The Contracts (Rights of Third Parties) Bill ("the Bill") was gazetted on 28 February 2014. The Government will introduce the Bill into the Legislative Council for first reading on 26 March 2014.
Hong Kong's Current Law – the Doctrine of Privity of Contract
Under the existing law, a third party cannot acquire and enforce right under a contract to which he is not a party. The Bill seeks to reform this aspect of the doctrine of privity of contract in Hong Kong. The Bill is based on the United Kingdom's Contracts (Rights of Third Parties) Act 1999. If the Bill is passed, it will enable a third party to enforce a contract to which he is not a party in some circumstances.
Various other jurisdictions, including England, Canada (New Brunswick), Australia (Western Australia, Northern Territory and Queensland), New Zealand and Singapore have similar laws conferring enforcement rights to third parties to a contract. The Cayman Islands has also introduced a new Contracts (Rights of Third Parties) Bill 2014 recently, and the same is expected to be passed into Cayman Islands' law in mid March 2014.
What kind of contracts will be affected?
The Bill does not apply to contracts entered into before the Ordinance takes effect.
The Bill does not apply to certain types of contracts including bills of exchange, promissory notes, contracts on negotiable instruments, deeds of mutual covenant, contracts for the carriage of goods by sea and by air, contracts on a letter of credit, company's articles, and employment contracts.
The requirement of a "Third Party"?
The Bill provides that the third party should be expressly identified by name, as a member of a class or as answering a particular description. Rights may also be conferred on a third party who is not in existence at the time when the contract is entered into.
Third Party Enforcing a Contractual Term
The Bill provides a two-limb test and the satisfaction of either limb will permit a third party to enforce the contract.
A third party may enforce a right under the contract if:
Following the UK position, parties may by agreement opt out the application of this new statutory scheme.
Can the Contracting Parties Rescind or Vary the Contract?
Rights of third parties in a contract may not be rescinded or varied without the third party's consent if certain conditions are met. These conditions include a third party's assent to or reliance on the term conferring benefit on him.
Such restriction on rescission and variation of the contract may be overridden if the contracting parties expressly exclude this restriction in the contract.
Arbitration and Exclusive Jurisdiction Clauses
If it is specified in the contract that the third party, if it wishes to enforce its rights in the contract, will need to enforce it by arbitration or in a specified jurisdiction, the third party will be bound by the arbitration and the specified jurisdiction clauses in the agreement unless a contrary intention is proved.
Assignment of Third Party's Right
The Bill allows third parties to assign their rights to enforce a term under the contract to another person. The assignment of such rights may, however, be prohibited by an express term of the contract.
The Bill is a long-awaited reform and it gives legal recognition to contracting parties' intention to benefit third parties in a contract between them. Its implementation will bring Hong Kong's contractual law regime more in line with other common law jurisdictions.
It should be noted that the Bill has been tailored for the needs of Hong Kong. As opposed to mirroring exactly the regime in the UK, the Bill expressly excludes its application to deed of mutual covenants and company's articles. These type of contracts are not excluded from the application of the UK Contracts (Rights of Third Parties) Act.
The Bill, once enacted, is going to bring fundamental changes to contract law in Hong Kong. If it is not the intention of the parties to a contract to confer benefits directly to a third party, one should be mindful that an express opt-out provision must be incorporated in the contract.
Companies which use standard form contracts or terms and conditions, will need to consider updating these forms to include an express clause providing that the Ordinance does not apply to that contract or those terms and conditions, if they wish to opt out from the application of the legislation. Similarly, companies which do intend the legislation to apply to their contracts and terms and conditions should consider amending these to clearly identify the jurisdiction where claims by third parties benefiting from the contract should be brought.
Please contact Deacons for assistance if needed.