The Contracts (Rights of Third Parties) Ordinance – the Impact on Hong Kong Contracts
The Contracts (Rights of Third Parties) Ordinance – the Impact on Hong Kong Contracts
Introduction
The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (the Ordinance) came into force on 1 January 2016. It amends the doctrine of privity of contract, according to which “only a person who is a party to a contract can sue on it”. The doctrine had long been criticised as unfair since it applied even when the contracting parties intended to benefit a third party. Under the Ordinance, a person who is not party to a Hong Kong contract (a third party) now has the right to enforce a term of a contract if: (i) this is expressly provided for in the contract; or (ii) on a proper construction of the contract, the term purports to confer a benefit on the third party.
It is however possible to contract out of the effect of the Ordinance and this may be desirable in many cases given the potentially broad scope of “purports to confer a benefit” under the second limb of the enforceability test. In England, where similar legislation has been in place since 1999, contracts commonly include clauses excluding its operation and it is expected that this practice will be followed in Hong Kong. However, a blanket exclusion clause will not be appropriate where the contracting parties wish to give a third party the right to enforce a term of the contract, e.g. giving the benefit of an indemnity to a group company. In these cases, the contract should expressly identify the third party and the specific term(s) that it may enforce. The operation of the Ordinance can then be excluded with respect to all other third parties. It will therefore be important to identify at the drafting stage whether the operation of the Ordinance should be excluded completely or preserved in relation to specific terms for specified third parties. Read more