More flexibility for group companies to enforce proprietary rights and restrictions against employees?

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (the “Ordinance”) came into force in Hong Kong on 1 January 2016. The Ordinance applies to contracts executed on or after that date.

As a general rule, the principle of privity of contract under common law in Hong Kong meant that only the parties to a contract are able to enforce its terms. The Ordinance amends this principle to allow third parties in certain circumstances to enforce the terms of a contract even where they are not a party to it.

The area of employment law to which this is likely to apply is post-termination restrictions, confidentiality and intellectual property rights. For such provisions it is common for clauses to be drafted in such a way as to also grant rights in favour of group companies (in addition to the employing entity that signs the agreement).

It is worth noting however that employment contracts are excluded from the scope of the Ordinance. The result of this exclusion is that notwithstanding the introduction of the Ordinance, group companies would still not be able to directly enforce the terms of an employment contract against an employee (unless they were a signatory).

Often it is in the employer’s interest for group companies to be able to enforce an agreement against an individual, without the need for any litigation to be brought via the employer. An example is where an overseas parent company owns the intellectual property or confidential information which is protected rather than the local HK subsidiary that is the employer. If the intention is for group companies to have the right to enforce, this has to be specified in the contract.

The good news is that the exclusion in respect of employment contracts is unlikely to apply to separate or stand-alone agreements such as settlement agreements, non-disclosure agreements (often referred to as NDAs) or restrictive covenant agreements which are concluded outside the terms of an employment contact.

In summary, the Ordinance is likely to be a welcome change by many employers in Hong Kong as it may provide more flexibility for group companies to enforce proprietary rights and restrictions against employees. However, you will only be able to take advantage of this flexibility if the rights form a separate agreement outside the terms of the employment contract, and even then we recommend expressly stating the intention for group companies to be able to enforce their rights.