Impact of Contracts (Rights of Third Parties) Ordinance on trademark licensing

The Contracts (Rights of Third Parties) Ordinance (Cap 623) will come into force on January 1 2016. The ordinance introduces a variation of the common law doctrine of privity of contract which provides that a party cannot acquire and enforce rights under a contract to which it is not a party.

Changes introduced by the ordinance
Under the ordinance, a third party may enforce a term of a contract to which it is not a party if:

• the contract expressly provides that the third party may do so; or
• 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 regardless of whether it has given consideration for the term. A benefit can also be conferred on a third party which did not exist at the time of contracting.

Impact on trademark licensing
Under the common law, if a rights holder 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 be unable to enforce such right against the rights holder directly, as they are not a party to the contract.

Following implementation of the ordinance, group companies will be able to rely on the ordinance to enforce against the rights holder the provision which extends the right of licence to them. Moreover, any warranties concerning trademarks given by the rights holder will be directly enforceable by the sub-licensee(s)  if the warranty is breached.

Rights holders will also benefit from the operation of the ordinance. For instance, a rights holder may enforce certain licence terms (eg, the right to audit financial records to establish the amount of royalties due to it 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 terms 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. In the United Kingdom, contracts commonly 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, rights holders should carefully consider whether and to what extent to contract out the application of the ordinance.