Do you want to learn about Hong Kong Law Contracts? Contract disputes can make headlines and lead to costly legal battles. One such case involved the HNA Group and CWT International.

The HNA Group had agreed to acquire a 51% stake in CWT International for $1.5 billion, but the deal fell apart, and the two companies ended up in court.

CWT International accused the HNA Group of breaching the contract by failing to make payments, while the HNA Group claimed that CWT International had misrepresented its financial situation. The case went to arbitration, and in 2019, an arbitrator ruled in favour of CWT International, awarding the company $38.5 million in damages.

In another high-profile case in 2015, Shenzhen Zqgame Network Technology Co. Ltd sued Hong Kong Gamania Digital Entertainment Co. Ltd for breach of contract. The two companies had agreed in 2010 to distribute a game called “Soul of the Ultimate Nation” in Taiwan, Hong Kong, and Macau.

Hong Kong Legal Agreements

Zqgame accused Gamania of failing to fulfill its obligations under the contract, including failing to make payments and providing marketing support. The case went to court, and in 2017, a Hong Kong court ruled in favour of Zqgame, awarding the company $57.8 million in damages.

In another case, China Mobile Hong Kong Company Limited (CMHK) and Hutchison Telephone Company Limited (HTCL) found themselves in a contract dispute in 2017 over roaming charges. CMHK had accused HTCL of breaching their agreement by charging CMHK excessive roaming fees for using HTCL’s network.

The case went to arbitration, and in 2018, an arbitrator ruled in favour of CMHK, ordering HTCL to pay CMHK HK$56.9 million in damages. This case was significant because it was the first time that Hong Kong’s Competition Ordinance had been used in a dispute between two telecommunications companies.

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How can we ensure that the interests of both parties are balanced and protected? Perhaps the answer is to choose Hong Kong Law to govern the terms of the contract and resolve Canadian-Chinese contractual disputes in Hong Kong.

Let us look at how the recognition and enforcement of foreign judgements in these two jurisdictions work.

Difficulties in recognizing and enforcing a Canadian judgement in China

Article 282 of the Chinese Civil Procedure Law (‘CPL’) provides that Chinese courts may rely on existing treaties to decide whether recognition should be considered. If such a treaty does not exist, the court can consider applying the reciprocity principle to recognize and enforce a foreign judgment.

There are no reciprocity agreements between Western countries and China regarding commercial matters. This situation is not unique to Western countries; China’s other major trading partners, such as the United States or Japan, do not have it either.

If a party wishes to enforce a Canadian judgment in China, its legal basis would have to be the Principle of Reciprocity. Chinese courts practice the application of de facto reciprocity.

This means that if courts of a foreign jurisdiction had previously recognized and enforced Chinese judgments, Chinese courts would determine that a reciprocal relationship existed between these two jurisdictions.

Once Chinese courts are satisfied with a reciprocal relationship between the two jurisdictions, they can recognize and enforce these foreign judgments in China.

Contracts and Legalities in Hong Kong

In other words, a party seeking to enforce a Canadian judgment in China must rely on Canadian precedence and demonstrate a history of recognizing and enforcing a Chinese judgment in Western countries.

Recently, in Wei v Li 2019 BCCA 144,  the British Columbia Supreme Court recognized and gave effect to a Chinese judgment. However, this is a criminal case. It is difficult to say that its application extends to commercial contracts. Chinese courts could also refuse to apply to recognize a foreign judgment based on other grounds, such as contravention of public policy.

If the underlying judgment is an emanation of a sanction towards a Chinese company, the chances of it being recognized and enforced in China are also very low.

Moreover, in practice, China has not applied reciprocity since 2016, and academics have argued that Chinese courts will continue to reject its application and favour de jure reciprocity (via reciprocity agreements with other states).

Without a reciprocity agreement, whether a Canadian judgment concerning a commercial contractual dispute could be enforced in China remains uncertain.

Legal Documentation in Hong Kong – Enforcing Foreign Judgements

There are often no reciprocity requirements, arguably making it easier for foreign judgments to be recognized and enforced in Western countries.

Although this made it seem relatively more simple, judgments from any jurisdiction would easily be recognized and enforced in Western countries. While that may be true, the situation became more complex with China’s new legislation.

This legislation may grant relief for Chinese companies sanctioned by foreign legislation. PRC authorities can identify an unjustified extra-territorial application of ‘foreign legislation’ based on factors such as contravention of international law or encroachment of China’s state sovereignty.

If a foreign company has benefited from a foreign judgment made by that ‘foreign legislation’ that is within the scope of that prohibition order.

It can potentially allow the Chinese counterparty to the contract to apply for relief before the PRC court. Hence, parties must contemplate the consequences of enforcing a foreign judgment upon a Chinese entity.

Why is Hong Kong Law the solution?

Firstly, parties may want to choose a neutral governing law and jurisdiction. More importantly, Hong Kong’s jurisdiction follows the common law system that is compatible with Western countries’ legal systems.

Choosing Hong Kong Law would make it easier for Canadian parties to understand what default rules would apply to the contract. On the other hand, it would not necessarily burden Chinese parties.

Hong Kong is a special administrative region of China that operates under the ‘One Country, Two Systems’ principle. It is highly unlikely that any of Hong Kong’s laws would fall under the scope of China’s prohibition orders.

Moreover, many Hong Kong lawyers are also qualified in Mainland China and vice versa. Hong Kong’s technical legal infrastructure is sufficiently strong to meet the needs of commercial contracts.

Mutual Reciprocity Agreement between Hong Kong and China

Now, the judgment rendered by Hong Kong must also be recognized and enforced in China. Hong Kong judgments do not need reciprocity to be recognized and enforced in China.

Hong Kong is the only ordinary law jurisdiction in the world with an effective mutual reciprocity agreement with China. Singapore, which operates under an ordinary law jurisdiction, has a Memorandum of Guidance (‘MOG’) with China.

The MOG allows monetary judgments rendered from Singaporean courts to be enforced in China and vice versa. However, strictly speaking, this is a non-binding instrument. It explicitly affirms that, in principle, a Chinese or Singaporean court should not refuse to recognize and enforce monetary judgments arising from these two jurisdictions.

On the other hand, as long as the parties fulfil the necessary procedural requirements (such as registration), parties can rely on Hong Kong’s predictable framework in recognizing and enforcing foreign judgments as there is a reciprocity agreement between Hong Kong and China.

Hong Kong Law for resolving disputes

Does Chinese law allow parties to choose the law that governs their contracts? Under Article 3 of the Foreign-Related Civil Relations Act, parties can choose the law that governs their cross-border agreements.

There are, however, limited exceptions where parties cannot opt out of Chinese Law. (e.g. product liabilities)

Parties who intend to resolve their disputes in Hong Kong need legal advice. They should be aware of the wording of the jurisdiction clause in their contract. Industrial and Commercial Bank of China (Asia) Limited v Wisdom Top International Limited is a case worth considering.

It was a case involving a loan agreement with an asymmetric jurisdiction clause. This clause limits a certain party to being sued in one jurisdiction only. However, the other party is free of the other party in any jurisdiction.

The court held that such a clause does not confer exclusive jurisdiction to Hong Kong courts. Parties must also expressly specify the court in Hong Kong to determine the dispute.

Judgment reciprocity remains uncertain in China

Below are some things that you should know.

The application of reciprocity remains uncertain in China, making it difficult for judgments from Western countries without a reciprocity agreement to be enforced in China. Hong Kong’s legal system is based on common law, although it may favour the Canadian party regarding technicalities (as China is a civil law jurisdiction).

Due to the Mutual Reciprocity Agreement between Hong Kong and China, a Hong Kong judgment is arguably much more readily recognizable and enforceable in China than in Western countries

Hong Kong’s judgments can also be recognized and enforced in many Western countries due to its liberal approach to foreign judgments. Judgments that conform to its legislation have a lower risk of falling into the scope of the PRC’s prohibition order, which aims to tackle the unjustified use of foreign laws.