Contracts, negotiation and enforcement in Hong Kong: overview

A Q&A guide to general contracts and their negotiation and enforcement in Hong Kong.

The Q&A gives a high level overview of the key legal concepts, including contract formation with general discussions as to authority, formal legal requirements, formalities for execution, the requirements for deeds and notarisation, and powers of attorney. It also considers the status of contractual terms, variation and assignment of contracts, and enforcement of the contract. The enforcement section covers remedies and liability, exclusion of liability, and cross-border/jurisdictional matters.

To compare answers across multiple jurisdictions, visit the Contracts, Negotiation and Enforcement: Country Q&A tool.

The Q&A is part of the global guide to contracts, negotiation and enforcement. For a full list of jurisdictional Q&As visit www.practicallaw.com/contracts-guide.

Contents

Formation of contracts

Authority and capacity

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

Hong Kong companies

A company must not enter into any contract which is outside its stated objects. However, under the Hong Kong Companies Ordinance (Cap. 622) (Companies Ordinance), a company is not required to state its objects in its articles of association (articles). Therefore, Hong Kong companies have the capacity to enter into any lawful contract.

In relation to contracts entered into prior to incorporation, these will be enforceable against the company if the company later ratifies them once it is incorporated (section 122(3), Companies Ordinance).

Foreign companies

Under Hong Kong law, the capacity of a foreign corporation to enter into a contract is governed by the law of its place of incorporation. Although Hong Kong law cannot overcome any defect in capacity under the law of that place, there is a rebuttable presumption that unless proven otherwise, a commercial party to a contract has full legal capacity to execute that contract.

Partnerships

Under the Partnership Ordinance (Cap. 48), when a partner is carrying out the usual business of the firm, contracts entered into will be enforced against the partnership, unless either (section 7):

  • That partner had no authority to act.

  • The person dealing with them knows that they have no authority or does not know or believe them to be a partner.

Trustees

A trustee's authority stems from the trust deed. Therefore, trustees can enter into contracts which they are permitted to enter into under the trust deed. They can also enter into contracts in pursuance of certain other statutory rights under the Trustee Ordinance (Cap. 29). These rights include the power to (Trustee Ordinance):

  • Insure the trust property against risks of loss or damage caused by any event and without restrictions on the amount of insurance (section 21).

  • Settle or dispute any claims or debts relating to the trust estate (section 16).

  • Appoint agents, nominees and custodians (part 4A).

Non-profit organisations

The capacity for a non-profit organisation to enter into contracts is determined by its legal form. In Hong Kong, a non-profit organisation can be in any form, but are often in the form of:

  • A Hong Kong company incorporated under the Companies Ordinance.

  • A company incorporated overseas and registered in Hong Kong.

  • A trust.

  • An unincorporated association, which may or may not be required to be registered under the Societies Ordinance (Cap. 151).

Unlike the other forms listed above, unincorporated associations have no legal entity and generally cannot enter into contracts, or sue or be sued, in the association's name or on its behalf, unless such power has been expressly conferred by legislation.

Agency

The law of agency in Hong Kong is governed by common law principles of equity and contract. Under these principles, an agent has the capacity to enter into contracts on behalf of the principal provided:

  • They have the authority to so act.

  • Their action does not exceed the scope of their authority.

An agent's authority can be any of the following:

  • Express. This is where the agent is given the authority directly from the principal orally or in writing.

  • Implied. This is where the agent has the authority to do acts which are reasonably incidental to and necessary for the effective performance of their duties.

  • Apparent. This is where a reasonable third party would believe the agent had authority to act. A third party will be prevented from relying on the apparent authority of a company agent when that reliance was "dishonest or irrational (which includes turning a blind eye and being reckless)" (Akai Holdings (2010) 13 HKCFAR 479). The courts apply an objective standard. The third party's reliance must be reasonable.

Liquidators

Hong Kong insolvency law is primarily set out in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (Winding-up Ordinance). This confers the express authority to the liquidator to do various acts, including the authority to (section 199, Winding-up Ordinance):

  • Bring or defend any action or other legal proceeding in the name and on behalf of the company.

  • Carry on business of the company necessary for the beneficial winding up thereof.

 

Formal legal requirements

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

The essential elements of a valid contract are:

  • Offer and acceptance (mutual assent).

  • Consideration.

  • Intention to be legally bound.

  • Certainty.

Offer

An offer is an expression of willingness to contract on certain terms, made with the intention that a contract will become binding as soon as it is accepted by the person to whom it is addressed.

Acceptance

Acceptance is a promise or act on the part of an offeree indicating a willingness to be bound by the terms and conditions contained in an offer. Hong Kong follows the common law mirror image rule, whereby the offeree must accept the offer on the terms offered. If the offeree varies the terms, then the "acceptance" constitutes a counter-offer and the original offer is rejected. The offeree must communicate its acceptance to the offeror in a method acceptable to the offeror. Generally, acceptance occurs when it is sent.

Consideration

For a contract to be binding there must be consideration (that is, mutual exchange). One party makes a promise to do something or refrain from doing something in exchange for something of value from the other party. If one party has no obligation, the contract may fail for lack of consideration. Courts generally will not examine the adequacy or fairness of the consideration.

Intention to create legal relations

Generally, the person seeking to enforce the contract will be required to demonstrate that there was an intention on parties to a contract to be legally bound. For commercial transactions, there is a rebuttable presumption that the parties intended to create legal relations (Rose & Frank Co v JR Crompton & Bros Ltd [1924] UKHL 2).

Certainty

Normally, a valid contract must identify the parties, the subject matter, and the consideration. The price can be fixed or a mechanism for fixing the price can be set out. If no price is agreed, the buyer must pay a reasonable price in sale of goods contracts (section 10, Sale of Goods Ordinance).

 
3. What are the main forms of contract?

Both written and oral contracts are valid under Hong Kong law.

Offer or invitations to treat

When an offeror makes it clear that its offer, if accepted, is a binding agreement, a contract is formed from the time of acceptance. This must be distinguished from an invitation to treat (or to negotiate or tender) which is nothing more than one party communicating to another party that it is willing to hear the other party's terms (to consider an offer from that other party).

Withdrawing an offer

An offeror can withdraw its offer at any time prior to the offeree accepting it. Once accepted, the offeror cannot avoid its contractual obligations unless it successfully raises a contractual defence.

Incorporation by reference

Terms can be incorporated by reference. Common law rules of incorporation by reference will apply, which requires that clear words of reference must be used to incorporate terms referred to (Circle Freight International Limited v Medast Gulf Exports Limited [1988]).

Electronic contracts

Contracts can be formed electronically. The Electronic Transactions Ordinance (Cap. 553) states that "for the avoidance of doubt, it is declared that in the context of the formation of contracts, unless otherwise agreed by the parties, an offer and the acceptance of an offer may be in whole or in part expressed by means of electronic records" (section 17).

Digital evidence

Under the Evidence Ordinance, "computer-generated records" are specifically included within the definition of "records". Digital evidence must satisfy the evidentiary requirements of authentication, relevance, and reliability.

 
4. How are preliminary agreements used in your jurisdiction?

Whether a preliminary agreement constitutes a legally binding document depends on whether the parties intend to be presently bound to each other or whether they do not so intend until the occurrence of some subsequent event (Daiman Development Sdn Bhd v Mathew Chin Teck [1981] 1 ML] 56, 58).

To limit uncertainty, preliminary agreements which are not intended to be binding should be marked "subject to contract". It may also be useful to include an express provision that the preliminary agreement is not binding and that the parties will later negotiate a binding contract.

The requirements for the creation of a valid contact must be satisfied for any preliminary agreement to be binding.

 
5. Can negotiations become legally binding in any circumstances? What are the principles and rules (if any) on pre-contractual liability and good faith in negotiations?

Consequences of termination of negotiations

In general, either party can terminate negotiations without incurring liability. A party who starts to perform in reasonable reliance of statements made in negotiation can attempt to raise an argument based on estoppel to claim damages.

Good faith

Under Hong Kong law, there is no duty to conduct contractual negotiations in good faith (Hyundai Engineering and Construction Co Ltd v Vigour Ltd).

 

Formalities for execution

6. When are written contracts required and for which assets/interests?

Real estate

Under the Conveyancing and Property Ordinance (Cap. 219) (Property Ordinance), contracts for the sale of land and leases exceeding three years must be in writing (section 3; section 4(2)( d)).

Mortgages

Whether a mortgage must be evidenced by writing depends on the type of interest mortgaged. Under the Property Ordinance, a mortgage is a type of legal estate, and legal estates in land can be created only by a writing (section 2; section 4(1)).

Guarantees

In Hong Kong, guarantees are usually in writing, and are often executed as deeds to avoid any dispute as to consideration.

Assignments

Assignment contracts can be written or made orally. A written assignment is a legal assignment, and oral assignments are treated as equitable assignments. The difference lies in the assignee's ability to enforce the assignment.

Consumer contracts

A sale of goods contract does not need to be in writing to be enforceable. Section 5 of the Sale of Goods Ordinance states that "a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties".

 
7. Are there different formalities for different types of contractual document?

Contract

A contract can be oral or written. Consideration is an essential element to simple contract formation. There is no witness requirement when signing a contract.

Deeds

A deed must be in writing, and must be signed, sealed and delivered. There is no requirement for consideration to pass for a deed to be legally binding.

If only one party under a contract is receiving a real benefit from an agreement, it is advisable under Hong Kong law to execute the contract as a deed so that it is not void for lack of consideration. As good practice, deeds are witnessed.

 
8. What are the formalities for the execution of documents by companies, foreign companies and individuals?

Companies

The Companies Ordinance states that a company can execute a document by either (section 127):

  • Common seal, if the company has one.

  • Signature of any two directors, or any director and the company secretary, or of its sole director in the case of a single-director company.

Also, a document can be executed by an agent under power of attorney, which itself must be granted by an instrument executed as a deed in compliance with the above formalities.

Foreign companies

It is unclear whether a foreign company is only required to comply with the law governing the place of incorporation or only the governing law of the relevant document, or both. As a matter of good practice, foreign companies should execute documents in compliance with all of the following:

  • Place of incorporation.

  • Governing law of the contract.

  • Place of execution of the documents.

The Companies Ordinance is silent on this issue and does not establish formalities for deed execution by foreign companies.

Individuals

There are no specific formalities for the execution of documents by individuals.

 
9. What is the status of electronic and faxed signatures in your jurisdiction?

The Electronic Transactions Ordinance (ETO) accords electronic signatures the same legal status as their paper-based counterparts (section 6(1) , ETO). However, under Schedule 1 of the ETO, several documents are specifically excluded from this rule, such as:

  • Wills.

  • Powers of attorney.

  • Government leases.

  • Real estate transactions requiring a deed instrument.

For details of documents which can or must be documented in deeds, see Questions 10 to 12.

 

Deeds

10. When are deeds required in relation to contracts?

Legal estates in land

Conveyance of an interest in land can only be accomplished by deed (section 4(1), Property Ordinance). A legal estate includes leases, easements and mortgages (section 2, Property Ordinance). However, certain documents are exempted from this requirement, including leases which do not exceed three years (section 4(2)(d), Property Ordinance).

Powers of attorney

Under the Powers of Attorney Ordinance, an instrument creating a power of attorney must be signed and sealed by, or by direction and in the presence of, the donor of the power (section 2(1)). Two other persons must be present as witnesses and attest the instrument (section 4(2)).

Releases

For a release to be valid as a contract, there must be consideration. Parties wishing to execute a release without consideration can do so by way of deed. Release of a security is therefore usually documented by deed.

Guarantees

To limit the argument that the contract fails for lack of consideration, guarantees are usually documented by deed.

 
11. What are the legal formalities for a deed?

Under common law a deed must be signed, sealed and delivered. In Hong Kong, the legal requirements to seal and deliver a deed have been relaxed significantly.

Written and clear

The written document must be clear on its face that it is intended to be a deed. It is useful to refer to the document as a deed and include appropriate language in the execution block ("executed as a deed") to help satisfy this requirement.

Execution

The deed must be duly executed. It is advisable that it is executed as a whole, physical document (including any schedules and the signature pages).

Delivery

A deed must be "delivered" to be effective. Historically, delivery meant the physical handing over of the document. Now, any act which signifies an intention to be bound satisfies the delivery requirement.

For Hong Kong companies, a properly executed deed is presumptively delivered: "a document is presumed, unless the contrary is proved, to be delivered as a deed on its being executed" (section 128, Companies Ordinance).

 
12. What are the legal requirements for the execution of deeds?

In Hong Kong, a document is presumed sealed by an individual if any of the following applies to the signed document (section 19, Property Ordinance):

  • It describes itself as a deed.

  • It states that it has been sealed.

  • It bears any mark, impression or addition intended to be or to represent a seal.

Hong Kong companies can execute a document as a deed by satisfying all of the following requirements (section 128, Property Ordinance):

  • Executing it under its common seal, or in accordance with document execution requirements (see Question 8, Companies).

  • Having it expressed (in whatever words) to be executed by the company as a deed.

  • Delivering it as a deed.

For Hong Kong companies, when electing to execute a deed by common seal, the company must follow the procedures set out in its articles.

As a matter of good practice, execution of a deed is witnessed.

 

Notarisation

13. Is notarisation required for contracts in your jurisdiction?

It is not necessary to notarise contracts for them to be effective.

In Hong Kong, notarisation can be carried out by private notary publics registered with the Register of Notaries Public.

It is common to require certified true copies of documents for various purposes. Certification can be carried out by solicitors.

 
14. What are the legalisation requirements in your jurisdiction and how is it carried out?

The HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (Apostille Convention) applies to Hong Kong. Therefore, a straightforward apostille procedure can be used when dealing with other member jurisdictions. Documents accepted for apostille are public documents bearing the true signature of an official party (such as an officer of the Hong Kong government), and documents signed by a notary public or a commissioner for oaths in Hong Kong. The document should be mailed or hand-delivered to the Apostille Service Office, High Court Registry, Room LG115, along with the relevant apostille fee.

 

Powers of attorney

15. What are the main types of powers of attorney in your jurisdiction?

General power of attorney

A power of attorney will be a general power of attorney unless the creating instrument restricts the power to certain limited transactions or responsibilities, which would make it a "limited" or "special" power of attorney. It ceases to be effective if the donor becomes mentally incapacitated.

Enduring power of attorney

An enduring power of attorney is a legal instrument which allows a donor while still mentally capable to appoint an attorney-in-fact to take care of the donor's financial matters in the event of subsequent mental incapacity. That is to say the power will "endure" the donor's mental incapacity.

The Powers of Attorney Ordinance (Cap. 31) and the Enduring Powers of Attorney Ordinance (Cap. 501) are the primary sources of law for powers of attorney.

For details of the scope of powers of attorney and enduring powers of attorney, see Question 17, Scope.

 
16. What are the main transactions when powers of attorney are used?

Powers of attorney are mainly used in the following types of transactions:

  • Overseas execution of documents by company agents.

  • Partnership agreements to enable partners to deal with partnership matters on behalf of each other.

  • Delegation of trustee's powers to appointees.

  • Proxy voting (if permitted by the company's articles).

 
17. What are the key provisions in a power of attorney?

Mental capacity

The donor must be able to understand the effect of creating a power of attorney, be able to make the decision to grant it and have the intention to do so (section 1A, Powers of Attorney Ordinance (PAO)).

Identity of the power of attorney holder

A power of attorney cannot be enduring unless the attorney has attained the age of 18 years and is not a bankrupt or mentally incapable, or if the attorney is a trust corporation (section 6, Enduring Powers of Attorney Ordinance (EPAO)).

The registered medical practitioner or solicitor who certifies mental capacity must be a person other than the attorney, the attorney's spouse or a person related to the attorney by blood or marriage.

Scope

A general power of attorney confers on the attorney "authority to do on behalf of the donor anything which he can lawfully do by an attorney" (section 7, PAO). However, the scope of an enduring power of attorney is limited to acts in relation to the property and financial affairs of the donor (section 8(1), EPAO).

Delegation

An enduring power of attorney is restricted to the agent or agents identified in the instrument creating the power. The instrument cannot empower the agent to appoint another person in substitution for themselves or as their successor (section 7, EPAO).

 
18. What are the formalities for the execution of a power of attorney?

General power of attorney

The donor only needs to sign and seal the instrument creating the power of attorney. If the donor is physically unable to sign and seal themselves, they can instruct another to sign for them in their presence (in these circumstances, two other persons must be present as witnesses and must attest the instrument) (section 2, PAO).

Enduring power of attorney

An enduring power of attorney contains the additional requirement that both a registered medical practitioner and a solicitor must, within 28 days of each other, certify that the donor of the power appeared mentally capable of understanding the meaning and consequences of an enduring power of attorney, and signed it voluntarily (section 5(2), EPAO).

A certified copy of the instrument creating the enduring power must be registered with the High Court (section 4(2), EPAO).

 

Other

19. Is virtual closing used in your jurisdiction?

Virtual closings are common in Hong Kong. According to English legal authority, for a contract by deed to be effective, the signature and the attestation must form part of the same physical document. Therefore, it is advisable that when executing written agreements virtually, each party should:

  • Print the document in full.

  • Sign the complete document.

The entire signed document should then be returned both electronically and by hard copy.

 
20. How are legal opinions obtained and used in your jurisdiction?

Legal opinions are relied on to evaluate the legal risks of a transaction. Opinions are obtained from either solicitors or barristers, depending on the complexity of the issue involved. The legal opinion will:

  • Contain information on the background of the transaction.

  • Identify the documents reviewed and enquiries made.

  • State the assumptions on which it is made.

  • Provide the opinion itself, in which the lawyer expresses a qualified legal analysis and/or conclusion on the relevant point of law or transaction.

 
21. What are the key issues in the conduct of completion meetings?

Collating documents

One important issue for completion meetings is the collation of key documents and instruments. This includes the collation of:

  • Share transfer forms and share certificates.

  • Pre-emption waivers.

  • Third-party consents.

  • Ancillary contracts.

  • Seal of the target company.

  • Certificate of incorporation of all companies involved.

  • Title documents of all relevant properties.

Proof of authority to sign

A duly constituted board meeting with a quorum of directors must be held where the board passes a resolution to authorise a specific person by name and title (usually an officer of the corporation) to sign the contract on behalf of the company.

Post-completion

After completion of a share transfer, the purchaser stamps the instruments of transfer and notes. The purchaser will also update the register of directors to reflect all changes pursuant to the sale and purchase agreement, and all other forms are submitted to the Companies Registry for filing.

 

Content of contracts

22. What is legal status of contractual terms in your jurisdiction?

Representations and terms

There is no clear distinction between the legal status of representations and terms, and the Hong Kong courts will examine the facts to determine the intent of each statement.

A term forms part of the contract, a breach of which usually gives rise to a remedy of damages in an action for breach of contract.

A pre-contractual statement which merely induces the other party to enter into a contract is a representation, and if false (whether made fraudulently, negligently, or innocently), is therefore actionable as a misrepresentation, and may give rise to the remedy of rescission.

Conditions

A condition is a material term that goes to the heart of the contract. A breach of a condition permits the innocent party, if it elects, to treat the contract as repudiated, and then terminate it and seek damages. It can also elect to continue with the contract and sue for damages. The description of a term as a "condition" is not dispositive. The test is whether the parties intended the term to be a condition.

Covenants

Covenants are promises that carry similar contractual weight as a warranty (see Question 23). A breach of a covenant gives rise to damages.

Express terms

Express terms are those which the parties have jointly agreed upon and form the contract. Remedies for breach will depend on whether the term is a condition (see above, Conditions) or warranty (see Question 23).

Implied terms

Certain terms are so fundamental to the integrity of the contract, that even if the parties did not expressly state them or were otherwise omitted from the contract, the courts will nonetheless read them into the contract. Implied terms can be conditions (see above, Conditions) or warranties (see Question 23).

The Sale of Goods Ordinance implies certain conditions into every consumer sale of goods contract, such as:

  • The seller has the right to sell the goods (section 14).

  • The goods are of merchantable quality or fitness (section 16).

  • The goods sold conform to the description or sample provided by the seller (sections 15 and 17).

 
23. Are warranties recognised in your jurisdiction?

Warranties are recognised in Hong Kong. If the injured party will retain the substantial benefit of the contract, this is a breach of warranty and the injured party can only sue for damages. Unlike with conditions, a breach of warranty does not excuse performance for the innocent party.

As a breach of warranty is a claim arising in contract, the innocent party has six years to bring the claim (section 4(1)(a), Limitation Ordinance).

An attempt to limit liability arising out of a breach a warranty will be unenforceable in certain instances, including in cases of:

  • Death and personal injury arising from negligence.

  • Fraud.

  • Fraudulent misrepresentation.

Further, a limitation on a warranty may be void if it deprives the buyer of an effective remedy, is unclear, or unconscionable.

 

Variation and assignment

24. What are the main ways to transfer contractual rights?

Assignment

Generally, when contractual rights are assigned, it is the benefit of the contract which is assigned (that is, the proceeds of a sale or transaction). An assignee can sue to enforce its rights as though it were a party to the original contract.

Legal assignments

A legal assignment allows the assignee to enforce the assignment in the assignee's own name. However, to enforce the assignment, the following requirements must be satisfied (section 9, Law Amendment and Reform (Consolidation) Ordinance (Cap. 23)):

  • The assignment must be absolute.

  • The assignment must be in writing by the hand of the assignor.

  • The assignment does not purport to be by way of a charge only.

  • Notice in writing of the assignment must be given to the debtor.

Equitable assignments

An oral assignment is valid and enforceable, but is treated as an equitable assignment. However, the drawback to an equitable assignment is that the assignee cannot enforce the assignment without joining the assignor to the action. For an equitable assignment to be perfected as a legal assignment, it must satisfy the same requirements as for legal assignments (see above, Legal assignments).

Operation of law

In certain situations (for example, death, bankruptcy and/or foreclosure), the law will automatically operate to effect an assignment.

Novation

Unlike an assignment, novation transfers both the obligations and rights of a contract to a third party. It is carried out by the parties to the current contract and the party entering into the new contract, which allows a new (third) party to take over the rights and obligations of a party to the original contract. One of the original parties is consequently discharged from the contract.

Non-assignable contracts

Parties can expressly agree that a right cannot be assigned or delegated by inserting a no-assignment clause into the contract. The default rule is that a contract which is silent on assignment is generally freely transferrable unless prohibited by statute or public policy.

Personal service contracts are generally non-assignable (for example, an employer cannot assign an employee's employment contract to another firm).

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

Generally, a waiver can be stated expressly or by conduct.

Waiver by estoppel

A waiver by estoppel occurs when one party acts in such a way as to suggest that it has agreed to waive its contractual rights, and the other party, in awareness of that act, relies on that to its own detriment.

Waiver by contract or deed

This occurs when a party expressly agrees to abandon its legal rights. The waiver is binding if there is mutual assent and consideration (if not in the form of a deed).

 

Enforcement

Liability and remedies

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

Mutual mistake

A mutual or common mistake exists where there is an incorrect belief shared by both parties or when the parties have agreed to one thing, but have mistakenly recorded something else. Hong Kong law applies an objective test. A mutual mistake renders the contract voidable, because an essential element of contract formation, mutual assent, is missing.

Unilateral mistake

A unilateral mistake often occurs in the context where terms are incorrect due to clerical or mechanical error (for example, if a bidding party when making a bid omits or adds a zero to the price). The courts apply a subjective standard. The mistake must be so egregious that the other party is put on notice (Kowloon Development Finance Limited v Pendex Industries Limited & Ors [2013] HKEC 704). The effect is that the erring party may rescind the contract or have it rectified.

Invalidity

An invalid contract cannot be legally enforced, and so neither party is bound by its terms. If a contract is missing an essential element of contract formation (offer, acceptance, consideration, intention to create legal relations (see Question 2)), it is void from the outset, and the parties are free to walk away without liability as if there was never a contract at all. In other instances, though the contract was properly formed, it is unenforceable under Hong Kong law, and thus becomes invalid. Common examples include:

  • Contracts which are invalid because their terms are illegal, against public policy, or impossible to perform.

  • Contracts under which the parties that entered into them lacked capacity (for example, a party was not of sound mind, or was too young).

  • Contracts entered into under duress, undue influence, by fraud or misrepresentation, or if their terms are unconscionable.

  • Contracts which unfairly restrict the rights of a party (unnecessarily broad restraint of trade clauses).

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

A party can be discharged from performing its obligations under a contract as a result of one party's conduct, the agreement of all parties, or because an unforeseeable independent event occurs.

Examples of unilateral discharge

Examples of unilateral discharge include:

  • Breach of a condition.

  • Anticipatory repudiation: a clear and unequivocal refusal to perform.

  • Non-occurrence of a condition precedent.

Bilateral discharge

Examples of bilateral discharge include:

  • Mutual rescission. The parties can mutually agree to cancel the contract as if it were never entered.

  • Mutual agreement. A mutual agreement supported by new consideration that releases the other party from the obligations under the first agreement.

  • Variation. The parties can agree to modify or alter the terms of the original agreement.

  • Waiver. See Question 25.

Force majeure

The effect of force majeure is to suspend or excuse a party's non-performance. Force majeure is not implied into contracts governed by Hong Kong law, and so must be expressly included.

Frustration

The effect of the doctrine of frustration is to terminate the contract. Frustration is a common law principle that will operate even if not expressly agreed by the parties.

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

Generally, a person cannot acquire and enforce rights under a contract to which they are not a party.

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) has recently come into effect in Hong Kong. Now, a third party can enforce a term of a contract (including a term that excludes or limits liability) in the following circumstances:

  • If the contract expressly provides that the third party may do so.

  • If, on the proper construction of the contract, the term purports to confer a benefit on the third party.

 
29. What are the main rules relating to contractual liability?

Conditions and warranties

A breach of condition (contractual or statutory, express or implied) entitles the innocent party to either:

  • Terminate the contract and claim damages.

  • Continue with the contract and claim damages.

A breach of warranty entitles the innocent party to claim damages but not terminate the contract (see Questions 22 to 23).

Joint and several liability

Multiple parties with common interests are often stated in contracts to be jointly and severally liable. This formulation is permitted under Hong Kong law. Joint and several liability is a common feature of partnership agreements.

 
30. What are the main rules relating to excluding contractual liability?

Express/implied terms

The primary statutes governing limitations on liability are the:

  • Control of Exemption Clauses Ordinance (CECO) (Cap. 71).

  • Sale of Goods Ordinance (SOGO).

A key tenet of CECO is that any contract term which aims to reduce a party's liability must be reasonable (section 3, CECO). In certain situations, liability for breach of condition can be excluded in Hong Kong provided it is reasonable (section 8, CECO). Any exclusion clause should be unambiguous and expressly made.

Generally, commercial parties with equal bargaining power are free to exclude liability for both implied and express contractual terms. Exclusion of implied terms and conditions can be accomplished by express agreement, course of dealing, or by usage (section 57, SOGO). However, a seller cannot exclude liability for breach of its undertaking as to title (section 11(1), CECO).

When a buyer in a contract deals as a consumer, a seller cannot exclude liability for SOGO-implied conditions (see Question 22, Implied terms) (section 11(2), CECO).

Liability can never be limited for death or personal injury resulting from negligence (section (7)(1), CECO).

Gross negligence

The threshold question in CECO is whether the exclusion is reasonable. Gross negligence is a reckless disregard for the rights of others, and so is inherently unreasonable. Therefore, a party should not be able to limit liability for gross negligence.

 
31. What are the main contractual remedies?

Damages

The following types of damages are available:

  • Compensatory damages. These put the non-breaching party in the position it would have been had the breach not occurred. These damages can include incidental damages for expenses incurred incidental to the breach.

  • Liquidated damages. These are pre-estimated damages which must not be so excessive as to be a penalty. Liquidated damages should be restorative in nature and must be a genuine pre-estimate of the loss.

  • Punitive or exemplary damages. These are to punish or make an example of the defendant. The Hong Kong courts hardly, if ever, award such damages.

A claimant has a duty to mitigate its damages and cannot recover for losses which could have been avoided through a reasonable effort. Further factors in determining damages are causation and remoteness.

Specific performance

With specific performance, the Hong Kong courts can order a contracting party to perform its end of the bargain. This equitable remedy is available in instances when monetary damages are inadequate to compensate the injured party owing to the unique nature of the subject matter of the contract. Real estate and rare artwork are common examples.

Restitution

Restitution compels the defendant to disgorge to the claimant the benefit he unjustly received due to the fact he provided no consideration for that benefit.

Rescission

Rescission is the unmaking of a contract to bring the parties back to the position they were in before they entered into the contract.

 
32. What are the main differences between indemnity and damages? Are penalty clauses subject to any limitation?

Damages/indemnity

The right to damages arises automatically in the event of breach. On the other hand, an indemnity clause must be expressly provided for in the contract. Further, to be enforceable, it must be clearly and precisely worded.

The unique characteristics of a claim to enforce an indemnity clause include the following:

  • There is no need to show fault or negligence: it is sufficient to show that the "trigger" for the indemnity has simply occurred.

  • There is no requirement for the indemnified party to show that he has mitigated or sought to reduce or minimise its loss.

  • A party can generally claim all loss actually suffered, no matter how remote.

Liquidated damages clauses and penalty clauses

Liquidated damages clauses are enforceable. However, if the amount is disproportionate to potential losses, it will be construed as a penalty clause and will therefore be unenforceable. Liquidated damages must be a genuine pre-estimate of loss.

Penalty clauses are unenforceable in Hong Kong.

 

Enforcement and cross-border issues

Choice of law

33. Is a foreign choice of law in a contract upheld by the local courts?

In Hong Kong, parties have the freedom to choose the applicable law, even one with no apparent connection to the underlying contract.

 
34. Are any mandatory terms implied by statute?

For terms implied by statute in certain consumer contracts, see Question 22, Implied terms.

Hong Kong has not adopted the HCCH Principles on Choice of Law in International Commercial Contracts 2015 (Hague Choice of Law Principles) and has no relevant domestic legislation on choice of law. When there is no express choice of law provision, the Hong Kong courts will determine the substantive law of the contract by applying the common law "closest and most real connection" test.

 

Jurisdiction

35. Is a choice of jurisdiction in a contract upheld by the local courts?

Jurisdiction clauses

Hong Kong courts will uphold jurisdiction clauses. Jurisdiction clauses are usually written as either:

  • Exclusive jurisdiction clauses. These clauses limit the parties' forum of recourse to only courts as expressly identified in the contract.

  • Non-exclusive jurisdiction clauses. These enable the parties to submit a dispute to the courts of the country expressly identified in the contract, while leaving the parties free to commence proceedings in another country's courts.

Hong Kong courts adhere to the principle that contracting parties should be held to the terms of their agreement in order to meet the need for predictability, consistency and stability in the resolution of international commercial disputes. Therefore, a party who is seeking to stay court proceedings in Hong Kong and displace it as the jurisdiction named in the contract will have a heavy burden to discharge.

International legislation

The HCCH Convention on Choice of Court Agreements 2005 (Hague Choice of Court Convention) does not apply to Hong Kong.

 

Enforcement of foreign judgments

36. When are foreign judgments recognised in your jurisdiction?

Foreign judgments from jurisdictions with reciprocity

Under the Foreign Judgments (Reciprocal Enforcement) Ordinance (FJREO), judgments from superior courts of commonwealth countries and certain countries with reciprocity agreements with Hong Kong are recognised. This includes judgments from:

  • Australia.

  • Bermuda.

  • Brunei.

  • India.

  • Malaysia.

  • New Zealand.

  • Singapore.

  • Sri Lanka.

  • Belgium.

  • France.

  • Germany.

  • Italy.

  • Austria.

  • The Netherlands.

  • Israel.

For recognition of a foreign judgment under the FJREO, the following must be satisfied (section 3, FJREO):

  • There must be reciprocity between Hong Kong and the reciprocating country.

  • The court granting the judgment must be deemed a superior court in the foreign country.

  • The judgment must be final and conclusive and in respect of a sum of money (other than taxes, penalties or fines).

Common law

If the judgment is from a country without reciprocity with Hong Kong, the judgment creditor must apply for enforcement by commencing a new action.

Common law requires all of the following to be satisfied:

  • The judgment must be issued from a court of competent jurisdiction.

  • The judgment must be for a definite sum of money.

  • The judgment must be a final judgment that is conclusive on the merits of the claim.

*The authors would like to thank Mr Kenneth McCauley for assisting us with writing this article.

 

Online resources

Legislation.gov

W www.legislation.gov.hk/index.htm

Description. Bilingual Laws Information System, containing full text of all legislation and subsidiary legislation in Hong Kong.

Hague website

W www.hcch.net/en/states/hcch-members/details1/?sid=30

Description. List of Hague conference conventions applying to Hong Kong.



Contributor profiles

Paul Starr, Partner

King & Wood Mallesons

T +852 3443 1118
F +852 3443 1299
E paul.starr@hk.kwm.com
W www.kwm.com

Professional qualifications. New South Wales, Australia (Supreme Court); Australia Capital Territory, Australia (Supreme Court); Hong Kong (High Court); England and Wales (Senior Courts)

Areas of practice. Dispute resolution and litigation; construction; infrastructure.

Suraj Sajnani, Associate

King & Wood Mallesons

T +852 3443 8583
F +852 3443 1299
E suraj.sajnani@hk.kwm.com
W www.kwm.com

Professional qualifications. Hong Kong (High Court)

Areas of practice. Dispute resolution and litigation; construction; infrastructure.


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