The Secretary for Justice has, by a notice published in the Gazette, appointed 1 January 2016 as the effective date for the commencement of operation of the Contract (Rights of Third Parties) Ordinance (the “Ordinance”).
Applicability of the Ordinance
The Ordinance applies to contracts entered into after the Ordinance takes effect.
The Ordinance does not apply to certain types of documents including bills of exchange, promissory notes, contracts on negotiable instruments, deeds of mutual covenant, contracts for the carriage of goods by sea and by air, letters of credit, company’s articles, and employment contracts (as regards enforcement against employees).
The Ordinance clearly stipulates that the third party should be expressly identified by name, as a member of a class or as answering a particular description. Rights may be also be conferred on a third party who is not in existence at the time when the contact is entered into, and the third party does not need to give any consideration to enforce the right granted.
Enforcement by Third Parties
The Ordinance provides a two-limb test and the satisfaction of either limb will permit a third party to enforce the rights granted to him / her under the contract.
A third party may enforce a right under the contract if:
- the contract has an express term to that effect; or
- the contract purports to confer a benefit on such third party.
The Ordinance also provides that if a third party may enforce a term of the contract then the parties to the contract may not without the third party’s consent rescind or vary the contract so that the third party’s rights are altered or extinguished unless there is an express term in the contract permitting them to do this without such consent.
Exclusion / Prevention of Third Parties Gaining Rights
Most importantly, the Ordinance makes clear that if, on a proper construction of the contract, a term a third party is seeking to enforce is not intended to be enforceable by that third party, then the rights granted under the Ordinance do not apply. In other words that if the contract makes clear that there is no intention to confer a benefit on third parties, the Ordinance will not have the effect of doing so.
The Way Forward
Once the Ordinance comes into effect, it is suggested that the use of express clauses in the contract is the preferred method of opting out of or qualifying the provisions of the Ordinance. Companies with standard form contracts which are governed by Hong Kong laws may require specific amendments to reflect the changes to contract law in Hong Kong.
In preparation for the commencement of this Ordinance, it is advisable to conduct a thorough review of your existing standard contracts and consider if an opt-out clause is desirable. Examples of documents which may require attention:-
- employment contracts where benefits are offered to employees’ families;
- license agreements where sub-licensees’ rights are specified;
- distribution agreements where the distributor may appoint sub-distributors; and
- contracts where indemnity is extended to the directors, officers, and employees of the other party.