Camilla Horneman

In November of last year, we wrote about the Contract (Formation and Remedies) (Scotland) Bill, which was introduced to the Scottish Parliament on 2 October 2025. A summary of the bill as introduced along with our views regarding its provisions can be read here.

The bill is now at stage three which means that it is in the final stage of the parliamentary process. MSPs can propose further changes to the bill which are then debated and decided on. Following this, a debate takes place on whether to pass the bill. On 2 February, some amendments were proposed and accepted to the bill as part of stage two of the parliamentary process. Let’s take a closer look at those changes.

Formation of contracts - part one of the bill

As explained in our previous article, part one of the bill seeks to codify the existing law regarding contract formation. Only minor amendments were proposed and accepted to part one during stage two, which do not change the scope of the bill.

Remedies for breach of contract - part two of the bill

Part two of the bill deals with some but not all remedies available for breach of contract. The most substantive amendment during stage two was the insertion of provisions in relation to the law of retention as this was not included within the bill when it was first introduced.

Retention is a remedy that can be used when one party to a contract refuses or fails to perform their obligations. It allows Party A to withhold its own performance of the terms of a contract (for example by refusing to deliver goods or services), when Party B has failed to perform its own obligations under the same contract (for example making payment). There has been uncertainty around the law of retention and how it operates in practice. For example, it has been unclear how serious a breach of the contract must be before retention is justified. 

The purpose of the amendments is therefore to clarify when and on what terms a party to a contract can utilise retention as a remedy.

The bill as amended confirms that a party to a contract (“PA”) may temporarily withhold or suspend performance of an obligation that is due to be performed under the contract (“contractual retention”) in the following circumstances:

• Following a breach of a counterpart obligation by the other party to the contract (“PB”);
• In anticipation of a breach of a counterpart obligation by PB (an “anticipatory breach”); or
• In relation to an obligation subsisting when the contract is ended by PA as a result of PB’s breach or an anticipatory breach.

The provisions also confirm that only an anticipatory breach must be a material breach. Therefore, non-anticipatory breaches do not require to be material in order for a party to exercise contractual retention. However, the bill does not define what constitutes a material breach of contract and as such the question of whether or not a breach is material will be subject to common law rules. 

This will therefore be an important determination in cases where one party seeks to exercise the right of retention as a result of an anticipatory breach. In Scots law, a material breach is a serious, fundamental failure to perform a key obligation under the contract. For example, non-payment for goods or services would be considered a material breach. However, whether something is a material breach is not always clear-cut and therefore it is likely that this will continue to be a ripe area for disputes.

In addition, the effect of the contractual retention must not be “clearly disproportionate to the effects of the breach or anticipatory breach”. For example, if Party A delivers the majority of goods that were ordered by Party B, Party B will only be entitled to withhold payment for the goods that have not been delivered and not for all of the goods ordered. A party may exercise contractual retention until the other party has performed the obligation in question or paid damages in lieu of performance. In addition, where PA exercises contractual retention for an anticipatory breach, PA must notify PB of the contractual retention before the contractual retention begins or “as soon as reasonably practicable” after the start of the contractual retention.

The amendments do not seek to radically change the existing principles of retention. However, we remain of the view that whilst the bill clarifies the law of retention to an extent, some areas will continue to be subject to common law rules such as the definition of a material breach. Therefore, many of the provisions will require judicial interpretation when disputes arise. In addition, the question of whether or not the effect of contractual retention is “clearly disproportionate” will be dependent on the facts of each case. It is therefore unclear whether the provisions on the law of retention provide meaningful certainty and clarity to parties.

As explained above, the bill is now at the final stage of the parliamentary process. Significant amendments may be made and we will continue to monitor developments closely.

Camilla Horneman is an associate at MFMaC