22 July, 2015
The Contracts (Rights of Third Parties) Ordinance will come into effect on 1 January 2016 and, subject to limited exceptions, will apply to contracts entered into from that date. The Ordinance provides an exception to the doctrine of privity of contract by providing a person who is not a party to a contract with a right to enforce the contract terms directly. In addition, unless the contract states otherwise, the consent of the third party will be required for any variation of the contract which affects that third party. Further information about the Ordinance and what it means for contract drafting can be found here.
Similar to the position under English statute, the Ordinance does not apply to enable a third party to enforce a term of a contract of employment against an employee. Accordingly, to the extent that the parties wish to give rights to a third party to enforce an employee’s obligations, they will need to consider alternative ways to document those arrangements so as to give effect to that intention.
The Ordinance will apply in relation to third party rights against an employer. However, parties will be at liberty to contract out of the effect of the Ordinance in whole or in part.
Actions for employers
Ahead of the Ordinance coming into effect, employers will need to consider how third party rights may arise out of different types of contracts commonly used in the employment context and whether additional clauses are appropriate to exclude or to control the application of the Ordinance (for example, to limit its application to specified clauses or in respect of particular classes of third parties). By careful planning and particular attention during the negotiation and drafting of employment related contracts, employers should be able to take advantage of the Ordinance while avoiding its potential pitfalls.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
May Tai, Partner, Herbert Smith Freehills
may.tai@hsf.com
