Legal update: Contracts (Rights of Third Parties) Ordinance (Cap 623)08Jan2016
The Contracts (Rights of Third Parties) Ordinance (Cap 623) (the “Ordinance”) came into effect on 1 January 2016. The Ordinance modifies the doctrine of “privity of contract” which states that only those who are named in the contract and have signed it are able to enforce and derive a benefit from the contract. The purpose of the Ordinance is to bring Hong Kong in line with other common law jurisdictions by providing for the enforcement of contractual terms by third parties regarding related matters. Similar legislation has long been enacted in other common law jurisdictions including Australia, England, New Zealand, Singapore and Wales.
It is important to note that the Ordinance only applies to contracts entered into on or after 1 January 2016.
The Ordinance does not apply to the following:
- a bill of exchange, a promissory note or any other negotiable instrument;
- a deed of mutual covenant;
- a covenant relating to land;
- a contract of carriage which does not exclude or limit liability;
- a contract for the carriage of goods by air;
- a letter of credit; and
- a company’s articles having effect as a contract under seal.
C. THIRD PARTY’S RIGHT TO ENFORCE CONTRACTUAL TERM
A third party may enforce a term of contract provided that:
- the third party is expressly identified in the contract by name, whether as a member of a class or as answering a particular description; and
- the contract either:
- expressly provides that the third party may do so; or
- that the term purports to confer a benefit on the third party.
This is applicable regardless of whether or not the third party provides consideration for the term and whether or not the third party was in existence when the contract was entered into.
Once a third party enforces a term of the contract, they are subject to any other term of the contract relevant to the term in question.
D. REMEDIES AVAILABLE TO THIRD PARTY
A third party enforcing a term of contract has the remedies available to it in an action for breach of contract had the third party been a party to the contract including remedies under the rules of equity.
The rights or remedies available to the third party apart from the Ordinance are not affected by the Ordinance.
E. RESCISSION AND VARIATION OF CONTRACT
Once a third party enforces a term of contract, the parties to the contract may not, without the consent of the third party, rescind the contract or alter or extinguish the third party’s right under the term.
This is only applicable in circumstances where:
- the third party has assented to the term and the promisor has received notice of the assent;
- the third party has relied on the term and:
- the promisor is aware of the real reliance; or
- the promisor can reasonably be expected to have foreseen that the third party would rely on the term.
However an express term stating that (i) one or more parties to the contract may rescind or vary the contract without the third party’s consent or (ii) the third party’s consent is required only required in specified circumstances shall prevail if before any of the above circumstances occurs the third party is aware of the express term, or if one or more parties to the contract have reasonably attempted to make the third party aware of express term.
Notwithstanding the above, the court has the power to make an order to rescind or vary the contract without the consent of the third party if each other party to the contract agrees to do so or the court thinks it just and practicable. Such an order may be made subject to any condition the court thinks fit, including payment of compensation to the third party.
F. AVAILABILITY OF DEFENCE, SET-OFF, COUNTERCLAIM AND ENFORCEMENT OF A TERM
For proceedings brought by a third party, the promisor may raise the following as defence or set-off:
- a matter which arises in connection with the contract;
- a matter expressly provided for as a defence or set-off available to the promisor in proceedings brought by a third party; or
- a matter which would have been available had the third party been a party to the contract
if such matter would have been available to the promisor by way of defence or set-off if the proceedings had been brought by the promisee.
Similarly, the promisor may raise a counterclaim in relation to a matter not arising from the contract which would have been available to the promisor if the third party had been a party to the contract.
For proceedings brought against a third party, the third party may not seek to enforce a term of contract if the third party could not have enforced the term had the third party been a party to the contract.
G. PROTECTION OF PROMISOR FROM DOUBLE LIABILITY
The right of a third party to enforce a term of contract does not affect the promisee’s right to enforce a term of the contract. However, a promisor is discharged from the obligations owed by the promisor to the promisee, to the extent of having performed the same obligations to the third party.
In proceedings regarding a third party enforcing a term of contract, the court or arbitral tribunal must reduce any award to the third party to the extent to which it thinks appropriate to take account of (i) the sum the promisee has recovered from the promisor for the third party’s loss in relation to the term or (ii) the expense to the promisee of making good to the third party the default of the promisor in relation to the term.
In short, the promisor is only liable for a single liability for the same loss and the Ordinance protects the promisor against double liability if the promisee and the third party enforce the same term.
H. ARBITRATION AGREEMENT
Where a third party’s right to enforce a term of contract is subject to an arbitration agreement, the third party seeking to enforce the term is treated as a party to the arbitration agreement. Accordingly, such third party is entitled to arbitration and would be bound by arbitration as well.
If the intention is not to treat the third party as a party to the arbitration agreement or disputes between the third party and the promisor are not to be submitted to arbitration, the contract may include a term to explicitly state such intention for clarity.
I. EXCLUSIVE JURISDICTION CLAUSE
In relation to the enforcement of the term by the third party, the third party is bound by the exclusive jurisdiction clause in a dispute between the third party and the promisor. However, this position may be opted-out in the drafting of the contract so that the third party is not bound by the exclusive jurisdiction clause.
J. ASSIGNMENT OF THIRD PARTY RIGHTS
A third party may assign to another person a right under a term of a contract enforceable by the third party in the same way as a party to the contract may assign a right under the contract. This default position may be varied by having an express term in the contract to provide otherwise or drafting the right to be personal to the third party and not assignable.
K. CLOSING REMARKS
Despite multiple references to the availability of certain rights, remedies or defences depending on the position of the third party, it is important to note that the third party is not to be treated as a party to the contract for the purposes of any ordinance or any instrument under any ordinance.
For parties wanting to ensure that the rights of third parties do not arise, express identification of third parties in the contract should be avoided. Additionally, an express clause can be included in the contract to exclude the rights of a third party in relation to a specific term or the contract as a whole.
If there is an intention to confer a benefit to a third party, assistance from a legal professional is recommended.
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.