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Contracts (Rights of Third Parties) Bill in Hong Kong
1 March 2013

It has been argued that strict adherence to the doctrine of privity of contract produces unfair results. In many cases, the Court resorted to principles such as agency and trust to circumvent the doctrine of privity of contract. For these and other reasons, the Law Reform Commission of Hong Kong (the “Commission”) recommended the reform of the long established common law doctrine of privity of contract in September 2005. The Secretary for Justice then prepared the Contracts (Rights of Third Parties) Bill (the “Bill”) in October 2012.

Other reasons supporting the reform include : –

  • The need for contracting parties to be given the freedom to confer rights on third parties.
  • The Court should give effect to the true intention of the parties where they wish to benefit a third party.
  • A third party who suffers losses should have the right to sue.

The doctrine of privity of contract has been reformed in many countries such as England, Singapore, Australia (Northern Territory, Western Australia and Queensland) and New Zealand.

Scope of the Bill

Under the new regime, major changes to the doctrine of privity of contract are as follows :-

  • A third party has the right to enforce a contractual term against either party to the contract if there is an express term which allows the third party to do so (Clause 4 of the Bill).
  • In the absence of any express term, a third party can still sue if the contract confers a benefit on that party unless on a proper construction of the contract, the parties do not intend the third party to have that right (Clause 4 of the Bill).
  • A third party must be expressly identified by name, as a member of a clause or as answering a particular description. Rights may also be conferred on a third party who is not in existence when the contract is entered into. (Clause 4 of the Bill)
  • A third party is entitled to any remedy that would have been available to him in a contractual claim as if he is a party to the contract (Clause 5 of the Bill).
  • The contracting parties could not vary or rescind their contract if the third party’s rights are crystalized (e.g. when the third party has relied on the provision conferring benefit on him and the contracting parties are aware of such reliance) (Clause 6 of the Bill).
  • The Court is given the power to vary the contract without the consent of the third party if it is just and practicable to do so (Clause 7 of the Bill). However, in doing so, the Court may impose conditions, such as payment of compensation to the third party.
  • A third party is not required to provide consideration in order to sue the contracting party, so long as the contract contains an express term that the third party has such right or a term which purports to confer a benefit on the third party.

Exceptions to the Bill

The Bill applies to most contracts except for two categories. The first is where the third party already has rights pursuant to rules under international conventions, for example, in contracts relating to bills of exchange, promissory notes or other negotiable instruments and contracts for the carriage of goods by air and sea. The current laws already provide separate regimes for those contracts.

The second category refers to contracts where a third party has no rights under the existing rules but it is inappropriate for the third party to intervene. This includes the contract in a company’s memorandum and articles of association, and employment contracts.

Arbitration clause

Contracting parties are free to include an arbitration clause in a contract requiring the parties to resolve the disputes by arbitration.

Under the new regime, if that contract confers a benefit on a third party, that party will be treated as a party to the arbitration clause. This is to ensure that a third party who has an enforceable right is not only entitled to arbitration, but is also bound by arbitration.

Protections to contracting party

The Bill offers some protections to the contracting parties : –

  • Parties are free to contract out of the application of the Bill and to maintain the doctrine of privity of contract.
  • If a contracting party has recovered a sum in respect of the third party’s loss from the other party, the Court would reduce the amount awarded to the third party if there are subsequent proceedings against the paying party so that there will be no double liability.

Impact on insurance contracts

The Bill may allow a third party to take legal action against the insurer provided that he can show that the contract purports to confer a benefit on him and he is identified in the contract.

Hartford Insurance Co (Singapore Ltd) (fka The People’s Insurance Co Ltd) v Chiu Teng Construction Pte Ltd [2002] 1 SLR 278 is an example of how the Bill may apply in the context of insurance.

Where a contractual term confirming substantive rights on a third party is conditional upon the third party enforcing that term by arbitration and that such arbitration agreement is in writing for the purpose of the Arbitration Ordinance (Cap 609),

In Hartford, the main contractor (third party) obtained a judgment against the insured for its loss in respect of rectification works. The main contractor subsequently commenced legal proceedings to recover the judgment sum from the insurer. The insurer argued that the judgment sum was not binding on them. The Court rejected the insurer’s argument and held that the third party would have a claim against the insurer under the Singapore Third Parties (Rights against Insurers) Act (Cap 395, 1994 Ed).

Conclusion

It has been criticized that the doctrine of privity of contract is artificial and complex. The underlying principle of the Bill is to avoid injustice and to give effect to the true intentions of the contractual parties who intend to benefit a third party. The need for reform in this area is inevitable. The consultation on the Bill was just completed at the end of December 2012 and the Contract (Rights of Third Parties) Ordinance is not expected to come into force until late 2013 or early 2014.

If you have any questions relating to the Bill or any other litigation matters, experienced lawyers in our Litigation department will be happy to assist you.

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