Which party gets the benefit?
11 December 2014
The Contracts (Rights of Third Parties) Ordinance ("Ordinance") was gazetted on 5 December.
The Ordinance reforms the longstanding doctrine of privity of contract by allowing third parties who are not parties to a contract to enforce their rights in it, subject to the intention of the contracting parties.
This reform brings Hong Kong law in line with certain other common law jurisdictions, notably the UK and Singapore. Although now passed into law, the commencement date of the Ordinance has yet to be appointed.
The doctrine of privity
The doctrine of privity, also known as the 'third party rule', is the idea that only parties to a contract can be bound by its terms; a contract cannot confer rights or impose obligations on third parties. This has two aspects:
(a) a person (third party) who is not a party to the contract cannot acquire or enforce rights in the contract.
(b) a person who is not a party to the contract cannot be made liable under it.
Aspect (a) has often been criticised as being unfair to a third party where the parties to the contract intended to confer a benefit upon the third party.
A typical situation would be when "A" and "B" enter into a contract agreeing that "A" would do something to benefit a third party, "C". If "A" fails to fulfil his promise, "C" has no rights to enforce the contract against "A". Further, "B" cannot sue "A" because he has not suffered any damage.
The Ordinance unwinds the doctrine of privity by providing that a third party may enforce a term of a contract if:
(a) the contract expressly provides that the third party may do so, or
(b) the term purports to confer a benefit on the third party.
The Ordinance allows parties the freedom to expressly contract out of these new statutory provisions. It also excludes certain types of contracts from its application, including bills of exchange, deeds of mutual covenant and company's articles of association.
Impact on businesses
Parties may expressly contract out of the new statutory provisions.
Accordingly, when entering into an agreement, parties should consider carefully whether they intend for the contract to confer any benefit upon any third parties. That intention should be expressly set out in the contract.
Businesses should also consider whether to review and revise any standard terms and conditions to include boilerplate clauses to exclude application of the Ordinance.
 The Court may be able to prevent injustice to "C" if "B" is prepared to sue "A" for specific performance. Other legal principles have also developed to allow the effect of allowing third parties to enforce rights under different circumstances. However, despite the various common law and legislative inroads to circumvent the doctrine, the Law Reform Commission has now recommended reform of the doctrine by a comprehensive, systematic and coherent legislative scheme.
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