The new Contracts (Rights of Third Parties) Ordinance (“CRTPO”) (Cap. 623) has come into effect on 1 January 2016. In the past, under the strict privity of contract doctrine, only a person who is party to the contract can enforce it, while a third party cannot acquire any right even if the contract is made to give benefits to him or her. According to the Ordinance, parties entering into a contract may create contractual rights which are legally enforceable by a third party, such as to claim damages or to seek specific performance.
A third party can enforce a term of contract under the CRTPO if:
(1) The contract expressly provides that it may or purports to confer the benefit on it; and
(2) It is expressly identified in the contract as answering to a particular description.
Once a third party right is granted, the contracting parties cannot rescind the contract or vary the contractual terms in a way that would alter the third parties’ rights in general. If a third party brings an action to enforce certain contractual terms, the contracting party may raise defence or counterclaim against the third party as if the legal proceeding was brought by a counterparty.
Notwithstanding the above, the CRTPO does not apply to some contracts, including:
- Bills of exchange
- Promissory notes
- Negotiable instruments
- Deeds of mutual covenant
- Contracts of carriage
- Letters of credit
- Company's articles of associations
An employment contract cannot confer a right onto a third party to enforce a term against an employee. However, a third party could be allowed to enforce a term against an employer.
To avoid potential disputes concerning the liability of unintended third party rights, a company is advised to review its standard forms and contracts, such as pre-printer forms. A company may consider putting an opt-out clause in standard forms and contracts to prevent application of the CRTPO, and excluding all third parties rights apart from those expressly provided for in the contract. A company should also be mindful of situations where they may have privity as a third party in contracts that fit the above descriptions.