International trade and commercial transactions in Hong Kong: overview

A Q&A guide to the regulation of international trade and commercial transactions in Hong Kong.

The Q&A covers key matters relating to sale of goods contracts, including rules on formation, price and payment, delivery, passing of title and risk, variation and assignment, enforcement and remedies, exclusion of liability, choice of law and jurisdiction, and arbitration. It also provides an overview of the rules governing storage of goods, imports, trade remedies, exports and international trade restrictions.

To compare answers across multiple jurisdictions, visit the international trade and commercial transactions Country Q&A tool.

This Q&A is part of the International Trade and Commercial Transactions Global Guide. For a full list of jurisdictional Q&As visit www.practicallaw.com/internationaltrade-guide.

Contents

Recent trends

1. What are the recent trends affecting the regulation of international trade in your jurisdiction? Is your jurisdiction a member of the World Trade Organization (WTO)?

Recent trends

Various factors contribute to Hong Kong's reputation as a major international trade and financial centre, including:

  • An economic policy of free enterprise and free trade.

  • The rule of law.

  • A well educated and industrious workforce.

  • A sophisticated commercial infrastructure.

Political considerations. As a special administrative region of the People's Republic of China, Hong Kong has a high degree of autonomy. It has its own common law legal system, which is distinct from the civil law system in China, and is enshrined in the Basic Law. Under Article 151 of the Basic Law, Hong Kong can determine its own policy on commercial, economic and trade matters. Hong Kong also has its own currency, an elected legislature and is an independent taxation system and customs territory. Most of the international agreements that were implemented in Hong Kong before 1997 continue to apply. Hong Kong is also a separate signatory to some international organisations, including the WTO.

Economic situation. Hong Kong continues to be a low-tax regime, and corporate profit tax is among the lowest in advanced economies. The peg between the Hong Kong dollar and US dollar also minimises exchange rate risks.

Hong Kong continues to deepen its economic and financial ties with mainland China through the Closer Economic Partnership Arrangement (CEPA). Further economic collaboration with mainland China is anticipated, and major infrastructure projects are underway to improve transport links to mainland China, such as the Hong Kong-Zhuhai-Macao Bridge.

In light of the increasing economic liberalisation of China and the greater use of renminbi in international transactions, Hong Kong intends to establish itself as an offshore renminbi and asset management centre. It is also anticipated that projects such as the link-up between Hong Kong Exchanges and Clearing Limited (HKEx) and the Shanghai stock markets will encourage the opening of China's capital market and deeper economic co-operation.

Negotiations of international trade agreements. Hong Kong's trade policy is largely multilateral, although it is also open to agreeing bilateral arrangements and free trade agreements (FTAs).

In July 2014, Hong Kong commenced formal negotiations for a FTA with the member states of the Association of South East Asian Nations (ASEAN). These negotiations are expected to conclude in 2016.

Further, Hong Kong is involved in WTO negotiations related to:

  • The extension of product coverage of the Information Technology Agreement.

  • A Trade in Services Agreement involving 23 WTO members.

  • Liberalising trade in environmental goods by eliminating tariffs.

Pending and recently resolved trade disputes. Hong Kong has not been the object of any complaints before the WTO Dispute Settlement Body. Hong Kong has, in certain limited circumstances, exercised its right to intervene as a third party in disputes between other WTO members. Hong Kong has brought a case against Turkey for alleged discriminatory quantitative restrictions on the importation of textiles and clothing products from Hong Kong to Turkey.

Trade agreements

Hong Kong entered into the CEPA with various countries with the objective of facilitating trade in goods and services with these countries. Those countries include:

  • China. With effect from 1 January 2006, all Hong Kong products are imported tariff free into China. Hong Kong service providers also benefit from preferential access to the mainland China market in various sectors including financial services, tourism and recognition of professional qualifications. A new agreement was entered into on 18 December 2014 to facilitate trade in services between Guangdong and Hong Kong. A further agreement made on 27 November 2015 has extended the geographical scope of the liberalisation of trade in services to the whole of mainland China.

  • New Zealand. New Zealand will remove tariffs on Hong Kong products by 2016.

  • The European Free Trade Association member states.

  • Chile.

Further information on Hong Kong's trade policy is available at www.tid.gov.hk/eindex.htmland.

Full texts of the above FTAs are available on the Hong Kong Department of Justice website at www.doj.gov.hk/eng/public/external.html.

Hong Kong is also a member of the following organisations:

  • WTO. Hong Kong is also actively involved in various WTO negotiations. Within the WTO, Hong Kong is part of the Asia-Pacific Economic Cooperation, Asian Developing WTO Countries and Friends of Anti-dumping negotiations.

  • Pacific Economic Cooperation Council.

  • Organisation for Economic Co-operation and Development.

  • United Nations Economic and Social Commission for Asia and the Pacific.

  • Asian Development Bank.

  • World Customs Organisation.

Reform

The Competition Ordinance, which introduces the first economy-wide prohibitions of anti-competitive agreements and abusive conduct in Hong Kong, was passed on 14 June 2012 and came into force on 14 December 2015.

The new Companies Ordinance (Cap 622) also became effective on 3 March 2014. It is a comprehensive revision of the previous Companies Ordinance with the aim of enhancing corporate governance, ensuring better regulation and facilitating business.

The Insurance Companies (Amendment) Ordinance was passed on 10 July 2015 and came into force on 7 December 2015. It establishes a new and independent insurance authority, the Provisional Insurance Authority (PIA), and introduces some radical changes to insurance regulation in Hong Kong. It is intended to be implemented in three stages, starting with the establishment of the PIA.

The Contracts (Rights of Third Parties) Ordinance was passed on 26 November 2014 and entered into force on 1 January 2016. The Ordinance enables contracting parties to confer enforceable contractual rights on third parties, reforming the current law, which is governed by the doctrine of privity.

There is also ongoing work in relation to the regulation of intellectual property and corporate insolvency in Hong Kong.

In respect of tax, Hong Kong supports the Organisation for Economic Co-operation and Development regarding the implementation of a new global standard on the automatic exchange of financial account information on tax matters. The Hong Kong Government has also signed agreements for the exchange of information relating to tax matters with a number of countries. 

Hong Kong is concerned to maintain an efficient import/export clearance system for goods. For example, the Customs and Excise Department of Hong Kong has agreed measures to facilitate the clearance of wine imports entering mainland China via Hong Kong. Hong Kong has also imposed a licensing regime to control the import and export of certain commodities, such as strategic goods.

 

Contracts for the sale of goods

General

2. What is the legal system in your jurisdiction based on (for example, civil law (codified), common law or sharia law)?

Hong Kong is a common law jurisdiction. While the Chinese resumption of sovereignty over Hong Kong on 1 July 1997 undoubtedly had an impact on the Hong Kong legal system, the main provisions of the Basic Law (Hong Kong's constitutional document), which came into force on 30 June 1997, ensure continuity.

The laws of Hong Kong in force as at 30 June 1997 (that is the common law, rules of equity, ordinances, subordinate and subsidiary legislation and customary law) are maintained, except for any laws that contravene the Basic Law (Article 8, Basic Law).

The common law and rules of equity in force as at 30 June 1997 were those of England and Wales. While they have been subject to independent development by the courts of Hong Kong since then, there remains a considerable degree of overlap between the English common law and rules of equity, and the corresponding laws and rules of Hong Kong. Similarly, the statutory regime applicable to international trade in Hong Kong largely predates 30 June 1997 (for example, the Sale of Goods Ordinance, Cap. 26) and for this and other reasons (including comity) bears considerable similarities to that of England and Wales.

Formation

3. What domestic legislation and international rules apply to a sale of goods contract in your jurisdiction? Are standard international contractual terms commonly used?

Domestic legislation

The key piece of domestic legislation that applies to contracts for the sale of goods is the Sale of Goods Ordinance (Cap. 26) (SGO), which is based on the UK Sale of Goods Act 1893 (as amended).

International rules

The following international conventions apply in Hong Kong:

  • Convention for the Unification of Certain Rules for International Carriage by Air.

  • International Convention for the Unification of certain Rules of Law relating to Bills of Lading signed at Brussels on 25 August 1925, as amended by the Protocol signed at Brussels on 23 February 1968 and by the Protocol signed at Brussels on 21 December 1978.

The following international conventions are not applicable in Hong Kong:

  • Vienna Convention on Contracts for the International Sale of Goods.

  • United Nations Convention on Contracts for the International Sale of Goods.

  • Customs Convention on the International Transport of Goods under Cover of TIR Carnets.

Standard contractual terms

The application of the following standard contractual terms is not uncommon:

  • International Chamber of Commerce international commercial terms (Incoterms) 2010.

  • UNIDROIT Principles of International Commercial Contracts.

  • Uniform Customs and Practice for Documentary Credits.

  • Uniform Rules for Demand Guarantees.

However, the incorporation of these terms is a matter left to the discretion of the contracting parties, and none of these terms will apply automatically or compulsorily.

 
4. What are the authority/capacity rules for entering contracts, for different commercial entities?

Natural persons have the capacity to contract. However, three classes of individual are not capable of contracting, or only have a limited capacity to do so, namely:

  • Minors.

  • Mentally disabled persons.

  • Drunken persons.

The Companies Ordinance (Cap. 622) confers on Hong Kong companies the rights, powers and privileges of a natural person, and therefore the capacity to contract. While a company's powers can be limited by its articles of association (for example, through a restrictive objects clause), if the company carries out an unauthorised act or exercises its powers in violation of its articles, this will generally not invalidate that act or otherwise render it void, unless the counterparty is aware at the time of contracting that the act in question was unauthorised or otherwise contrary to the company's articles.

The capacity of a foreign company to contract is governed both by the constitution of the corporation and by the law of the country that governs the transaction. All matters concerning the constitution of the company will be governed by the law of its place of incorporation.

A company (Hong Kong or foreign) is bound by contracts made on its behalf by its agents (which includes its directors) when acting within the scope of their authority. Further, an agent will bind the company as principal in the following cases:

  • The company expressly or impliedly gives the agent the authority to do so (actual authority).

  • The company represents by words or conduct that the agent has authority to enter into the contract, even if the agent has not in fact been given the authority to do so (ostensible authority).

  • After a contract is made by an agent purportedly on behalf of the company, without either actual or ostensible authority, the company proceeds to ratify that contract.

A liquidator can carry on the business of the company so far as is necessary for a beneficial winding-up. This includes the power to:

  • Sell the company's assets.

  • Do all acts in the name and on behalf of the company.

  • Raise security.

  • Do all other things as may be necessary to wind up the affairs of the company and distributing its assets.

However, certain acts require the sanction of the court. It is advisable to take Hong Kong legal advice when appointing and dealing with a liquidator.

 
5. What are the essential requirements to create a legally enforceable contract?

Subject to certain exceptions (for example, the sale of land), which are unlikely to apply in the context of international sale of goods, no formalities are required to create a legally enforceable contract. A contract can be in any language. A contract of sale can be made orally or in writing, or can be implied from the conduct of the parties. For a contract to be legally enforceable, the following elements must be present:

  • Agreement (that is, an offer is made by one party which is accepted by another).

  • Certainty as to the main terms of the contract.

  • An intention by the parties to create legal relations.

  • Consideration (that is, something of value is given to support the promises made).

Where a contracting party is a company, it is advisable to also verify that:

  • The individual with whom a person is dealing is authorised to contract on behalf of the company.

  • The proposed transaction falls within the authority of this individual.

  • The transaction is permitted by the company's articles of association or equivalent constitutional documents.

It is also advisable to ensure that the contract is executed by or on behalf of the company in the manner prescribed by the company's articles of association or equivalent. In the case of Hong Kong companies, the Companies Ordinance (Cap. 622) establishes a statutory regime for the execution of simple contracts. Under this regime, a Hong Kong company can execute a simple contract through the company's sole director, two directors, or a director and the company secretary (there is a similar statutory regime for the execution of deeds), and by any other method permitted by the company's articles of association. Foreign companies must execute contracts in the manner prescribed by their law of incorporation.

Price and payment

6. If price provisions are not agreed by the parties, does local law impose requirements in relation to price (for example, the time, method and place of payment)?

If the contract does not fix a price, and it is not possible to identify a price from a previous course of dealing between the parties, the buyer must pay a reasonable price for the goods. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

Unless otherwise agreed, payment is due on delivery of the goods. There is no prescribed currency of payment applicable to contracts governed by Hong Kong law.

If no payment method is stated in the contract, the court will examine the previous course of dealing between the parties (if any) or the trade usage to determine the parties' intentions. Provided that the parties agree, payment can be made by any method, at any place, including by a letter of credit, bill of exchange or other negotiable instrument.

Delivery

7. If delivery provisions are not agreed by the parties, does local law impose requirements in relation to delivery (for example, the time, method and place of delivery)?

The seller has a duty to deliver the goods and the buyer has a corresponding duty to accept and pay for them in accordance with the terms of the contract (section 29, Sale of Goods Ordinance (Cap. 26) (SGO)). Unless otherwise agreed, delivery and payment are concurrent conditions.

The parties to a contract will usually agree the time and place of delivery. Under Hong Kong law, the parties' agreement on these points will be respected. In the absence of agreement, express or implied, the following default rules relating to apply (section 31, SGO):

  • Place of delivery. The default place of delivery is the seller's place of business, or if no such place exists, his place of residence. There is an exception for "specific goods" (that is, goods specifically identified in the contract). If the parties know that specific goods are in a place other than the seller's place of business or residence, then this other place is the place of delivery.

  • Time of delivery. If the contract provides for the seller to deliver the goods but no time of delivery is fixed, the seller must send them to the buyer within a reasonable time. In addition, delivery may be ineffective if it is not made at a reasonable hour. "Reasonableness" in this context depends on the circumstances of the case.

  • Warehouses and other third parties. If a third party holds the goods at the time of sale, there is no delivery until that third party acknowledges to the buyer that he holds the goods on the buyer's behalf (attornment). Attornment is not required if a bill of lading has been issued because, as a document of title, it confers on the buyer constructive possession of the goods in question. The same is generally not true in the case of warehouse receipts and other similar documents, so that attornment remains necessary.

  • Delivery expenses. The seller must bear the costs of putting the goods into a "deliverable state". This is subject to any express agreement to the contrary (for example, under certain Incoterms). The seller is not responsible for costs that the buyer may incur in receiving delivery.

  • Acceptance. Following delivery, the buyer is deemed to accept the goods when he:

    • intimates acceptance to the seller;

    • does anything inconsistent with the seller's ownership of the goods; or

    • keeps the goods and does not intimate rejection within a reasonable time.

Passing of title and risk

8. If not agreed by the parties, when does title to the goods pass to the buyer?

The rules determining when title to goods passes from the seller to the buyer are set out in sections 18 to 20 of the Sale of Goods Ordinance (Cap. 26) (SGO).

The basic rule is that title to goods passes to the buyer when the parties to the contract intend it to pass. For specific and ascertained goods, it is necessary to consider the terms of the contract, the conduct of the parties and the circumstances of the case when determining the parties' intention.

There is an exception to this rule in the case of unascertained goods, the title to which will not pass unless and until the goods are ascertained. This is the case even where the buyer has paid for the relevant goods.

In the absence of any express intention, section 20 of the SGO sets out five presumptions (rules), which apply to ascertain the parties' intention as to when title is transferred. Each rule applies depending on the type of contract concerned (in particular, the category of goods sold under the contract), as follows:

  • Rule one. Where there is an unconditional contract for the sale of specific goods in a deliverable state, title passes when the contract is made. This applies regardless of whether the time for payment or delivery (or both) is later.

  • Rule two. Where there is a contract for the sale of specific goods and the seller must do something to put them into a deliverable state (that is, where the seller must take action to prepare the goods for delivery), title passes when that thing has been done and the buyer has notice that it has been done.

  • Rule three. Where there is a contract for the sale of specific goods in a deliverable state and the seller must take some step to calculate the price of the goods (for example, weigh, measure or test them), title passes when this step has been taken and the buyer has notice that it has been done.

  • Rule four. When the goods are delivered to the buyer on approval or "on sale or return" or similar terms (that is, where the buyer has the option to accept or reject the goods following delivery), title passes when:

    • the buyer signifies his approval or acceptance to the seller (expressly or by conduct);

    • a contractual deadline for the buyer to accept or reject the goods has been agreed and the buyer has let it pass without giving notice of rejection; or

    • if no such time has been agreed, after a reasonable time.

  • Rule five. Where there is a contract for the sale of unascertained or future goods by description, title passes when goods of that description are unconditionally appropriated to the contract. The goods can be appropriated to the contract either by the seller with the assent of the buyer or vice versa.

Where a seller retains documents against payment of the price (for example, under a cost, insurance and freight contract), appropriation is not unconditional and property will not pass. By contrast, where a seller delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer (without retaining title), the seller is deemed to have unconditionally appropriated (or allocated) the goods to the contract.

 
9. Are retention of title clauses enforceable in your jurisdiction? If so, what are the requirements to create a legally enforceable retention of title clause?

Under the Sale of Goods Ordinance (Cap. 26) (SGO), the parties can provide that, although the buyer is entitled to possession of the goods, the seller maintains a right to dispose of the goods until the price is paid or some other condition is satisfied. Retention of title clauses (otherwise known as Romalpa clauses) are in principle enforceable in Hong Kong.

An effective retention of title clause will need to be appropriately drafted and validly incorporated into the contract. Practical difficulties can arise in the enforcement of these clauses, for example, where:

  • The goods have been incorporated into other products so as to lose their identity, in which case the property in the goods is lost and title in the resulting product vests in the buyer.

  • The goods are sold before they are paid for.

There are various ways to address these practical difficulties, including proceeds of sale clauses, all monies clauses and mixed goods clauses. However, depending on the identity of the parties and the location of the goods in question, more elaborate or far-reaching clauses may constitute charges that require registration under the Companies Ordinance (Cap. 622) and/or under the legislation of the country where the buyer is incorporated. Failure to register the charge when required to do so can render the charge void and/or expose the individuals responsible for registering the charge (which could include the seller) to a fine.

The SGO provides that where goods are shipped, and delivery under the bill of lading is "to the order" of the seller or his agent, the seller is prima facie deemed to retain the right of disposal of the goods. In addition, when a seller releases the bill of lading to obtain payment under a letter of credit, title will not pass to the holder of the bill of lading until the seller has received payment.

 
10. If not agreed by the parties, when does risk in relation to the goods pass to the buyer?

In the absence of agreement, risk will pass when title passes, regardless of whether the goods have been delivered at the time title passes. However, where delivery is delayed due to the actions of the buyer or seller, the party responsible for the delay will be liable for any loss that would not have occurred but for the delay.

Variation and assignment

11. What are the main ways and formalities to transfer contractual rights?

Contractual rights can be transferred by way of assignment or novation.

Assignment

Assignment involves the transfer of a right or benefit (but not an obligation) under a contract from one person to another. An assignment can be legal or equitable. Not all rights can be assigned (statute and public policy can prohibit the assignment of certain types of right, such as the right to receive social security payments), but in principle most (if not all) rights arising in contracts for the sale of goods will be assignable. The major barrier to assignment in the context of sale of goods contracts (as in most commercial contracts) are clauses that prohibit assignment, or make it subject to the consent of the counterparty. Any right assigned in breach of such a clause will probably be invalid against the debtor, but may be effective between the assignor and the assignee.

An assignment is a legal assignment if the following conditions are met:

  • It is in writing.

  • It is in writing under the hand of the assignor.

  • It does not purport to be by way of charge only (that is, as security for something).

  • Notice in writing is given to the debtor.

For an equitable assignment, there is no requirement to give notice to the debtor. There is also no requirement for the assignment to be in writing, save for the assignment of interests relating to land.

The key practical difference between a legal assignment and an equitable assignment is that, under an equitable assignment, the assignee can only sue on the contract by joining the assignor as a party.

Novation

Novation takes place where two contracting parties agree that a third, who also agrees, will take the place of one of them as contracting party. The effect of a novation is that:

  • A new contract is made on the same terms as the original contract (or whatever amended terms the parties agree), and the original contract is discharged.

  • The original party is no longer liable to perform.

  • All rights and obligations are transferred to the new party.

The key practical distinction between an assignment and a novation is that a party's obligation cannot be transferred under an assignment. There are no particular formal requirements to effect a novation, but the usual principles of contract formation will apply (see Question 5).

 
12. What are the main rules relating to waiver of contractual rights?

A party can be held to have waived a contractual right if the following conditions are met:

  • It makes a clear statement or conducts itself in such a way so as to objectively indicate an intention to give up, or promise not to enforce, a right.

  • The counterparty relies on that statement or conduct.

  • It would be unfair to allow the waiving party to rely on the right, having represented that it would not do so.

The effect of a waiver is that the waiving party loses the right to insist on performance in accordance with the original terms of the contract. However, depending on the circumstances of the case, and the nature and scope of the waiver, the waiving party can, after giving reasonable notice, insist on performance of the obligation in question.

A waiver need not be in writing, even if the underlying contract must be in writing or evidenced in writing. Unlike in the case of variation (see below), a waiver does not need to be supported by consideration.

The variation of a contract involves the parties agreeing to change the terms of the contract, as opposed to one party unilaterally refraining from insisting on contractual performance of an obligation (as in the case of waiver). In practice, there can be difficulties in distinguishing between a waiver and a contractual variation. The key point in the case of a variation is that the agreement to vary in itself amounts to a contract, and must therefore satisfy the requirements for the formation of a contract (see Question 5). However, if there is a variation (as opposed to a waiver), the waiving party can only insist on performance of the obligation as varied, and not on performance of the original obligation (as it may be entitled to do in the case of a waiver, in certain circumstances).

A contract made by deed or required to be evidenced in writing must be varied by an agreement in writing, otherwise a variation can be made by oral agreement. The parties can agree in advance that one party has the right to unilaterally vary certain terms (for example, interest rates).

Enforcement and remedies

13. What are the seller's obligations in relation to the description and quality of the goods?

Parties can agree on express terms relating to the description and quality of the goods. In addition, the Sale of Goods Ordinance (Cap. 26) (SGO) sets out several implied terms. These are binding unless they are excluded from the contract in accordance with section 57 of the SGO. These implied terms are as follows:

  • Implied undertaking as to the seller's title to the goods, including contracts for future sale (that is, where the seller does not own the goods it is selling at the time of contracting) (section 14, SGO).

  • Implied term that goods sold by description will correspond to that description (section 15, SGO).

  • Implied undertaking as to quality or fitness of the goods (section 16, SGO).

  • Implied term that the bulk of goods sold by sample will correspond to the sample (section 17, SGO).

If the parties wish to exclude any of these terms, they must comply with the following restrictions (Control of Exemption Clauses Ordinance (Cap. 71) (CECO)):

  • Where one party is a consumer, the implied terms in sections 15, 16 and 17 of the SGO cannot be excluded or restricted.

  • Parties dealing otherwise than as consumers can limit or exclude liability under those sections, but these limitations or exclusions must be reasonable.

  • Liability for breach of the section 14 implied undertaking (right to sell the goods) cannot be excluded. This prohibition applies to both consumer and non-consumer contracts.

However, the restrictions in the CECO do not apply to sale of goods contracts made between parties whose places of business are in different countries or territories, or are in and outside Hong Kong, and any of the following applies:

  • At the time the contract is concluded the goods are in the course of carriage or will be carried between different countries or territories or across the Hong Kong border.

  • Offer and acceptance took place in different countries or territories, or in and outside Hong Kong.

  • The goods are to be delivered to a country or territory other than the country or territory where the offer and acceptance took place.

  • Offer and acceptance took place in Hong Kong, but the contract provides that goods are to be delivered outside Hong Kong.

  • Offer and acceptance took place outside Hong Kong, but the contract provides that the goods are to be delivered in Hong Kong.

See Question 21 for further details on the CECO.

In addition, the Consumer Goods Safety Ordinance (Cap. 456) imposes a duty on sellers and manufacturers to make sure that their goods are "reasonably safe having regard to all the circumstances".

 
14. What are the different types and legal status of contractual terms in your jurisdiction?

Contractual terms fall into three broad categories, namely:

  • Conditions.

  • Warranties.

  • "Intermediate" or "innominate" terms.

The remedies available as a consequence of a breach of a contractual term depend mostly on the categorisation of the term breached. However, the label applied to a term (for example, "condition") is not determinative. The categorisation of a term is ultimately dependent on the construction of the contract as a whole.

Conditions

A condition is a fundamental term of the contract, the breach of which would deprive the party not in breach of substantially the whole benefit of the contract. Breach of a condition generally entitles the innocent party to treat the contract as repudiated. If the innocent party accepts the breach of condition as repudiatory and communicates this acceptance, by words or conduct, to the party who has breached the condition, then:

  • The innocent party and the party in breach are relieved from further performance of their primary obligations under the contract.

  • The party in breach is liable to pay to the innocent party monetary compensation (damages) for its non-performance.

If the innocent party does not accept the breach of condition as repudiatory, it is still entitled to claim damages for any losses it incurs as a consequence of the breach.

There are certain circumstances in which an innocent party can be deprived of the right to treat the contract as repudiated. In the context of a sale of goods, the best example is section 13(4) of the Sale of Goods Ordinance (Cap. 26), which provides that in certain circumstances a buyer can be deprived of his right to reject the goods and to treat the contract as repudiated by his acceptance of the goods.

Warranties

A warranty is a less important term of the contract, which is collateral to the main purpose of the contract. The primary distinction between a condition and a warranty is that a breach of a warranty does not entitle the innocent party to treat its obligations under the contract as discharged. However, the breach can give rise to a right to claim damages on the part of the innocent party.

Intermediate/innominate terms

Not all terms fall squarely into the category of condition or warranty and the Hong Kong courts, consistent with the approach taken in other common law jurisdictions, recognise a third category of intermediate or innominate terms. The breach of an intermediate term may or may not give rise to a right to terminate, depending on the severity of the consequences of the breach. Generally, if the breach deprives the innocent party of substantially the whole benefit of the contract, it will be entitled to treat the contract as discharged. A term can be classified as intermediate even if it is expressly called a "warranty" or "condition" in the contract. The crucial consideration for the courts when considering which remedies are available to the innocent party is the severity of the breach and the degree to which it is deprived of the benefit of the contract.

 
15. What are the key rules on privity of contract and third party rights?

Previously, subject to limited exceptions, the general rule in Hong Kong was that a contract could not confer rights or impose obligations on third parties. The position has now changed for contracts entered into from 1 January 2016 onwards. The Contracts (Rights of Third Parties) Ordinance (Cap. 623), which came into force on 1 January 2016, has reformed Hong Kong law in this area. It confers on third parties a general right to enforce a contract where the contract expressly provides that the third party can do so, or the terms of the contract purport to confer a benefit on the third party, unless on a proper construction of the contract, the term is not intended to be enforceable by the third party.

 
16. What are the rules relating to invalidity, misrepresentation and mistake relating to contracts?

Invalidity

Under Hong Kong law, a contract can be "invalid" because it is:

  • Void ab initio. A contract that is void ab initio is treated as if it had never existed and had been inoperative from the moment that the parties purported to form it. Assets that have been transferred under such contracts can generally be recovered by the transferor, as they were never legally transferred.

  • Voidable. A contract can be invalid if it is voidable at the option of one or both parties, and one or both parties exercises the right to set it aside. A voidable contract is valid when formed and will remain so unless the party with the right to set it aside exercises that right. If an asset has been transferred before the contract has been avoided, the property can be validly transferred.

  • Unenforceable. An unenforceable contract will generally be valid, but the contracting parties will not have the right to sue on it.

It is important to distinguish between these different causes of invalidity, as the precise categorisation of the invalidity determines the legal consequences of that invalidity.

Void, voidable or unenforceable contracts can arise in a number of ways. For example, a contract can be void or voidable due to a party's lack of capacity to enter into the contract (see Question 3). Similarly, a contract will be voidable if one of the parties has been pressured into making the contract in a manner amounting to duress or undue influence (which can include economic duress). A contract can also be void ab initio or unenforceable if it is illegal (for example, a contract to commit a crime).

These examples are not exhaustive and there are numerous other circumstances in which the validity of a contract can be questioned.

Misrepresentation

A misrepresentation is an untrue representation of fact or law made by one party (A) (or its agent acting within the scope of his authority) to another party (B) which induces B to enter into the contract, the effect of which causes B to suffer a loss. The element of inducement is crucial. There is no actionable misrepresentation if the untrue representation did not induce B to enter into the contract. The representation can be express or implied, or by conduct.

A misrepresentation can be:

  • Fraudulent, if it is false and made either knowingly or without belief in its truth, or recklessly as to whether it was true or false.

  • Negligent, if it is made carelessly or without reasonable grounds for believing it to be true.

  • Innocent, if it is false but is neither fraudulent nor negligent.

The remedies for misrepresentation depend on whether it is fraudulent, negligent or innocent:

  • Fraudulent misrepresentation: the innocent party can rescind the contract and/or bring a claim for damages.

  • Negligent misrepresentation: the court can allow the innocent party to rescind the contract and/or recover damages.

  • Innocent misrepresentation: the court can allow the innocent party to rescind the contract, and has discretion to award damages in lieu of rescission.

Under the Control of Exemption Clauses Ordinance (Cap. 71) (CECO), the parties can only exclude liability for misrepresentation if it is reasonable to do so. See Question 21 for more information on CECO.

Mistake

The common law doctrine of mistake concerns the validity of a contract where one or more of the parties entered into it on the basis of a mistake. There are three categories of mistake:

  • Mutual mistake. Where a misunderstanding concerning a fact means that the parties are acting at cross-purposes, there will be no contract if the result is that there was no mutual assent when the agreement was made. Therefore, this will only arise where the misunderstanding is fundamental to the contract (for example, both parties are mistaken as to the other's understanding of the type of goods to be transferred under the contract). See for example Falck v Williams [1900] AC 176 (PC).

  • Common mistake. A common mistake occurs where both parties are operating under the same mistake. If the mistake is "operative", consent is said to be "nullified" and the contract will not be enforced. An "operative" mistake is an error that is:

    • a mistake of fact;

    • fundamental to the contract such that it renders performance impossible; and

    • not covered by the allocation of risks included in the contract.

  • Unilateral mistake. A unilateral mistake is a mistake made by one party only. As with common mistake, an "operative" unilateral mistake nullifies consent. For a unilateral mistake to be operative, it must be a mistake about a term of the disputed contract. In addition, the non-mistaken party must have known that its counterparty had made a mistake. For example, there will be no contract if a seller offers goods at a mistakenly low price and the buyer purports to accept the offer knowing that the seller has made a mistake.

Where mistake is established, the contract will be void.

 
17. What are the main performance and discharge rules relating to contracts?

Although there is no general duty to act in good faith in contractual dealings in Hong Kong, the parties must perform their obligations according to the terms of the contract, failing which the innocent party will be entitled to remedies as described at Question 14.

A contract can be discharged in the following ways:

  • Discharge by performance. A contract is automatically discharged once all the obligations of the parties under the contract have been fully performed.

  • Discharge by agreement. The parties can agree to discharge the contract, either expressly or by conduct. The agreement to discharge the contract must itself amount to a contract (that is, it must fulfil the requirements set out at Question 5). This amounts in effect to a variation (see Question 12). The agreement need not be in writing, even if the underlying contract must be evidenced in writing.

  • Discharge following breach. If a party breaches a condition of a contract, or commits a breach of an innominate term which has serious consequences see Question 14), the innocent party can treat the contract as discharged. Where a party indicates a clear intention not to perform, the innocent party may be entitled to terminate the contract even if the actual breach has not yet taken place. This is called an anticipatory repudiatory breach. However, to be entitled to terminate a contract following a repudiatory breach, the innocent party must take active steps to accept its counterparty's breach and terminate the contract within a reasonable time. If it does not, it can be taken to have affirmed the contract and will lose the right to terminate the contract (but not the right to sue for damages).

  • Discharge in accordance with contractual terms. A contract can contain clauses that entitle one party to treat the contract as discharged on the occurrence of an event. Force majeure clauses or counterparty insolvency clauses are examples of such terms.

  • Discharge by frustration. The doctrine of frustration can be invoked by a party when an event takes place after the contract is formed, which strikes to the root of the contract and renders that party's further performance impossible, illegal or radically different from that contemplated by the parties when the contract was made. As a general rule, for an event to amount to frustration, it must not be the fault of either party and must not be contemplated or provided for in the contract. The effect of frustration is that the contract is discharged from the point at which it is frustrated and the parties can recover sums paid/expenses incurred.

 
18. What are the main remedies and rules for losses and damages for breach of a sale of goods contract?

Generally, where either party is in breach of a contract for the sale of goods, one or more of the following remedies will be available:

  • Damages. A breach of contract entitles the innocent party to claim damages as compensation for loss arising directly and naturally, in the ordinary course of events, from the breach. In the case of non-acceptance of goods or non-delivery of goods, where there is an available market for the goods in question, the prima facie measure of damages is the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted or delivered. Damages outside the reasonable contemplation of the parties at the time of entering into the contract are generally not recoverable. Further, an innocent party must take reasonable steps to mitigate any loss it incurs. If loss is in fact avoided, the innocent party cannot recover damages for any avoided loss.

  • Rectification. Where there is a mistake in the language used in the written form of the contract, a court can order an alteration of the written contract to properly reflect the true intention of the parties. This is an equitable remedy, which is usually only relevant in circumstances where there is a common mistake. It is often granted together with specific performance.

  • Rescission. Rescission is when a contract is set aside and the parties are put back to their pre-contractual position (see Question 16). It is an equitable remedy and a court can set aside a contract by reason of misrepresentation, mistake, duress or undue influence.

  • Specific performance. An innocent party can apply to court for an order for specific performance of the contract by the defaulting party. A court will only award specific performance where damages are not held to be an adequate remedy. In addition, in deciding whether to order specific performance, the court will take into account whether:

    • the contractual terms to be enforced are sufficiently clear;

    • the interests of third parties will be adversely affected by the order;

    • the innocent party comes to court "with clean hands"; and

    • there will be severe hardship on the defaulting party as a result of an order.

In practice, orders for specific performance are rarely granted.

  • Injunction. A court or an arbitral tribunal can order a party to perform acts that are required under a contract or restrain a party from breaching a contract. As an equitable remedy, an injunction order is generally only granted when damages are not an adequate remedy.

  • Restitution. This is a further remedy (both legal and equitable), and permits an injured party to bring a claim for restitution if the party in breach has been unjustly enriched at the injured party's expense.

See Questions 19 and 20 for information on specific actions and remedies of the buyer and seller.

 
19. What are the buyer's remedies for breach of a sale of goods contract?

Non-delivery

Damages are available when the seller is in breach of the contract by failing to deliver the goods to the buyer. The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller's breach of contract. Where there is an available market for the goods in question, the measure of damages is prima facie the difference between the contract price and the market price of the goods at the time they ought to have been delivered. If no time was fixed for delivery, the market price at the time of the breach will be used.

Late delivery

Where the seller delivers the goods later than the time stipulated in the contract and the buyer accepts them, the measure of damages is prima facie the difference between the value the goods would have had at the place of delivery if they had been delivered on time and the value which they had at that place when they were in fact delivered. Where goods are bought to keep and not for resale, this difference in value will not be recoverable. However, in the case of a profit earning chattel, damages will normally include the loss of profit that is reasonably foreseeable following the delay.

Other breaches

Where the seller breaches a condition of the contract (see Question 14, Conditions), the buyer can rescind the contract and claim damages for non-performance by the seller.

Where there is a breach of warranty by the seller (or where the buyer elects to treat a breach of condition as a breach of warranty, for example if it is a condition that the goods be delivered at a specified time, they are delivered late but the buyer accepts them), the buyer is not entitled to reject the goods, but can claim damages and/or a reduction in price.

The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the breach.

If the seller fails to deliver specific or ascertained goods, the buyer can apply to the court, which can, if it thinks fit, order that the contract be performed specifically and the seller deliver the goods. The judgment on this matter can be unconditional, or on terms and conditions as to damages, payment of the price or otherwise, as the court sees just.

 
20. What are the seller's remedies for non-payment or late payment?

The general remedies outlined in Question 18 apply to all breaches of contract. The Sale of Goods Ordinance (Cap. 26) (SGO) sets out the following remedies for the seller:

  • Action for the price (section 51, SGO). If the buyer fails to pay the price in accordance with the contract, the seller can claim the price of the goods. If the contract does not specify a date of payment, the seller can claim the price once title to the goods has passed to the buyer. If payment was to be made on a specific date, the seller can claim the price from that date, even if title to the goods has not yet passed to the buyer.

  • Damages for non-acceptance (section 52, SGO). A seller can claim damages for loss arising due to the buyer's wrongful failure to accept and pay for the goods.

  • Unpaid seller's lien (sections 41 and 43, SGO). An unpaid seller has a lien over the goods or a right to retain possession of the goods until the price is paid.

  • Withholding delivery. In addition to other remedies, an unpaid seller can withhold delivery of the goods when property in the goods has not yet passed to the buyer (section 42, SGO). Additionally, when a buyer is insolvent, the unpaid seller, who no longer has possession of the goods, has the right to stop the goods in transit and to retain possession until paid (section 46, SGO).

  • Right of resale (section 41, SGO). An unpaid seller has a right to resell the goods.

Exclusion of liability

21. What are the main rules relating to excluding contractual liability? Are exclusion clauses enforceable in your jurisdiction? If so, what are the requirements to create a legally enforceable exclusion clause?

In principle, exclusion clauses, either excluding implied terms or limiting the remedies available to one party on the occurrence of a breach, are enforceable.

When construing an exclusion clause, a court will apply the following principles:

  • The party seeking to rely on the exclusion clause must show that it was incorporated as a term of the contract, which usually involves the taking of reasonable steps to bring it to the notice of the other party.

  • In the event of ambiguity, an exclusion clause must be construed strictly against the party seeking to rely on it (contra proferentum principle).

Therefore, it is important for an exclusion clause to be very precisely drafted to include specifically the type of liability or the implied term that it seeks to exclude. For example, liability for negligence of a party will not be excluded unless it is made sufficiently clear in the clause (ideally, by referring expressly to negligence).

In addition, the Control of Exemption Clauses Ordinance (Cap. 71) (CECO) limits the extent to which a party can avoid liability for breach of contract, negligence or other breaches of duty. Under CECO, clauses excluding or restricting liability for the following events are void:

  • Death or personal injury resulting from negligence.

  • Loss or damage caused by defects in goods supplied for private use or consumption resulting from the negligence of a person concerned with the manufacture or distribution of those goods.

  • In a contract with a consumer, breach of implied terms as to the quality of the goods, their fitness for purpose or conformity with description or sample (see Question 12).

  • Breach of the seller's implied undertakings as to title or possession of the goods.

Further, the following clauses will only be valid if they satisfy the requirement of reasonableness (CECO):

  • A clause excluding liability for negligence, but not for death or personal injury resulting from negligence.

  • As against a consumer or a person dealing on the other party's written standard terms of business, a clause restricting liability for the consequences of breach or entitling a party to render substantially different performance from that reasonably expected of him, or to render no performance at all.

  • As against a consumer, a clause requiring that consumer to indemnify the other party for liability that may be incurred by the other party in negligence or breach of contract.

  • As against a non-consumer, a clause that restricts or excludes the seller's implied undertakings as to the quality of the goods, their fitness for purpose or conformity with description or sample.

Whether or not a clause is "reasonable" is a matter for the courts to decide, considering the circumstances of the case. One particular factor raised by CECO is the extent to which the clause is expressed in a language understood by the person against whom it is invoked. Other factors taken into account are the strength of the parties' bargaining position, the customer's knowledge of the clause and the reality of the customer's consent to the clause.

However, the restrictions in CECO do not apply to sale of goods contracts made between parties whose places of business are in different countries or territories, or are in and outside Hong Kong, and one of the following applies:

  • At the time the contract is concluded the goods are in the course of carriage or will be carried between different countries or territories, or across the Hong Kong border.

  • Offer and acceptance took place in different countries or territories, or in and outside Hong Kong.

  • The goods are to be delivered to a country or territory other than the country or territory where the offer and acceptance took place.

  • Offer and acceptance took place in Hong Kong, but the contract provides that goods are to be delivered outside Hong Kong.

  • Offer and acceptance took place outside Hong Kong, but the contract provides that the goods are to be delivered in Hong Kong.

Choice of law

 
22. Will local courts recognise a choice of foreign law in a sale of goods contract? Are there any mandatory local rules that apply, despite a choice of foreign law?

The Hong Kong courts will generally recognise a choice of foreign law in a sale of goods contract, except where it is contrary to Hong Kong public policy or a mandatory rule of law. Unlike in certain jurisdictions, it is not usually necessary to show that the law chosen has anything to do with the underlying transaction.

Hong Kong public policy only plays a minimal role. However, mandatory rules of law have a potentially wider impact in the context of sale of goods contracts.

In this regard, both the Control of Exemption Clauses Ordinance (Cap. 71) (CECO) and the Unconscionable Contracts Ordinance (Cap. 458) apply in favour of consumers, and in certain limited circumstances, in favour of commercial parties, regardless of the express choice of law, to deny legal effect to specific contractual clauses. Therefore, it is not possible to circumvent either Ordinance by selecting a foreign law.

Regardless of the choice of governing law, the proprietary consequences of a contract are in all cases governed by the law of the place in which the goods are located at the relevant time.

 
23. If the parties do not make a choice of law, what rules determine the law applicable to a sale of goods contract?

In the case of "free on board" contracts, there is a presumption that, in the absence of an express or implied choice of law, the governing law of the contract is that of the place of delivery of the goods. However, this presumption is unlikely to apply in the case of "cost, insurance and freight" contracts.

In all other cases, in the absence of an express or implied choice of law, the governing law of the contract will be the law with which the transactions has its closest and most real connection In determining this, the Hong Kong courts will consider various factors including the:

  • Location of the goods in question.

  • Dispute resolution provisions of the contract.

  • Place of intended performance.

  • Place of making or negotiating the contract.

  • Domicile or residence of the parties.

  • Use of particular legal terminology.

  • Language of the contract.

  • Other related transactions between the parties (if any).

Choice of jurisdiction

24. Will local courts recognise a choice of foreign jurisdiction in a sale of goods contract? Are there any mandatory local rules that apply, despite a choice of foreign jurisdiction?

The Hong Kong courts will generally recognise a choice of foreign jurisdiction in a sale of goods contract, except where it is contrary to Hong Kong public policy or a mandatory rule of law.

Hong Kong public policy only plays a minimal role. However, mandatory rules of law have a potentially wider impact in the context of sale of goods contracts.

In this regard, the Unconscionable Contracts Ordinance (Cap. 458) could in principle be invoked to render a jurisdiction agreement unenforceable against a consumer, if the agreement is part of the sale of goods contract. However, there is no Hong Kong case authority on this point.

The Hong Kong courts also draw a distinction between exclusive and non-exclusive choices of jurisdiction. Under an exclusive jurisdiction clause, the parties must litigate defined disputes in a specified court (and refrain from doing so elsewhere). The position under a non-exclusive jurisdiction clause is more complex, and would likely operate so that either party can sue in the named jurisdiction without the risk of being displaced, but a party can also choose to sue in other jurisdictions if the courts of these jurisdictions will accept the case.

 
25. If the parties do not make a choice of jurisdiction, what rules determine the jurisdiction applicable to a sale of goods contract?

If the parties do not make a choice of jurisdiction, the claimant will have to establish that the court before which it brings its claim has jurisdiction to determine it. Whether the court has jurisdiction to determine that claim will depend on the procedural rules of the jurisdiction in question.

Broadly, the jurisdiction of the Hong Kong courts can be established by either:

  • Serving the defendant with originating process within Hong Kong.

  • Obtaining prior leave of a Hong Kong court to serve originating process on the defendant outside of Hong Kong.

To obtain prior leave to serve out of Hong Kong, the claimant must demonstrate (among other things) that the Hong Kong court is the appropriate forum to try the case. However, the defendant can subsequently apply to set aside the leave to serve out of the jurisdiction on the ground that the Hong Kong court is not the most appropriate forum. In determining whether Hong Kong is the appropriate forum, the court will consider various factors including the:

  • Location of witnesses.

  • Governing law of the contract.

  • Predominant language of documents and witnesses.

  • Location of relevant assets.

  • Location of the parties.

Given the potential difficulties associated with not choosing a jurisdiction, parties are well advised to include an express choice of jurisdiction clause in a sale of goods contract.

Arbitration

26. Are arbitration clauses commonly included in sales of goods contracts in your jurisdiction?

The Arbitration Ordinance (Cap. 609), which came into effect on 1 June 2011, governs the arbitration regime in Hong Kong. The Ordinance has almost entirely adopted the provisions of the UNCITRAL Model law on International Commercial Arbitration, bringing it into line with recognised international practice.

Arbitration clauses are routinely included in sales of goods contracts in Hong Kong. Even a contract does not include an arbitration clause, once a dispute has arisen, the parties can subject that dispute to arbitration by entering into a separate arbitration agreement (sometimes referred to as a submission agreement).

Arbitration clauses and separate agreements to arbitrate can provide for institutional or ad hoc arbitration. Institutional arbitration is where the parties specifically agree that the arbitration must be conducted under the auspices of, and in accordance with, the rules promulgated by a particular arbitration institution (for example, the Hong Kong International Arbitration Centre (HKIAC)). Ad hoc arbitration is conducted pursuant to rules agreed by the parties themselves or the appointed arbitration tribunal.

The terms of the arbitration clause or agreement must be sufficiently certain for the agreement to be effective, although the Hong Kong courts take a relatively lenient view when considering whether to give effect to the clause or agreement. Issues arising out of the drafting of arbitration clauses or agreements can largely be resolved by including standard form clauses prepared by reputable arbitration institutions, such as those of the HKIAC (see www.hkiac.org/en/arbitration/model-clauses).

The UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) applies to Hong Kong, as China is a contracting state to this Convention. Therefore, arbitral awards made in Hong Kong can be enforced in other New York Convention states.

The New York Convention does not apply to the enforcement of Hong Kong awards in mainland China, and vice versa, as Hong Kong awards are not considered by mainland China to be awards made in the territory of another New York Convention state.

However, reciprocity with mainland China is covered by the Arrangement Concerning the Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region, which was signed on 21 June 1999. The Arrangement provides that Hong Kong awards are enforceable in mainland China and vice versa, on similar terms as under the New York Convention. Further, the Supreme Court of the People's Republic of China has expressly recognised the enforceability in China of ad hoc awards rendered in Hong Kong. This is not the case for New York Convention awards.

The Arbitration Ordinance also allows the enforcement of awards from non-New York Convention states and territories. These awards can be summarily enforced in Hong Kong through a common law action.

For further information on the enforcement of arbitration awards in Hong Kong, and in relation to arbitration in Hong Kong more generally, see Arbitration procedures and practice in Hong Kong: overview.

 

Storage of goods

27. How is title to goods in storage protected and evidenced? Are warehouse receipts recognised as documents of title in your jurisdiction?

There is no registration system for the ownership of goods in Hong Kong. Ownership is protected under Hong Kong law in accordance with the principle that a seller cannot give better title to goods than he has. This means that under Hong Kong law, subject to the exceptions outlined below, if goods are misappropriated and sold by someone who does not have legal title to them, the party that has title can recover the goods or their value from the person that purported to purchase them. The exceptions are as follows:

  • Estoppel (section 23, Sale of Goods Ordinance (Cap. 26) (SGO)).

  • Sale in a shop or market (section 24, SGO).

  • Sale under a voidable title (section 25, SGO).

  • Paid seller in possession (section 27(1), SGO).

  • Buyer in possession before payment (section 27(2), SGO).

  • Certain exceptions under the Factors Ordinance (Cap. 48).

The terms of a contract of storage should make it as difficult as possible for any of the above exceptions to apply. A detailed examination of these terms is beyond the scope of this chapter, but as a minimum, a contract of storage should expressly state that:

  • Title to the goods is retained by the party on whose behalf the goods are being stored.

  • The warehouse is under an obligation to re-deliver the same (not equivalent) goods to the party.

In terms of practical steps, a party on behalf of whom goods are being stored should ensure (insofar as possible) that its goods are labelled and segregated from other goods stored at the warehouse. Parties should also conduct due diligence of the warehouse(s) where their goods are stored or to be stored to, among other things:

  • Verify the existence of the warehouse and operator.

  • Verify the existence of the goods and the way in which they will be segregated.

  • Verify the track record of the warehouse and operator.

  • Confirm that adequate insurance cover is in place.

Title to goods in storage can be evidenced by warehouse receipts, which, unlike in certain jurisdictions, are not recognised as documents of title in Hong Kong. A warehouse receipt can contain or evidence a contract between the warehouse and the party on whose behalf the goods are stored, but it is not in itself a negotiable document of title. It is a document that describes the goods and acts as a receipt for the goods stored, the possession of which gives the holder the right to possession of the goods (subject to attornment by the warehouse in the case third parties acquire the warehouse receipt).

 
28. What conditions and formalities must warehouse receipts comply with?

Under Hong Kong law, warehouse receipts are not subject to any particular conditions, registration requirements or general formalities.

 
29. Are other interests over goods in storage recognised?

The types of security that are recognised in Hong Kong are outlined below.

Pledge

At common law, a pledge is created by delivery of the goods to the pledgee, either actual or constructive. If the pledgor has actual possession of the goods, it can effect the pledge by actual delivery. In other cases, the pledgor can give constructive possession by, for example, handing over the keys of the store in which the goods are held.

However, goods in storage are often held in the custody of a third party (such as a warehouse). If this is the case, the pledge can be effected by the warehouse "attorning" to the pledge (that is, acknowledging that it holds the goods for the pledgee, thereby giving the pledgee constructive possession).

In practice, the purchaser will deliver to the financing bank certain documents relating to the goods, such as a warehouse receipt or cargo receipt, along with an acknowledgement from the purchaser (if the purchaser has possession of the goods) or from a third party (if a third party has possession of the goods) that the purchaser or the third party (as the case may be) is holding the goods on behalf of the bank.

A pledge gives the pledgee the right of sale on default by the pledgor, and does not require any form of registration.

Charge

A charge is a security over an asset which gives the creditor the right to the proceeds of sale from the charged assets in order to discharge the debt in question. A charge does not transfer ownership, but is merely an encumbrance on the asset. There are two types of charge:

  • Fixed charge. A fixed charge is generally only used in respect of movable or fixed assets. To create a fixed charge, the security document usually prohibit dealing with any interest in the movable property or moving the charged assets without the lender's prior consent.

  • Floating charge. A floating charge can be taken over present, future and changeable assets, which can continue to be used in the ordinary course of the chargor's business until the occurrence of a specified event. A floating charge will "crystallise" over the assets subject to it on the occurrence of a specified event, such as an event of default in a lending transaction.

Lien

A lien is a right to retain possession of the goods until the underlying obligations are discharged. This can arise, for example, if a warehouse that is in possession of the goods is left unpaid for storage services rendered. The main difference between a pledge and a lien is that the holder of the lien cannot sell the goods. In practice, liens can prevent the owner from disposing of the goods or any financing bank realising the value of the goods, where they are used as collateral for a loan.

Liens do not need to be registered.

Mortgage

A mortgage, either legal or equitable, can in theory be created over tangible movable property.

A legal mortgage involves a transfer of the legal title to the mortgaged assets to the creditor (mortgagee), subject to the debtor's (mortgagor's) equity of redemption (that is, the mortgagor's right to require the mortgagee to transfer the mortgaged assets back to it on discharge of the underlying obligations). A legal mortgage is created by way of a charge in writing and executed as a deed (section 44(1), Conveyancing and Property Ordinance (Cap. 219)). In the event of default by the mortgagor, the mortgagee can force the sale of the asset as collateral for providing a loan.

An equitable mortgage does not transfer the legal title to the mortgagee. An equitable mortgage can be created by depositing the title deeds or other similar documents of title with the mortgagee.

Registration requirements

Specified charges created by Hong Kong incorporated companies (or foreign companies registered in Hong Kong as a non-Hong Kong company) must be registered with the Companies Registry (sections 334 to 347, Companies Ordinance (Cap. 622)). These charges include mortgages, floating charges and charges over a ship or aircraft.

 

Imports

Customs authority

30. What is the authority responsible for enforcing customs laws and regulations? Are certain goods subject to specific examination procedures?

The Customs and Excise Department is responsible for enforcing customs laws and regulations (www.customs.gov.hk/en/home/index.html).

Investigation and examination procedures

Officers of the Customs and Excise Department have wide ranging powers of investigation and examination under the Import and Export Ordinance (Cap. 60) (IEO).

Physical checks on goods covered by certificates of origin and import/export licences (see Question 32) are conducted by authorised officers of the Customs and Excise Department to verify the accuracy of material particulars or other relevant information declared on the documents.

Officers of the Customs and Excise Department can enter the premises of the importer or exporter concerned, and conduct inspections at any reasonable time. Inspection of goods can take place at the container terminal, the airport, and other points of exit. Where necessary, sealed packages or containers can be opened for inspection. Suspected malpractices are subject to full investigation.

Penalties

Any breach of the Import and Export (Strategic Commodities) Regulations is subject to a maximum penalty of an unlimited fine and seven years' imprisonment (IEO). Offences can be committed by corporate bodies and natural persons.

For most other breaches or contraventions of the IEO or its regulations, the maximum penalty is a fine of HK$500,000 and two years' imprisonment (see for example section 36 of the IEO for offences relating to licences).

Import duties, tariffs and rates

31. What are the main customs import tariffs and duties?

General tariffs and rates

Hong Kong is a free port with no general tariff on imported goods.

Excise duties are charged in accordance with the Dutiable Commodities Ordinance (Cap. 109) on four commodities only (namely alcoholic liquors, tobacco, hydrocarbon oil and methyl alcohol) regardless of whether they are imported or manufactured locally.

Liquor with an alcoholic strength of more than 30% is the only dutiable commodity subject to ad valorem duty (that is, duty is calculated as a percentage of the value of the liquor). For tobacco, hydrocarbon oil and methyl alcohol, duty is charged at a specific rate per unit of quantity. A list of the relevant duty rates is available at: www.customs.gov.hk/en/trade_facilitation/dutiable/types/index.html.

Preferential tariffs

Imports. There are no preferential import tariffs to favour certain countries of origin or certain goods.

Exports. Goods originating from Hong Kong benefit from preferential tariffs under the following agreements:

  • Free Trade Agreement (FTA) between the European Free Trade Association (EFTA) states and Hong Kong. The FTA between Hong Kong and the four EFTA states (Iceland, Lichtenstein, Norway and Sweden) provides for the removal of tariffs on all industrial products, fish and certain marine products of Hong Kong origin. Preferential tariff rates will apply to Hong Kong origin processed agricultural goods imported to EFTA states (tariff-free trade of basic agricultural products is agreed under bilateral agreements between the individual EFTA states and Hong Kong).

  • Mainland China and Hong Kong Closer Economic Partnership Arrangement (CEPA). CEPA is a FTA signed between mainland China and the Hong Kong Special Administrative Region. The implementation of CEPA enables a wide range of Hong Kong products complying with CEPA rules of origin to enjoy zero-tariff treatment on importation into mainland China if they are covered by a certificate of Hong Kong origin-CEPA.

  • New Zealand Closer Economic Partnership Agreement (CEP Agreement).The CEP Agreement is a free trade agreement signed between New Zealand and Hong Kong, which provides for a reduction in tariffs for exports from Hong Kong to New Zealand. All tariffs on Hong Kong exports to New Zealand were phased out by 2016.

  • FTA between Hong Kong, China and Chile. This FTA came into force on 9 October 2014. Since then, 88% of Chile's tariff lines have become duty free for products originating from Hong Kong. Chile will phase out the tariffs on certain additional tariff lines over the next two years. The remaining 2% (comprising, for example, cereals, sugars, articles of iron or steel) will continue to be subject to tariffs due to domestic sensitivity in Chile.

Non-tariff barriers to imports

32. Are there non-tariff barriers to imports into your jurisdiction?

Hong Kong implements a free trade policy and does not generally maintain barriers to trade.

Licensing is only imposed to fulfil obligations of Hong Kong to its trading partners, or to meet public health, safety or internal security needs. There is also no origin certification requirement for imports.

Imports and exports of certain articles are subject to licensing control by the Director General of Trade and Industry and the Customs and Excise Department, respectively, under the:

  • Import and Export Ordinance (Cap. 60).

  • Reserved Commodities Ordinance (Cap. 296).

  • Dutiable Commodities Ordinance (Cap. 109) (DCO).

  • Subsidiary legislation issued under these ordinances.

The following articles are subject to import licensing control by the Trade and Industry Department:

  • Rice.

  • Rough diamonds.

  • Strategic commodities.

  • Ozone depleting substances.

The licensing requirement in respect of rice (reserved commodity) aims to ensure the availability of staple food. For ozone depleting substances, the purpose of licensing control is to ensure that the local consumption of controlled substances does not exceed levels agreed under the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer, as amended from time to time.

The Customs and Excise Department is responsible for the licensing control of dutiable commodities.

Rice

Generally, all imports and exports of rice into and from Hong Kong must be covered by import or export licences, as appropriate. An import/export licence application must be lodged with the Rice Control Unit at Room 102B, 1/F of the Trade and Industry Department (Room 102B, 1/F, Tower 700 Nathan Road, Kowloon). The processing time is usually one clear working day following lodgement.

Strategic commodities

The importation of strategic commodities into Hong Kong requires an import licence. The list of strategic commodities is extensive, and they are specified in Schedules 1, 2 and 3 to the Import and Export (Strategic Commodities) Regulations (Cap. 60G). Broadly, they include:

  • Firearms.

  • Ammunition.

  • Articles relating to nuclear, chemical or biological weapons.

  • A wide variety of technological goods, software and electronic systems.

A full list of strategic commodities is available at: www.stc.tid.gov.hk/mobile/english/checkprod/sc_control.html. This is generally known as the Hong Kong Strategic Commodities Control List, and it includes details of restricted dual use goods.

Dutiable commodities

The DCO requires an ordinary import licence to import tobacco, liquor and methyl alcohol. A special import licence is required to import hydrocarbon oil (which includes aircraft spirit, light diesel oil, motor spirit and kerosene).

The application for an import and export licence (and a special import licence) must be made using form CED 65. Licences must be renewed annually. The normal processing time for a licence is 12 working days and the cost is HK$1,200.

Additionally, to obtain an import licence, or any of the permits under the DCO, an applicant must be registered with the Business Registration Office of the Inland Revenue Department. The registration process is straightforward, and the cost of a business registration certificate is currently HK$2,250 for one year and HK$5,950 for three years.

Further, the owners, charterers or agents of any vessel in which dutiable goods are imported or exported must, within 14 days after arrival or departure, provide to the Commissioner a statement of all dutiable goods that were on board the vessel (on Forms CED 40H and CED 39H, respectively) (section 22, DCO). If there are no longer any dutiable goods on board, the owners, charterers or agents must provide to the Commissioner a statement saying so (on Forms CED 39 (NIL) and CED 40 (NIL)).

Other commodities

Other commodities that require an import/export licence are ozone depleting substances and rough diamonds. The relevant application procedures can be found at the following links: www.tid.gov.hk/english/aboutus/form/sampleform/files/ozone_transhipment.pdf and www.tid.gov.hk/english/import_export/nontextiles/nt_rd/nt_rd_cer.html.

 
33. Can customs decisions and import restrictions be challenged?

Any person aggrieved by a decision of the Commissioner (including the granting and/or revocation of licences) can, within 14 days from the date the person was informed of the decision or the decision became known to him (whichever is later), lodge an objection to the decision with the Chief Secretary for Administration by notice in writing (section 6, Import and Export Ordinance (Cap. 60)). The Chief Executive can vary or reverse the decision and make an order as he thinks fit.

With respect to dutiable commodities, any person that is aggrieved by any decision of the Commissioner in respect of the granting and/or revocation of licences and permits can appeal to the Administrative Appeals Board.

 

Trade remedies

Regulatory framework

34. What are the main regulations and authorities responsible for investigating and deciding on trade remedies?

Regulatory framework

Anti-dumping, subsidies and countervailing measures. The use of anti-dumping, subsidies and countervailing measures by members of the World Trade Organisation (WTO) is governed by the following provisions:

  • Article VI (anti-dumping and countervailing measures) and Article XVI (subsidies) of the General Agreement on Tariffs and Trade 1994 (GATT 1994).

  • Agreement on Implementation of Article VI of GATT 1994 (Anti-dumping Agreement).

  • Agreement on Subsidies and Countervailing Measures.

As a founding member of the WTO, Hong Kong is party to all the agreements listed above. However, it is not mandatory for Hong Kong to introduce domestic legislation implementing these agreements or to take any measures to counteract anti-dumping, subsidies and countervailing or safeguard measures. Hong Kong has not adopted any legislation to counteract dumping or subsidies, nor implemented any anti-dumping or countervailing measures. Additionally, Hong Kong has not advised the WTO of any intention to do so.

WTO disputes are dealt with by the WTO General Council convening as the Dispute Settlement Body (DSB). The DSB is responsible for administering the rules of dispute settlement within the WTO (that is, for overseeing the entire dispute settlement process).

Anti-bribery. The Prevention of Bribery Ordinance (POBO) is the primary anti-bribery legislation in Hong Kong. Under the POBO, there are various types of bribery offences in both the public and private sector.

For example, in the public sector, it is an offence to do any of the following acts without lawful authority or a reasonable excuse:

  • Offer an advantage to a public servant for performing, abstaining from performing, or influencing the performance of any act in his capacity as a public servant, or for influencing any business transaction between any person and a public body.

  • Offering, soliciting or accepting an advantage in connection with a contract with, or an auction conducted by or on behalf of a corporate body.

Private sector bribery offences under the POBO include doing the following acts without lawful authority or reasonable excuse:

  • Offer an advantage to an agent without the permission of his principal, in connection with his performance of any act or his favouring/disfavouring of any person, in relation to his principal's affairs business.

  • As an agent, soliciting or accepting an advantage in connection with performance or abstaining from performance of any act, or with favouring/disfavouring of any person, in relation to the principal's affairs or business.

    At common law, it is an offence to bribe a person performing a public duty or for such a person to solicit or accept a bribe.

    Competition. The Competition Ordinance (Cap. 619), enacted on 14 June 2012, and which came into force on 14 December 2015, aims to prohibit and deter conduct that prevents, restricts or distorts competition in Hong Kong. There are three basic rules relating to the three major areas of anti-competitive conduct:

    • The First Conduct Rule prohibits agreements and concerted practices that have as their object or effect the prevention, restriction or distortion of competition in Hong Kong. Examples include price-fixing agreements, market share allocations to competitors, bid-rigging and agreements limiting production/sales (for example, to drive up prices).

    • The Second Conduct Rule prohibits businesses that have substantial market power from engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.

    • The Merger Rule, which only applies in the telecommunications sector, prohibits mergers or acquisitions that have the effect (or likely effect) of substantially lessening competition in Hong Kong.

    Regulatory authority

    The Hong Kong Trade and Industry Department is the government authority responsible for investigating trade remedies. The Anti-dumping Agreement regulates the actions a member government can take on behalf of its domestic industry to counter the adverse effects of dumping. Member governments can use the WTO's dispute settlement procedure to request the offending exporting country to cease dumping or to remove its adverse effects. Alternatively, a member government can launch its own investigation and ultimately charge extra import duty on the particular product of the exporting country in order to bring the product in line with its usual value. Anti-dumping measures must expire five years after the date of imposition, unless an investigation shows that ending the measure would harm the domestic industry.

    Subsidies, countervailing measures and safeguards. The WTO Agreement on Subsidies and Countervailing Measures regulates the actions a member government can take on behalf its domestic industry to counter the effects of subsidies. Broadly, member governments can use the WTO's dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Alternatively, it can launch its own investigation and ultimately charge extra duty (countervailing duty) on subsidised imports that are harming domestic procedures.

    As for anti-dumping measures, countervailing measures must expire five years after the date of imposition, unless an investigation shows that ending the measure would harm the domestic industry.

    Anti-bribery. The Independent Commission Against Corruption (ICAC) is the principal agency responsible for investigating and preventing corruption and bribery in Hong Kong.

    The ICAC has the power to:

    • Arrest a person without warrant if it reasonably expects that a person is guilty of an offence.

    • Search premises (with the court's permission).

    • Seize evidence (with or without the court's permission).

    • By court order:

      • require a witness to provide information and produce documents;

      • require a suspect to surrender his travel documents;

      • require a suspect to disclose details of property, expenditure and liabilities; and

      • require a person to attend interviews under caution.

    Under the Interception of Communications and Surveillance Ordinance (Cap 589), various regulatory bodies including the ICAC, the Customs and Excise Department and the Hong Kong Police can:

    • Intercept communications under a prescribed authorisation.

    • Conduct surveillance in certain circumstances.

    The ICAC, as an investigatory body, cannot impose any sanction or sentence. A person under investigation will be prosecuted by the Hong Kong courts if the Department of Justice considers that the evidence is sufficient to justify the institution of proceedings and it is in the public interest to prosecute. The maximum sentence for offences under the POBO is ten years' imprisonment and a fine of up to HK$1 million.

    A person found guilty of an offence under the POBO can appeal to the appropriate appellate court. A person can also challenge through judicial review any unlawful exercise of powers by the ICAC. Non-criminal complaints against the ICAC can be lodged at the ICAC Complaints Committee.

    Competition. The Competition Commission and the Competition Tribunal are responsible for enforcing the provisions of the Competition Ordinance. The Commission conducts investigations into competition-related matters. The Tribunal is set up within the judiciary as the superior court of record to hear and adjudicate on competition cases brought by the Commission, with jurisdiction to hear private actions and appeals from decisions of the Commission.

    The Commission has a broad range of investigations powers, including the power to:

    • Request the production of documents and information.

    • Require the attendance of relevant persons at hearings.

    • Enter and search premises, after obtaining a warrant from a judge of a court of first instance.

    Following investigations, a business found in breach of a conduct rule can be fined up to 10% of its turnover (section 93, Competition Ordinance). The Competition Tribunal has broad powers, including to:

    • Order the disqualification of directors.

    • Impose penalties on individuals.

    • Award damages to aggrieved parties.

    • Make injunction orders.

    • Make an order for costs of the Commission's investigation.

    • Terminate or vary an agreement.

    Parties have a right of appeal to the court of appeal against any decision (including a decision on the amount of any compensatory sanction or pecuniary penalty), determination or order of the Tribunal made under the Competition Ordinance (section 154, Competition Ordinance).

    Investigations and enforcement

    35. What are the requirements and procedure to start trade remedies investigations?

    Hong Kong has not adopted any domestic legislation to counteract dumping or subsidies, nor implemented any anti-dumping or countervailing measures. There is therefore no legal basis under which local producers can commence trade remedies investigations against foreign exporters to counteract the effects of dumping and subsidies in Hong Kong (if any).

    On the other hand, local exporters can complain against anti-dumping and countervailing measures implemented by foreign member states via the Hong Kong Trade and Industry Department. The relevant points of contact at the Trade and Industry Department are set out in the following link: www.tid.gov.hk/english/trade_relations/ad/ad_contact.html.

    The Trade and Industry Department can apply to vary or remove the offending anti-dumping or countervailing measure(s) in the foreign importing country if it considers that these measures are inconsistent with WTO law (that is, the Anti Dumping Agremeent, GATT 1994 or the Agreement on Subsidies and Countervailing Measures (as the case may be)). If negotiations with the relevant member state fail, the Hong Kong Government can use the WTO dispute settlement procedure to challenge the offending anti-dumping or countervailing measure(s) (see Question 44).

    Appeals

    36. Is there a right of appeal against the authority's decision? What is the applicable procedure?

    Hong Kong has not adopted any domestic legislation to counteract dumping or subsidies, nor implemented any anti-dumping or countervailing measures (see Question 35). There is therefore no domestic right of appeal or procedure available to domestic producers to counteract the effects of dumping or subsidies in Hong Kong (if any).

     

    Exports

    Regulatory framework

    37. What are the main requirements to export goods from your jurisdiction?

    Hong Kong operates a free trade policy. Consequently, there are generally few formal requirements to export goods from Hong Kong. As with imports, the primary pieces of legislation governing the export of goods out of Hong Kong are the:

    • Import and Export Ordinance (Cap. 60).

    • Reserved Commodities Ordinance (Cap. 296).

    • Dutiable Commodities Ordinance (Cap. 109) (DCO).

    • Subsidiary legislation issued under these ordinances.

    The party responsible for the export formalities (for example, under a sale contract) must lodge with the Commissioner an accurate and complete export declaration within 14 days after exporting the goods (if these are not exempted, such as oil) (regulation 5(1), Import and Export (Registration) Regulations (Cp. 60E)) (see regulation 3 for exempted goods).

     
    38. Are certain categories of goods subject to specific export quotas, restraints or other controls?

    Hong Kong implements a free trade policy and does not generally maintain barriers to trade.

    There are certain licensing requirements. However, these are only imposed when there is a genuine need to fulfil obligations of Hong Kong to its trading partners, or to meet public health, safety or internal security needs.

    The following articles are subject to export licensing control by the Trade and Industry Department:

    The authority responsible for the licensing control of dutiable commodities is the Customs and Excise Department. The rules in this regard are the same as for import licences (see Question 32, Dutiable commodities). A licence can be obtained by completing form TID 502 and the applicable guide is available at: www.stc.tid.gov.hk/english/applytips/how_complete.html. A licence is valid for three months.

    Penalties

    39. What are the consequences of non-compliance with export regulations?

    The maximum penalty for any breach of the Import and Export (Strategic Commodities) Regulations is an unlimited fine and seven years' imprisonment (Import and Export Ordinance (Cap. 60) (IEO)).

    For most other breaches or contraventions of the IEO or its regulations, the maximum penalty is a fine of HK$500,000 and two years' imprisonment (see for example section 36 of the IEO for offences in respect of licences).

    The Reserved Commodities Ordinance provides for a maximum penalty of a fine of HK$100,000 and imprisonment for two years.

    The licensing requirements for ozone depleting substances are governed by the Ozone Layer Protection Ordinance, which provides for a maximum penalty of a fine of HK$1 million and imprisonment for two years.

     

    International trade restrictions

    Trade sanctions

    40. Are there specific restrictions on trade with certain jurisdictions?

    In Hong Kong, UN sanctions are given legislative effect by the United Nations Sanctions Ordinance (Cap. 537) (UNSO) and its subsidiary legislation (regulations). The regulations are issued by the Chief Executive of Hong Kong on the instruction of the UN Security Council via the Ministry of Foreign Affairs of China.

    The regulations relate to a specific, designated territory and vary in nature and scope depending on the identity of the sanctioned targets. For example, most regulations impose prohibitions against making "available any funds or other financial assets or economic resources to, or for the benefit of, a relevant person or relevant entity".

    The following countries are currently subject to regulations under the UN sanctions:

    • Afghanistan.

    • Central African Republic.

    • Côte d'Ivoire.

    • Democratic Republic of the Congo.

    • Eritrea.

    • Guinea-Bissau.

    • Iran.

    • Iraq.

    • Lebanon.

    • Liberia.

    • Libya.

    • North Korea.

    • Somalia.

    • Sudan.

    • Yemen.

    A complete list of the applicable regulations is available on the website of the Department of Justice by searching "UNSO Cap.537" (www.legislation.gov.hk/eng/home.htm). These sanctions are liable to change without notice. Companies are advised to monitor the situation and to seek specialist legal advice when considering business in countries subject to the UN sanctions programme. Further, EU/US nationals in particular must be aware of EU/US sanctions prohibiting EU/US citizens from dealing with certain countries/individuals. Individuals are recommended to seek specialist legal advice on sanctions.

     
    41. What is the authority responsible for imposing trade restrictions?

    While Hong Kong has a high degree of autonomy, matters concerning foreign affairs fall under the ambit of the Central People's Government of China. Regulations, such as those relating to sanctions, are issued by the Chief Executive on the instruction of the Ministry of Foreign Affairs of China (after consultation with the Executive Council). Sections 34 and 35 of the Interpretation and General Clauses Ordinance (Cap. 1) (which require subsidiary legislation to be placed before, and approved by, the Hong Kong Legislative Council) do not apply to regulations made under section 3(5) of the United Nations Sanctions Ordinance (Cap. 537) (see Question 40).These regulations, which implement UN sanctions in Hong Kong, are therefore not put before the Hong Kong Legislative Council for vetting.

    The Hong Kong police and certain members of the Customs and Excise Department (known as "authorised officers") have considerable powers of investigation. For example, under the United Nations Sanctions (Liberia) Regulation 2015, an authorised officer who has reason to suspect that a ship is being used to carry any prohibited goods can board the ship, search it, and, if necessary, detain it. The regulations also empower relevant officers to obtain search warrants to collect evidence of a suspected offence. In addition, executive power can be obtained for the disclosure of information and production of documents. This information can be shared with various UN organs for sanctions enforcement.

     
    42. What are the consequences of non-compliance with trade restrictions?

    A breach of the Hong Kong regulations on trade sanctions is punishable as follows (section 3(3), United Nations Sanctions Ordinance (Cap. 537)):

    • On summary conviction, by a fine not exceeding HK$500,000 and imprisonment for a term not exceeding two years.

    • On conviction by indictment, by an unlimited fine and imprisonment for a term not exceeding seven years.

    Under some of the regulations, if the person convicted of an offence is a body corporate or firm, an officer or partner of such entity is guilty of the same offence if it is proved that he consented to, connived in, or was guilty of neglect in the commission of the offence.

     
    43. Are businesses subject to specific compliance requirements? What practical steps should a business take to ensure compliance with trade restrictions?

    Businesses are not subject to any mandatory compliance requirements. However, there are practical steps businesses can take to ensure compliance with trade restrictions, in particular UN sanctions.

    A comprehensive, tested compliance programme is the best way to mitigate sanctions risks and avoid enforcement scrutiny. This requires updated automated screening tools, a written programme, implemented procedures and regular auditing. Employees should be informed about their responsibilities under applicable laws and company policy. In addition, employees should have appropriate tools (such as checklists) available to ensure compliance, and be trained to spot and report red flags of non-compliance. Management should play an active role in enforcing the compliance policy. Further, the programme and procedures must be tailored to the specific risks a company is facing, and must evolve as the business and legal risks change over time.

    The following measures can also be used to ensure sanctions compliance:

    • Conduct regular sanctions risk assessments to identify the areas of greatest risk exposure within the firm.

    • Check counterparties carefully.

    • Choose counterparties and find out what policies and procedures they have in place to ensure they do not expose the business.

    • Check contract terms to ensure they provide the protection the business needs.

    • Think carefully about warranties in contracts (for example, look at whether the contract grant the right to terminate if there is a change of law and a counterparty is subject to sanctions (therefore making continued payment unlawful)).

    • Know the applicable sanctions regime in the jurisdiction where the firm conducts business.

    • Know which third parties (if any) are involved in the transaction (that is, know where and to whom products are being shipped, and which markets agents and distributors operate).

    • Be alert to unusual arrangements (such as the involvement of unnecessary intermediaries, unusual locations and so on).

    • Take advantage of technology systems, such as e-verification or screening software.

    Foreign trade barriers

    44. What is the procedure for local exporters to complain against foreign trade barriers contrary to the WTO or other trade agreements?

    Complaints should be made to the relevant contact person at the Hong Kong Trade and Industry Department (www.tid.gov.hk/english/trade_relations/ad/ad_contact.html).

    WTO disputes are dealt with by the WTO General Council convening as the Dispute Settlement Body (DSB). The DSB is responsible for administering the rules of dispute settlement in the WTO (that is, for overseeing the entire dispute settlement process).

    The DSB has the authority to:

    • Establish panels.

    • Adopt panel and Appellate Body reports.

    • Maintain surveillance of the implementation of rulings and recommendations.

    • Authorise the suspension of obligations under the relevant agreements.

    Local exporters cannot access the WTO dispute procedure directly, but must go through their government (via the Hong Kong Trade and Industry Department). Governments will only take the matter to the WTO if they are convinced that there has been an infringement of WTO law.

    The first step in the dispute procedure is for the relevant member states to enter into consultations with each other. These consultations start when the WTO Secretariat is notified that the countries are discussing the matter or will be discussing it from a certain date. More informal discussions can sometimes take place between countries before the consultations, but they will not go further than a few telephone calls or one meeting.

    If the consultations between the countries fail, and no solution is found after 60 days, the complainant country can ask the DSB to establish a panel to examine the case. The panel must be constituted within 30 days of its establishment. The panel usually consists of government officials of neutral countries or recognised trade law experts. Panellists serve in their individual capacities and are not subject to government instructions.

    The panel's final report must normally be given to the parties to the dispute within six months. Either party can appeal against the findings of the panel.

    Appeals against any decision of a panel are conducted according to the procedures established under the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and the Working Procedures for Appellate Review (Working Procedures). The Working Procedures are drawn up by the Appellate Body in consultation with the Director-General of the WTO and the Chairman of the DSB.

    An appeal is commenced by the appellant on written notification to the DSB and the simultaneous filing of a notice of appeal with the Appellate Body Secretariat. Rule 20 of the Working Procedures sets out what must be included in the notice of appeal (www.wto.org/english/tratop_e/dispu_e/ab_e.htm#20).

    On the same day the notice of appeal is filed, the appellant must file a written submission (Rule 21(1), Working Procedures). A party to the dispute that wishes to respond to the allegations raised by the appellant can file its own written submission within 18 days of the date on which the notice of appeal and the appellant's submission were filed (Rule 22, Working Procedures).

    An oral hearing is held for each appeal. At the oral hearing, appellants, appellees and third participants have an opportunity to present oral arguments and to respond to questions put to them by the Appellate Body Division hearing the appeal. The hearing generally takes place within 30 to 45 days of the filing of the notice of appeal.

    Proceedings before the Appellate Body are confidential. Only WTO members that are appellants, other appellants, appellees or third participants can attend oral hearings. However, Appellate Body oral hearings have been opened to the public in a few instances, at the request of the parties.

    After the oral hearing and before finalising the Appellate Body report, the Appellate Body Division hearing the appeal exchanges views with the other four Appellate Body members (Rule 4(3), Working Procedures).

    The Appellate Body report is circulated to WTO members in the three official languages of the WTO (English, French and Spanish) within 90 days of the date of filing of the notice of appeal. The report becomes public immediately on circulation to members. In its report, the Appellate Body can uphold, modify or reverse the legal findings and conclusions of the panel.

    Hong Kong has only made one complaint to the WTO. On 12 February 1996, Hong Kong requested consultations with Turkey concerning Turkey's quantitative restrictions on imports of textile and clothing products. Hong Kong claimed that those measures violated Articles XI (General Elimination of Qualitative Restrictions) and XIII (Non-discriminatory Administration of Qualitative Restrictions) of the General Agreement on Tariffs and Trade 1994 (GATT 1994). The dispute arose out of the introduction of restrictions on textile imports by Turkey on the ground that the restrictions were required to comply with obligations resulting from its entry into a customs union or free trade area with the EU. Hong Kong claimed that Article XXIV of GATT 1994 did not entitle Turkey to impose new quantitative restrictions.

     

    The regulatory authorities

    Customs and Excise Department

    W www.customs.gov.hk/en/home/index.html

    Principal responsibilities. The Customs and Excise Department is responsible for enforcing customs laws and regulations.

    Trade and Industry Department

    W www.tid.gov.hk/eindex.html

    Principal responsibilities. The Trade and Industry Department facilitates and supports the development of trade and industry in Hong Kong.



    Online resources

    Department of Justice

    W www.doj.gov.hk

    Description. This is the website of the Department of Justice of the Government of the Hong Kong Special Administrative Region. It includes comprehensive information on the legal system and the work of the Department of Justice, including access to the Bilingual Laws Information System (Chinese/English), an electronic database of Hong Kong legislation. The content is maintained by the Department of Justice.

    Judiciary

    W www.judiciary.gov.hk

    Description. This is the bilingual website of the Judiciary of the Hong Kong Special Administrative Region, which provides detailed information about the operation of the legal system in Hong Kong, a searchable database of Hong Kong courts judgments and access to e-services. The website is up to date.

    Basic Law

    W www.basiclaw.gov.hk

    Description. This is a Hong Kong Government website that provides access to the text of the Hong Kong Basic Law, and information about the Basic Law, the constitutional document setting out the "one country two systems" system. This is a dual language website provided by the Hong Kong Government.

    Trade and Industry Department

    W www.tid.gov.hk

    Description. The website of the Trade and Industry Department of the Hong Kong Government provides detailed information on the import and export formalities and trade regulations. The website is bilingual (Chinese/English) and is maintained the Department of Trade and Industry.

    Strategic commodities control system

    W www.stc.tid.gov.hk

    Description. The strategic commodities control system website is part of the Hong Kong Government Trade and Industry's website. It includes information and e-services related to the control of certain strategic commodities, in Chinese and English.

    World Trade Organization (WTO)

    W www.wto.org

    Description. The WTO website provides comprehensive information on the work of the WTO. See www.wto.org/english/thewto_e/countries_e/hong_kong_china_e.htm for detailed information on Hong Kong and China's participation in the WTO. The website is up to date and available in English, French and Spanish.



    Contributor profiles

    Andrew M Johnstone, Partner

    Holman Fenwick Willan

    T +852 3983 7676
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    E andrew.johnstone@hfw.com
    W www.hfw.com

    Professional qualifications. England and Wales, Barrister, 2004; Hong Kong, Solicitor, 2014

    Areas of practice. International trade; fraud; commercial litigation; commodities and shipping litigation and arbitration.

    Fergus Saurin, Associate

    Holman Fenwick Willan

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    Professional qualifications. England and Wales, 2011; Hong Kong, 2014

    Areas of practice. International trade; banking; commodities and shipping; litigation and international arbitration; environmental regulatory.

    Philip Kelleher, Associate

    Holman Fenwick Willan

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    Professional qualifications. England and Wales, 2015

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    Siân Knight, Professional Support Lawyer

    Holman Fenwick Willan

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    Professional qualifications. England and Wales, 2006; Hong Kong, 2012

    Areas of practice. International trade; commodities; shipping litigation and arbitration.

    Non-professional qualifications. LLM (Distinction), University of Hong Kong, 2015


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