Member Article

The Law Reform Commission (Commission) published a report on 25 October 2005 recommending proposals to reform the doctrine of privity of contract in Hong Kong. The aim of the reform is to allow a person who is not a party to a contract to enforce the contract if that was the intent of the contracting parties. Under the existing doctrine of privity of contract, a person cannot acquire and enforce rights under a contract to which he is not a party. The doctrine has been criticised as frustrating contracting parties’ intention to benefit third parties and could lead to unfairness. The report recommended that the doctrine should not be completely abolished but should be reformed by means of a clear and straightforward legislative scheme. The Commission made twenty-one recommendations, for example that a third party should be expressly identified by name, as a member of a class or as answering a particular description, and that it should be possible to confer rights on a third party who was not in existence at the time of contracting. The Commission also recommended that a third party’s contractual right may not only be derived from express clauses, but also be implied from provisions of the contract. The Commission recommended excluding certain contracts from the operation of the legislation because intervention of third parties might not always be appropriate. Such contracts include contracts of employment, companies’ Memorandum and Articles of Association, negotiable instruments, contracts for the carriage of goods by sea or air and letters of credit. The underlying principle of the reform is to respect contract parties’ freedom of contract and, where appropriate, to give effect to their intention to benefit a third party. If the parties prefer, they will be able to contract out of the proposed legislation. Contracting parties are advised to make it clear in the contract whether or not any terms are designed to be enforceable by a third party. The doctrine of privity of contract has been reformed in many common law jurisdictions including Canada, England, New Zealand, Singapore and some states and territory in Australia.