On May 27, 2015 the Secretary for Justice issued the Commencement Notice for the Contracts (Rights of Third Parties) Ordinance (Cap. 623) (the “Ordinance”), which will come into effect on January 1, 2016. The Ordinance, based on the “Contracts (Rights of Third Parties) Act 1999” from the United Kingdom, will have a wide effect across all sectors on how contracts are drafted and enforced in Hong Kong visavis the rights of nonparties to the contract. The Ordinance will only apply to contracts entered into after its commencement, with specific exclusions such as bills of exchange, letters of credit, covenants related to land or employment agreements (as against the employee but not the employer).
In Hong Kong, the common law tenet of privity of contract states that only a party to a contract can enforce the contract (or have it enforced against him). A nonparty to a contract, or a third party, has no contractual rights. Any claim that the nonparty may have against a contract party under the contract must be formulated through other means (with very limited exceptions) such as in a trust situation. For example, a subsidiary of a named party to a contract may not be able to directly enforce a term of the contract against the other party, even if the intention of that term was to confer a direct benefit on that subsidiary. This legal framework occasionally results in unsatisfactory outcomes contrary to the intention of all the parties to the contract. This led to the promulgation of the Ordinance in December 2014 after 10 years of consultation and deliberation.
From January 1, 2016
The Ordinance will expressly recognize the rights of the third party to enforce his rights under the contract, even if the third party did not exist at the time of the contract, as long as he is sufficiently identifiable in the contract (whether by name, description or class).
Such rights will theoretically be at the same level as the rights of a named party under the contract but may potentially surpass the named party’s rights as the nonparty may be free of certain clauses specific to the parties (for example, where restrictions are only imposed on a named party). The remedies available to the nonparty would be identical to the remedies available to a contract party, including equitable relief such as injunctions or specific performance. The standing of the claimant and the mechanism of such claims will be subject to judicial interpretation of the Courts of Hong Kong where disputed.
Conversely, the Ordinance will not impose any obligations upon nonparties to a contract (perhaps except in situations where the performance of such obligations may be a condition of receiving the benefit claimed). Therefore, a party cannot independently sue a nonparty for breach of contract under the Ordinance. Third parties are further protected by a statutory mechanism preventing the rescission or variation of a contract without reference to the third party, where the latter’s rights may be infringed. However, double recovery will not be permitted for the same loss, regardless of the contractual status of the party.
Except in specific situations as stated above, the Ordinance will apply to every oral or written contract in all sectors in Hong Kong. In practice, this would mean that from next year onwards contractual parties must be more vigilant during the drafting process to be cognizant of potential third party rights and concerns, even where none are intended by any of the parties.
Businesses have another six months to review their templates and future contracts to ensure that these are not inadvertently caught by the Ordinance in conferring a third party right. Steps should be taken to expressly restrict the operation of the Ordinance where applicable. Even where this is not possible or desired, the parties should prevent the transferability of such rights by the third party to parties even more remote to the contract. Failure to do so may lead to unintended and costly consequences in dealing with claims from third parties many degrees removed from the contract, including assignees for value.