Contract law changes bring clarity for Scottish businesses

Written by Hannah Campbell and originally published in Scottish Legal News

The Contract (Formation and Remedies) (Scotland) Act 2026 received Royal Assent in April this year and will apply to contracts entered into once it comes into force. Although the legislation is rooted in long-standing legal principles, its real significance for businesses lies in how it makes those principles clearer and easier to use in day-to-day commercial situations.

For many years, Scots contract law has largely been built on court decisions rather than set out in a single, accessible framework. That has often meant businesses needed specialist advice to understand fairly basic questions, such as when a contract has actually been formed or what happens if something goes wrong. The new Act does not replace all of that existing law, but it brings much of it together and explains it in a more structured and predictable way. In practice, this should make it easier for businesses to understand their position when negotiating, entering into and enforcing contracts, while still allowing them the flexibility to agree different terms where they choose.

One practical change that businesses will notice is a clearer definition of when a contract comes into existence. The Act confirms that a binding contract is formed when the parties have agreed the essential terms and intend those terms to have legal effect. Importantly, it recognises the commercial reality that parties can still be discussing secondary points while already being legally bound on the core deal. This means businesses should be careful during negotiations, as they may unintentionally create a binding agreement sooner than they expect if the key elements have been settled.

The rules around offer and acceptance are also clarified in a way that reflects modern business practice. The Act confirms that acceptance can be shown through conduct as well as words, provided it clearly demonstrates agreement. At the same time, the Act confirms that attempting to accept an offer while changing its terms is not really acceptance at all, but a counteroffer. In practical terms, this reinforces the importance of making sure that any response to a commercial proposal is carefully worded, as even small changes can alter the legal position.

A particularly relevant update for modern businesses is the removal of the old “postal acceptance rule”. Under the previous law, a contract could be formed when an acceptance was sent, even if it never arrived. This has now been replaced with a more intuitive rule that acceptance only becomes effective when it reaches the other party, including by email or other electronic means when it becomes reasonably accessible to them. For businesses, this provides greater certainty and aligns the law with how contracts are actually agreed in practice, especially in fast-moving digital communications.

The Act also brings useful clarity to what happens when a contract is not performed properly. One key area is the principle that both parties are expected to fulfil their obligations. Previously, there was uncertainty about whether a party that was itself in breach could still take action against the other side. The new legislation confirms that, unless the contract has been formally brought to an end, a party can still enforce its rights even if it is in breach. This is likely to be helpful in complex commercial relationships where both sides may have competing claims.

Where a contract is terminated because of a serious breach, the Act sets out more clearly how the parties should be put back into the position they were in before the contract was made. In practical terms, this means that money paid will usually need to be returned, goods handed back where possible, or their value paid if that is not feasible. The rules also deal with situations where goods have been altered or improved, giving businesses a clearer framework for resolving what can otherwise be complicated disputes.

Another area where the Act provides practical guidance is the right to withhold performance. It confirms that a business can temporarily hold back its own obligations, such as payment, if the other party is in breach or is clearly going to be. This gives businesses more confidence in managing risk during a contract, although it still requires careful judgment to ensure that withholding performance is justified.

Finally, the Act introduces the concept of contributory negligence into contract claims. In simple terms, if a business suffers a loss but has partly caused that loss itself, any damages it recovers may be reduced. This encourages businesses to take reasonable care in their own operations and not assume that the other party will bear full responsibility in every situation.

Overall, the Act is less about changing the substance of Scots contract law and more about making it easier to understand and apply. For businesses, the main benefit is greater clarity and predictability in key areas such as when a contract is formed, how communications are treated, and what remedies are available if something goes wrong. That said, as with any new legislation, its full impact will only become clear as it is tested and interpreted in real disputes.

In the meantime, businesses would be well advised to review their contracting practices and standard terms to ensure they reflect the new framework and take advantage of the greater certainty it is intended to provide.