The essence of the privity of contract rule means that only the parties to a contract can enforce it.
In an attempt to relax certain aspects of a rule that is at times artificial, various jurisdictions have implemented statutes providing for third party rights, including Hong Kong. The Contracts (Rights of Third Parties) Ordinance, Cap.622 is expected to come into force on 1st January 2016 and will enable a third party to enforce his rights in a more straightforward manner.
A third party can enforce a contract either where it is expressly provided so (section 4(1)(a) of Cap.623) or where it purports to do so (section 4(1)(b) of Cap.623).
Section 6 of Cap.623 makes it clear that the contracting parties may not, without the third party’s consent, by agreement vary or rescind the third party’s rights so that the third party’s right is altered or extinguished.
In England, the default position in the commercial world has been to exclude such third party rights. However, there are some areas where the Contracts (Rights of Third Parties) Act 1999 has not been excluded in its entirety, such as in the context of M&A transactions.
For example, where a seller agrees not to compete but fails to abide by the restrictive covenant, this may mean that the buyer’s group of companies may suffer losses. It is therefore common for contracts governed by English law to make use of the rights under the Contracts (Rights of Third Parties) Act 1999 to directly enforce restrictive covenants.
The aforementioned example demonstrates that whilst the default commercial position in the UK is to exclude the Contracts (Rights of Third Parties) Act 1999, there should always be a careful consideration of the context and circumstances of each contract before the parties choose to adopt such default position.