The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (“Ordinance”) was passed and gazetted on 4 December 2014 (Ord. No. 17 of 2014).  It has not yet come into operation.  This article aims to give a brief overview of some of the major provisions of the Ordinance which may have a significant impact on various industries. 

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (“Ordinance”) was passed and gazetted on 4 December 2014 (Ord. No. 17 of 2014).  It has not yet come into operation.  This article aims to give a brief overview of some of the major provisions of the Ordinance which may have a significant impact on various industries.

The Ordinance was enacted in response to the report of The Law Reform Commission of Hong Kong on “Privity of Contract” published in September 2005, following a Consultation Paper issued in May 2004, recommending reform (as opposed to complete abolition) of the common law doctrine of privity of contract.  Shortly stated, the doctrine of privity of contract prevents a third party, who is not a party to a contract, from enforcing a term of the contract, even if the term of the contract seeks to confer a benefit on that third party.  Similar legislation had long been enacted in other common law jurisdictions, namely, England & Wales, Australia, New Zealand and Singapore on this front.  The purpose is to bring Hong Kong in line with other common law jurisdictions.

Time of Application and Contracting Out

The Ordinance is to apply to contracts which are entered into after it comes into operation (s.3(1)).  However, it is worthy to note that the Ordinance can be contracted out of by an express provision in the contract between the parties (s.4(3)), e.g. something to the effect that “No third party may enforce any term in the contract in accordance with the Contracts (Rights of Third Parties) Ordinance”.

The following parts focus on the operation of the Ordinance, assuming the Ordinance has not been contracted out of by the parties.

Excluded Contracts

The Ordinance does not apply to a bill of exchange, a promissory note, negotiable instrument, a deed of mutual covenant, a covenant relating to land, a contract of carriage, a letter of credit, a company’s registered articles.

In relation to employment contracts, the Ordinance does not confer a right on a third party to enforce a term of a contract of employment against an employee.  However, the Ordinance is silent on the position of the employer and it appears that the Ordinance does not prevent a third party from enforcing a term against the employer.  A situation can arise therefore where a term in a contract of employment which confers a benefit on a third party may be enforced by the third party against the employer.

Main Provision – Third Party’s Enforcement of Term

The main provision is section 4 of the Ordinance, which provides that a third party may enforce a term of a contract under the following two circumstances:

  1. the contract expressly provides that the third party may do so – if the contract expressly provides that a third may enforce a term, this will cause no issues of uncertainty in practice; or  
  2. the term purports to confer a benefit on the third party, if on a proper construction of the contract, it is so intended to be enforceable by the third party.

The uncertainty will most likely arise under the second limb if the contract is silent on whether a term is intended to be enforceable by the third party.  If a dispute in relation to the interpretation of such term ends up in court, it will be for the court to interpret the term in question, which is clearly undesirable.  It is therefore advisable for the parties to the contract to clearly and expressly specify whether a term is intended to be enforceable by a third party, rather than leaving the matter to the court.

The Ordinance refers to the enforceability of “a term” (as opposed to the whole contract) by a third party.  It is possible for the parties to specify in the contract what terms are enforceable by which third party (in which case the Ordinance will apply to those terms) and what terms are not.  In other words, the parties can select terms which are intended to be enforceable by a third party and exclude the operation of the Ordinance to the remaining terms in the contract, e.g., something to the effect that “No third parties may enforce any term in the contract in accordance with the Contracts (Rights of Third Parties) Ordinance, save for [Third Party A] who may enforce [Contract Term X].”

Alteration of Third Parties’ Rights by Recission or Variation of Contract

The Ordinance also seeks to protect a third party’s rights once such rights are “crystallised” or “accrued”: If the third party has (i) assented to the term and the promisor has received notice of the assent, whether in writing or otherwise (“acceptance test”); or (ii) relied on the term and the promisor is aware of or can reasonably be expected to have foreseen such reliance (“reliance test”), then parties to the contract cannot by agreement, rescind or vary the contract which alters or extinguishes the third party’s right (s.6).

In relation to the acceptance test, it is possible that the assent may be given by conduct and the promisor’s notice of the conduct on the part of the third party may amount to the promisor’s receipt of notice of the assent for the purpose of the provision, thereby creating an obligation not to rescind or vary the contract by the parties.

It is permissible for the parties to specify in a term of the contract that the parties may rescind or vary the contract without the third party’s consent; however, such term will only be effective if, before “crystallisation” or “accrual” of such rights, the third party is aware of the term or the parties to the contract have taken reasonable steps to make the third party aware of the term.

Defences and Prevention of Double Liability of Promisor

The Ordinance also provides for defences, set-offs and counterclaims to be available to the promisor in proceedings brought by a third party to enforce a term of a contract (s.8).  In short, the promisor may raise a matter that would have been available to himself / herself by way of defence or set-off as if the third party had been a party to the contract. 

The Ordinance ensures that the promisor is only liable for single liability for the same loss and protects the promisor against double liability when the promisee and the third party are allowed to enforce the same term (s.11).

Conclusion

The Ordinance is expected to come into operation in the course of this year.  Since the Ordinance is applicable to a wide range of contracts entered into after the date it comes into operation and in light of the significant impact of the Ordinance on these contracts, businesses, financial institutions, banks, construction companies and insurers should review their standard contracts with suppliers, counterparties, customers and sub-contractors, and bear in mind the potential application and impact of the Ordinance whenever they enter into contracts.