The Contracts (Rights of Third Parties) Ordinance - impact on the licensing of trademarks

The Contracts (Rights of Third Parties) Ordinance (Cap 623) will come into operation on January 1 2016. The object of the ordinance is to bring out a variation of the common law doctrine of privity of contract, which provides that a person cannot acquire and enforce rights under a contract to which he/she is not a party.

Under the ordinance, a third party may enforce a term of a contract to which he/she is not a party if:

1. the contract expressly provides that the third party may do so; or

2. the term purports to confer a benefit on the third party, unless on proper construction of the contract, the term is not intended to be enforceable by the third party.

The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description. The third party can be a volunteer and can enforce a term of the contract whether or not he/she has given consideration for the term. A benefit can also be conferred on a third party who was not in existence at the time of contracting.

Under the common law, if a trademark owner grants a licence to a licensee to use the trademark and the right extends to other members of the licensee’s group, the other companies of the group may not be able to enforce such right against the trademark owner directly as they are not a party to the contract.

Following the implementation of the ordinance, members of the group companies may rely on the ordinance to enforce against the trademark owner the provision which extends the right of licence to them. Moreover, any warranties concerning trademarks given by the trademark owner may be enforceable by the sub-licensee(s) directly in the event any of the warranties are breached.

On the other hand, a trademark owner may also benefit from the operation of the ordinance. For instance, a trademark owner may enforce certain licence terms such as the right to audit financial records to establish the amount of royalties due to the trademark owner and confidentiality obligations against the sub-licensee, if the licence contains a term requiring the licensee to include similar terms in the sub-licence granted by the licensee.

The ordinance allows the contracting parties to specify which term shall or shall not be enforceable by a third party. In the same way, the parties may also exclude any specific term of the contract from the operation of the ordinance. It is common practice in England that contracts generally exclude the application of the equivalent UK legislation by adding a 'boilerplate' clause to that effect.

When entering into a licence agreement on or after January 1 2016, trademark owners should give careful consideration to whether or not and to what extent to 'contract out' the application of the ordinance.

David Choi and Florence Lam, Wilkinson & Grist, Hong Kong