Consultation Paper Privity of Contract


The Law Reform Commission of Hong Kong



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The Law Reform Commission

of Hong Kong




Sub-committee on

Privity of Contract




Consultation Paper


_________________________________


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

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 conclusion

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 conclusion

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 conclusion

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



Preface


__________

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:





Mr Benjamin Yu, SC
(Chairman)

Senior Counsel


Mr Anthony Chow, SBS, JP

Partner


Peter C Wong, Chow & Chow

Mr Desmond Chow


Associate General Counsel

American International Underwriters Ltd

Mr Simon Chui


Legal Counsel

Consumer Council

Mr Baptista Lai


Barrister-at-Law


Mr Christopher Potts


Partner


Crump & Co

The Hon Mr Justice Reyes


Judge


Court of First Instance


Ms Isabelle Tsang

Legal Counsel

Bank of China (HK) Ltd






Ms Jessica Young

Assistant Professor



Department of Professional Legal

Education

Faculty of Law

The University of Hong Kong

Mr Byron Leung


Secretary







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