Contracts (Rights of Third Parties) Bill

Overview

The Contracts (Rights of Third Parties) Bill was gazetted on 28 February and will be introduced into the Legislative Council on 26 March 2014. When enacted, it will reform the 'third party rule' otherwise known as the doctrine of privity of contract.  Under this doctrine a person cannot either acquire (and thus enforce) rights or be made liable under a contract to which he or she is not a party.  The part of the doctrine this Bill seeks to change is to allow a third party to a contract to acquire and enforce rights in certain circumstances.  

Third party's right to enforce a contractual term and available remedies

The Bill provides that a third party will have the right to enforce the term of a contract if:  (i) the contract expressly provides as such; or (ii) there is a term which purports to confer a benefit on him, unless the contracting parties did not intend that the term be enforceable by a third party.

When enforcing his rights, the Bill provides that a third party will be able to seek any remedy that would be available to him had he been a named party to the contract. The proposal expects, therefore, that the rules relating to damages, injunctions, specific performance and other relief would follow or apply accordingly. Equally, the benefit of any exclusions or limitations of liability in the contract should (as appropriate) also be available to the third party, although the Bill is silent on this point.

Defining or identifying a third party

In order for rights to be conferred, the Bill provides that a third party must be identified either by name, as a member of a particular class or as answering a particular description.  It will be up to the courts to decide how broadly they interpret the terms “class” and “description” but it seems likely that this will include classes such as “beneficiaries” and “employees”. The Bill also proposes to cover a third party who may not be in existence at the time the contract was created.  For instance, a company does not need to have been incorporated at the time a contract is entered into for it to take benefit of that contract.

Variation/rescission of a contract and the third party's consent

Once it is established that a third party has a right conferred on it under a contract, in the absence of any contractual provisions to the contrary the Bill provides limitations on the extent to which the contracting parties are able to modify those rights without the third party’s consent. The Bill does propose, however, that a wide discretion be given to the courts to authorise variation or rescission without the consent of the third party where such relief is just and practicable.

Protection offered to promisors

Under the Bill, promisors are offered all defences, set-offs and counterclaims against a third party that would be available to them if the proceedings were brought by a promisee. Further, certain provisions are proposed to avoid double liability on the promisor to both the third party and another party to a contract.

Jurisdiction and arbitration clauses, and assignment of rights

The Bill proposes provisions that, in effect, would bind a third party to an arbitration clause or exclusive jurisdiction clause contained in the contract as if it were a party to it. 

In addition, it is proposed that third parties be given the liberty to assign their rights of enforcement, similar to contracting parties, unless the contract expressly provides otherwise or the right is not intended to be assignable.

Contracting out of the proposed statute

One of the most notable characteristics of the gazetted Bill is that it does not contain any provision which provides that parties cannot contract out of its application.  Similar to what has happened over the years in England and Wales, it is expected that many parties, faced with the uncertain consequences of this new proposed legislation, will simply prefer to contract out of it and maintain in full the doctrine of privity. Therefore, although the changes proposed appear quite significant, we forecast that the potentially dramatic effects will not materialise at least in the short to medium term.

Contracts to which the proposed law may apply

There are a number of contracts listed in the Bill to which the proposed rules will not apply.  These include (i) letters of credit, bills of exchange, promissory notes and other negotiable instruments; (ii) covenants relating to land; (iii) contracts for the carriage of goods by air and sea; (iv) a company's articles having effect as a contract; and (v) employment contracts. 

The Bill will, when enacted, nevertheless potentially apply to a large range of commercial contracts in many different business sectors. Examples include (i) insurance contracts where third party beneficiaries may seek to claim directly against the insurer; (ii) holiday contracts, where holiday makers who have not been party to the contract with a holiday company may seek to sue the company direct; (iii) corporate finance transactions where, for instance, rights may be conferred by placing agreements; (iv) contracts relating to software between a manufacturer and retailer referring to licence terms in favour of the end user (such as warranties) which may confer rights on that third party end user; and (v) contracts relating to the supply of goods and services of all types.  Other examples include financial services contracts, consultancy agreements and contracts involved in a project.  This is, of course, not an exhaustive list.

Take-away points

• The single most important point to take away, perhaps, is that although the changes proposed appear significant, the potentially dramatic effects of the Bill are not expected to materialize if, similar to England and Wales, parties in Hong Kong choose to contract out of the Bill and maintain privity.
• It is, in any event, important for businesses to be aware of the new Bill, in particular those people in businesses responsible for negotiating contracts.
• In order to avoid inadvertent conferring of third party rights, those dealing with contracts ought to start thinking whether to include wording to wholly exclude the operation of the proposed statute, or in some cases where parties' interests require, partially exclude it.
• Where third party rights are conferred, contracting parties ought to consider the limitations they wish to impose, if any, on their ability to modify those rights with or without the third party's consent and make provisions to that effect in the contract.
• The Bill, if enacted, is expected to apply to all contracts entered into on or after the date on which the proposed statute passes into law and comes into operation.

Click here to read our previous e-bulletin on the topic which provides, amongst others, examples of contracts where parties in England and Wales have chosen not to exclude the operation of the statute, so that third parties are able to enforce their rights.