The doctrine of privity
A new contract law in Hong Kong is set to change the way we do business. The law will apply to a wide range of contracts and affect all employers and employees in Hong Kong.
Let’s look at an example. Employees often have access to confidential company information, and are expected to protect their firm’s interests by keeping such information private. During employment and, in particular, after it ends, the employer and other entities within the group will want to ensure that the employee keeps such information confidential and does not use it to compete with the group.
Most employees are contractually required to ensure certain information remains confidential by way of non-disclosure obligations. While such obligations protect employers, they currently do not protect the larger corporate group, or its related third parties.
Where the confidential information relates to a part of the group’s business in which the employer is not involved, the employer may be unable or unwilling to seek enforcement while another entity within the group may wish to do so.
Under the existing Hong Kong law, which is based on the doctrine of privity, only the parties to a contract can enforce its terms. In other words, a third party to a contract cannot enforce the contract, even if it has been created for the benefit of the third party.
Protecting third parties
However, a new ordinance passed by the Legislative Council in November last year will protect such third parties. The Contracts (Rights of Third Parties) Ordinance will come into effect on 1 January 2016.
The ordinance provides an exception to the doctrine of privity, giving the third party, who expects to benefit from the contract, the potential to enforce the terms directly against a contracting party.
The ordinance will apply to all employment contracts entered into after 1 January 2016, unless the parties expressly exclude the operation of the ordinance by the terms of the contract.
Impact of the ordinance
Leading up to January 2016, contracting parties are likely to start including clauses in a wide range of contracts referring to the ordinance. In some cases, ordinance will be welcomed, but in other cases it will not. It is important for those entering into a contract to carefully consider when and how the ordinance will apply, and whether its operation should be excluded or modified by the terms of the contract.
By careful planning and particular attention during the negotiation and drafting of employment-related contracts, employers and employees should be able to take advantage of the ordinance in appropriate cases while avoiding its potential pitfalls.
Benefits and pitfalls
The main benefit for contracting parties is the ability to enable third parties to enforce the relevant terms of the contract, without the need for them to become a direct party to the contract. The right of enforcement by a third party can be limited to the terms which purport to confer a benefit on them.
For example, in a contract where an obligation of confidentiality is intended to benefit members of a corporate group who are not parties to the contract, those third parties will be able to enforce the obligation.
The main pitfall of the ordinance is the risk that an employee who breaches a contractual obligation may inadvertently be subject to a third party claim. This is why it is important for parties to carefully consider whether they should include terms in the contract that modify or exclude the function of the ordinance.
Employees and employers can best protect themselves by being alert to clauses in the contract which benefit a third party, and to clauses excluding or modifying the function of the ordinance. Ensure that you understand the effect of such clauses and use them appropriately.
This article appeared in the Classified Post print edition as How a new contract law will affect you.
