The Hong Kong government commenced a public consultation on a Contracts (Rights of Third Parties) Bill ("Bill"). The Bill seeks to reform the common law doctrine regarding privacy of contracts, which applies in Hong Kong. Currently, Hong Kong has no equivalent of the English Contract (Rights of Third Parties) Act 1999. Other common law jurisdictions, including England and Wales, Ireland, Singapore, New Zealand and certain states of Australia, have adopted similar reforms. The proposal is closely modelled on the English legislation.

The Bill allows third parties to enforce rights under a contract if the contract expressly allows for this, or if the third party can demonstrate that it was the intention of the contracting parties that the third party should have the right to do so.

Where a life insurance policy allows the insured party to direct payments to a nominated third party, such interests are currently unenforceable by the third party beneficiary (subject to certain statutory and common law exceptions, developed to redress potential unfairness). If the Bill passes, third party rights in insurance policies governed by Hong Kong law could be enforced directly without resorting to such exceptions.

Insurance policies are unique in that they impose a duty of utmost good faith on the insured party (and a consequential duty of material disclosure). The Bill, however, allows a third party to enforce its benefit under the policy even though it is not held to the same standard of disclosure. As a result, the insurer may be unjustly expected to confer benefits upon a third party who has not yet satisfied the standards required under insurance contracts for duty of disclosure.

The Bill seeks to address such concerns by allowing an insurer, in response to a third party action, to rely on any defences which would have been available to it if the insured had brought the action, such as proving that the insured party had breached its duty of disclosure or, indeed, any other contractual term under the policy.

Moreover, the Bill permits the inclusion of a term to exclude its effect. It is likely that, as in other jurisdictions, commercial contracts including insurance contracts, will start to exclude this legislation.