A. Contracts (Rights of Third Parties) Bill

Introduction

The Contracts (Rights of Third Parties) Bill (the "Bill") was gazetted on 28 February 2014. The Government introduced the Bill into the Legislative Council for first reading on 26 March 2014.

Hong Kong's Current Law - the Doctrine of Privity of Contract

Under existing law, a third party cannot acquire and enforce a right under a contract to which he is not a party. The Bill seeks to reform this aspect of the doctrine of privity of contract in Hong Kong. The Bill is based on the United Kingdom's Contracts (Rights of Third Parties) Act 1999. If the Bill is passed (and thereby, becoming an Ordinance), it will enable a third party to enforce a contract to which he is not a party in some circumstances.

Key features of the Bill

  • Prospective effect: The Bill will only apply to contracts entered into on or after the Ordinance takes effect.
  • Definition of a "third party": The Bill defines a third party as a person who is not a party to the contract. To have rights under the Bill, the third party should be expressly identified by name, as a member of a class or as answering a particular description. Rights may also be conferred on a third party who is not in existence at the time when the contract is entered into.
  • Enforcement by a third party: A third party may enforce a term under a contract if (i) the contract expressly provides that the third party may do so; or (ii) the term purports to confer a benefit on such third party.
  • Remedies of a third party: The Bill provides that a third party who enforces a contract term under the Bill would have the same remedies in an action for breach of contract as if the third party had been a party to the contract.
  • Contracting out: Following the UK position, parties may by agreement opt out of the application of this new statutory scheme.

The Bill and employment contracts

One type of contract to which the Bill does not apply is an employment contract (as defined in the Employment Ordinance) but the exclusion is only limited to the enforcement of a term in the employment contract by a third party against an employee.

In other words, there is a possibility that a third party may be able to rely on the provisions of the Bill to enforce a term of the employment contract against the employer. An example of this would be a term which provides that the employer will provide medical insurance to the employee and his spouse and children. The employee's spouse and children in such case are third parties within the meaning of the Bill who may be able to seek enforcement of the term against the employer under the Bill. If the employer does not wish to confer a right of enforcement on a third party under the Bill, an express opt-out provision should be incorporated into the employment contract to that effect.

The Bill and employment-related contracts

Other than the exemption relating to employment contracts mentioned above, other types of contracts to which the Bill does not apply are bills of exchange, promissory notes, contracts on negotiable instruments, deeds of mutual covenant, contracts for the carriage of goods by sea and by air, contracts on a letter of credit and company's articles.

However, as can be seen, many types of contracts commonly entered into in the human resources/employment context are not covered by the exemptions under the Bill.

Examples of such contracts include:

  • Independent contractor agreements;
  • Settlement agreements;
  • Standalone confidentiality agreements; and
  • Standalone restrictive covenant agreements.

This means that when the Ordinance takes effect, third parties to these contracts may conceivably have a right under the Ordinance to enforce a term of the contract against the contracting parties. To give an example, under a restrictive covenant agreement, a staff member agrees not to solicit customers from the company and its holding companies or subsidiaries within a certain period. As the contract expressly identifies those companies and the term confers a benefit on them, the Bill will allow them to enforce the restrictive covenant agreement directly against the staff member.

What should employers do with respect to the Bill?

i)For contracts entered into before the Ordinance takes effect

Since the Bill will not apply to contracts entered into before the commencement of the Ordinance, third parties to such contracts will not be entitled to any rights against the contracting parties under the Ordinance. Nothing needs to be done in respect of contracts executed before the Ordinance takes effect.

ii)For contracts to be entered into on or after the Ordinance takes effect

Companies should review their contracts/terms and conditions to see if there are any terms which purport to confer a benefit on third parties who might be able to enforce such terms against the companies under the Ordinance.

If so, companies should consider updating their contracts/terms and conditions to include an express clause providing that the Ordinance does not apply to the contract or those terms and conditions if they wish to opt out from the application of the legislation.

B. New Companies Ordinance

The New Companies Ordinance has become effective since 3 March 2014.

Section 4 of the Companies Disclosure of Company Name and Liability Status Regulation under the New Companies Ordinance (the "Regulation") provides that a company must state its registered name(s) in its (i) communication document; (ii) transaction instruments; and (iii) website.

The term "communication documents" under the Regulation means business letter, notice (e.g. termination notice), and official publications (e.g. employment handbook), and the term "transaction instrument" means contracts (e.g. employment contracts, independent contractor contract, settlement agreement, standalone confidentiality agreement, restrictive covenants) or deeds (e.g. settlement deed), bill of exchange, promissory note, cheques, invoice or receipts. If a company has registered both English name and Chinese name, then both names should be stated.

Therefore, in preparing employment contracts, employment handbook, settlement agreement, independent contractor agreement, termination notice etc, it is important that the company shall expressly stipulate its English/Chinese name(s) registered in the Companies Registry. Otherwise, whilst it will not render the relevant contracts, handbook or notice void, it is in breach of the New Companies Ordinance, and the company, its responsible persons and persons authorised the breach committed an offence, and the fine is at level 3 (i.e. HK$10,000)