- The Contracts (Rights of Third Parties) Ordinance will come into force on 1 January 2016. The Ordinance changes the application of the common law doctrine of privity of contract in Hong Kong (which essentially means only the contracting parties have the benefit and burden of the terms of the contract) and will allow certain third parties to enforce contracts to which they are not a part.
- As a clear exception to the broad approach, the Ordinance does not provide a third party with the right to enforce the terms of a "contract of employment" against an employee. It does, however, provide a third party with the right to enforce the terms of the contract of employment against an employer.
Introduction of the Ordinance and "privity of contract"
The Contract (Rights of Third Parties) Ordinance (Cap. 623) ("Ordinance") will come into force on 1 January 2016. The Ordinance changes the application of the common law doctrine of "privity of contract" in Hong Kong, which entitles the parties to a contract to enforce the terms of the contract against each other, but prevents a third party (who is not a party to the contract) from doing so.
The application of the "privity of contract" rule has been met with some criticism, particularly as it currently operates to override any intention of the parties to create a contractual, legal obligation that is enforceable by a third party (for example, an associated or group company).
The introduction of the Ordinance is in line with legislation already in place in other common law territories, in particular, England and Wales. The Ordinance allows contracting parties to give third parties enforceable contractual rights, with a few exclusions. The Ordinance does not, however, allow a contract to impose a duty on a third party, nor require a third party to give up any right.
Features of the third party right
Under the Ordinance, a third party may enforce a contract term if:
- the contract expressly provides that the third party has the right to do so; or
- in the absence of an express right, the contract purports to confer a benefit on the third party and there is no evidence that the contracting parties have any contrary intentions in the contract itself.
The contract must further expressly identify the third party by name, as a member of a class or as answering to a particular description, for the third party to be conferred the third party right.
So what does this mean for employers?
A notable exclusion is the fact that terms in a "contract of employment" cannot be enforced by a third party against an employee. The same exclusion is not however extended to enforcement against an employer by a third party.
"Contract of employment" is defined in the Employment Ordinance (Cap. 57) ("EO") as "any agreement, whether in writing or oral, express or implied, whereby one person agrees to employ another and that other agrees to serve his employer as an employee…"
With this definition in mind, third parties can rely on the Ordinance and enforce, against an employee, any contracts that are entered into with the employee but are not "contracts of employment" as defined under EO ("Employment-related Contracts").
Examples of such Employment-related Contracts include:
- separation/ settlement/ compromise agreements, which may contain a waiver and release from claims against the employer and any associated or group companies;
- confidentiality agreements, where the employee may agree not to disclose or use any confidential or proprietary information about the employer and any associated or group companies that the employee may have obtained in the course of employment;
- employee share incentive schemes or plans, particularly if the shares issued to the employees are the shares of an associated or group company of the employer;
- post-termination restrictive covenant agreements, which may contain restrictions on an employee not to compete with the employer or any associated or group companies, or not to solicit or deal with any clients or employees of any associated or group companies of the employer;
- secondment/ assignment agreements, whether entered into between the host company and the employer (for the employee to be seconded to the host company), or between the employer and the employee (for the host company to host the employee).
Of course, the above list is not exhaustive, and whether or not a specific contract does fall outside the definition of "contracts of employment" will depend on the content and wording of the particular agreement.
As mentioned above, third parties mentioned in the contract of employment have the right to enforce the contract against the employer. Examples of third party claims that may arise as a result of this right include:
- an employee's spouse or family seeking to enforce certain benefits (such as insurance, school fees, housing allowance or relocation benefits) contained in the contract of employment; and
- the employee relying on the terms of a secondment agreement between the host company and employer, or the host company similarly relying on a secondment agreement between the employee and the employer.
Taking advantage of the Ordinance - top four tips for employers
- Any Employment-Related Contracts should be a separate, independent agreement from the contract of employment to ensure that they do not get caught by the "contract of employment" definition.
- The third party intended to benefit from the agreed terms must be expressly identified. Any third party or a class of third party (e.g. associated or group companies) that has not been specifically identified in the contract will not have a right to enforce the contract against the parties.
- Contract-out of the Ordinance where the operation of the Ordinance is not desired. Employers can expressly "opt-out" of the Ordinance by including wording in the contract to indicate that the parties do not wish to confer third-party contractual rights. Given third parties cannot enforce a contract of employment against an employee but can enforce against an employer; employers may wish to include "opt-out" wording in any contract of employment.
- Although the Ordinance will not affect contracts entered into before 1 January 2016, employers should review and restructure any current template contracts of employment, contractual handbooks or policies and Employment-Related Contracts in light of the Ordinance as soon as possible. This is to ensure that the employer is fully utilising third party enforcement rights to the extent needed, and specifically excluding third party enforcement rights where this is not intended by the parties.
First published in the November 2015 issue of Human Resources, the Official Journal of the Hong Kong Institute of Human Resource Management"