Outsourcing: Hong Kong overview

A Q&A guide to outsourcing in Hong Kong.

This Q&A guide gives a high level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; formalities required for transferring or leasing assets; data protection issues; customer remedies and protections; contracting parties' remedies; dispute resolution; and the tax issues arising on an outsourcing.

To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to outsourcing. For a full list of jurisdictional Q&As, visit www.practicallaw.com/outsourcing-mjg.

For the rules relating to transferring employees, visit Transferring employees on an outsourcing in Hong Kong: overview.

Contents

Regulation and requirements

National regulations

1. To what extent does national law specifically regulate outsourcing transactions?

While there may be some regulatory oversight for certain sectors involving outsourcing transactions, Hong Kong does not have a specific ordinance regulating outsourcing arrangements.

Sectoral regulations

2. What additional regulations may be relevant for the following types of outsourcing?

Financial services

Insurance Authority. The Office of the Commissioner of Insurance issued a Guidance Note that became effective on 1 January 2013 (see Question 4, Insurance Authority).

Securities and Futures Commission. The Hong Kong Securities and Futures Commission (SFC) has not published its own guidelines on outsourcing. However, it has endorsed the Principles on Outsourcing of Financial Services for Market Intermediaries, published by the International Organisation of Securities Commissions for financial services firms under the SFC's jurisdiction. These principles cover seven areas of outsourcing:

  • Due diligence process in selecting a service provider.

  • Contract with a service provider.

  • Business continuity issues.

  • Client confidentiality.

  • Concentration of outsourcing services.

  • Termination procedures.

  • Access to books and records.

Business process

There is no specific ordinance regulating outsourcing of business process. Contract law can govern these arrangements. Depending on the scope of the outsourcing arrangements and the business sector of the customer of outsourcing services, compliance with sector regulations, personal data privacy requirements and business confidentiality issues under common law may apply.

IT

There is no specific ordinance regulating outsourcing of information technology services. However, the parties should have in place appropriate security management processes and procedures protecting sensitive data and customer privacy. Key data should be protected at all times to ensure compliance with Hong Kong's privacy laws, industry regulations and general common law requirements.

Telecommunications

Providers of telecommunication services in Hong Kong must be licensed by the Communications Authority. While specific functions can be outsourced by licensees, ultimate accountability cannot be shifted away from those licensees. As personal data may be disclosed, to ensure compliance with Hong Kong's privacy laws and other laws and regulations, both:

  • Appropriate security management processes and procedures protecting sensitive data and customer privacy should be in place.

  • Key data should be protected at all times.

Public sector

The government has a policy of outsourcing non-core services to the private sector as a means to improve efficiency, effectiveness and quality in the delivery of services. Core functions of government such as policy formulation, regulatory control and delivery of statutory services such as licensing or law enforcement cannot be outsourced.

Other

3. What further legal or regulatory requirements (formal or informal) are there concerning outsourcing in any industry sector?

The government has a policy of imposing minimal restrictions on outsourcing. Other than in regulated industries, parties are fairly free to negotiate and enter into outsourcing arrangements suitable for their needs with very little regulatory requirements. In seeking an outsource service supplier, an enterprise should comply with both:

  • Any applicable regulatory requirement for its industry.

  • Comply with data security, personal data privacy, and general laws and regulations.

Financial services

See Question 2, Financial services.

 
4. What requirements (formal or informal) are there for regulatory notification or approval of outsourcing transactions in any industry sector?

Insurance Authority

An authorised insurer must provide the Insurance Authority with three months' prior written notice with detailed description if it intends to enter into a new or significantly vary an existing material outsourcing arrangement.

"Material outsourcing" is defined as an outsourcing arrangement, which if disrupted or falls short of acceptable standards, would have the potential to significantly affect an insurer's:

  • Financial position, business operation or reputation.

  • Ability to meet obligations or provide adequate services to policy holders, or to conform with legal and regulatory requirements.

Monetary Authority

There are specific rules relating to outsourcing banking related business areas (including back office activities) or to make changes to or amend the scope of their outsourcing of such areas. If the outsourcing arrangement may result in their internal control systems or business conduct being compromised or weakened after the activity has been outsourced, an Authorised Institution under the Hong Kong Monetary Authority (HKMA) must both:

  • Discuss their plans in advance with the HKMA.

  • Satisfy the HKMA that all major issues are properly addressed.

Major issues include accountability, risk assessment, ability of service providers, outsourcing agreement, customer data confidentiality, control over outsourced activities, contingency planning, and access to outsourced data. Where outsourcing involves an overseas service provider, additional concerns must also be discussed with the HKMA.

Securities and Futures Commission (SFC)

Financial services firms licensed by the SFC should comply with guidelines on outsourcing published by the International Organisation of Securities Commissions.

 

Legal structures

5. What legal structures are commonly used in an outsourcing?

Direct outsourcing

Description of structure. The typical arrangement is a contractual arrangement between customer and outsourcing service provider.

Advantages and disadvantages. Direct outsourcing allows the customer of outsourcing services to focus on its core expertise without the need to invest in staff and equipment for the outsourced goods and services. However, the reputation of the customer in respect of the outsourced goods and services relies on the quality of the goods and services provided by the outsourced service provider. Therefore, the customer may need to devote resources to monitor the quality of the goods and services outsourced.

Indirect outsourcing

Description of structure. An example of indirect outsourcing is a relationship between a manufacturer and a distributor where the manufacturer has granted a distributorship to an unrelated company to distribute the manufacturer's goods.

Through a set of contracts, a manufacturer licenses the distributor the right to use the manufacturer's trade marks, promotional publications and other intangible rights for the purpose of distributing the manufacturer's goods within a territory either exclusively or non-exclusively. A distribution agreement by the manufacturer to the distributor can impose minimum obligations on the distributor as part of the agreement. These may include minimum purchase requirements, advertising or promotional and non-competition obligations. In exchange, the distributor may benefit from the reputation of the manufacturer in its sales and marketing efforts.

Advantages and disadvantages. A manufacturer benefits by not needing to develop and sell into a new territory. It can expand its sales by the efforts of the distributor. At the same time, the distributor is the public face of the manufacturer in the territory so the manufacturer's reputation may depend on the efforts, behaviour and success of the distributor.

Joint venture or partnerships

Description of structure. Instead of outsourcing to an unrelated third party as a distributor, the manufacturer and the distributor can form a separate joint venture entity or partnership to distribute the manufacturer's products.

The manufacturer and the distributor together form a separate legal entity or partnership for the purpose of distributing the manufacturer's products in a territory. Both parties have an ownership interest in the joint venture and both contribute resources to the joint venture. The manufacturer's primary obligation is to contribute products and the distributor's primary obligation is the sale and marketing of these products.

Advantages and disadvantages. Both parties have a stake and a successful joint venture has many benefits. However, it is a separate business entity that will require ongoing obligations of the partners. As a separate business entity, it may be subject to a separate regulatory compliance requirement distinct from those regulating the partners' own business. The entity will have its own books of accounts, employees, assets and liabilities, so the parties will have obligations and a commitment in operating the entity. Disengagement from the joint venture may also be more complex.

Multi-sourcing

Description of structure. Business entities sometimes outsource their information technology systems to different vendors. For example, a business may outsource its helpline or customer service hotline to one vendor, its IT network management to another vendor and employ another vendor for maintenance of its servers at a data centre.

A business enters into separate service contracts with each service provider for the provision of the required services. The business may need to co-ordinate with each outsourced service provider to minimise service disruption and interoperability issues.

Advantages and disadvantages. Using outsourcing services allows a business to focus on its core expertise without the need to develop and devote resources to its technology needs. This outsourcing may allow the business to keep up with technological advances by delegating this responsibility to outsourcing service providers. There are potential areas of concern as using multiple outsource service providers may result in some interoperability issues, redundancy or gaps in services. These service providers will also have access to confidential and sensitive data, and the customers must monitor with care to avoid leakage of confidential information, intended or accidental. Where its customer hotline is outsourced, a business relies on the quality and courtesy of the outsourced service provider's frontline staff in dealing with its customers.

Captive entities

Description of structure. A captive is a separate entity established for the specific purpose of serving the needs of its parent corporation or its customers. Apart from complying with regulatory requirements, Hong Kong law does not prohibit the use of captive units. An example of a captive include a parent company setting up a manufacturing entity to take advantage of lower labour and compliance costs to manufacture its products for sale in markets outside China. A captive insurance company provides insurance coverage to protect the parent company against insurable risks and a captive finance company provides financing to assist the parent company's customers in purchasing or leasing the parent's products. An example is providing financing to customers for the purchase or lease of automobiles manufactured by the parent carmaker.

Captive units are set up as separate legal entities, typically as wholly owned subsidiaries of the parent company or as entities controlled by the parent company. The operations of the captive unit are intended to service the needs and requirements of the parent company.

Advantages and disadvantages. A captive may provide better risk management or risk shifting, cost savings, a less restrictive regulatory or licensing regime, or tax benefits for the parent company. However, there may be reputational costs to the parent company should a significant loss occur at the captive level and the parent company is viewed as using the captive to avoid legal or social responsibility by shifting the loss to the captive, protecting itself against loss.

Build operate transfer

Description of structure. Build operate transfer (BOT) is a model that usually involves large infrastructure projects requiring heavy capital investment.

BOT are usually large public projects built and operated by private entities for an agreed to period until investment is recouped. The project is then transferred to the public entity at the end. In Hong Kong, all cross harbour tunnels are BOT projects, the oldest of which has already been transferred back to the Hong Kong government.

Advantages and disadvantages. The advantage of BOT is that capital layout is shifted to the contractor with expertise in building and operating these projects. As BOTs are long term projects, by the time the project is transferred to the public entity, its usefulness may have changed. In the Hong Kong cross harbour examples, the term of the BOT is 30 years and the oldest tunnel was transferred to Hong Kong in 1999. The tunnels were two lane roads in each direction and are now the most congested cross harbour tunnels in Hong Kong as the newer tunnels are all three lane roads.

 

Procurement processes

6. What procurement processes are used to select a supplier of outsourced services?

Request for proposal

A request for proposal (RFP) is used in Hong Kong as the initial step of the procurement process. A customer seeking outsourcing services can learn a great deal about potential service providers, their experience, capability and capacity, as well as pricing mechanism, through this process. It is also useful to help a customer focus and clarify its outsourcing needs.

Invitation to tender

In addition to an RFP or in situations where a shortlist of potential outsourcing service providers is already identified, an invitation to tender (ITT) is a useful tool in relation to the commencement of negotiations. This is because it specifies the scope of work and main commercial terms.

Due diligence

Initial due diligence on services to be outsourced should commence before the issuance of an RFP or ITT. The due diligence exercise will assist the customer in RFP preparation, as it will allow the customer to know if there are restrictions, limitation or other regulatory issues relating to the outsourcing of the required services.

Once responses to the RFP or ITT are received, a customer should conduct due diligence on the potential service providers before serious negotiation begins.

 

Transferring or leasing assets

Formalities for transfer

7. What formalities are required to transfer assets on an outsourcing?

Immovable property

Transfer of title to immovable property must be in writing and registered with the Land Registry. Likewise, other transactions involving immovable property, such as leases of premises, may have to be in writing and registered. Stamp duty must be paid on transfer or leasing of immovable property.

IP rights and licences

To be enforceable against third parties, a transfer of registered IP rights should be in writing and the transfer registered with the relevant IP registry. Although licences of registered IP rights need not be filed, exclusive licensed rights should be filed with the relevant IP registry to facilitate enforceability when required.

Movable property

Vehicles, aircraft and vessels must be licensed and registered before they can be operated. Transfer of title of vehicles must also be registered with the Transport Department, transfer of title of aircraft with the Civil Aviation Department and vessels with the Marine Department. While there is no single registry mechanism for recording transfer of other movable property, transfer of movable property should be in writing to reduce evidentiary disputes in enforcement proceedings.

Formalities for leasing or licensing

8. What formalities are required to lease or license assets on an outsourcing?

Immovable property

Although a tenancy agreement of less than three years need not be registered, stamp duty is payable. If stamp duty is not paid, the agreement cannot be registered nor can the agreement be used as evidence in court for enforcement against a party. An agreement of more than three years must be executed as a deed and registered with the Land Registry. Stamp duty is also payable on a lease.

IP rights and licences

Licensing of IP rights should be in writing to facilitate enforceability. Where recording of licensing of registered IP rights is available, it should be recorded with the relevant registry.

Movable property

See Question 7.

 

Transferring employees on an outsourcing

9. In what circumstances (if any) are employees transferred by operation of law?

Hong Kong law does not have specific provisions for transferring employees to other employers by operation of law.

For more information on transferring employees on an outsourcing, including structuring employee arrangements (including any notice, information and consultation obligations) and calculating redundancy pay, see Transferring employees on an outsourcing in Hong Kong: overview. ( www.practicallaw.com/3-576-6547)

 

Data protection and secrecy

10. What legal or regulatory requirements and issues may arise on an outsourcing concerning data protection?

Data protection and data security

General requirements. Personal Data (Privacy) Ordinance (PDPO) is the primary law governing personal data privacy. Where a business (data user) outsources the processing of personal data, the data user must adopt contractual or other means to prevent (PDPO):

  • Transferred personal data from being kept longer than necessary to process the data.

  • Unauthorised or accidental access, processing, erasure, loss or use of the personal data by the outsourced processor.

In addition, the data user must have contractual or other means to monitor the outsourced processor's compliance with PDPO requirements.

Security requirements. A data user should contractually impose on the outsourced data processor the following minimum obligations:

  • Adopting the same level of security measures regarding data privacy that the data user itself would adopt if processing that personal data.

  • Timely return, destruction or deletion of personal data no longer required for the entrusted data processing.

  • Prohibiting any use or disclosure of personal data other than for the entrusted purpose.

  • Prohibiting sub-contracting of entrusted services without the data user's consent.

  • Where sub-contracting is allowed, imposing the same obligations on the sub-contractor as on the outsourced processor, and being fully liable to the data user for any failure of the sub-contractor in fulfilling these obligations.

  • Setting and implementing measures such as private data protection policies and procedures, providing adequate training to staff to ensure carrying out of those policies, and complying with such security measures in handling personal data.

  • Providing the data user with the right to audit and inspect how personal data is handled by the outsourced processor.

  • Immediate reporting of any signs of abnormality such as an audit trail showing unusual frequent access of personal data by the outsourced processor's staff at odd hours, or a security breach.

  • Imposing consequences for violation of these contractual obligations.

Mechanisms to ensure compliance. The data user should have the right to audit and inspect how the outsourced processor handles personal data and impose stiff penalties for any violation or breach of PDPO compliance.

International standards. There is no obligation or specific guidelines for outsourced personal data processors to observe international standards of handling personal data. The parties may require compliance with international standards as part of the outsourced personal data processor's contractual obligations.

Sanctions for non-compliance. Sanctions between the data user and outsourced personal data processor are generally governed by contract. Breaches of personal data privacy laws may also lead to injunctions, damages and other sanctions by the Office of Privacy Commissioner under the PDPO. Both the data user and the outsourced personal data processor may be liable for the breach.

Banking secrecy

General requirements. Although Hong Kong does not have banking secrecy laws, in respect of loss of customer data, the Hong Kong Monetary Authority (HKMA) requires all authorised institutions to comply with data security measures set out in its circulars and guidelines. These are in addition to requirements under personal data privacy requirements under the PDPO by the Office of Privacy Commissioner and other obligations under common law.

The HKMA requires authorised institutions under its jurisdiction to have in place effective incident handling and reporting procedures for loss of the institutions' customer data. Authorised institutions must appoint a senior ranking officer to be in charge of the process of handling and reporting of loss or leakage of customer data. They must have procedures for handling incidents relating to data loss and disclosure of customer identity, including:

  • Taking prompt action to protect affected customers' interests.

  • Prompt notification of affected customers.

  • Reporting to the designated officer, HKMA and the Office of Privacy Commissioner.

Mechanisms to ensure compliance. The HKMA has guidelines for control measures for customer data protection. Authorised institutions must ensure that in respect of customer confidentiality, an outsourcing arrangement complies with relevant statutory requirements such as those in the PDPO and common law customer confidentiality. They must also:

  • Have controls in place to ensure compliance with proper safeguards to protect the integrity and confidentiality of customer data.

  • Ensure appropriate effective procedures are in place to monitor and manage the performance by the outsourced service provider and to manage the risks associated with the outsourcing.

The authorised institution must:

  • Conduct regular review of the outsourced service provider's financial condition and risk profile.

  • Be able to handle material problems encountered by the outsourced service provider.

  • Ensure that the outsourced service provider has in place a robust contingency plan that is tested and improved periodically.

A reporting procedure for notification of management of the authorised institution and the outsourced service provider must be established, and control procedures must be subject to regular reviews by the authorised institution's internal audit team.

International standards. Authorised institutions are not required to follow specific international standards for outsourcing services.

Sanctions for non-compliance. Breach of customer data requirements is subject to sanctions under the PDPO and other common law remedies. Serious breaches may also implicate an authorised institution's licensing with the HKMA.

Confidentiality of customer data

General requirements. The PDPO governs the sharing of personal data. It:

  • Governs the collection, holding, processing and use of personal data by data users.

  • Provides a data subject with the means to request access to and correction of personal data about the subject.

The PDPO requires data users to observe six data protection principles. These are:

  • Principle 1: purpose and manner of collection of personal data.

  • Principle 2: accuracy and duration of retention of personal data.

  • Principle 3: use of personal data.

  • Principle 4: security of personal data.

  • Principle 5: information to be generally available.

  • Principle 6: access to personal data.

Security requirements. Principle 4 of the PDPO covers security of personal data. The principle requires that all practicable steps are taken to ensure that personal data are protected against unauthorised or accidental access, processing or erasure with particular regard to:

  • The kind of data and the harm that could result if any of those things should occur.

  • The physical location where the data is stored.

  • Any security measures incorporated (whether by automated means or otherwise) into any equipment in which the data is stored.

  • Any measures taken for ensuring the integrity, prudence and competence of persons having access to the data.

  • Any measures taken for ensuring the secure transmission of the data.

Where processing of personal data is outsourced, the data user must take steps to prevent unauthorised or accidental access, processing, erasure, loss or use of the data transferred to the data processor for processing.

Mechanisms to ensure compliance. The Office of Privacy Commissioner is the independent statutory body set up to oversee the enforcement of the PDPO. It has the authority to receive complaints, conduct investigations and issue enforcement notices.

International standards. There is no obligation or specific guidelines for the outsourced personal data processor to observe international standards of handling personal data. The parties may provide for compliance with international standards as part of the outsourced personal data processor's contractual obligations.

Sanctions for non-compliance. The Office of Privacy Commissioner has the power to investigate breach of the PDPO. It can also issue enforcement notices to data users for violation of the PDPO requirements and direct the data user to remedy the breach. Criminal breaches of the PDPO can be punished by fines of up to HK$50,000 and up to two years' imprisonment.

 

Service specification and levels

11. How is the service specification typically drawn up and by whom?

Each situation is unique, but typically service specifications are reached by mutual agreement of the customer and service provider. The parties should jointly agree on:

  • Description of services.

  • Services' standards.

  • Duration of the required services.

  • Roles and responsibilities of the parties.

  • Ways to evaluate the key performance indicator levels.

  • Mechanism for changing the level of services required.

  • Mechanism for payment and withholding of payments if minimal levels of services cannot be maintained.

Typically, the service provider will draw up the service level agreement based on discussions, analysis and review by the parties. The customer can provide comments on the drafts. The result tends to be a collaborative effort of the parties. Most service level agreements can be changed and amended over time as requirements change.

 
12. How are the service levels and the service credits scheme typically dealt with in the contract documentation?

Service level agreements (SLAs) tend to be complex and are tailored to the customers' needs. Therefore, issues such as service levels and service credits must also be made through discussions, review and analysis by the parties. The customer and the service provider may have differing interests and do not share the profitability of the outsourcing project. Each has its own profitability expectations. The customer's objective may be cost savings and efficiency. The service provider may try to achieve higher net profits by keeping its costs low and efficiencies high. To ensure that minimum levels of services are realistic, it is important that the parties carefully negotiate service credits schemes so that they may serve as useful tools and incentives for achieving the required service performance levels.

Flexibility in volumes purchased

 
13. What level of flexibility is allowed to adjust the volumes customers purchase?

Service level agreements (SLAs) tend to be long-term arrangements and the parties may need to change the services being provided or required over time due to changing circumstances. The SLA should provide for a detailed procedure for approving changes, perhaps by a committee of representatives of both the customer and service provider. Justification for change in volume should be based on measured changes to the level of services provided in relation to the original objectives, outcomes and benefits achieved.

 

Charging methods and key terms

14. What charging methods are commonly used on an outsourcing?

Fixed fees tend to be popular. Fixed fees can be adjusted for service credits or volume changes. Where services are required that are outside the scope of agreed-to services, charges may be on a time-cost or adjustment to fixed fees basis.

 
15. What other key terms are used in relation to costs, including auditing and benchmarking mechanisms?

The general practice is not to have a cost of living adjustment (COLA) or other adjustments. Auditing, benchmarking, key performance indicators (KPIs) and other performance measuring tools can be used as tools to assess the level of services and justification for change of fee arrangements.

 

Customer remedies and protections

16. If the supplier fails to perform its obligations, what remedies and relief are available to the customer under general law?

If the supplier fails to perform its obligations, the general remedy is through litigation or arbitration for breach of contract under common law.

 
17. What customer protections are typically included in the contract documentation to supplement relief available under general law?

Where contractual provisions include auditing rights, benchmarking and other performance measuring tools, the courts and arbitrators can use these tools to assist in resolving disputes between the parties.

 

Warranties and indemnities

18. What warranties and/or indemnities are typically included in the contract documentation?

Typical warranties in service level agreements (SLAs) relate to proper performance and non-infringement of third party rights.

Indemnities may include a restriction on liability to a specific sum of money in a contract (cap), calculated as a multiple of fees actually paid to the service provider within a specified period (for example, total fees for a period of one calendar year actually paid during the year when the dispute arose).

 
19. What limitations are imposed by national or local law on fitness for purpose and quality of service warranties?

There is no law specifically relating to fitness for purpose or quality of service.

 
20. What provisions may be included in the contractual documentation to protect the customer or supplier regarding any liabilities and obligations arising in connection with outsourcing?

The customer of the outsourcing services is generally responsible to its own customers for breaches of obligations and damages incurred.

 

Insurance

21. What types of insurance are available in your jurisdiction concerning outsourcing, and to what extent are they available?

Insurance against typical risks is generally available. Typical business insurance coverage such as first party loss, third party liability, business interruption and fidelity coverage are available from authorised insurers.

 

Term and notice period

22. Does national or local law impose any maximum or minimum term on an outsourcing? If so, can the parties vary this by agreement?

There is no specific law governing termination and notice period for an outsourcing services agreement. Generally, parties are free to negotiate these terms in their agreement. However, the Limitation Ordinance (Cap. 347) provides that a claim for breach of contract must be brought within six years of the breach. For personal injuries, the limitation for bringing an action is three years from the occurrence causing the injury.

 
23. Does national or local law regulate the length of notice period required (maximum or minimum)? If so, can the parties vary this by agreement?

There is no law governing minimum or maximum notice periods for termination of an outsourcing services agreement.

 

Termination and termination consequences

Events justifying termination

24. What events justify termination of an outsourcing without giving rise to a claim in damages against the terminating party?

The parties generally negotiate damages against a terminating party for early termination of an outsourcing agreement. There is no specific requirement imposed by law in this regard.

Material breach

Material breach of the obligations of the other party may justify termination of an outsourcing contract.

Insolvency events

Where an entity is subject to a bankruptcy order, no legal proceedings can be brought or continued against the entity without the court's permission (Bankruptcy Ordinance (Cap. 6)).

Other

There is no specific legal requirement regarding termination of outsourcing arrangements.

 
25. In what circumstances can the parties exclude or agree additional termination rights?

Post-termination rights are negotiated between the parties as part of their agreement for outsourcing services.

 
26. What remedies are available to the contracting parties?

The parties' rights are negotiated. For breach of contract, typical remedies are through litigation or arbitration.

IP rights and know-how post-termination

27. What implied rights are there for the supplier to continue to use licensed IP rights post-termination? To what extent can the parties exclude or include these by agreement?

Rights to use licensed IP rights are based on contract law and are expressly given. Where the contract does not provide for post-termination use of licensed IP rights, the right typically expires with termination of the agreement and the former licensee no longer has the right to use the licensed IP.

 
28. To what extent can the customer gain access to the supplier's know-how post-termination and what use can it make of it?

The right to use know-how is typically governed by contractual terms. Where the right to use know-how terminates with the agreement, there is no implied right for post-termination use of a supplier's know-how.

 

Liability, exclusions and caps

29. What liability can be excluded?

Exclusion of liability for death or personal injury may not be invalid under the Control of Exemption Clauses Ordinance (Cap. 71). Likewise, the ordinance requires that exclusion of liability for financial loss or damage to property must pass a "reasonableness" test to be enforceable. In addition, Hong Kong's common law may further limit the parties' ability to exclude liability by exemption clauses.

 
30. Are the parties free to agree a cap on liability? If so, how is this usually fixed?

The Control of Exemption Clauses Ordinance (Cap. 71) allows parties to a contract to restrict liability to a specific sum of money provided that the contractual provision satisfies the requirement of reasonableness. In determining if a provision is reasonable, the Control of Exemption Clauses Ordinance considers the resources that the party could expect to be available to him for the purpose of meeting the liability, should it arise, and the availability of insurance.

In practice, the cap on liability is generally determined by the amount of fees the service provider has been paid under the contract over an agreed period.

 

Dispute resolution

31. What are the main methods of dispute resolution used?

Hong Kong is a common law jurisdiction rooted in English common law. Its official languages are Chinese and English. Dispute tends to be resolved through litigation, arbitration and mediation.

The court system is divided into the High Court, District Court and Magistrate Court. There are also other tribunals such as the Land Tribunal, Labour Tribunal, Small Claims Tribunal, Obscene Articles Tribunal and the Coroner's Court. The High Court includes the Court of Appeal and the Court of First Instance. The Court of Final Appeal sits at the top of the entire judiciary.

Hong Kong has its own alternative dispute resolution institutions. Hong Kong International Arbitration Centre is the local arbitration institution and Hong Kong Mediation Centre is the institution for mediation.

Most disputes in Hong Kong not settled by the parties directly are resolved through one or more of these channels.

 

Tax

32. What are the main tax issues that arise on an outsourcing?

Hong Kong is a low tax jurisdiction and parties do not generally consider tax issues as a driver for outsourcing service arrangements.

Transfers of assets to the supplier

Hong Kong imposes a stamp duty on:

  • Conveyancing of real property.

  • Agreements for the sale of residential property.

  • Leases of immovable property (that is, a tenancy agreement).

  • Transfer of Hong Kong stock.

Transfer of movable assets is not subject to stamp duty.

Transfers of employees to the supplier

Hong Kong does not impose a tax on the transfer of employees to suppliers.

VAT or sales tax

There is no VAT or sales tax.

Service taxes

There is no service tax.

Stamp duty

Hong Kong does not impose stamp duty on outsourcing service contracts.

Corporation tax

Hong Kong has a profits tax for businesses that is capped at 16.5%. There is no withholding tax or capital gains tax. Dividends are not taxable.

 

Online resources

Inland Revenue Department

W www.ird.gov.hk

Description. The Commissioner of Inland Revenue (who also holds the statutory appointments of Collector of Stamp Revenue and Estate Duty Commissioner) is responsible for the administration of tax and public revenue-related Ordinances and the Rules and Regulations made under these Ordinances.

Hong Kong Labour Department

W www.labour.gov.hk

Description. The Labour Department aims to provide comprehensive employment services, foster harmonious labour relations, promote and safeguard employees' rights and benefits, as well as occupational health and safety.

Hong Kong Monetary Authority (HKMA)

W www.hkma.gov.hk

Description. The HKMA is the government authority in Hong Kong responsible for maintaining monetary and banking stability.

Hong Kong Office of the Commissioner of Insurance

W www.oci.gov.hk

Description. The Office of the Commissioner of Insurance is the insurance regulator in Hong Kong, empowered by the Insurance Companies Ordinance to oversee the financial conditions and operations of authorised insurers.

Office of the Privacy Commissioner for Personal Data

W www.pcpd.org.hk

Description. The Office of the Privacy Commissioner for Personal Data is an independent statutory body set up to oversee the enforcement of the Personal Data (Privacy) Ordinance.

Securities and Futures Commission (SFC)

W www.sfc.hk

Description. The Securities and Futures Commission (SFC) is an independent statutory body set up to regulate the securities and futures markets in Hong Kong.



Contributor profile

Rizuko Soo

Edwards Wildman Palmer LLP

T +852 3150 1984
F +852 2116 9330
E rsoo@edwardswildman.com
W www.edwardswildman.com

Professional qualifications. England and Wales, Barrister, 1998; Malaysia, Advocate and Solicitor, 1999; Singapore, Advocate and Solicitor, 2002; Hong Kong, Solicitor, 2009

Areas of practice. Business law; mergers and acquisitions; joint ventures; privatisations; debt and equity capital markets; funds; private equity; initial public offerings; regulatory and compliance; debt restructuring and financing.

Non-professional qualifications. Bar Vocational Course, BPP Law School; LLB, University of Sheffield; Postgraduate Law Course, Singapore

Recent transactions

  • Acted on an initial public offering by Sunbridge Group Limited on the Australian Securities Exchange, to raise up to A$10 million.

  • Acted for various Hong Kong and Singapore listed or private companies in relation to their group restructuring, acquisition/disposal of shares/assets/hotel and office building within Asia.

  • Acted in various types of bonds, warrants and/or convertible bonds transactions issued by Hong Kong and Singapore companies as well as financial institutions.

  • Acted for various US Companies (including NASDAQs) in relation to their inbound investment in the People's Republic of China (PRC) markets.

Languages. English, Malay, Mandarin

Professional associations/memberships. Gray's Inn, London; Singapore Academy of Law; The Law Society of Singapore; The Law Society of Hong Kong; Bar Council of Malaysia.

Publications

  • "Impact of Technological Advances on Intellectual Property Rights" and "Tackling Unsolicited Electronic Messages in Hong Kong", 2007 (author).

  • "Hong Kong - a New Mecca? – Following Chief Executive Donald Tsang's recent pronouncements, what are the prospects for Hong Kong becoming an Islamic finance hub?", Hong Kong Securities Institute, January/February 2008 (contributor).


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