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.

Background

Section 81(4) of the Ordinance states that “[t]he leave of the Court is required for any appeal from a decision of the Court under article 34 of the UNCITRAL Model Law, given effect to by subsection (1).” The “Court” refers to the Court of First Instance (hereinafter, “CFI”).

In China International Fund Ltd v Dennis Lau & Ng Chun Man Architects & Engineers (HK) Ltd (2015) HKEC 1626, the Court of Appeal (hereinafter, “CA”) considered the constitutionality of section 81(4).

The Applicant sought leave to appeal against L Chan J’s decision (the learned judge dismissed the Applicant’s application to set aside an arbitration award). The Respondent contended that the CA has no jurisdiction to grant leave because of section 81(4), whilst the Applicant contended that this section is unconstitutional because it disproportionately restricts the Court of Final Appeal’s power of final adjudication (as per Article 82 of the Basic Law)

Judgment

The CA held that notwithstanding the apparent finality of section 81(4), it possesses a residual jurisdiction to supervise the process in the CFI as a means of redress in the rare case where a lower court’s decision to refuse leave cannot be regarded as a judicial decision.

The CA also held that section 81(4) imposes finality in respect of the CFI’s decision on whether leave to appeal should be granted, but this is subject to its residual jurisdiction (as aforementioned). The CA held that if multiple rounds of applications were to be allowed, the legitimate aims of dispute resolution by arbitration (that is, finality, speed and reduction of costs) would be undermined. Further, the limitation in section 81(4) was held to be not more than what is necessary to achieve the aforesaid legitimate aims.

Robotunits Pty Ltd v Juergen Karl Mennel (2015) VSC 268 is a case from the Supreme Court of Victoria concerning disputes arising from shareholders agreements.

The Defendant sought a stay of the proceedings and referral to arbitration on the basis that the parties agreed to submit disputes between them to arbitration. He sought to rely on the arbitration agreement in Clause 15(2) of the Amended Shareholders Agreement, which stated as follows:

“Each party irrevocably and unconditionally submits to arbitration in accordance with the arbitration guidelines of the Law Institute of Victoria.”

Is there an operable arbitration agreement? Croft J held that it was undisputed that on its face the arbitration agreement was pathological because “the arbitration guidelines of the Law Institute of Victoria” referred to” do not exist and do not appear to have ever existed.” The Claimant conceded that the agreement may be rendered effective with judicial assistance. Croft J found the words in Clause 15(2) to be strong words evincing a clear intention to submit disputes, falling with the scope of the arbitration agreement, to arbitration. As such, it was held that the arbitration agreement is operable and capable of forming the basis of the orders sought by the Defendant.

Croft J held that the whole of the proceedings should be stayed, but only the issue of whether the Shareholders Agreements provided a legal or equitable basis for the Defendant to cause the Claimant to make the share payment shall be referred to arbitration. It was further held that as a result of the pathologies of the arbitration agreement, the orders should be made on the condition that the parties (within 28 days) seek to agree on the arbitral seat and the rules of the arbitration.

In Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy [2015] 3 HKLRD 247, the Court of Appeal maintained the lower court decision that a litigation funding agreement and assignment of a cause of action were champertous.

Background

The Defendants, a solicitors’ firm and a barrister respectively, were alleged to have provided negligent advice to a company (the Company) in about 2005 or 2006. The Plaintiff and the Company entered into a funding agreement whereby the Plaintiff agreed, inter alia, to lend $3.4 million to the Company at an interest rate of 25% for a term of 2 years for an intended litigation against the Defendants, guaranteed by the proceeds that the Company would recover from the Defendants, and entitling the Plaintiff to 20% of such proceeds. After the Company issued writs against the Defendant, the Company assigned to the Plaintiff the cause of action against the Defendant and, inter alia, the right to the proceeds arising from such action for $100,000 and 10% of the net proceeds of the action. The Defendants challenged that the assignment was champertous. The Plaintiff argued that it was a major creditor of the Company and its controlling shareholder and so had a genuine commercial interest in the enforcement of action.

Ruling

The Court of Appeal disagreed with the Plaintiff’s contention and upheld the court of first instance’s finding that both the funding agreement and the assignment were champertous. It was held that the Judge below had examined the totality of the facts in forming the views that the transactions would pose a genuine risk to the integrity of the court’s processes. The vastly disproportionate potential returns for the outlay in the funding agreement and the assignment created a serious doubt into the genuineness of the assertions of the Plaintiff.

General Principles on Maintenance and Champerty (as enunciated in the CFA decision Unruh v Seeberger [2007] HKLRD 414)

The core concepts of maintenance of champerty are as follows:
› Maintenance involves a person’s “officious intermeddling” in litigation in which he has no legitimate interest.
› Champerty is a particular kind of maintenance and involves a person taking a share of the proceeds of the litigation maintained.

There are several categories of exceptions:
› The common interest category which justified certain persons with a legitimate common interest in the outcome of litigation in funding it.
› Case involving access to justice considerations.
› A miscellaneous category of practices accepted as lawful including sale and assignment by a trustee in bankruptcy of an action commenced in the bankruptcy and the doctrine of subrogation as applied to contracts of insurance.

In considering whether a contract will be vitiated on the grounds of maintenance and champerty, public policy considerations shall be evaluated in light that:
› The fact that an arrangement may be caught by the broad definition of maintenance of champerty is not in itself sufficient to impose liability. It is necessary to examine the “totality of the facts” and ask whether they pose a genuine risk to the integrity of the court’s processes.
› Countervailing public policies must be taken into account, especially policies in favour of ensuring access to justice and of recognizing, where appropriate, legitimate common interests of a social or commercial character in the litigation.

The disciplinary inquiry in question was held in relation to a medical practitioner (“W”) in public. The initial sentence for a warning letter to be served on W was substituted by an order that W’s name be removed from the General Register for a period of 1 month after the Council was alerted by the media that W did not have a clear record. In the written decision given by the Council on the same day, the Council stated that they would expect legal representatives of a defendant to be frank with the Council in respect of the defendant’s disciplinary record in the future.

Enquiries on the identity of members sitting at the inquiry, the Legal Adviser of the Council and the defence counsel were made by a member of the public (“N”) who is unconnected with the case. N did not explain his purpose of the inquiry despite being repeatedly asked by the Council. N then applied for judicial review to quash the Council’s decision in refusing to disclose the requested information (“the Decision”). The Council relied on the Data Protection Principle 3 (“the Principle”) in Schedule 1 of the Personal Data (Privacy) Ordinance (Cap. 486) (“the PDPO”) to restrict disclosure to N.

The Court of First Instance allowed N’s application and quashed the Decision. Godfrey Lam J found that the Council had irrelevantly taken into account the Principle in making the Decision and failed to consider the requirements of the principle of open justice, which if applicable, would invoke section 60B(a) of the PDPO for exemption to the Principle.

Godfrey Lam J in his obiter stated that the principle of open justice was not limited to physical access to the court room where a judicial hearing is taking place and applied to all tribunals exercising the judicial power of the state. The public interest in the administration of justice and the accountability of the judicial process required basic information about the identities of the key persons who have taken part in a public judicial hearing should normally be published. If the information was not disclosed in the written decision of the tribunal, then it should be disclosed upon inquiry made at a time reasonably close to the hearing.

Background

The Contracts (Rights of Third Parties) Ordinance, Cap. 623 (hereinafter, “the Ordinance”) is expected to come into force on 1st January 2016.

There are two aspects to the doctrine of privity of contract, and it is the second aspect (that is, a party who is not a party to the contract cannot acquire and enforce rights under the contract) that the Ordinance seeks to address.

Legislative provisions

The Ordinance stipulates that a third party may enforce a term of a contract either where the contract contains an express provision that the third party may do so (section 4(1)(a)) or where the term purports to confer a benefit on the third party (section 4(1)(b)). Section 4(1)(b) will not apply if, on a proper construction of the contract, the term is not intended to be enforceable by the third party. Section 4(1) applies to a third party even if the third party was not in existence when the contract was entered into.

Section 5 provides the third party with the same remedies that would have been available to the third party in an action for breach of contract as if the third party was a contracting party.

Where the third party has assented to the term and the promisor has received notice of the assent or where the third party has relied on the term and the promisor has relied on or can reasonably be expected to have foreseen that the third party would rely on the term, then the contracting parties cannot rescind or vary the contract without the third party’s consent.

Conclusion

Whilst the likely impact of the Ordinance remains unknown, if Hong Kong follows the default commercial position of the UK (that is, to exclude the operation of the equivalent statute), then the impact may be minimal. Nonetheless, there should be careful drafting of the contracts by the contracting parties.