Contracts (Rights of Third
Edmund Wan and James Wilkinson
Parties) Ordinance King & Wood Mallesons | 22 September 2016
King & Wood Mallesons / www.kwm.com 2
Overview of
Ordinance.
Impact on
construction
contracts.
Standard form
contracts.
01 02 03
Nuts and bolts.
04
01 Overview of Ordinance
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Snapshot
4
Ordinance came into operation on 1 January 2016.
Applies to contracts
entered into on or after
1 January 2016.
Allows third parties to enforce
contractual terms subject to
contracting parties’ intention.
Reforms doctrine of
privity.
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Privity of Contract
5
Employer Sub-
contractor
Main Contractor
• Only parties to a contract
may enforce rights under
the contract.
• This prevents effect being
given to contracting
parties’ intention to benefit
a third party.
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Third party rights under Ordinance
6
Employer Sub-
contractor
Main Contractor
• A third party may enforce a
term of a contract if:
• the contract expressly
provides that the third
party may do so; or
• the term purports to
confer a benefit on the
third party and is
intended to be
enforceable by the third
party.
• The third party must be
expressly identified in the
contract by name, as a
member of a class or as
answering a particular
description.
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Third party rights under Ordinance
7
Employer Sub-
contractor
Main Contractor
Example – Rights conferred
on third party
• “Sub-contractor shall have the
right to enforce the contract.”
• “Sub-contractor shall have the
right to enforce clauses 3 and
4 of the contract against
Employer.”
Example – No rights conferred
on third party
• “Contractor agrees with
Employer to provide
renovation services to
Owner’s apartment. All
disputes arising from this
renovation contract shall be
dealt with between Contractor
and Employer only.”
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Remedies available to third party
8
• Third party may seek any
remedy that would be available
to him had he been named a
party to the contract.
• Eg damages, injunctions,
specific performance.
• Including a remedy under rules
of equity.
• The Ordinance does not affect
a right or remedy of a third
party that exists or is available
apart from the Ordinance.
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Opting out of Ordinance
9
If contracting parties do not wish the
Ordinance to be applicable to their
contract, they may make an express
provision to that effect in the contract
(i.e. contract out).
Example of opt-out clause
“The Contracts (Rights of Third
Parties) Ordinance shall not
apply to this contract and unless
specifically herein provided no
person other than the parties to
thiscontract shall have any rights
under it nor shall it be
enforceable by any person other
than the parties to it.”
02 Impact on construction contracts
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Prior to Ordinance
11
Employer Contractor
Design Consultant Purchaser
Sale and
purchase
agreement
Design
contract
Funder
Prior to Ordinance
• Funder/Purchaser could not
sue the Contractor or
Design Consultant for
defects in the work.
• Difficult for
Funder/Purchaser to
recover damages in tort,
since recovery for pure
economic loss is available
only in limited
circumstances.
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Prior to Ordinance
12
Employer Contractor
Design Consultant Purchaser
Sale and
purchase
agreement
Design
contract
Funder
Collateral warranties
• Collateral warranties
may be used to protect
third party rights. Direct
contractual relationship
between third party and
contractor/professional
consultant.
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Options under the Ordinance
13
Employer Contractor
Design Consultant Purchaser
Sale and
purchase
agreement
Design
contract
Funder
Employer and Design Consultant
under the Ordinance
• Contract between Employer and
Contractor may give Design
Consultant right to claim payment
directly from Employer.
• Contract between Contractor and
Design Consultant may give
Employer right to claim directly
against Design Consultant.
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Options under the Ordinance
14
Employer Contractor
Design Consultant Purchaser
Sale and
purchase
agreement
Design
contract
Funder
Purchaser’s rights under the
Ordinance
• Contracts may give rights for
Purchaser to sue Contractor or
Design Consultant.
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Options under the Ordinance
15
Employer Contractor
Design Consultant Purchaser
Sale and
purchase
agreement
Design
contract
Funder
Funder’s rights under the
Ordinance
• Contracts may give right for
Funder to sue Contractor or
Design Consultant.
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Collateral warranty v third party rights
16
• There is no difference in practice between collateral
warranties and third party rights in a construction or
engineering project. Either may give effective construction
security.
• In the UK, collateral warranties remain popular because:
• They are familiar. Historically, construction lawyers are
more familiar with collateral warranties. Once a collateral
warranty is formally entered into, it is a contract like any
other. Even though they have been available for ten years,
third party rights are a more recent creation of statute.
• It may be easier to grant step-in rights. If a borrower (such
as a developer) becomes insolvent, a funder wants to be
able to step in to its shoes to complete and sell the project
for the best price. Some argue it is easier to include
effective step-in rights in a collateral warranty. However,
those who prefer third party rights feel it is just as
straightforward in practice to use third party rights to grant
step-in rights.
03 Standard form contracts
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NEC 3
18
Option to confer rights on third parties
Clause Y3.1 ECC
“A person or organisation who is not one of the Parties may
enforce a term of the contract under the Contracts (Rights of
Third Parties) Act 1999 only if the term and the person or
organisation are stated in the Contract Data.”
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HKIA Building Contract (2005)
19
Clause 29.3
“If it is stated in the Contract that the
Employer will require a Nominated Sub-
Contractor or Nominated Supplier to enter
into a sub-contractor or supplier warranty
agreement with the Employer, the
Contractor shall, before entering into a
sub-contract or supply contract with that
Nominated Sub-Contractor or Nominated
Supplier, ensure that the Nominated Sub-
Contractor or Nominated Supplier has
given the sub-contractor or supplier
warranty agreement to the Employer in the
form set out in the Contract Bills or the
Specification or, if not set out in either of
those documents, in the form set out in
Schedules 2 and 3 of the Conditions.”
Schedule 2 – Form of Warranty to be given by NSC
“(a) We will commence and complete the Sub-Contract Works in
accordance with the Sub-Contract.
(b) We will indemnify the Employer against all extra costs that may be
incurred by non-performance of the Sub-Contract Works, by late
completion of the Sub-Contract Works or by any breach of these
warranties.
(c) We have exercised and will exercise all reasonable skill and care in:-
(i) the design of the Sub-Contract Works insofar as the Sub-
Contract Works have been or will be designed by us; and
(ii) the selection of materials and goods for the Sub-Contract Works
insofar as such materials and goods have been or will be
selected by us.
(d) We will comply with and satisfy any performance specification or
requirements insofar as such performance specification or
requirements are included or referred to in the Tender Documents
and/or our Tender as part of the description of the Sub-Contract
Works.”
Collateral warranties
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JCT 2011
20
Clause 7A-1
“Where clause 7A is stated in Part 2 of the
Contract Particulars to apply to a
Purchaser or Tenant, P&T Rights shall vest
in that Purchaser or Tenant on the date of
receipt by the Contractor of the Employer’s
notice to that effect, stating the name of
the Purchaser or Tenant and the nature of
his interest in the Works.”
Rights conferred on purchasers, tenants and funders
Clause 7B-1
“Where clause 7B is stated in Part 2 of the
Contract Particulars to apply to a Funder,
the Employer may by notice to the
Contractor confer Funder Rights on the
Funder identified in the notice. Those
rights shall vest in the Funder on the date
of receipt by the Contractor of the
Employer’s notice.”
04 Nuts and bolts
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Rescission and variation
22
Restriction on rescission and variation
• If a contract is enforceable by the third party, parties to the contract may not, without the third party’s consent, by agreement rescind or vary the contract so that the third party’s right under the term is altered or extinguished where:
• the third party has assented to the term and the promisor has received notice of the assent; or
• the third party has relied on the term and the promisor is aware of the reliance or can reasonably be expected to have foreseen that the third party would rely on the term.
Express terms override restrictions
• Contracting parties may override the above requirement by way of an express term in the contract provided the third party is aware of such express term or reasonable steps have been taken by one or more parties to the contract to make the third party aware of such express term.
Court may intervene
• A party to the contract may apply to the court to make an order dispensing with the third party’s consent.
• The court may make the order if:
• the other party or each other party to the contract agrees to rescind or vary the contract; and
• the court thinks it just and practicable to make the order.
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Defences
23
Example: Contract between
Buyer and Seller. Seller is to
supply concrete to Buyer.
Buyer is to make payment
direct to Manufacturer. In
breach of the contract, Seller
did not provide the concrete
to Buyer. Manufacturer sues
Buyer for the payment. Buyer
may raise the defence of
breach of contract.
If a third party brings proceedings
to enforce the contract, the
promisor may raise the following by
way of defence or set-off:
1. A matter that:
(a) arises from or in
connection with the
contract and is relevant to
the term; and
(b) would have been available
to the promisor by way of
defence or set-off if the
proceedings had been
brought by the promisee.
Buyer Distributor
Manu-facturer
Supply of
concrete
Sale of
concrete
Buyer to pay
Manufacturer
direct
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Defences
24
2. A matter in respect of which
the following conditions are
met:
(a) an express term of the
contract provides for it
to be available to the
promisor by way of
defence or set-off in
proceedings brought by
the third party; and
(b) the matter would have
been available to the
promisor by way of
defence or set-off if the
proceedings had been
brought by the
promisee.
Example: Distributor supplies
concrete to Buyer. Under the
contract, Buyer agrees to pay
the price to Manufacturer.
Buyer has borrowed money
from Distributor and the loan is
due on demand.
The contract for sale of
between Distributor and Buyer
contains the following clause:
“If Buyer fails to pay
Manufacturer, and
Manufacturer enforces
contractor against Buyer,
Buyer is entitled to raise
any defence and set-off as
is available against Buyer
under the loan agreement.”
Buyer Distributor
Manu-facturer
Supply of
concrete
Sale of
concrete
Buyer to pay
Manufacturer
direct
Loan
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Defences
25
3. A matter that would have
been available to the
promisor by way of defence
or set-off if the third party
had been a party to the
contract.
Example: Buyer agrees
with Distributor to pay a
sum of money to
Manufacturer.
Manufacturer has
induced Buyer to enter
into the contract with
Distributor by
misrepresentation.
Buyer may have a
defence against
Manufacturer that the
contract is voidable for
misrepresentation.
Buyer Distributor
Manu-facturer
Sale of
concrete
Buyer to pay
Manufacturer
direct
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Protection from double liability
26
The promisor is
protected from double
liability under the
Ordinance.
On obligations
If the contract is
enforceable by the third
party and the promisor
has wholly or partly
performed the promisor’s
obligations to the third
party, then the promisor
is discharged from the
obligations owed to the
promisee to the extent of
having performed the
same obligations to the
third party.
On loss
If the contract is
enforceable by the third
party and the promisee
has recovered from the
promisor a sum for:
• the third party’s loss;
or
• the expense of making
good to the third party
the promisor’s default,
then a court or arbitral
tribunal must reduce any
award to the third party
to the extent it thinks
appropriate to take
account of the sum
recovered.
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Dispute resolution
27
Arbitration
If a third party’s right to enforce a term of a
contract is subject to an arbitration agreement,
the third party is treated as a party to the
arbitration agreement for the purposes of
enforcement of the term, unless on a proper
construction of the contract, the third party is not
intended to be so treated.
A third party will have a procedural right under a
contract to submit disputes to arbitration if:
• the contract term is enforceable by the third
party;
• the term provides that the dispute between
the third party and the promisor is to be
submitted to arbitration; and
• the term constitutes an arbitration agreement.
Exclusive jurisdiction
clause
If a contract term is
enforceable by a third party
and the contract contains
an exclusive jurisdiction
clause, then the third party
is bound by the exclusive
jurisdiction clause if there is
any dispute relating to the
enforcement of the term by
the third party against the
promisor, unless on a
proper construction of the
term, the third party is not
intended to be so bound.
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Assignment
28
A third party may assign to another
person a right under a term of a contract
enforceable by the third party unless:
• the contract expressly provides
otherwise; or
• on a proper construction of the
contract, the right is personal to the
third party and is not assignable.
Contracts (Rights of Third
Edmund Wan and James Wilkinson
Parties) Ordinance King & Wood Mallesons | 22 September 2016