Aspect Asia BackGround1

Background

The Contracts (Rights of Third Parties) Ordinance, Cap. 623 took effect from 1 January 2016 in Hong Kong.

Prior to 1 January 2016, under the doctrine of privity a person could not acquire or enforce any rights under the contract to which he/she was not a party.

Impact on the Construction Industry

In the vast majority of cases, construction projects contain a benefit to a third party. Therefore, the impact of the Ordinance will be widespread and will be applied to construction contracts and agreements for the appointment of construction professionals.

The result of this is that any identified third parties, or third parties which will be the recipient of a benefit under a contract, will be permitted to enforce the terms of that contract against contractors and designers, should the requirements arise.

The Rights of Third Parties

In order for a third party to be able to have rights in accordance with the Ordinance it has to be expressly identified by name, as a member of a class or answering a particular description.

For a third party to enforce the rights given to it under a contract, it has to satisfy the following criteria:

  • that there is an express provision contained in the contract to that effect; or
  • that the contract purports to confer a benefit on such a third party.

The Ordinance provides that if a contract is constructed so it allows a third party to enforce a clause of the contract, the parties to the contract are not permitted to amend or rescind the third party’s rights unless they are consented to do so, or there is an express provision in the contract that permits such action.

Therefore it is not an express requirement for such third parties to be provided for in the construction contract. They could simply be an identifiable class of people, such as prospective purchasers, tenants or financiers of a project.

This is something that could be open to interpretation since there may be difficulty in identifying all third parties that could potentially establish rights against a contracting party.

Opting Out

Something that is likely occur in Hong Kong is that parties may wish to insert express clauses that result in them ‘opting out’ or restrictively qualifying the provisions of the Ordinance, particularly where contracting parties adopt standard forms of contract which are governed by Hong Kong law.

In anticipation of the Ordinance, it is advisable to review any existing standard contracts that may be used and make a decision as to whether it is beneficial to insert an opt-out term.

Attention should be given when executing contracts that the implications of opting out are fully understood and considered by all parties.

Collateral Warranties

In the UK, and despite the Contracts (Rights of Third Parties) Act 1999 being well established, it appears that there is still a preference for collateral warranties.

The reasoning for this is widely considered to be that the use of collateral warranties is established, there is a high level of understanding throughout the industry of how to use them and the use of the 1999 Act has not been tested to any degree of significance in the UK Courts.

Further Consideration

When dealing with new contracts in Hong Kong, consideration should be given to the following matters:

  • Is there a third party expressly named in the contract?
  • If so, does it state if they have any rights under the contract?
  • Is there an acceptance that a third party may be able to enforce these rights?

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