Asia Pacific - focus on insurance: Hong Kong

Impact of the Contracts (Rights of Third Parties) Bill on the insurance industry in Hong Kong

'Privity of contract' is a well-established common law doctrine establishing that a person cannot acquire or enforce rights under a contract to which he is not a party. The strict application of the doctrine may, however, give rise to absurdity or even unfairness. By way of example, A promises B to pay a sum of money to C. If A fails to pay as agreed, under the privity of contract doctrine, C cannot enforce the contract between A and B. While B can sue A, it may be difficult for B to prove loss as the contract is to confer benefit to C and not B. Legislators in Hong Kong are considering the Contracts (Rights of Third Parties) Bill (the Bill), which is intended to address such possible absurdity. The Bill has gone through its first reading and the date for second reading has yet to be fixed.

Applicability of 'privity of contract' in employees' compensation insurance context

In a situation where a subcontractor takes out an insurance policy with an insurer to cover his and the principal contractor's liability to employees' compensation, if an employee of the subcontractor is injured due to the negligence of the principal contractor's employee and the principal contractor pays the compensation to the injured employee, can the principal contractor (who is not a party to the insurance policy) seek indemnity from the insurer?

The authority suggests that the common law principle of privity of contract applies. In B+B Construction Ltd v Sun Alliance and London Insurance Plc [2000] 2 HKC 295, the plaintiff, as principal contractor, subcontracted its construction work to Pak Kee Transportation Co Ltd (Pak Kee). Under the sub-contract Pak Kee was obliged to provide employees' compensation insurance. Pak Kee had taken out an insurance policy with Sun Alliance and London Insurance plc under which Pak Kee 'and his contractors' were the insured. The policy expressly excluded liability to 'employees of contractors to the insured' (the Exception). An employee of Pak Kee was subsequently injured during the course of employment, which was due to the negligence of an employee of the principal contractor. The principal contractor was held liable for damages and brought an action against the insurer for an indemnity.

The Court of First Instance granted a summary judgment against the insurer. The insurer successfully appealed to the Court of Appeal on the ground that the...