Hong Kong Department of Justice publishes Contracts (Rights of Third Parties) Bill

The Department of Justice of Hong Kong has recently prepared the Contracts (Rights of Third Parties) Bill (the “Bill”) which, if enacted, will significantly change the law relating to privity of contract in Hong Kong.  Gareth Thomas provides an overview of the key proposals

It is presently the case that only a party to a contract can enforce rights under that contract. This is known as the doctrine of privity of contract, a doctrine which has been at the heart of the law of contract at common law since its foundation. The effect of the Bill, if enacted, would be to alter this doctrine, so that a third party to a contract could enforce rights under that contract subject to being able to demonstrate that it was the manifest intention of the actual contracting parties that the third party should have the right to do so.

Although there are some significant differences (see below), the Bill tracks in large part the terms of the English Contracts (Rights of Third Parties) Act 1999 (the "Act"), and is designed to cure the perceived unfairness under the current law for a third party ("C"). Currently, if a contracting party ("A") promises another contracting party ("B") to do an act to benefit C, then C cannot itself enforce this promise, but must rely on B to do so. Under the Bill, which will apply to contracts made after it comes into force (subject to certain exceptions), provided C can show that A and B intended that the contract benefit him, he can sue to enforce it.

Proposed exceptions to the scope of the Bill include:

(a) Contracts where third parties already have rights under rules reflecting international conventions (eg, bills of exchange, promissory notes, negotiable instruments, contracts for the carriage of goods by air and sea);

(b) The contract contained in a company's memoranda and articles of association; and

(c) Employment contracts.

Although the Act also expressly excludes incorporation documents of Limited Liability Partnerships, there is no such specific carve out provided for in the Bill.

The Bill also differs materially from the Act as follows:

(i) The Bill contains a provision which binds the third party to any exclusive jurisdiction clause contained in the contract. There is no such equivalent provision in the Act due to issues that arise under the Brussels Regulation which regulates jurisdiction between EU Member States.  On the other hand both the Act and the Bill stipulate that the third party is to be bound by an arbitration clause contained in the contract if it wishes to enforce its rights under the contract.

(ii) The Bill contains an express right of the third party to assign its rights under the contract. This is a moot point under the Act, which is silent on the issue.

Parties would be at liberty to contract out of the effect of the Bill, when enacted, so as to maintain the present privity doctrine in their contracts. This in our experience has been the case in England & Wales in relation to the provisions of the Act, so that a clause excluding its effects is generally included as a boilerplate clause in commercial contracts, often without clear thought. Thus, in England & Wales at least, the potentially dramatic effects of the changes proposed for Hong Kong have not materialized. 

However, experience from England & Wales has been that there are certain classes of commercial contracts where parties have been willing not to exclude the operation of the Act, so that third parties are able to enforce rights direct. These include: 

(i) Acquisition agreements that allow non-party group companies to enforce restrictive covenants and warranties contained in such agreements;

(ii) Client – adviser engagement letters extending the contractual duty of care and also the contractual exclusion clauses to group companies or other connected third parties such as directors and officers;

(iii) Confidentiality agreements which permit a successful buyer of a business to enforce their terms against unsuccessful bidders who signed similar agreements;

(iv) Software licence agreements between supplier and retailer which require that the restrictions in the retailer’s sub-licences with consumers are given for the benefit of the supplier as well as the retailer. 

The Department of Justice is inviting comments on the draft Bill before 31 December 2012.  We will follow the Bill’s progress and report in greater detail as and when it progresses towards enactment.