Privity of Contract

This Consultation Paper has been prepared by the Privity of Contract Sub-committee of the Law Reform Commission. It does not represent the final views of either the Sub-committee or the Law Reform Commission, and is circulated for comment and discussion only.

The Sub-committee would be grateful for comments on this Consultation Paper by 31 August 2004. All correspondence should be addressed to:

It may be helpful for the Commission and the Sub-committee, either in discussion with others or in any subsequent report, to be able to refer to and attribute comments submitted in response to this Consultation Paper. Any request to treat all or part of a response in confidence will, of course, be respected, but if no such request is made, the Commission will assume that the response is not intended to be confidential.

It is the Commission's usual practice to acknowledge by name in the final report anyone who responds to a consultation paper. If you do not wish such an acknowledgment, please say so in your response.

THE LAW REFORM COMMISSION
OF HONG KONG

SUB-COMMITTEE ON
PRIVITY OF CONTRACT

CONSULTATION PAPER

Chapter	*Page*

Preface	1

Terms of reference	1
The Sub-committee	1
Meetings	2
What is “privity of contract”?	2
Criticisms of the privity doctrine and reform in other jurisdictions	2
Consultation paper	3

1. The current law in Hong Kong	4

The doctrine of privity	4
(i) Contracts to pay money to a third party	5
(ii) Contracts to purchase real property	5
(iii) Insurance contracts	6
Legal principles which have the effect of allowing third parties to enforce rights	6
Common law	7
Statutory provisions	8
How the Hong Kong courts have received judicial developments in other common law jurisdictions	10
Canada	10
Australia	11
Hong Kong courts	12

2. Should the privity doctrine be reformed?	14

Arguments against reforming the privity doctrine	14
Third party should not be able to sue in the absence of consideration	14
Contracts are personal transactions	15
Undesirable to subject promisor to two actions	15
Unjust that the third party can sue on the contract but cannot be sued	16
Freedom of the contracting parties to rescind or vary might be affected and a wide range of possible third party plaintiffs	16
Arguments for reforming the privity doctrine	17
Frustrating parties' intention to benefit third parties	17
The privity doctrine is unduly complex, uncertain and artificial	17
The person who has suffered the loss cannot sue, while the person who has suffered no loss can sue	19
The injustice to a third party who has relied on the promise	19
Widespread and continuous criticism of the doctrine, and abrogation of the doctrine in other jurisdictions	20
Conclusion	21

3. Options for reform of the privity doctrine	23

Option 1 – Judicial development of circumvention of the privity doctrine	23
Option 2 – Legislative exceptions to the privity doctrine to be made in specific instances	24
Option 3 – Adopting a general provision that no third party should be denied enforcement of a contract made for his benefit on the grounds of lack of privity	25
Option 4 – Reform by means of a detailed legislative scheme	25
Conclusion	26

4. The elements of the new legislative scheme	28

Who is a third party?	29
Australia	29
England and Wales	30
New Zealand	30
Singapore	31
Options and conclusions	31
What is the test of enforceability?	33
Australia	33
England and Wales	34
New Zealand	35
Singapore	36
Options and conclusions	37
Can the contracting parties vary or rescind the contract?	45
Australia	45
England and Wales	46
New Zealand	46
Singapore	47
Options and conclusions	47
Can the parties vary or rescind the contract after crystallisation, or lay down their own crystallisation test?	51
England and Wales	51
New Zealand	51
Singapore	51
Options and conclusions	52
Should there be any judicial discretion to authorise variation or cancellation?	54
England and Wales	54
New Zealand	54
Singapore	54
Options and conclusions	55
Should consideration be an issue?	56
Australia	56
England and Wales	57
New Zealand	58
Singapore	58
Options and conclusions	58
What defences, set-offs and counterclaims should be available to promisors?	59
Australia	59
England and Wales	60
New Zealand	61
Singapore	61
Options and conclusions	61
How should overlapping claims against promisors be dealt with?	64
Promisor's duty owed both to the promisee and the third party	65
Discharge of promisor by performing obligation to the third party	67
Avoidance of double liability	68
Should arbitration clauses and exclusive jurisdiction clauses be binding on the third parties?	69
England and Wales	69
Singapore	70
Options and conclusions	70
What should the scope of the present reform be?	76
Preservation of existing rights of third parties	76
Areas to which the recommended legislation should not apply	78
Miscellaneous issues	81

5. Summary of recommendations	84

Annex 1	88

Comparison table of the rules on reforming the privity doctrine

Annex 2	94

Legislation in other jurisdictions

Hong Kong Law Reform Commission

THE LAW REFORM COMMISSION OF HONG KONG