Contracts (Rights of Third Parties) Ordinance is now in force

Hong Kong , 22 January 2016

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (“Ordinance”) came into force in Hong Kong on 1 January 2016. This new law relating to third party rights brings Hong Kong more in line with other common law countries including the United Kingdom. The Ordinance only applies to contracts entered into on or after the date on which the Ordinance comes into operation. Therefore, contracts signed before 1 January 2016 are not affected.

Previously, the doctrine of privity prevented a person from enforcing rights under a contract to which he is not a party to. Under the doctrine, only parties to a contract could enforce rights under the contract. The Ordinance reforms the common law doctrine of privity of contract and provides a mechanism for a third party to enforce contractual terms subject to the contracting parties’ intention.

The Ordinance will impact contracts in many contexts including but not limited to the following practice areas:

Banking

Only certain classes of contracts are excluded from the application of the Ordinance such as letters of credit, bills of exchange, promissory notes and any other negotiable instrument. However, loan agreements and banking contractual documents have not been excluded from the ambit of the Ordinance. In light this Ordinance, banks and companies in the banking industry should consider reviewing all their standard form contracts prior to execution to see if any modification is necessary in order to avoid giving rights to unintended third parties.

Employment

The Ordinance does not confer a right to a third party to enforce a term in the employment contract against an employee as this is intended to protect the interests of employees. However, the Ordinance does not prohibit a third party from enforcing a term against an employer. Therefore, employers should review their employment contracts and consider inserting a clause to exclude third party rights. For example, an employer may not want to allow an employee’s spouse, children or other family members to be able to enforce the employee’s employment contract with the employer.

Corporate

The Ordinance does not apply to a company’s articles of association having effect as a contract under seal under section 86 of the Companies Ordinance (Cap. 622). A company’s articles of association is a constitutional document that governs the relations between the company and its members. Thus, a person or entity that is not a shareholder of a company cannot enforce a term in the company’s articles of association against the company. Conversely, a company also cannot rely on its articles to enforce a term against a non-member. Since the Ordinance still applies to other corporate documents, such as sales and purchase agreements, companies should review their contractual documents to see if any amendments are needed to prevent unintended third parties enforcing their rights against them.

We can review your contracts and advise you on whether any modifications or updates are needed in light of the operation of the Ordinance should you require such assistance.

For further information please contact, Harry Lin of Lin and Associates, by email (harry.lin@laa.hk) or telephone (+852 2629 3201).

Disclaimer: This material has been prepared for general informational purposes only and is not intended to be relied upon as legal or other professional advice. Please refer to your legal advisors for specific advice. Lin and Associates accepts no responsibility for any loss arising from or out of reliance of information contained in this article.