CONTRACTS (RIGHTS OF THIRD PARTIES) BILL

[Mr Speaker in the Chair]

Order for Second Reading read.

The Minister for Law (Prof. S. Jayakumar): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time".

Sir, this Bill is essentially a law reform measure, what I would call lawyer's law. It is to reform the law by making provision for enforcement of contractual terms by third parties.

By way of background, let me say that, at present, under the general principle of law, a person who is not a party to a contract has no legal right to enforce the contract, even if the contracting parties intended the contract to confer a benefit on him. This principle is known as the "third party rule". For example, under the third party rule, a person who bought a house on the resale market will have no contractual recourse against the housing developer for defects in the house even though the developer had contractually agreed with the original purchaser to confer a benefit on subsequent purchasers. This is because, unlike a person who bought direct from the developer, the resale buyer has no direct contractual relationship with the developer. Another instance is where a couple is getting married, and a relative goes to a shop where a wedding list is kept, buys them whatever gift, a dining table or sofa set, as a wedding present and arranges to have it delivered directly to them. It is made clear in the discussions with the shop that holds the list that the item is a gift for the couple. Under the third party rule, the couple would not have any recourse against the shop, because they were not parties to the contract. Any action against the shop for breach of contract would have to be taken by the relative who was one of the original contracting parties.

We inherited this third party rule from England and it forms part of the law of contract. The United Kingdom, however, itself has modified the third party rule. Therefore, the Law Reform and Revision Division of the Attorney-General's Chambers reviewed the third party rule in Singapore and has recommended this amending law which the Government agreed to.

With this reform, Singapore's law will then be in line with developments in other advanced economies of the world, including the leading international financial centres, such as New York and London. The "third party rule" has already been abrogated throughout much of the common law world; in countries such as the United States, New Zealand, parts of Australia and, most recently, in the UK. Most member states of the European Union also recognise and enforce the rights of third party beneficiaries under contracts.

Sir, this reform is clearly needed as it enables carrying out the intention of contracting parties to confer benefits on third parties. The third party rule, as it stands, causes injustice to a third party who may have reasonable expectations about his rights under the contract and, for example, may have arranged his affairs accordingly.

The third party rule has led to many ad hoc statutory and common law exceptions to circumvent the inconvenient effects of the third party rule. It has also led to complicated legal documentation and consequently higher legal costs. In the example I gave earlier, to overcome the effect of the third party rule, additional legal documentation, such as an assignment of rights, a collateral warranty or a deed of indemnity, would have to be effected. All these and the resulting litigation cause legal uncertainty and it is commercially not convenient.

This law reform Bill will facilitate business and contractual practice by providing a simple method to give third parties rights to enforce a contract. It will bring, in my view, certainty to the law and help to lower legal costs incurred by business.

If I may now turn to the provisions of the Bill, the provisions are essentially modelled after the United Kingdom's Contracts (Rights of Third Parties) Act, which came into force in November 1999. It provides a detailed legislative scheme spelling out when a third party will have the right to enforce a contract and how a third party's rights can be exercised.

Clause 2 of the Bill provides that a third party would have the right to enforce a term of a contract in one of two situations:

Firstly, where the contract says so expressly; or

Secondly, where the term purports to confer a benefit on the third party unless, on a proper interpretation of the contract, the contracting parties did not intend the third party to have the right to enforce it.

Clause 2, paragraph (3), provides that the third party must be expressly identified in the contract by name, class or description. However, there is no requirement that the third party should be in existence when the contract is made. This allows contracting parties, for example, to confer enforceable rights on an unborn child or a future spouse or a company that has not yet been incorporated.

Clause 3 provides that the parties to a contract lose their right to vary the contract without the consent of a third party beneficiary if:

Firstly, the third party has communicated his assent of the term to the promisor; or

Secondly, the third party has relied on the term, and the promisor is either aware of the third party's reliance on it; or can reasonably be expected to have foreseen that the third party would rely on the term.

Clause 4 provides that any defence which the promisor can use against a claim by the other contracting party will also be usable against a claim by a third party.

Clause 5 preserves the right of the contracting parties to sue each other on the contract, notwithstanding the existence of third party rights.

Clause 6 protects the promisor from double liability.

Clause 7 sets out a list of subject matter to which the Bill will not apply. The list includes:

contracts of employment;

negotiable instruments;

contracts for carriage of goods by sea covered by the Bills of Lading Act;

contracts for carriage of goods by air covered by the Carriage by Air Act;

contracts for international carriage of goods by land which are covered by such international conventions as may be prescribed by the Minister; and

contracts formed among a company and members of a company as a result of the memorandum and articles of associations of the company.

Sir, contracts of employment are excluded so that employees who breach their duties to their employers will not be exposed to law suits from their employers' customers. The customer's remedy should be against the employer, not the employee. The other categories are excluded because these are areas of laws where clear and established rules have already emerged concerning the rights of third parties and the limitation to such rights.

As regards commencement, let me say that the Bill will come into operation in two stages. During the first six months of its operation, the new law will apply to a contract only if the parties expressly opt into the new regime. This will change to an opt-out regime after six months. The six-month phasing-in period will ensure that parties who are in the midst of negotiating contracts are not taken unawares by the new law. It will also allow time for publicity on the new law to reach various sectors, the legal profession, the business community and the public. In the meantime, having an opt-in regime during the first six months will allow contracting parties who wish to take advantage of the new law to do so immediately.

In conclusion, Sir, let me say that in the drafting of this Bill, feedback from various agencies such as the Ministry of Trade and Industry, Ministry of Finance, the Law Society as well as leading academics and practitioners were sought. Parties consulted were generally supportive of the Bill, and felt that the change was a positive and commercially progressive one.

Sir, I beg to move.

Question proposed.

Mr Chandra Mohan K Nair (Nominated Member): Mr Speaker, Sir, with your leave, may I firstly say that it is an honour and a privilege for me to be chosen to serve as a Nominated Member of Parliament.

Sir, I rise in support of the Contracts (Rights of Third Parties) Bill. This Bill is to be welcomed as it protects third parties in certain instances, as the Hon. Minister has indicated, even though there may not be what is known as privity of contract (or agreement) between the parties, ie, the parties were not originally parties to the agreement. On a proper construction, may I just clarify that I take it that this Bill covers both written contracts and oral, or what is known as verbal contracts, so that that point is clarified and members of the public would be fully aware that it applies to all contracts, and not just to written contracts.

Other than that, Sir, I think the provisions in this Bill are to be welcomed, as indicated by the Minister. It would save, in many ways, legal costs and also documentation that might be required if third parties are involved subsequently, in terms of assignments of contractual rights. I take it that in this situation, it is only the benefits that are passed on, and not the burdens of a contract that applies to the original parties.

In a sense, although there are, as indicated, other jurisdictions that have this particular kind of law, would it be proper for me to suggest also, for purposes of parliamentarians to consider some of the Bills as presented to Parliament, that there would be access to information and material that are prepared by various Ministries to be made available also to those parliamentarians who are interested in having access to them, except perhaps on sensitive pieces of legislation where sensitive information is made available to the Minister or to the Minister of State, for instance, on Defence matters perhaps. If so, parliamentarians would have access to this research that is probably thoroughly done by Permanent Secretaries from various Ministries and legal officers and senior officers of the relevant Ministry. And if that is so, it will give a more positive approach to us parliamentarians also doing research and contributing in a better fashion in Parliament.

Sir, in conclusion, I do support this Bill.

Mr Noris Ong Chin Guan (Nominated Member): Mr Speaker, Sir, I rise to speak in support of this Bill.

The nature of some business and consumer transactions can be quite complicated involving several parties. Some of these transactions involve significant amounts of money and long-term warranties on the product. It is fair that we grant protection to third parties in a transaction, and not just to the original parties who signed the contract.

All this while, promisors have been shielded by the rule of privity of contracts when the issue involves a third party. For example, property developers have been shielded by this rule from resale property buyers. And certain household appliance suppliers have been shielded by this rule from third party consumers. In the interest of making business and consumer transactions fairer, it is therefore appropriate that we enact this Bill. In the interest of bringing our law to be in line with developments in other advanced economies and leading financial centres, it is appropriate that we enact this Bill.

However, there are two clarifications that I would like the Minister to respond. The Minister has clarified the rationale for allowing a time lag in applying the Bill, as stated in clause 1(2). The Bill applies to contracts made more than six months after the commencement of the Bill, with the exception of contracts made within six months of the commencement of the Bill, which expressly provides for the application of the Bill. However, if we agree to the merit of this Bill, I would have thought that it would be preferable to apply it straightaway, rather than wait for six months for it to take effect. I also would have thought that it would be more confusing to have a provision to allow, by exception, contracts made within six months of the commencement of the Bill to grant third party rights where the term of contract provides for the Bill to apply. Does this mean that during the six-month period, the law grants certain people who have knowledge of it the right of third parties and disadvantaging others? May I seek the Minister's further clarification on this point, please?

Sir, secondly, under clause 2(2) of the Bill, third party rights shall not apply if, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by third party. This clause gives some flexibility for the promisor and promisee not to confer third party rights. I believe that this proviso may be valid under certain circumstances. But it can be a loophole for the promisor to include as a fine print in the contract, especially if the promisee is ignorant of the relevance of third party rights. Hence, I would like the Minister to consider whether third party rights can be enforced at all times for some transactions, making it irrelevant for contracts to expressly state otherwise. These transactions that will grant compulsory third party rights should be contracts involving substantial value, such as property and cars.

The basis for my suggestion is that, too often, consumers are ignorant of what is in the agreement. For example, for most first-hand property buyers, their main concern would be the location, the value, the finishing, and so on. Whether the contract conferred the right to third party or not is likely to be of a much lesser concern to them. It may not be something that they would pay particular attention to. After all, a typical agreement for consumer transaction, such as property and cars, is usually very lengthy and couched in terms that would test one's patience in trying to understand it fully. It is possible for these property buyers to miss the fine print in the agreement that expressly takes away third party rights.

Hence, I suggest that for transactions involving a substantial amount, we should protect consumers who are ignorant of third party rights by making third party rights compulsory. My concern is that no matter how we try to educate the public on third party rights, there will still be some who may not be aware of it. The law should still seek to protect those unsuspecting consumers from promisors who delete the third party rights from the contract, especially if the transaction involves a substantial amount of money.

With these two clarifications which I would like the Minister to respond to us, I support the Bill.

Prof. Jayakumar: I thank Mr Chandra Mohan and Mr Noris Ong for their support of the Bill and I will turn to the comments that they have made.

First, a general point was made by Mr Chandra Mohan as to whether parliamentarians could have access to information or materials which the relevant Ministries may have, on the basis of which Bills and amendments are proposed in this House. Let me say that it has always been the approach of my Cabinet colleagues and myself that where Members request for such information, we will be happy to consider it. But it is best that specific requests be made according to the particular issue that is before the House because the Ministry may have a whole array of files and papers and the Member concerned may be interested in one particular part of the Bill. And if he can tailor the request accordingly, I am sure the Ministry will be happy to oblige. In this particular case, the basic materials and research were done by the Law Reform and Revision Division of the Attorney-General's Chambers and they produced most of the essential research work. And if the Member is interested, I will be happy to furnish him with a copy of that report.

He raised one substantive point and that is to seek clarification whether the Bill only covers written contracts or would it also cover oral contracts. To that, I would respond by saying that the Bill does not distinguish between oral contracts and written contracts, and by normal interpretation of the word "contract", it would also include oral contracts, granted that some of the requirements in the Bill may be more easily fulfilled by a written contract than an oral contract. But I should think that it is not impossible for an oral contract to meet them. And if an oral contract were to meet the requirements, then the Bill would apply. Indeed, Sir, examples which were given in the report of the United Kingdom Law Reform Commission indicated that even there, the Law Commission envisaged application of the new law to oral contract and examples included the purchase of wedding gifts in a department store.

Mr Noris Ong has raised at least two points to which I should respond. First, the six-month period. Let me clarify, Sir, first, that the six-month period does not mean that parties who wish to benefit would actually have to wait for six months. I hope my Second Reading speech made it clear that it really provides for a two-stage process for the new law to come into operation. During the initial six months, parties who wish to benefit from the new law immediately can expressly opt into the new law and take advantage of it. This phasing-in period actually is to allow time for lawyers and the public to be educated about the new law so that there will be less risk of confusion once the new law comes completely into force after the phasing-in period.

Let me add also that the United Kingdom also adopted this six-month phasing-in period, and I am not aware of any negative consequences or effects from that approach. In any case, it occurs to me that even if we did not have the six-month period written into the Bill, I think we would still have to provide for sufficient time before the commencement of the Bill for the lawyers and other sectors of society to familiarise themselves with the new law. If we did not so provide, I think there will be some inconvenience. Lawyers who are ready to take advantage of this new law, for example, in preparing corporate finance instruments, would then be forced to wait.

The second point concerns Mr Noris Ong's comment that this rule ought to be made obligatory or mandatory for certain types of important contracts, like purchase of property and cars. It is important for me to stress and clarify that this Bill is not intended to be a consumer protection measure. That is an important point. Although I can see that some, including Mr Noris Ong, may see the benefits for some consumers, the purport of this law is not a consumer protection measure. The purpose is not to impose liabilities on businesses against their wishes. What then is the purpose? The purpose is really to meet the needs of parties who contractually wish to confer rights on third parties but find it inconvenient or not possible to do so under the existing law. So the new law is to give them a convenient way or method to achieve the objectives of conferring rights to third parties. If the contracting party has no intention to confer rights on third parties, then we would not want to force an unintended consequence on unwilling parties. In other words, the basic principle is to give effect to the intention of the contracting parties. And that principle of giving effect to the intention of contracting parties is a cardinal principle in the law of contract. So, it would be difficult for me to accept the proposal of Mr Noris Ong because it would mean departing from that cardinal principle. It also means that the legislation will interfere with the parties' freedom to contract. I hope my explanations have clarified these points.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Prof. Jayakumar].

Bill considered in Committee; reported without amendment; read a Third time and passed.