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The Contracts (Rights of Third Parties) Bill : What employers should be aware of
1 September 2014

In Hong Kong, under the common law doctrine of privity of contract, a person cannot acquire and enforce rights in a contract to which he is not a party nor can he be made liable under that contract. Therefore, only those who signed a contract are entitled to sue or be sued on it.

This doctrine has been long criticized as it defeats any contracting parties’ intention to benefit third parties and that could lead to unfavourable consequences. For example, Company A entered into a licensing agreement with Company B for the use of intellectual property rights owned by Company A’s associated company. If an infringement takes place, the associated company would not be able to enforce its rights under the licensing agreement simply because it was not a party to the agreement. Another example is that if an employee signs a settlement agreement with his employer waiving all his claims against his co-workers and associated companies of his employer, the co-workers and the associated companies would have no right to rely on the settlement agreement if the employee breaches the settlement terms and brings legal proceedings against them.

Following similar reforms in the UK and other jurisdictions, the Contracts (Rights of Third Parties) Bill (the “Bill), was gazetted on 28 February 2014 and introduced to the Legislative Council for first reading on 26 March 2014. The Bill proposes reforms to the above doctrine so that parties to a contract may be free to confer the benefit of the contract on a third party, who is then able to directly enforce it. In this eNews, we consider the changes and impact of the Bill from an employment perspective and some aspects of the Bill that employers should be aware of.

Employment Contracts

Like in the UK, the Bill is not applicable to certain types of contract. Section 3(4) of the Bill provides that the Bill does not confer a right on a third party to enforce a term of a contract of employment (as defined in the Employment Ordinance) against an employee. Since the exclusion is limited to the enforcement “of a contract of employment against an employee”, it is possible to argue that third parties may rely on the Bill to enforce a term in the employment contract against the employer. An example of this would be terms that entitle the employee and his family members to certain benefits, such as medical insurance coverage or club memberships. The employee’s spouse and children are third parties within the meaning of the Bill and they would therefore be able to seek enforcement of employment terms against the employer under the Bill.

Employment-related Contracts

It is also possible to argue that other contracts in the employment context which are not contracts of employment are not excluded by Section 3(4) of the Bill. Examples of contracts between employer and employee which may be applicable under the Bill include settlement agreements, standalone confidentiality agreements and restrictive covenant agreements. Usually, such agreements intend that one or more members of the employer’s companies should benefit from the employee’s promise. In a confidentiality agreement or a non-competition agreement, the employee may agree (i) to keep confidential information about the employer and its related companies or (ii) not to compete with clients of employer and its associated companies. If the contract expressly identifies the related companies and the term confers a benefit on them, the related companies may then be able to enforce the confidentiality/non-competition agreement directly against the employee under the Bill.

However, for the third parties to rely on the Bill, the contracts must be separate from the employment contract and the terms of such contract must expressly identify the third parties who are intended to benefit from the agreed terms. Otherwise, third parties who are not expressly stated will not be able to enforce the contract.

What can employers do?

The Bill will not apply to contracts made before the legislation comes into effect. In the meantime, employers should consider reviewing their standard form employment contracts, handbooks, terms and conditions and employment-related contracts to check whether there are any terms which may purport to benefit third parties and if so, whether the third parties would be able to rely on the Bill to enforce the terms directly. Employers can also consider including an express clause to provide that the Bill does not apply to any particular contract, and the result would be that no one rely on the Bill and enforce the terms of the contract as a non-party.

If you have any queries regarding the above eNews or any other questions relating to employment or corporate or commercial matters, experienced lawyers in our Corporate and Commercial department would be happy to assist you.

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