The Contract (rights of third parties)

Ordinance (cap. 623)

On 26 November 2014 the Hong Kong Legislative Council passed the Contract
(Rights of Third Parties) Ordinance 2014 (Ordinance)
We expect that the Ordinance will come into force this year. When it does, the Ordinance will change the
law of privity of contract in Hong Kong so that certain third parties can enforce provisions of contracts
to which they are not a party. The Ordinance only applies to contracts that are entered into after the
Ordinance comes into force.

The Doctrine of Privity of Contract
The rules of privity provide that: (a) a person cannot acquire and
enforce rights under a contract if he is not a party to it; and (b) a
person who is not a party to a contract cannot be made liable under
it. Owing to a perceived unfairness, a number of countries such as
England & Wales, New Zealand, Singapore and territories in
Australia and Canada have adopted similar legislation to enable
interested third parties to enforce provisions of a contract to which
they are not a party in certain circumstances.
The Effect of the Ordinance
The most important provision of the Ordinance is Section 4. This
provides that third parties can enforce provisions of a contract if
(a) the contract expressly provides that the third party may do so
or (b) the term purports to confer a benefit on the third party. This
class extends to third parties who were not in existence at the time
the Contract was entered into, and extends to all third parties
regardless of whether they are based in Hong Kong or elsewhere.
This therefore creates potentially a very wide class of third parties
who would be entitled to enforce contractual terms. It is has been
argued that this is un-workable in situations such as complex
construction contracts, however, despite objection, the Ordinance
will apply to the construction industry.
effect unless provision is made to the contrary. The Ordinance is
unclear about whether it has extra-territorial effect. It is likely that
given the intention is to affect the position in Hong Kong law, that
contracts governed by Hong Kong law will be affected by the
Ordinance even if the conduct in question is not in Hong Kong.
Impact on the Construction Industry
The Ordinance will apply to construction contracts and
appointments of construction professionals. This will mean that
any identified third parties, or third parties which have a benefit
under a contract, will be able to enforce terms against contractors
and designers. It is not necessary for such third parties to be
expressly provided for in the construction contract. They could
simply be an identifiable class of people, such as prospective
purchasers, tenants or funders of buildings project for example.
This means that arguably a term which required the Contractor to
construct a building which was fit for purpose would confer a
benefit on a future purchaser of that building, and entitle that
purchaser to directly sue the Contractor for any defects. Similarly
the designer who is required to use reasonable care and skill in his
design, could face action from a subsequent purchaser for
negligence. This significantly increases the risk profile of such
projects for contractors and construction professionals alike.

This class of third parties is limited in that they must be identifiable

either by name, as a member of a class or as answering a particular
description. Further, in respect of third parties relying on limb (b)
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above, this will only apply where it can be said that on a proper
construction of the contract, the term was intended to be
enforceable by the third party.

Arbitration and Jurisdiction

Third parties will be treated as parties to any arbitration agreements

in contracts, and bound by any exclusive jurisdiction provisions when
they seek to enforce a term, unless on proper construction of the
contract this is not the intention. The Ordinance permits contracting
parties to decide whether a third party should be bound by the
dispute resolution clause in their contract.

As to whether the Ordinance will have extra-territorial effect, the

presumption is that legislation does not have an extra-territorial

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The Contract (rights of third parties)
Ordinance (cap. 623)

The approach of construction industries faced with equivalent Liaise with insurers on coverage of third party claims of this nature
statutory provisions elsewhere has been to routinely exclude the
Acknowledging the potential reliance of third parties on services
application of such provisions in construction contracts and
and works provided; consider when it is appropriate to include
appointments. For example, when the Contract Rights of Third
disclaimers and limitations in Contracts, Appointments
Parties Act was passed in England and Wales, it was anticipated that
and deliverables.
there would no longer need to be requirements for wide-scale
collateral warranties from contractors and construction
professionals in favour of third parties. However, the industry did not For more information about the Ordinance, and the issues that
embrace the changes bought about by the law. Arguably resistance arise out of its implementation, please contact:
was partly driven by the insurance industry, concerned that the Act
increased the risk profile of projects. We have yet to see what the
Dean Lewis
response of the insurance market will be in Hong Kong. As a result, in
Partner
the UK, collateral warranties remain the most common mechanism Construction Advisory & Disputes
to give third parties contractual rights of recovery in relation to Hong Kong
construction projects, and the provisions of the Act are routinely T: +852 2294 3392
excluded in contracts and appointments. This is also an option M: +852 9151 3034
frequently selected in the NEC EEC and PSC contracts. E: dean.lewis@pinsentmasons.com
However, exclusion of the Ordinance in public contracts in Hong
Kong may simply not be realistic, given that this could be perceived Mohammed Talib
as contrary to the intentions of the legislature. Therefore Associate
alternative ways of managing this risk will need to be sought for
Construction Advisory & Disputes
contracts subject to Hong Kong law such as:
Hong Kong
Where possible, exclude the application of the Ordinance in T: +852 2294 3453
contracts, or amend contracts to ensure that the application of E: mohammed.talib@pinsentmasons.com
the Ordinance does not lead to unintended consequences, such
as broad third party rights or uncertainty as to the classes or
types of individuals who are given third party rights under
the contracts

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This note does not constitute legal advice. Specific legal advice should be taken
before acting on any of the topics covered.
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