Hong Kong Law Reform Commission

Preface

• Terms of reference
• The Sub-committee
• Meetings
• What is "privity of contract"?
• Criticisms of the privity doctrine and reform in other jurisdictions
• Consultation paper

Terms of reference

1. In December 2002, the Secretary for Justice and the Chief Justice made the following reference to the Law Reform Commission:

"To examine the doctrine of privity of contract and its exceptions, and the justifications for and against its retention, and to make such recommendations for reform as appropriate."

The Sub-committee

2. In the same month, the Law Reform Commission appointed a sub-committee under the chairmanship of Mr Benjamin Yu, SC, to consider the above terms of reference and to make proposals to the Commission for reform. The membership of the Sub-committee was:

Meetings

3. The Sub-committee commenced the study of its reference on 29 January 2003 and between then and the publication of this consultation paper held a total of thirteen meetings.

What is "privity of contract"?

4. The doctrine of privity of contract ("the doctrine of privity") holds that a contract cannot confer rights or impose obligations on any persons other than the parties to the contract. The doctrine of privity is also known as the "third party rule". The doctrine has two aspects: as a general rule,

(a) a person cannot acquire and enforce rights under a contract to which he is not a party; and

(b) a person who is not party to a contract cannot be made liable under it.

The second aspect is generally regarded as just and sensible. However, the first aspect that a third party cannot acquire rights under a contract to which he is not privy has been criticised. The main concern of this paper is therefore with this first aspect of the rule, and references to the doctrine of privity or the "third party rule" are to this.

Criticisms of the privity doctrine and reform in other jurisdictions

5. The privity doctrine has long been criticised as artificial and contrary to the parties' intention to benefit a third party. As a result, the courts have sometimes needed recourse to devices such as agency and trust to allow a third party to enforce a right conferred on him. Furthermore, legislation has made incremental inroads to the doctrine in specific cases. These legal principles at common law and in statutes circumvent the privity doctrine in some cases, but not generally.[1] It is no surprise that law reform bodies in various common law jurisdictions have critically examined the doctrine and recommended its reform.[2] In Australia (Western Australia and Queensland), England, New Zealand and Singapore the privity doctrine has eventually been abrogated by legislation.[3]

6. The questions for the Sub-committee are whether the anomalies of the privity doctrine are serious enough to warrant its reform and, if so, whether ad hoc reforms, either by the courts on their own initiative or by legislation, are adequate in the modern Hong Kong context, or whether an issue of this magnitude calls for comprehensive legislative reform.

Consultation paper

7. Chapter 1 of this consultation paper further examines the doctrine of privity as well as the common law and statutory principles which have the effect of circumventing the doctrine. Chapter 2 discusses the arguments for and against reforming the doctrine, while Chapter 3 examines a number of options for reform and concludes in favour of recommending reform by means of a detailed legislative scheme. Chapter 4 examines the legislative schemes in other major common law jurisdictions and considers various options before making our provisional recommendations for a legislative scheme for Hong Kong. Chapter 5 summarises all our recommendations.

8. We emphasise that this is a consultation paper, and the recommendations presented here are put forward to facilitate discussion. We welcome views, comments and suggestions on any issues discussed in this Paper. The Sub-committee and the Commission will carefully consider all responses in drawing up final recommendations in due course.

[1] These legal principles are discussed in Chapter 1.

[2] Such as the Queensland Law Reform Commission, Report on a Bill to Consolidate, Amend and Reform the Law Relating to Conveyancing, Property, and Contract and to Terminate the Application of Certain Imperial Statutes (1973); the Law Commission (England), Privity of Contracts: Contracts for the Benefit of Third Parties (1996); the New Zealand Contracts and Commercial Law Committee, Report on Privity of Contract (1981); and Law and Revision Division, Attorney General Chambers (Singapore), Report on the Proposed Contracts (Rights of Third Parties) Bill 2001.

[3] See the Western Australian Property Law Act 1969 (Western Australia), the Queensland Property Law Act 1974 (Queensland), the Law of Property Act 2000 (the Northern Territory), the Contracts (Rights of Third Parties) Act 1999 (England), the Contracts (Privity) Act 1982 (New Zealand), and the Contracts (Right of Third Parties) Act 2001 (Singapore).