difficulties are principally to do with the revocability of these rights and the understanding in Scots law since the seminal Carmichael v Carmichael’s Executrix case in 1920 that, in order to properly confer a third-party right, there has to be irrevocability. The case also made it clear that there had to be communication, notification or intimation of the right in order to establish it, but the key issue was that the right had to be irrevocable. That is a very inflexible position, particularly in modern-day commercial activity, and it does not make use of the law attractive in the slightest. Other issues that have arisen include lack of clarity with regard to the remedies that are open to the third party when enforcing their right and the defences that are open to the contracting parties when they seek to defend a third-party claim, and there is also a lack of clarity with regard to the application of prescription to third-party rights and so forth.

The result of all that taken in the round is that people have sought to find another way round this, and I think that the committee has taken significant evidence on what are termed workarounds. The two key workarounds in this area have been to make the third-party rights clause in the contract or, indeed, the whole contract subject to English law or alternatively—and sometimes cumulatively—to have recourse to collateral warranties. You have heard a lot of evidence that collateral warranties involve a big, long paper chase and many larger transactions and lead to unnecessary expense and time having to be spent on securing all the required collateral warranties. As a result, there has been a lack of confidence in Scotland in using the third-party rights regime as set forth in the common law, and this bill principally seeks to remove that obstacle to using third-party rights law as it is and has been for many centuries in Scotland.

Having read all the documentation and all the arguments that the SLC has put forward, I think that we could talk all morning about all the problems that have arisen with using the third-party rights regime under common law in Scotland, but I just wanted to give the committee a flavour of them. As I said, the principal aim of the bill is to remove that obstacle.

The Convener

Excellent. I think that we largely agree with your aims and objectives.

Throughout the meeting, we will elicit further statements from you. We look forward to amendments being lodged in due course; you might want to talk about those as we go through the questions.

I will hand over to my colleague Stuart McMillan, the deputy convener of the committee, who has some questions for you.

Stuart McMillan (Greenock and Inverclyde) (SNP)

A few moments ago, you touched on the use of Scots law. The policy memorandum states that the bill

“will promote the use of Scots law”.

Can you outline how the bill will achieve that?

Annabelle Ewing

We are seeking through the bill, if it is passed in committee and Parliament, to provide an option. People will still have the freedom to contract—that is a fundamental principle of contract law in Scotland—and, within certain overarching limits, to do what they want with their contract. However, the bill provides an option that, over time—it will not happen overnight—will be seen as helpful and will lead to a change in behaviour from how we have recently approached third-party rights workarounds, to which I referred previously. As I say, that will not happen overnight, but there will be a change as people come to see the provisions in the bill as a helpful option that is available to them.

In addition, it is important to bear it in mind—this point emerged in evidence to the committee—that, aside from the administrative work and expense involved in collateral warranties, there are, increasingly, question marks about their scope and enforceability. As such issues come to the fore, it may therefore be necessary to look at what other options might be available. I think that, over time, the bill will help to change the culture of recourse to third-party rights workarounds in Scotland, which can only benefit the reputation and accessibility of Scots law in the eyes of parties in Scotland who are seeking to contract.

Stuart McMillan

Some witnesses have suggested in their evidence that lawyers often choose English law when setting up contracts because it is considered to be clearer than Scots law, as England is a bigger jurisdiction with more cases going through the courts. It has also been suggested that it is probable that, even after the bill is passed, lawyers will still choose to use English law. Could anything be done, when and if the bill is passed by the Scottish Parliament, to promote the legislation and encourage more lawyers to use Scots law?

Annabelle Ewing

Yes—there would be a job of work to do at that stage to ensure that practitioners in Scotland were aware of the new legislation and the alternative that they would have at their disposal. That could be done in a number of ways. I imagine that the Law Society of Scotland and the Faculty of Advocates would be involved in promoting information and awareness. The Royal Incorporation of Architects in Scotland suggested in its evidence to the committee that it would seek to proceed by way of a practice note. There are law conferences just about every day, which would provide an opportunity to raise awareness of the new option for parties in Scotland that are seeking to contract in a whole range of fields, given that the bill affects not only large commercial contracts but, potentially, any individual.

We as a Government would seek to facilitate the promotion of information and the awareness-raising work that would be carried out by the relevant professional bodies. At the end of the day, as I said, it will be a matter for the parties to the contract to choose how they wish to structure their contract and what they wish to do. We are saying, “Look, there will in due course be an attractive option for you. This is what the option is; you may wish to consider it as a more cost-effective way of drafting your contract.”

Stuart McMillan

On your point regarding the relevant professional bodies, would the Scottish Government be open to working with the likes of the Confederation of British Industry Scotland, the Federation of Small Businesses Scotland and other non-legal professional bodies to promote the legislation?

10:15  

Annabelle Ewing

Absolutely. It is not the case that, once the bill is passed, all responsibility for it will suddenly be put to one side. If the bill is passed, we will all have an interest in ensuring that it is made use of. We will be happy to consider what we can do to help to facilitate the actions of other relevant bodies—including the business organisations that you rightly mentioned—in that regard.

Stuart McMillan

Thank you very much.

The Convener

Monica Lennon has a series of questions.

Monica Lennon (Central Scotland) (Lab)

You touched on the benefits of the bill to individuals in your answer to Stuart McMillan. In much of the evidence that we have taken so far, much of the focus has been on the benefits to the business sector, which is understandable. To what degree does the Scottish Government expect the bill to benefit individuals as well as businesses?

Annabelle Ewing

The scope of the bill is not limited to large corporates; it applies to everybody who seeks to enter into a contract in which the relevance of conferring a third-party right would arise. In evidence to the committee, reference has been made—including by the SLC—to holiday contracts, whereby one member of a family will contract the holiday and all the arrangements pertaining thereto. If something mega goes wrong, the other members of the family might not have any right of recourse, because they did not personally conclude the contract. That is an obvious example of a situation in which making the law accessible to everybody could be a help, particularly to individuals.

I know, too, that the SLC gave the example of an informal carer for an adult with mental incapacity. The informal carer might enter into a contract for the benefit of the incapacitated adult, but if there is a problem, it will not be the carer who has suffered the loss. There is a need to ensure that it is possible to properly confer a third-party right that can be invoked and enforced. I have cited two examples of cases in which the applicability of the new regime to individuals is evident and would be beneficial.

Monica Lennon

Thank you for that helpful answer.

Some concerns have been raised about the impact of the bill on smaller businesses. For example, Professor Beale suggested that small businesses might not always realise that the rights of third parties are subject to cancellation or variation, particularly if that is tucked away in the small print. Is that a matter that the Scottish Government has considered? If so, do you have any plans to ensure that smaller businesses are properly protected?

Annabelle Ewing

Regardless of the size of someone’s business, if they were entering into a contract, they would want to ensure that they knew what the contract entailed. Normally, the advice would be that the person should seek legal advice on what it was that they were contracting to do, although that would not be the only route. At this stage, I should perhaps declare that I am a member of the Law Society of Scotland and that I hold a practising certificate, but as I am not practising, that advice does not benefit me. It is always important that an individual or a small or large business knows exactly what they are signing up to. There is no short cut to that. If someone felt confident that they could make that judgment without getting legal advice, that would be up to them, but legal advice in that regard would always be helpful.

An issue that was raised in a submission from a subcontractor—I do not know the size of the subcontractor concerned—was that a smaller subcontractor at the end of a very long chain might not feel that they had an equal say. However, I suggest that that issue does not fall within the scope of the bill; it relates to the relative contracting power of each contracting party. The bill does not impose obligations on third parties; it simply confers rights on them. A third party is not bound to accept those rights. In that regard, the bill does not act to the detriment of a smaller subcontractor or a smaller business. That is an important clarification to make.

Monica Lennon

So you think that there are benefits in providing clarity on what the remedies will be.

Annabelle Ewing

Yes. It is all very well having a right, but if it could not be enforced and we could not seek a remedy under the law if we were prevented from exercising the right, it would not be regarded as particularly valuable. It is therefore important that, as I alluded to earlier in my response to the convener, the bill seeks to clarify other issues, including the very important issue of remedies, which the member raised. It is important to make it clear that the remedies include the right to damages, which is an issue that has been unclear over the many decades and centuries in which we have relied on the common law third-party rights regime.

Monica Lennon

We have heard a lot in our evidence sessions about the use of third-party rights legislation in England. We have heard that lawyers in England and Wales have been slow to use the equivalent English legislation and that, as you touched on, they often use workarounds such as collateral warranties instead of third-party rights. You said in an earlier answer that, if the bill is enacted, the use of the legislation will take time. However, is there a risk that we will have the same problems as have occurred in England?

Annabelle Ewing

It is important to recall that, prior to the implementation of the Contracts (Rights of Third Parties) Act 1999 in England and Wales, there had been no possibility there of conferring a third-party right. Under English common law, the rule that applied was privity of contract, which means that a contract is absolutely between the parties to the contract and has no effect beyond that.

The 1999 act introduced for the first time in England and Wales the concept of the third-party right, so it did not simply codify a right that already existed in common law. That is perhaps why there has been a reluctance to try something new and why parties might prefer to continue to do what they know, which is to go down the collateral warranty route.

From reading the evidence about the situation in England and Wales, I understand that things may be starting to change there. As I said, given that key question marks are arising over collateral warranties, particularly with respect to their enforceability, we might see increasing recourse in England and Wales to the 1999 act.

The position in Scotland is slightly different in that, as I said, we have had a common-law regime of third-party rights for centuries but have had problems, for the reasons that have been explained, with parties having recourse to our regime. We have had third-party rights as part of our legal system for hundreds of years. By codifying our law on third-party rights, we are not introducing something new per se but simply hoping to make the law more accessible to people. We therefore start from a slightly different place from that of England and Wales.

We will have to wait and see whether the outcome in Scotland on recourse to third-party rights legislation differs from that in England. However, we are optimistic that, by removing the obstacle to people having recourse to our third-party rights regime and with the information and awareness to which Stuart McMillan referred, we will see increasing recourse to our legislation over time. Further to the work that the committee’s predecessor did on what became the Legal Writings (Counterparts and Delivery) (Scotland) Act 2015, officials conducted an anecdotal survey that suggested that that act was starting to change the previous requirements for extensive activity to get a document executed by all parties. We hope that, over time, we will also see changes from increased recourse to our third-party rights legislation.

Monica Lennon

We can tell from your evidence that you believe that the bill could provide a helpful option for people.

What could the Scottish Government do to increase the pace of change? You mentioned law conferences, and there is a job of work for the legal professions, but has the Scottish Government considered anything in particular?

Annabelle Ewing

We are happy to work collaboratively with the various professions that are most obviously involved, together with business—a point that Stuart McMillan raised—to ensure that parties and practitioners in Scotland know that a more accessible option will be available to them if the bill is passed. We are happy to consider any ideas on that.

Monica Lennon

Is the Scottish Government content for flexible approaches to remain? We took evidence from witnesses from the construction sector, who were positive but realistic about the bill. They said that the use of collateral warranties will probably continue and that, for lots of clients and investors, that would be the first point of call. Are you relaxed about that?

Annabelle Ewing

We accept that, as I said, freedom of contract is an overarching principle of contract law in Scotland. It is therefore entirely up to the parties to choose how to construct their contract in whatever field. It is not the Government’s role to impose a diktat on how they do that; the Government’s role is to facilitate options for them to ensure that, particularly in the commercial field, Scots law is keeping pace with other jurisdictions so that people who operate here in Scotland—not just in the commercial field, although that is what the member referred to—have that option. That is how we intend to proceed.

There will be no requirement for parties to invoke the bill; rather, we hope that, over time, they will see the advantages of invoking it. It is fair to say that the more familiarity practitioners have with the legislation, the more likely it is that they will be open to at least suggesting that their clients may wish to consider it. I think that we have grounds for reasonable optimism that the legislation will, over time, be seen as a help in Scots law, not a hindrance.

David Torrance (Kirkcaldy) (SNP)

Good morning, minister. Sections 4 to 6 of the bill include rules that prevent contracting parties from modifying or cancelling a third-party right. How will those provisions work in practice?

Annabelle Ewing

Different views have been expressed about sections 4 to 6. The general view is that they are balanced and that the objective that the insertion of the provisions is trying to secure is reasonable. The basic problem that arose with recourse to Scots common law in the area of third-party rights was irrevocability. It is important to say that, although parties will still be free to contract however they wish, the bill will be the default setting and will sit within the framework of the general law on obligations and contracts.

It was recognised that it would be helpful to strike a balance between giving the parties to the contract the right to modify or cancel the contract without, in effect, the consent of the third party on whom the right has been conferred, and limiting that when it would be manifestly unfair. One of the examples that are given in the sections is where the third party has relied on the right and that has been known to the contracting parties or where the contracting parties should have reasonably been able to foresee that, in the circumstances, the third party would rely on the right. It is felt that, in setting up the default structure, the bill should attempt to deal with such manifest unfairness, and that is what sections 4 to 6 seek to achieve.

10:30  

Certain, but not all, of those who have given evidence have suggested that they might wish to see different terminology, but there seems to be no consensus among them about what that different terminology should be. In some people’s view, sections 4 to 6 are unnecessarily complex. However, as we are setting out and codifying the default position in legislation, we feel that the bill has to deal with a multiplicity of facts and possible circumstances—it is not just a simple case of saying, “You have to pay me a sum of money”—that are outwith our ken when drafting. We must endeavour to anticipate those situations, which is why we have been happy to reflect the SLC’s carefully thought-through approach. That is why we have set out the provisions in the way that we have, and we are comfortable with that.

David Torrance

We heard from Professor Hugh Beale that, although the equivalent English provisions are cruder and less sophisticated than the Scottish ones, they are possibly easier to understand. A number of other witnesses have highlighted concerns about the clarity of sections 4 to 6. Are the provisions sufficiently clear for courts to follow?

Annabelle Ewing

Yes—they are clear. To go back to first principles, the bill is codifying hundreds of years of Scots law; we have had a tradition of third-party rights. We must not pretend that we are starting from scratch; we must recognise that we are codifying what has been a centuries-old element of our legal system and approach it in that way.

To make a direct comparison with the legislation in England and Wales—on any issue—is not to make the right comparison. In this case, we would be comparing an act that introduced third-party rights into a legal system for the first time with a bill that is patently not doing that. We are starting from a different place and we must reflect that in the drafting of our provisions.

I am not sure that the Scottish Government, in seeking to ensure the integrity of Scots law, would want to have, as Professor Beale said, a “cruder” version of the legislation as a first choice. Rather, we should draft the provisions in a way that we hope will achieve our aim, which is to slightly balance the fairness issue in relation to third parties. I hope that that answer is helpful to the member.

The Convener

That was a good answer—thank you.

Alison Harris (Central Scotland) (Con)

The Faculty of Advocates argued in its written evidence that the drafting of section 9 of the bill could be improved. What is your view on the faculty’s points and its suggestions for redrafting that section?

Annabelle Ewing

I am aware that the Faculty of Advocates has concerns about the drafting, albeit that they are not about what section 9 seeks to do, which is to allow third-party rights to be arbitrated. We feel comfortable that the drafting reflects the objective that is sought.

We are not sure whether there might be some misunderstanding, given the argumentation that the faculty put forward. However, if there is clear evidence that there is a better way to achieve the obvious objectives of section 9, we are happy to look at that. We feel that we have the drafting right on that issue.

The Convener

It would be fair to say that we have had a lot of evidence to suggest that the provision could be made clearer or more elegant. Given your previous response that you are seeking elegance, will you consider lodging an amendment or do you consider that the case has not yet been made?

Annabelle Ewing

I am not convinced that the case has been made. I will bring in Jill Clark, because we feel that there has been a misunderstanding on the part of those who have a problem with the drafting—they might not have understood the way in which section 9 sits in the bill and its interrelationship with other sections, including the key definition section.

The Convener

We would be grateful to hear from Jill Clark.

Jill Clark (Scottish Government)

What the minister said is exactly right. We would still like some time to work with the Scottish Law Commission and in particular with David Bartos, who helped the commission a great deal with its chapter on arbitration, to consider whether there is a real issue. We are not convinced of that but, as the minister said, if there is an issue, we will be happy to consider an amendment. However, we are not quite there yet.

The Convener

Forgive my lack of hearing, but did you say that you are in discussion with David Bartos and others?

Jill Clark

Absolutely—yes.

The Convener

Thank you. That is helpful.

We will move on to section 12(2), which protects from abolition existing third-party rights that were acquired before the legislation comes into force. Shepherd and Wedderburn argued in written evidence that the reference to “acquired” in section 12(2) means that existing conditional third-party rights might not be protected from abolition, as they will not be acquired until the condition is fulfilled, which might not happen until the legislation has come into force. What is the Scottish Government’s view on that argument?

Annabelle Ewing

Shepherd and Wedderburn raised a very good point. It is certainly clear that the intention is to ensure that contingent or conditional jus quaesitum tertio, or third-party rights, that are currently in existence can be enforced at the time of crystallisation of the right and that it is absolutely not the intention of the bill to do anything that would hinder that. Therefore, it is clear that we need to reflect further on our drafting on that point, because the use of the word “acquired”, although it is clear in one regard, could perhaps benefit from further clarity to ensure that there is absolutely no dubiety about the fact that contingent third-party rights that are currently in existence are absolutely not affected by the legislation. We will actively look at that.

The Convener

That would be welcome from our point of view. We would not wish to see a right that somebody had taken away from them—we want those rights to be maintained.

We will move on to adjudication. Some witnesses said that it might be worth investigating whether the bill’s rules on arbitration could be applied to the adjudication that is used in the construction sector, whereas others have suggested that that would overcomplicate and slow down the adjudication process. What is the Scottish Government’s view on the concerns raised by the construction industry in relation to the arbitration section?

Annabelle Ewing

I understand that, further to the evidence that was provided, officials are currently looking at the housing grants adjudication process, specifically as regards construction, in the Housing Grants, Construction and Regeneration Act 1996. We will reflect on the specific nature of that.

On adjudication in general, Hew Dundas made the point that adding adjudication is unnecessary and could be confusing. However, as you have alluded to, others felt that the suggestion is worth looking at. In that regard, it is important to bear in mind that, as far as I understand it, adjudication is a temporary process that leads to agreement, the courts or arbitration. That was probably the starting point, or one of the points, in the consideration of the issue.

It is important to recall why it is necessary to have a specific reference to arbitration in the bill. The Arbitration (Scotland) Act 2010 expressly limits the possibility of invoking that act to those who are parties to an arbitration agreement. Therefore, in order to displace, if you like, that provision in the 2010 act as far as third-party rights are concerned, in the circumstances set forth, we had to make an express reference to that act.

We are not convinced that the procedure would be the same for other dispute resolution mechanisms, which is why there is no reference to other forms of dispute resolution in the bill. Nevertheless, we are reflecting on that point to ensure that the legislation is drafted in the best way possible so as not to inadvertently exclude those proceedings that could be included.

The Convener

Excellent. That is what we wanted to hear on that subject. It is still work in progress.

We move to the human rights element of the bill.

Alison Harris

The policy memorandum explains that the bill complies with article 6 of the European convention on human rights, on the right to a fair trial, as it gives third parties the choice of using arbitration. Can you expand on why the bill complies with the convention?

Annabelle Ewing

The Presiding Officer has ruled that the bill is within scope and I would not want to second guess the Presiding Officer. I think that the point that is being raised is the issue of whether someone can be forced to give up their recourse to the courts.

Going back to the first principles of conferring a third-party right, the arbitration provisions make it clear that, in conferring a right, the bill cannot impose a requirement for a party to proceed with arbitration; it can simply facilitate that. It will be up to the party to choose to proceed with arbitration or not—to choose whether to waive their right to go the courts. Because there is no compulsion, there is no breach of the article 6 right.

The Convener

That is very welcome. I want you to be absolutely clear about that, because where the Parliament has tripped up over the past number of years is—as you well know—the removal of the element of choice. That is where we have fallen foul. As long as we are not removing choice—

Annabelle Ewing

We are simply stating that there is an opportunity to use arbitration. Going back to first principles, the conferring of a third-party right is simply that—you cannot impose an obligation on the third party in your contract. It is up to the third party to accept the right or not; the third party does not need to accept the right. However, in terms of the first element of the arbitration provision, it could be part of the package conferring the right that the matter will, in the event of dispute, be subject to arbitration, and, in accepting the right, the third party is accepting the package. That is the key issue.

The Convener

Okay. Thank you very much.

Stuart McMillan

When you spoke about third-party rights and the length of time for which they have been in operation in Scotland, you said that they go back hundreds of years. I am not going to argue with you on that particular point. However, some of the evidence that we have received has highlighted that there has been an issue with third-party rights in Scotland since the second world war. Is there an argument that the pace of law reform in the area has been too slow?

Annabelle Ewing

In an ideal world, one would like to see a lot of activity on a lot of fronts. However, we need to be realistic and take into account the complexity of this area of the law in particular. We want to get it right and have discussion, which is what the SLC has done with regard to this complex area of law. It has proceeded with extensive consultation and has carefully considered the responses that have been received. It has then proceeded with a draft and has had further discussions on particular issues. Now we are at the point of the stage 1 evidence session with the minister.

We would all like to see things happen more quickly in life, but, realistically—and particularly in complex areas of civil law—there is a process to be followed, and the point of that process is to ensure that we get the best piece of legislation that our collective endeavours can possibly arrive at. The prize is therefore worth a wee bit more delay.

I understand that Scotland is not unique in that regard. I think that there was a reference in one of the evidence sessions to the English and Welsh legislation of 1999 and to the first mooting of doing something there being before the second world war. Things tend not to move as quickly as maybe the general public would like. In the interests of getting it right, it is important to proceed without undue haste but, of course, we can always strive to do things better.

Stuart McMillan

Thank you. An issue that arose in some of the evidence sessions was the black hole of non-liability. We understand that the SLC is considering the issue separately, but its activity seems to have focused on individual areas of law. In terms of the process, is there an argument that law reform could be speeded up if further law reform bills were to incorporate more than just one specific area of the law?

Annabelle Ewing

That is an interesting question. I guess that that is a possible approach. We have seen both at Westminster, when it still legislated exclusively in the area of Scots civil law, and in some Scottish Parliament bills that once we have an omni-bill, things can get a bit rushed and difficult. Instead of there being a clear, straightforward focus on the matter in hand, bits are added, there are unintended consequences, or something needs to be added at the last minute to deal with something else that we included earlier on—it can become a bit of a hotchpotch. We need to balance proceeding in an orderly fashion with respecting the interests of the public by ensuring that we maintain our legal system to be effective and accessible for the benefit of all our citizens.

It is an interesting question and one that I can perhaps pursue further in my next meeting with Lord Pentland, but we should bear in mind that, if a bill has a wide reach and brings within its scope a series of issues that are not necessarily interlocked, issues can arise with regard to how it will end up further to its parliamentary handling. There is no ideal solution, but we are certainly encouraged to note that the SLC is proceeding with its next programme of reform, which I think it is about to announce.

Jill Clark

It will launch that tomorrow. The bill and the Legal Writings (Counterparts and Delivery) (Scotland) Bill are good examples of things from a big contract framework that the SLC is looking at. If we waited until it had concluded all of that, we would be waiting even longer for law reform to happen. The fact that it is breaking it down into these bite-sized chunks at least means that something is happening and improvements are being made. Otherwise, we would just wait longer, I think. Its 10th programme of law reform launches tomorrow.

Stuart McMillan

I was on the committee that considered the Legal Writings (Counterparts and Delivery) (Scotland) Bill, and I think that your point about bite-sized chunks is well made. Maybe there is potential in future, without having overarching bills, to address two or three bite-sized chunks that are compatible with one another. That might be worth considering, in comparison with looking at individual bite-sized chunks.

Annabelle Ewing

Exactly. Each instance will depend, I suppose, on the facts and circumstances of what we are seeking to do and which things could be combined. I am certainly happy to raise the issue in my next meeting with Lord Pentland. I do not know when that is set for, but I am sure that it is soon.

Stuart McMillan

Thank you.

The Convener

As no one has any further questions for the minister, it just remains for me to thank her very much, and Jill Clark and Catriona Marshall, who have accompanied her today, for giving us their evidence so elegantly. We will reflect on what they have said and we look forward to the stage 1 process continuing.

10:49 Meeting suspended.  

10:50 On resuming—  

The Convener

Agenda item 3 is our final evidence-taking session on the Contract (Third Party Rights) (Scotland) Bill at stage 1. It is a very real pleasure to welcome to the meeting Annabelle Ewing, Minister for Community Safety and Legal Affairs; Catriona Marshall, solicitor, Scottish Government legal directorate; and Jill Clark, bill team leader, civil law reform unit, Scottish Government. Welcome back, Jill.

We will move to questions. First, what are the general benefits of the bill? We have heard from various witnesses that it will clarify uncertainty in the current law and give parties the flexibility to amend or cancel third-party rights. Can you explain why that is important, and can you outline any other benefits that you think are relevant?

The Minister for Community Safety and Legal Affairs (Annabelle Ewing)

Thank you, convener, and good morning to you and members of the committee. I am pleased to be here to answer your questions about the bill.

I have read the reports of all the committee’s evidence-taking sessions and it is clear that there is a lack of clarity in the common law and significant concern about predictability and flexibility. If one reads all the documentation, including the Scottish Law Commission’s discussion paper of 2014, its report of 2016, and the submissions that you and the committee have received, it is quite clear that what we have in Scotland is a situation in which, although we have long-standing law on third-party rights, people are finding it increasingly difficult to invoke the benefit of Scots law as far as the third-party rights regime is concerned. Indeed, I believe that the SLC’s 2014 discussion paper starts with the Moncur case, which dates back to 1590 or thereabouts, and I suggest that, if we are having to look back to a case from 1590, we might want to have a wee think about whether there are better ways of doing this.

What has grown up in Scotland is a body of law driven by case law that has presented very serious difficulties with regard to the key issues of clarity and flexibility. In short, those difficulties are principally to do with the revocability of these rights and the understanding in Scots law since the seminal Carmichael v Carmichael’s Executrix case in 1920 that, in order to properly confer a third-party right, there has to be irrevocability. The case also made it clear that there had to be communication, notification or intimation of the right in order to establish it, but the key issue was that the right had to be irrevocable. That is a very inflexible position, particularly in modern-day commercial activity, and it does not make use of the law attractive in the slightest. Other issues that have arisen include lack of clarity with regard to the remedies that are open to the third party when enforcing their right and the defences that are open to the contracting parties when they seek to defend a third-party claim, and there is also a lack of clarity with regard to the application of prescription to third-party rights and so forth.

The result of all that taken in the round is that people have sought to find another way round this, and I think that the committee has taken significant evidence on what are termed workarounds. The two key workarounds in this area have been to make the third-party rights clause in the contract or, indeed, the whole contract subject to English law or alternatively—and sometimes cumulatively—to have recourse to collateral warranties. You have heard a lot of evidence that collateral warranties involve a big, long paper chase and many larger transactions and lead to unnecessary expense and time having to be spent on securing all the required collateral warranties. As a result, there has been a lack of confidence in Scotland in using the third-party rights regime as set forth in the common law, and this bill principally seeks to remove that obstacle to using third-party rights law as it is and has been for many centuries in Scotland.

Having read all the documentation and all the arguments that the SLC has put forward, I think that we could talk all morning about all the problems that have arisen with using the third-party rights regime under common law in Scotland, but I just wanted to give the committee a flavour of them. As I said, the principal aim of the bill is to remove that obstacle.

The Convener

Excellent. I think that we largely agree with your aims and objectives.

Throughout the meeting, we will elicit further statements from you. We look forward to amendments being lodged in due course; you might want to talk about those as we go through the questions.

I will hand over to my colleague Stuart McMillan, the deputy convener of the committee, who has some questions for you.

Stuart McMillan (Greenock and Inverclyde) (SNP)

A few moments ago, you touched on the use of Scots law. The policy memorandum states that the bill

“will promote the use of Scots law”.

Can you outline how the bill will achieve that?

Annabelle Ewing

We are seeking through the bill, if it is passed in committee and Parliament, to provide an option. People will still have the freedom to contract—that is a fundamental principle of contract law in Scotland—and, within certain overarching limits, to do what they want with their contract. However, the bill provides an option that, over time—it will not happen overnight—will be seen as helpful and will lead to a change in behaviour from how we have recently approached third-party rights workarounds, to which I referred previously. As I say, that will not happen overnight, but there will be a change as people come to see the provisions in the bill as a helpful option that is available to them.

In addition, it is important to bear it in mind—this point emerged in evidence to the committee—that, aside from the administrative work and expense involved in collateral warranties, there are, increasingly, question marks about their scope and enforceability. As such issues come to the fore, it may therefore be necessary to look at what other options might be available. I think that, over time, the bill will help to change the culture of recourse to third-party rights workarounds in Scotland, which can only benefit the reputation and accessibility of Scots law in the eyes of parties in Scotland who are seeking to contract.

Stuart McMillan

Some witnesses have suggested in their evidence that lawyers often choose English law when setting up contracts because it is considered to be clearer than Scots law, as England is a bigger jurisdiction with more cases going through the courts. It has also been suggested that it is probable that, even after the bill is passed, lawyers will still choose to use English law. Could anything be done, when and if the bill is passed by the Scottish Parliament, to promote the legislation and encourage more lawyers to use Scots law?

Annabelle Ewing

Yes—there would be a job of work to do at that stage to ensure that practitioners in Scotland were aware of the new legislation and the alternative that they would have at their disposal. That could be done in a number of ways. I imagine that the Law Society of Scotland and the Faculty of Advocates would be involved in promoting information and awareness. The Royal Incorporation of Architects in Scotland suggested in its evidence to the committee that it would seek to proceed by way of a practice note. There are law conferences just about every day, which would provide an opportunity to raise awareness of the new option for parties in Scotland that are seeking to contract in a whole range of fields, given that the bill affects not only large commercial contracts but, potentially, any individual.

We as a Government would seek to facilitate the promotion of information and the awareness-raising work that would be carried out by the relevant professional bodies. At the end of the day, as I said, it will be a matter for the parties to the contract to choose how they wish to structure their contract and what they wish to do. We are saying, “Look, there will in due course be an attractive option for you. This is what the option is; you may wish to consider it as a more cost-effective way of drafting your contract.”

Stuart McMillan

On your point regarding the relevant professional bodies, would the Scottish Government be open to working with the likes of the Confederation of British Industry Scotland, the Federation of Small Businesses Scotland and other non-legal professional bodies to promote the legislation?

10:15  

Annabelle Ewing

Absolutely. It is not the case that, once the bill is passed, all responsibility for it will suddenly be put to one side. If the bill is passed, we will all have an interest in ensuring that it is made use of. We will be happy to consider what we can do to help to facilitate the actions of other relevant bodies—including the business organisations that you rightly mentioned—in that regard.

Stuart McMillan

Thank you very much.

The Convener

Monica Lennon has a series of questions.

Monica Lennon (Central Scotland) (Lab)

You touched on the benefits of the bill to individuals in your answer to Stuart McMillan. In much of the evidence that we have taken so far, much of the focus has been on the benefits to the business sector, which is understandable. To what degree does the Scottish Government expect the bill to benefit individuals as well as businesses?

Annabelle Ewing

The scope of the bill is not limited to large corporates; it applies to everybody who seeks to enter into a contract in which the relevance of conferring a third-party right would arise. In evidence to the committee, reference has been made—including by the SLC—to holiday contracts, whereby one member of a family will contract the holiday and all the arrangements pertaining thereto. If something mega goes wrong, the other members of the family might not have any right of recourse, because they did not personally conclude the contract. That is an obvious example of a situation in which making the law accessible to everybody could be a help, particularly to individuals.

I know, too, that the SLC gave the example of an informal carer for an adult with mental incapacity. The informal carer might enter into a contract for the benefit of the incapacitated adult, but if there is a problem, it will not be the carer who has suffered the loss. There is a need to ensure that it is possible to properly confer a third-party right that can be invoked and enforced. I have cited two examples of cases in which the applicability of the new regime to individuals is evident and would be beneficial.

Monica Lennon

Thank you for that helpful answer.

Some concerns have been raised about the impact of the bill on smaller businesses. For example, Professor Beale suggested that small businesses might not always realise that the rights of third parties are subject to cancellation or variation, particularly if that is tucked away in the small print. Is that a matter that the Scottish Government has considered? If so, do you have any plans to ensure that smaller businesses are properly protected?

Annabelle Ewing

Regardless of the size of someone’s business, if they were entering into a contract, they would want to ensure that they knew what the contract entailed. Normally, the advice would be that the person should seek legal advice on what it was that they were contracting to do, although that would not be the only route. At this stage, I should perhaps declare that I am a member of the Law Society of Scotland and that I hold a practising certificate, but as I am not practising, that advice does not benefit me. It is always important that an individual or a small or large business knows exactly what they are signing up to. There is no short cut to that. If someone felt confident that they could make that judgment without getting legal advice, that would be up to them, but legal advice in that regard would always be helpful.

An issue that was raised in a submission from a subcontractor—I do not know the size of the subcontractor concerned—was that a smaller subcontractor at the end of a very long chain might not feel that they had an equal say. However, I suggest that that issue does not fall within the scope of the bill; it relates to the relative contracting power of each contracting party. The bill does not impose obligations on third parties; it simply confers rights on them. A third party is not bound to accept those rights. In that regard, the bill does not act to the detriment of a smaller subcontractor or a smaller business. That is an important clarification to make.

Monica Lennon

So you think that there are benefits in providing clarity on what the remedies will be.

Annabelle Ewing

Yes. It is all very well having a right, but if it could not be enforced and we could not seek a remedy under the law if we were prevented from exercising the right, it would not be regarded as particularly valuable. It is therefore important that, as I alluded to earlier in my response to the convener, the bill seeks to clarify other issues, including the very important issue of remedies, which the member raised. It is important to make it clear that the remedies include the right to damages, which is an issue that has been unclear over the many decades and centuries in which we have relied on the common law third-party rights regime.

Monica Lennon

We have heard a lot in our evidence sessions about the use of third-party rights legislation in England. We have heard that lawyers in England and Wales have been slow to use the equivalent English legislation and that, as you touched on, they often use workarounds such as collateral warranties instead of third-party rights. You said in an earlier answer that, if the bill is enacted, the use of the legislation will take time. However, is there a risk that we will have the same problems as have occurred in England?

Annabelle Ewing

It is important to recall that, prior to the implementation of the Contracts (Rights of Third Parties) Act 1999 in England and Wales, there had been no possibility there of conferring a third-party right. Under English common law, the rule that applied was privity of contract, which means that a contract is absolutely between the parties to the contract and has no effect beyond that.

The 1999 act introduced for the first time in England and Wales the concept of the third-party right, so it did not simply codify a right that already existed in common law. That is perhaps why there has been a reluctance to try something new and why parties might prefer to continue to do what they know, which is to go down the collateral warranty route.

From reading the evidence about the situation in England and Wales, I understand that things may be starting to change there. As I said, given that key question marks are arising over collateral warranties, particularly with respect to their enforceability, we might see increasing recourse in England and Wales to the 1999 act.

The position in Scotland is slightly different in that, as I said, we have had a common-law regime of third-party rights for centuries but have had problems, for the reasons that have been explained, with parties having recourse to our regime. We have had third-party rights as part of our legal system for hundreds of years. By codifying our law on third-party rights, we are not introducing something new per se but simply hoping to make the law more accessible to people. We therefore start from a slightly different place from that of England and Wales.

We will have to wait and see whether the outcome in Scotland on recourse to third-party rights legislation differs from that in England. However, we are optimistic that, by removing the obstacle to people having recourse to our third-party rights regime and with the information and awareness to which Stuart McMillan referred, we will see increasing recourse to our legislation over time. Further to the work that the committee’s predecessor did on what became the Legal Writings (Counterparts and Delivery) (Scotland) Act 2015, officials conducted an anecdotal survey that suggested that that act was starting to change the previous requirements for extensive activity to get a document executed by all parties. We hope that, over time, we will also see changes from increased recourse to our third-party rights legislation.

Monica Lennon

We can tell from your evidence that you believe that the bill could provide a helpful option for people.

What could the Scottish Government do to increase the pace of change? You mentioned law conferences, and there is a job of work for the legal professions, but has the Scottish Government considered anything in particular?

Annabelle Ewing

We are happy to work collaboratively with the various professions that are most obviously involved, together with business—a point that Stuart McMillan raised—to ensure that parties and practitioners in Scotland know that a more accessible option will be available to them if the bill is passed. We are happy to consider any ideas on that.

Monica Lennon

Is the Scottish Government content for flexible approaches to remain? We took evidence from witnesses from the construction sector, who were positive but realistic about the bill. They said that the use of collateral warranties will probably continue and that, for lots of clients and investors, that would be the first point of call. Are you relaxed about that?

Annabelle Ewing

We accept that, as I said, freedom of contract is an overarching principle of contract law in Scotland. It is therefore entirely up to the parties to choose how to construct their contract in whatever field. It is not the Government’s role to impose a diktat on how they do that; the Government’s role is to facilitate options for them to ensure that, particularly in the commercial field, Scots law is keeping pace with other jurisdictions so that people who operate here in Scotland—not just in the commercial field, although that is what the member referred to—have that option. That is how we intend to proceed.

There will be no requirement for parties to invoke the bill; rather, we hope that, over time, they will see the advantages of invoking it. It is fair to say that the more familiarity practitioners have with the legislation, the more likely it is that they will be open to at least suggesting that their clients may wish to consider it. I think that we have grounds for reasonable optimism that the legislation will, over time, be seen as a help in Scots law, not a hindrance.

David Torrance (Kirkcaldy) (SNP)

Good morning, minister. Sections 4 to 6 of the bill include rules that prevent contracting parties from modifying or cancelling a third-party right. How will those provisions work in practice?

Annabelle Ewing

Different views have been expressed about sections 4 to 6. The general view is that they are balanced and that the objective that the insertion of the provisions is trying to secure is reasonable. The basic problem that arose with recourse to Scots common law in the area of third-party rights was irrevocability. It is important to say that, although parties will still be free to contract however they wish, the bill will be the default setting and will sit within the framework of the general law on obligations and contracts.

It was recognised that it would be helpful to strike a balance between giving the parties to the contract the right to modify or cancel the contract without, in effect, the consent of the third party on whom the right has been conferred, and limiting that when it would be manifestly unfair. One of the examples that are given in the sections is where the third party has relied on the right and that has been known to the contracting parties or where the contracting parties should have reasonably been able to foresee that, in the circumstances, the third party would rely on the right. It is felt that, in setting up the default structure, the bill should attempt to deal with such manifest unfairness, and that is what sections 4 to 6 seek to achieve.

10:30  

Certain, but not all, of those who have given evidence have suggested that they might wish to see different terminology, but there seems to be no consensus among them about what that different terminology should be. In some people’s view, sections 4 to 6 are unnecessarily complex. However, as we are setting out and codifying the default position in legislation, we feel that the bill has to deal with a multiplicity of facts and possible circumstances—it is not just a simple case of saying, “You have to pay me a sum of money”—that are outwith our ken when drafting. We must endeavour to anticipate those situations, which is why we have been happy to reflect the SLC’s carefully thought-through approach. That is why we have set out the provisions in the way that we have, and we are comfortable with that.

David Torrance

We heard from Professor Hugh Beale that, although the equivalent English provisions are cruder and less sophisticated than the Scottish ones, they are possibly easier to understand. A number of other witnesses have highlighted concerns about the clarity of sections 4 to 6. Are the provisions sufficiently clear for courts to follow?

Annabelle Ewing

Yes—they are clear. To go back to first principles, the bill is codifying hundreds of years of Scots law; we have had a tradition of third-party rights. We must not pretend that we are starting from scratch; we must recognise that we are codifying what has been a centuries-old element of our legal system and approach it in that way.

To make a direct comparison with the legislation in England and Wales—on any issue—is not to make the right comparison. In this case, we would be comparing an act that introduced third-party rights into a legal system for the first time with a bill that is patently not doing that. We are starting from a different place and we must reflect that in the drafting of our provisions.

I am not sure that the Scottish Government, in seeking to ensure the integrity of Scots law, would want to have, as Professor Beale said, a “cruder” version of the legislation as a first choice. Rather, we should draft the provisions in a way that we hope will achieve our aim, which is to slightly balance the fairness issue in relation to third parties. I hope that that answer is helpful to the member.

The Convener

That was a good answer—thank you.

Alison Harris (Central Scotland) (Con)

The Faculty of Advocates argued in its written evidence that the drafting of section 9 of the bill could be improved. What is your view on the faculty’s points and its suggestions for redrafting that section?

Annabelle Ewing

I am aware that the Faculty of Advocates has concerns about the drafting, albeit that they are not about what section 9 seeks to do, which is to allow third-party rights to be arbitrated. We feel comfortable that the drafting reflects the objective that is sought.

We are not sure whether there might be some misunderstanding, given the argumentation that the faculty put forward. However, if there is clear evidence that there is a better way to achieve the obvious objectives of section 9, we are happy to look at that. We feel that we have the drafting right on that issue.

The Convener

It would be fair to say that we have had a lot of evidence to suggest that the provision could be made clearer or more elegant. Given your previous response that you are seeking elegance, will you consider lodging an amendment or do you consider that the case has not yet been made?

Annabelle Ewing

I am not convinced that the case has been made. I will bring in Jill Clark, because we feel that there has been a misunderstanding on the part of those who have a problem with the drafting—they might not have understood the way in which section 9 sits in the bill and its interrelationship with other sections, including the key definition section.

The Convener

We would be grateful to hear from Jill Clark.

Jill Clark (Scottish Government)

What the minister said is exactly right. We would still like some time to work with the Scottish Law Commission and in particular with David Bartos, who helped the commission a great deal with its chapter on arbitration, to consider whether there is a real issue. We are not convinced of that but, as the minister said, if there is an issue, we will be happy to consider an amendment. However, we are not quite there yet.

The Convener

Forgive my lack of hearing, but did you say that you are in discussion with David Bartos and others?

Jill Clark

Absolutely—yes.

The Convener

Thank you. That is helpful.

We will move on to section 12(2), which protects from abolition existing third-party rights that were acquired before the legislation comes into force. Shepherd and Wedderburn argued in written evidence that the reference to “acquired” in section 12(2) means that existing conditional third-party rights might not be protected from abolition, as they will not be acquired until the condition is fulfilled, which might not happen until the legislation has come into force. What is the Scottish Government’s view on that argument?

Annabelle Ewing

Shepherd and Wedderburn raised a very good point. It is certainly clear that the intention is to ensure that contingent or conditional jus quaesitum tertio, or third-party rights, that are currently in existence can be enforced at the time of crystallisation of the right and that it is absolutely not the intention of the bill to do anything that would hinder that. Therefore, it is clear that we need to reflect further on our drafting on that point, because the use of the word “acquired”, although it is clear in one regard, could perhaps benefit from further clarity to ensure that there is absolutely no dubiety about the fact that contingent third-party rights that are currently in existence are absolutely not affected by the legislation. We will actively look at that.

The Convener

That would be welcome from our point of view. We would not wish to see a right that somebody had taken away from them—we want those rights to be maintained.

We will move on to adjudication. Some witnesses said that it might be worth investigating whether the bill’s rules on arbitration could be applied to the adjudication that is used in the construction sector, whereas others have suggested that that would overcomplicate and slow down the adjudication process. What is the Scottish Government’s view on the concerns raised by the construction industry in relation to the arbitration section?

Annabelle Ewing

I understand that, further to the evidence that was provided, officials are currently looking at the housing grants adjudication process, specifically as regards construction, in the Housing Grants, Construction and Regeneration Act 1996. We will reflect on the specific nature of that.

On adjudication in general, Hew Dundas made the point that adding adjudication is unnecessary and could be confusing. However, as you have alluded to, others felt that the suggestion is worth looking at. In that regard, it is important to bear in mind that, as far as I understand it, adjudication is a temporary process that leads to agreement, the courts or arbitration. That was probably the starting point, or one of the points, in the consideration of the issue.

It is important to recall why it is necessary to have a specific reference to arbitration in the bill. The Arbitration (Scotland) Act 2010 expressly limits the possibility of invoking that act to those who are parties to an arbitration agreement. Therefore, in order to displace, if you like, that provision in the 2010 act as far as third-party rights are concerned, in the circumstances set forth, we had to make an express reference to that act.

We are not convinced that the procedure would be the same for other dispute resolution mechanisms, which is why there is no reference to other forms of dispute resolution in the bill. Nevertheless, we are reflecting on that point to ensure that the legislation is drafted in the best way possible so as not to inadvertently exclude those proceedings that could be included.

The Convener

Excellent. That is what we wanted to hear on that subject. It is still work in progress.

We move to the human rights element of the bill.

Alison Harris

The policy memorandum explains that the bill complies with article 6 of the European convention on human rights, on the right to a fair trial, as it gives third parties the choice of using arbitration. Can you expand on why the bill complies with the convention?

Annabelle Ewing

The Presiding Officer has ruled that the bill is within scope and I would not want to second guess the Presiding Officer. I think that the point that is being raised is the issue of whether someone can be forced to give up their recourse to the courts.

Going back to the first principles of conferring a third-party right, the arbitration provisions make it clear that, in conferring a right, the bill cannot impose a requirement for a party to proceed with arbitration; it can simply facilitate that. It will be up to the party to choose to proceed with arbitration or not—to choose whether to waive their right to go the courts. Because there is no compulsion, there is no breach of the article 6 right.

The Convener

That is very welcome. I want you to be absolutely clear about that, because where the Parliament has tripped up over the past number of years is—as you well know—the removal of the element of choice. That is where we have fallen foul. As long as we are not removing choice—

Annabelle Ewing

We are simply stating that there is an opportunity to use arbitration. Going back to first principles, the conferring of a third-party right is simply that—you cannot impose an obligation on the third party in your contract. It is up to the third party to accept the right or not; the third party does not need to accept the right. However, in terms of the first element of the arbitration provision, it could be part of the package conferring the right that the matter will, in the event of dispute, be subject to arbitration, and, in accepting the right, the third party is accepting the package. That is the key issue.

The Convener

Okay. Thank you very much.

Stuart McMillan

When you spoke about third-party rights and the length of time for which they have been in operation in Scotland, you said that they go back hundreds of years. I am not going to argue with you on that particular point. However, some of the evidence that we have received has highlighted that there has been an issue with third-party rights in Scotland since the second world war. Is there an argument that the pace of law reform in the area has been too slow?

Annabelle Ewing

In an ideal world, one would like to see a lot of activity on a lot of fronts. However, we need to be realistic and take into account the complexity of this area of the law in particular. We want to get it right and have discussion, which is what the SLC has done with regard to this complex area of law. It has proceeded with extensive consultation and has carefully considered the responses that have been received. It has then proceeded with a draft and has had further discussions on particular issues. Now we are at the point of the stage 1 evidence session with the minister.

We would all like to see things happen more quickly in life, but, realistically—and particularly in complex areas of civil law—there is a process to be followed, and the point of that process is to ensure that we get the best piece of legislation that our collective endeavours can possibly arrive at. The prize is therefore worth a wee bit more delay.

I understand that Scotland is not unique in that regard. I think that there was a reference in one of the evidence sessions to the English and Welsh legislation of 1999 and to the first mooting of doing something there being before the second world war. Things tend not to move as quickly as maybe the general public would like. In the interests of getting it right, it is important to proceed without undue haste but, of course, we can always strive to do things better.

Stuart McMillan

Thank you. An issue that arose in some of the evidence sessions was the black hole of non-liability. We understand that the SLC is considering the issue separately, but its activity seems to have focused on individual areas of law. In terms of the process, is there an argument that law reform could be speeded up if further law reform bills were to incorporate more than just one specific area of the law?

Annabelle Ewing

That is an interesting question. I guess that that is a possible approach. We have seen both at Westminster, when it still legislated exclusively in the area of Scots civil law, and in some Scottish Parliament bills that once we have an omni-bill, things can get a bit rushed and difficult. Instead of there being a clear, straightforward focus on the matter in hand, bits are added, there are unintended consequences, or something needs to be added at the last minute to deal with something else that we included earlier on—it can become a bit of a hotchpotch. We need to balance proceeding in an orderly fashion with respecting the interests of the public by ensuring that we maintain our legal system to be effective and accessible for the benefit of all our citizens.

It is an interesting question and one that I can perhaps pursue further in my next meeting with Lord Pentland, but we should bear in mind that, if a bill has a wide reach and brings within its scope a series of issues that are not necessarily interlocked, issues can arise with regard to how it will end up further to its parliamentary handling. There is no ideal solution, but we are certainly encouraged to note that the SLC is proceeding with its next programme of reform, which I think it is about to announce.

Jill Clark

It will launch that tomorrow. The bill and the Legal Writings (Counterparts and Delivery) (Scotland) Bill are good examples of things from a big contract framework that the SLC is looking at. If we waited until it had concluded all of that, we would be waiting even longer for law reform to happen. The fact that it is breaking it down into these bite-sized chunks at least means that something is happening and improvements are being made. Otherwise, we would just wait longer, I think. Its 10th programme of law reform launches tomorrow.

Stuart McMillan

I was on the committee that considered the Legal Writings (Counterparts and Delivery) (Scotland) Bill, and I think that your point about bite-sized chunks is well made. Maybe there is potential in future, without having overarching bills, to address two or three bite-sized chunks that are compatible with one another. That might be worth considering, in comparison with looking at individual bite-sized chunks.

Annabelle Ewing

Exactly. Each instance will depend, I suppose, on the facts and circumstances of what we are seeking to do and which things could be combined. I am certainly happy to raise the issue in my next meeting with Lord Pentland. I do not know when that is set for, but I am sure that it is soon.

Stuart McMillan

Thank you.

The Convener

As no one has any further questions for the minister, it just remains for me to thank her very much, and Jill Clark and Catriona Marshall, who have accompanied her today, for giving us their evidence so elegantly. We will reflect on what they have said and we look forward to the stage 1 process continuing.

10:49 Meeting suspended.  

10:50 On resuming—