How to identify third parties that can enforce rights under the Contracts (Rights of Third Parties) Ordinance?

The Contracts (Rights of Third Parties) Ordinance Cap.623 (“Ordinance”)  allows a person who is not a party to a contract i.e. a third party, to enforce a contractual term save in certain circumstances, if:[1]

• the contract expressly provides that the third party may do so; or
• the term purports to confer a benefit on the third party.

The Ordinance further provides that the third party must be “expressly identified” in the contract by name, as a member of a class or as answering a particular description.[2]

It has been two years since the Ordinance came into effect on 1 January 2016, yet, the question of how to decide whether the contract has sufficiently identified the third party so as to allow him/her to enforce the contract for the purpose of the Ordinance remains unanswered.  This issue has yet to be considered by the Hong Kong courts.

In the recent case of Chudley v Clydesdale Bank plc (t/a Yorkshire Bank) 2017 EWHC 2177 (Comm), the English High Court (“HC”) has provided useful guidance on the identification of  third parties that can enforce rights under the Contracts (Rights of Third Parties) Act 1999 (“English Act”) even where they were not named specifically as parties in the contract.

This case concerned a claim for damages by certain third party investors (“Claimants”) in connection with fraudulent investments in the Cape Verde Islands.  In the absence of a direct contract, the Claimants alleged a claim against the bank in reliance on a letter of instruction between the bank and its customer.  The Claimant also relied upon section 1(1) of the English Act which provides that a third party “may in its own right enforce a term of the contract if the contract expressly provides that he may, or the term purports to confer a benefit on him.”  Further, section 1(3) of the English Act provides that “the third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description…”

Background

• The Claimants had deposited monies by way of investment into a bank account at the defendant bank (“Bank”) but lost all their monies as the investment scheme was run by a fraudulent investment company (bank customer) (“Investment Company”).
• According to the letter of instruction (“LOI”) between the Bank and the Investment Company, the Bank was obliged to open a “segregated client account” for the investors’ fund, and that the investors’ fund would only be paid out of that account upon satisfaction of certain conditions.
• The Bank failed to open the segregated client account according to the LOI and the investors’ funds were paid into a different account which were subsequently withdrawn by the Investment Company fraudulently.
• Relying on the LOI, the Claimants brought a claim against the Bank, among other things, for a breach of contract with the Investment Company by the Bank.  The Claimants argued that the segregated client account meant to confer a benefit on the Claimants.  They were therefore clearly identified as the “third parties” for the purpose of the English Act.

Decision

The HC held that the LOI was not a binding contract and the claim therefore failed. However, the HC further mentioned that if the LOI had been enforceable, the Claimants would have a right to enforce it under the English Act as third parties. The purpose of the LOI was to provide a safeguard to third parties whose monies were deposited with the Bank.  The fact that the LOI referred to the client bank account was sufficient to identify the Claimants, who were clients of the Investment Company, as members of a class of people on whom the LOI intended to confer a benefit. 

The HC in its obiter also concluded that it was possible to identify an unnamed class or persons who could enforce their rights under a contract by a process of construction of the relevant express terms of the contract, provided such process did not involve the court “implying” identification of the third parties.

Comment

The case of Chudley provides useful guidance for the interpretation and identification of an unnamed class of people who may enforce a contract which was not entered into by them under the Ordinance.  Given that sections 4(1) and (2) of the Ordinance are substantially the same as the relevant sections 1(1) and (3) of the English Act, it is likely that Hong Kong courts would make reference to the HC’s obiter dicta when similar issues arise in the future.

The case of Chudley reminds us of the importance of excluding the application of the Ordinance where the parties do not intend that the contract should confer direct benefit on any third parties.  However, whether the Ordinance should be excluded in a contract should be considered carefully with regard to the prevailing circumstances in each case.

Key Contacts

Machiuanna Chu

Partner | Corporate Commercial

Email or call +852 2825 9630