Introduction

The Legislative Council in Hong Kong is presently debating the Contracts (Rights of Third Parties)  Bill (“the Bill”). The Bill is expected to be put into action later this year.

Under the current Hong Kong doctrine of privity of contract, a third party cannot acquire (and thus  enforce) rights under a contract to which he is not a party. Generally in U.S., a contract can  intentionally give a third party benefits. This doctrine is often criticized for not allowing the parties  to indicate a  contractual intent  to  benefit  a non-contracting third party. Based on the United  Kingdom's Contracts (Rights of Third Parties) Act 1999, the Bill aims to reform this aspect of the  existing law by allowing a third party to acquire and enforce rights in certain circumstances.

Key Features

1) Scope of the Bill 

A third party shall have the right to enforce the term of a contract if:

  1. the contract has an express term to that effect; or
  2. there is a term which purports to confer a benefit on such third party

The fulfillment of either of the two limbs will enable a third party to enforce the contract. Parties  may, by agreement, opt out of the application of this proposed new legislation.

It should be noted that the rights of the contractual parties who have entered into contracts before  the proposed new legislation takes effect will not be affected. Furthermore, the Bill does not apply  to certain contracts, including bills of exchange, letters of credit, promissory notes, negotiable  instruments, covenants relating to land including deeds of mutual covenant, contracts for the  carriage of goods by sea and by air, company's articles, and employment contracts.

2) The Requirements of "Third Party"

The Bill provides that the third party must be expressly identified by name, as a member of a class or as answering a particular description. Rights may also be conferred on a third party who is not in existence at the time when the contract is entered into provided that the third party is expressly identified. Contractual rights may also be conferred on a third party who is not yet in existence at the time when the contract is entered into, for example a  company which has yet to be incorporated at the time the contract is concluded.

3) Whether or Not the Contracting Parties Can Rescind or Vary the Contract 

Once it is established that a third party has a right conferred on him under a contract, the contracting parties cannot vary or rescind the terms of the contract in a way that affect the third party’s rights without the third party's consent. These conditions include a third party's assent to or reliance on the term conferring benefit on him. Such restriction on rescission and variation of the contract may be overridden if the contracting parties expressly exclude this restriction in the contract.

4) Exclusive Jurisdiction and Arbitration Clauses

If the contract specifies that the third party will need to enforce the right conferred on him by arbitration or in a specified jurisdiction, the third party will be bound by the arbitration and the specified jurisdiction clauses, unless a contrary intention is proved.

5) Assignment of Third Party's Right

It is permissible for a third party to assign his enforcement right to another person, unless the contract expressly states otherwise. However, if the right concerned is personal to the third party, the right is not assignable.

6) Protection of Contractual Parties from Double Liability

The Bill seeks to protect a contractual party from double liability owing to both the third party and  the other contracting party. For example, once a promisor has performed (wholly or partly) his contractual obligations to the third party under the term of the contract, the promisor will be discharged from the obligations owed by him to the promisee and will be  considered to have fulfilled the same obligations to the third party.

Implications

The Bill gives legal recognition to contracting parties’ intention to benefit third parties in a  contract between them. The Bill  aims to bring Hong Kong contract law more in line with other  common law jurisdictions where reforms have already been made to this area of law.

Although the Bill, once passed and  enacted, appears to bring significant changes to Hong Kong  contract law, it is envisaged that the contractual parties may wish to structure the contract as such  as to opt out of the proposed new legislation so as to avoid any unnecessary claims brought by third  parties.

To prevent unintentional conferring of third party’s rights, we advise clients to take the  opportunity to revisit the standard terms of a contract to see whether amendments are required.  We recommend paying particular attention to the language used to either include or exclude (in  whole or in part) the operation of the proposed new legislation and to ensure that the intention of the contracting parties is reflected therein.