THE LAW REFORM COMMISSION OF HONG KONG

The Law Reform Commission of Hong Kong was established by the Executive Council in January 1980. The Commission considers for reform such aspects of the law as may be referred to it by the Secretary for Justice or the Chief Justice.

The members of the Commission at present are:

The Hon Ms Elsie Leung Oi‑Sie, GBM, JP,

Secretary for Justice (Chairman)

The Hon Mr Justice Andrew Li, Chief Justice

Mr Tony Yen, SBS, JP, Law Draftsman

Dr John Bacon-Shone

The Hon Mr Justice Bokhary, PJ

Professor Albert Chen, JP

Mr Anthony Chow, SBS, JP

Professor Y K Fan, BBS, JP

Mr Alan Hoo, SBS, SC, JP

The Hon Mrs Sophie Leung, SBS, JP

Professor Michael McConville

Mr Benjamin Yu, SC, JP

The Secretary of the Commission is Mr Stuart M I Stoker and its offices are at:

20/F Harcourt House

39 Gloucester Road

Wanchai

Hong Kong

Telephone: 2528 0472

Fax: 2865 2902

E‑mail: hklrc@hkreform.gov.hk

Website: http://www.hkreform.gov.hk

The Law Reform Commission

of Hong Kong

Report

Privity of Contract

_________________________________

CONTENTS

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
The consultation process	3
Layout of this report	3

1. The current law in Hong Kong	5

The doctrine of privity	5
(i) Contracts to pay money to a third party	6
(ii) Contracts to purchase real property	6
(iii) Insurance contracts	7
Legal principles which have the effect of allowing third parties to enforce rights	7
Common law	8
Statutory provisions	9
How the Hong Kong courts have received judicial developments in other common law jurisdictions	11
Canada	11
Australia	12
Hong Kong courts	13


2. Should the privity doctrine be reformed?	15

Arguments against reforming the privity doctrine	15
Third party should not be able to sue in the absence of consideration	15
Contracts are personal transactions	16
Undesirable to subject promisor to two actions	16
Unjust that the third party can sue on the contract but cannot be sued	17
Limits freedom of the contracting parties to rescind or vary and exposes them to a wide range of possible third party plaintiffs	17
Arguments for reforming the privity doctrine	18
Frustrating parties' intention to benefit third parties	18
The privity doctrine is unduly complex, uncertain and artificial	18
The person who has suffered the loss cannot sue, while the person who has suffered no loss can sue	20
The injustice to a third party who has relied on the promise	21
Widespread and continuous criticism of the doctrine, and abrogation of the doctrine in other jurisdictions	21
Conclusion	22


3. Options for reform of the privity doctrine	26

Option 1 – Judicial development of circumvention of the privity doctrine	26
Option 2 – Legislative exceptions to the privity doctrine to be made in specific instances	27
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	28
Option 4 – Reform by means of a detailed legislative scheme	28
Conclusion	29


4. The elements of the new legislative scheme	32

Who is a third party?	33
Australia	33
Canada	34
England and Wales	34
New Zealand	35
Singapore	35
Options and conclusions	36
What is the test of enforceability?	38
Australia	39
Canada	39
England and Wales	40
New Zealand	41
Singapore	43
Options and conclusion	43
Can the contracting parties vary or rescind the contract?	53
Australia	53
England and Wales	54
New Zealand	55
Singapore	55
Options and conclusions	56
Can the parties vary or rescind the contract after crystallisation, or lay down their own crystallisation test?	60
Canada	61
England and Wales	61
New Zealand	61
Singapore	61
Options and conclusions	62
Should there be any judicial discretion to authorise variation or cancellation?	65
England and Wales	65
New Zealand	66
Singapore	66
Options and conclusions	66
Should consideration be an issue?	69
Australia	69
England and Wales	69
New Zealand	70
Singapore	71
Options and conclusion	71
What defences, set-offs and counterclaims should be available to promisors?	72
Australia	72
Canada	72
England and Wales	72
New Zealand	73
Singapore	74
Options and conclusion	74
How should overlapping claims against promisors be dealt with?	78
Promisor's duty owed both to the promisee and the third party	78
Discharge of promisor by performing obligation to the third party	82
Avoidance of double liability	83
Should arbitration clauses and exclusive jurisdiction clauses be binding on third parties?	86
England and Wales	86
Singapore	87
Options and conclusions	87
What should the scope of the present reform be?	93
Preservation of existing rights of third parties	93
Areas to which the recommended legislation should not apply	97
Miscellaneous issues	107


5. Summary of recommendations	110


Annex 1 - List of those who responded to the consultation paper	114

Annex 2 - Comparison table of the rules on reforming the privity doctrine	115

Annex 3 - Legislation in other jurisdictions	124

Hong Kong Law Reform Commission

Chapter