Hong Kong Law Contract Guide
Our team in Hong Kong recently developed a Hong Kong Law Contract Guide. The guide discusses relevant legal principles that inform the most common contractual clauses in Hong Kong. The guide offers practical points to consider in drafting a contract, and sample clauses that may be a useful reference when preparing or reviewing a contract. The guide also addresses Hong Kong principles related to implied terms, privity of contract, and resolution of disputes. As activity into Hong Kong grows, we hope this resource helps to facilitate the agreement process.
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Assignment, Delegation, and Commonly Used Contracts Clauses
LEARNING OBJECTIVES
- Learn about assignment and delegation.
- Examine novation.
- Explore restrictions on assignment, exculpatory clauses, noncompete clauses, mandatory arbitration clauses, acceleration clauses, and liquidated damages clauses.
- Explore the parol evidence rule.
What if you formed a contract with a rock ’n’ roll band for its services? Specifically, you wanted the band to play at your nightclub, because you thought that your customers would enjoy the band enough to pay to see it perform. You hired this specific band because you heard that it drew large crowds of paying customers. Imagine your surprise when, as you anticipate the band’s performance, you discover that another band—one you have never heard of—has come to play instead of the original contracting band. On inquiry, you learn that the original band transferred its duties to perform to a lesser known band. Can it do that?
Contract elements—the terms of the contract—are important. They may, among other things, foreclose your ability to bring a complaint in court, they may render you unable to be hired in your profession (at least within certain boundaries), or they may limit liability to a party that had a role in causing injury to you. If you are not aware of these elements, then you may face an unpleasant surprise if you act in a way contrary to the restrictions imposed by those terms. Likewise, contracts possess certain qualities that prohibit parties from acting in certain ways, unless those qualities are expressly waived. This section identifies common properties of contracts, as well as commonly used elements of contracts. If you are negotiating a contract and you do not like a term, then you should not agree to it. In law, there is a presumption that you have read, understood, and agreed to each and every term of any contract to which you are a party. Arguing that you did not understand or that you did not approve of a particular term in the contract will not be a valid excuse to performance. You should know what you can expect when you enter into a contract. Are you getting the band that you wanted to hire to play in your nightclub, or are you really getting any band that the original band happens to transfer its duties to?
As a preliminary matter, it is important to realize that contracts are, by law, assignable and delegable. This means that the rights conveyed by the contract may be transferred to another party by assignment, unless an express restriction on assignment exists within the contract, or unless an assignment would violate public policy. Likewise, the duties imposed on a party may be transferred to another party by delegation, unless the contract expressly restricts delegation, or there is a substantial interest in personal performance by the original party to the contract, or if delegation would violate public policy. In the case of a band hired to perform at a nightclub, an argument couldbe made that the original band cannot delegate its duties under the contract because there was a substantial interest in personal performance by the original band. This would render the contract nondelegable. To be on the safe side, your contract with that band should have had a clause expressly prohibiting delegation.
Many students have seen restrictions on assignment in the form of no-sublease clauses in leases with landlords. Do you have a no-sublease clause in your lease? If so, that is a restriction on assignment. This clause is necessary to prevent you from assigning your rights under the lease—your rights to inhabit the premises—to another party. It is necessary for the landlord to include that provision expressly if she wishes to prevent you from subleasing the unit, because there is a presumption in law that assignment is permitted unless it is expressly prohibited by the contract or unless the assignment would violate public policy. Since it is unlikely that letting someone else live in your housing unit in your absence would violate public policy, then the landlord must expressly prohibit the assignment within the original contract if she wishes to prevent tenants from subleasing. A landlord may have a very good reason to wish to prevent subleasing; she may wish to ensure that each tenant is creditworthy prior to allowing the tenant to live in the property.
Note that in delegation and in assignment, the original contracting party is not “off the hook” if it transfers its duties or rights to another party. For instance, if subleasing was not prohibited, and the new tenant assumed the rights and duties imposed by the original contract, the original party to the contract is still liable for the payment of rent. If the subleasing tenant does not pay the rent, the original party to the lease is still liable. The way to excuse oneself from this liability is to form a three-way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract. A novation is essentially a new contract that transfers all rights and duties to the new party to the contract and releases the previous party from any further obligation arising from the original contract.
Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpatory clauses are often employed when risk of injury exists. They seek to limit one party’s liability to another. You most certainly have signed exculpatory agreements or contracts containing exculpatory clauses if you have participated in any potentially dangerous activity at a club or with an organized group that could incur liability from injuries suffered by its patrons or members. For example, if you join a kayaking club, you will most likely be asked to sign such an agreement to “hold harmless” the club in the event of any accident or injury. However, despite the existence of an exculpatory clause, liability will not be limited (that is, the liability limitations will be unenforceable) when the party who would benefit from the limitation on liability acted with gross negligence, committed an intentional tort, or possessed greatly unequal bargaining power, or if the limitation on liability violates public policy. Imagine that you signed an agreement to engage in kayaking activities with a kayaking group, but the leader of the group battered you with her oar because she was angry with you for mishandling your kayak. Since battery is an intentional tort, the exculpatory clause will not protect the kayaking organization from liability it incurred through the actions of its employee.
Another common contract element that you may have encountered is a noncompete clause. A noncompete clause attempts to restrict competition for a specified period of time, within a certain geographic region, and for specified activities. Noncomplete clauses are generally valid against the party who signed it if the time, place, and scope are reasonable. These are very common clauses in employment contracts, particularly where the duties involved in employment are likely to involve trade secrets or other proprietary information that the company wishes to protect.
A mandatory arbitration clause is very common in consumer contracts and employment contracts.You have certainly subjected yourself to the restrictions imposed by these clauses if you have signed a contract for a credit card. Mandatory arbitration clauses require parties to a contract that contains such a clause to submit to mandatory arbitration in the event of a dispute arising under the contract. Mandatory arbitration clauses frequently foreclose any possibility of appealing arbitration awards incourt.
An acceleration clause commonly exists in contracts where periodic payments are contemplated by the agreement. For example, if you signed a lease for your housing unit, then you most likely pay rent on a month-to-month basis. If you breached your lease, you would still owe rent for each subsequent month contemplated by the lease agreement. This means that your landlord would have new injury every month that you did not pay. An acceleration clause accelerates all payments due under the contract on breach. This allows the injured party—in this case, the landlord—to sue for all damages due for unpaid rent under that contract at once, rather than having to bring a new suit each month to seek monthly unpaid rent.
A liquidated damages clause allows parties to set the amount of damages in the event of breach. Agreeing to a damage amount before any breach occurs can save money and time spent litigating. Providing that the liquidated damages clause does not look like a penalty, the clause will be valid and enforced by a court that hears a dispute arising under the contract. For example, imagine that you entered into a contract for the sale of your car. If the liquidated damages clause provided for two thousand dollars of damages in the event of breach, that will probably be a valid liquidated damages clause, providing that your car is an “average” car. However, if the liquidated damages clause provided for one million dollars of damages payable by the breaching party, then that would not be enforceable by the court because it looks like a penalty. The proposed liquidated damages far exceed the value of the car that is the subject of the agreement.
Of course, there are additional common elements to contracts. This is not an exhaustive study of possible provisions, though it is a list of commonly encountered elements. For example, time of performance is often included as a separate provision. However, time for performance is an essential element in common-law contract formation, and without it, the contract may fail due to lack of definite and certain terms in formation.
A major assumption made about a written contract is that it is integrated, which means that it contains the entire expression of the parties’ agreement. That means that any statements made before the parties signed the contract are not part of the contract, unless those statements are memorialized in the contract itself. In fact, any statements or actions that are not captured within the four corners of the contract are considered parol evidence, and they will not be used to interpret the meaning of the contract.
KEY TAKEAWAYS
Parties to contracts must not only take care to form the agreement so that it is legally enforceable, but they must also be aware of the properties of contracts in general, as well as specific provisions contained within contracts to which they are a party. Properties of contracts include ability to assign, delegate, and exclude parol evidence. Several types of contracts clauses are commonly used to restrict rights and limit liability.
- Think of an example of an exculpatory clause that you have signed. For what type of activity would you be unwilling to sign an exculpatory clause? If your refusal to sign the exculpatory clause or agreement prevented you from participating in that activity, would you still refuse to sign it?
- Do you think that too many limitations and restrictions can be placed on parties in a contract? Should there be more government regulation and standardization of contract terms between private parties?
Why or why not?
- Front Matter
- What Is Law? LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Sources of Law Hyperlink: The U.S. Constitution Hyperlink: How a Bill Becomes a Law KEY TAKEAWAYS EXERCISES
- The Rule of Law LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Importance of Rule of Law to Business LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- How Law Affects Business Disciplines LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Concluding Thoughts
- The Third Branch LEARNING OBJECTIVES Hyperlink: Excerpt from 2008 Year-End Report to Congress Hyperlink: Supreme Court Virtual Tour Hyperlink: The Little Rock Nine KEY TAKEAWAYS EXERCISES
- Video Clip: A Question of Ethics: The Right to Privacy and Confirmation Hearings Hyperlink: Biographies of the Current Supreme Court Justices KEY TAKEAWAYS EXERCISES
- Trial and Appellate Courts LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Video Clip: The U.S. Supreme Court Hyperlink: Amicus Briefs Hyperlink: Oyez.org KEY TAKEAWAYS EXERCISES
- Video Clip: You Can’t Handle the Truth Key Takeaways
- The Parties Involved LEARNING OBJECTIVES Hyperlink: The Lynne Stewart Case Hyperlink: A Question of Ethics Hyperlink: Korea Adopts Jury System KEY TAKEAWAYS EXERCISES
- Standing and Personal Jurisdiction LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Video Clip: A Deposition Goes Awry KEY TAKEAWAYS EXERCISES
- Video Clip: Johnnie Cochran Delivers Closing Arguments Hyperlink: Justice Ginsburg Reviews an Employment Discrimination Case KEY TAKEAWAYS EXERCISES
- Negotiation LEARNING OBJECTIVES Hyperlink: Rubbermaid’s Unequal Bargaining Power KEY TAKEAWAYS EXERCISES
- Mediation LEARNING OBJECTIVES Hyperlink: Mediators KEY TAKEAWAYS EXERCISES
- Video Clip: Al Franken Hyperlink: Arbitration KEY TAKEAWAYS EXERCISES
- Other Methods of Alternative Dispute Resolution LEARNING OBJECTIVES Hyperlink: Private Judges KEY TAKEAWAYS EXERCISES
- Public Policy, Legislation, and Alternative Dispute Resolution LEARNING OBJECTIVES Hyperlink: Arbitration Fairness Act Bill KEY TAKEAWAYS EXERCISES
- Video Clip: Schoolhouse Rock, the Preamble Key Takeaways
- Video Clip: “Mancow” Waterboarded Hyperlink: Medical Marijuana in the States Hyperlink: Can States Regulate Car Safety Standards? Hyperlink: If the FDA Approves a Drug Label, Can Patients Still Sue Drug Manufacturers? KEY TAKEAWAYS EXERCISES
- The Commerce, Taxing, and Spending Clauses LEARNING OBJECTIVES Hyperlink: The Powers of Congress Hyperlink: How Assisted Suicide Ruling Affects Doctors’ Work KEY TAKEAWAYS EXERCISES
- Business and the Bill of Rights LEARNING OBJECTIVES Hyperlink: Does the Second Amendment Apply to the States? Hyperlink: Fleeting Expletives Hyperlink: The Biased Judge Hyperlink: A Question of Ethics KEY TAKEAWAYS EXERCISES
- Formation LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Performance and Discharge, Breach, Defenses, Equitable Remedies LEARNING OBJECTIVES Hyperlink: Coach Mike Leach KEY TAKEAWAYS EXERCISES
- Assignment, Delegation, and Commonly Used Contracts Clauses LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Video Clip: Is a Single Name a Likeness or Identifying Characteristic? KEY TAKEAWAYS Exercises
- Video Clip: The Crash of Continental Flight 3407
- Video Clip: Palsgraf v. Long Island Railroad Company KEY TAKEAWAYS Exercises
- Strict Liability LEARNING OBJECTIVES Hyperlink: What’s Wrong with the Tire? Hyperlink: A Near-Fatal Mistake Due to Labeling? KEY TAKEAWAYS EXERCISES
- Methods of Acquisition of Personal Property Hyperlink: Finders Keepers?
- Bailment Hyperlink: Lost Dog KEY TAKEAWAYS EXERCISES
- Methods of Acquisition Hyperlink: A Question of Ethics
- Interests and Scope
- Duties of Landowners
- Ownership Interests in Real Property Hyperlink: Reverse Mortgage
- Scope of Interests in Real Property
- Landlord-Tenant Relationships KEY TAKEAWAYS EXERCISES
- Video Clip: United Airlines Commercial KEY TAKEAWAYS EXERCISES
- Patents LEARNING OBJECTIVES Hyperlink: Wal-Mart Tries to Produce Shoes EXERCISES
- Trade Secrets LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Trademarks LEARNING OBJECTIVES Hyperlink Hyperlink: KEY TAKEAWAYS EXERCISES
- Copyright LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Constitutional Rights Relevant to Criminal Proceedings
- Punishment Hyperlink: Shopping, Anyone?
- Purpose of Punishment
- Punishment of Business-Related Crime KEY TAKEAWAYS EXERCISES
- White-Collar Crime
- Fraud and Larceny Hyperlink: SEC v. Goldman Sachs Hyperlink: Health Care Fraud’s Epidemic Hyperlink: Financial Institution Fraud Hyperlink: The Mechanics of a Pyramid Scheme Hyperlink: Too Good to Be True? Statistically Impossible Returns
- Organized Crime
- Video Clip: Who Said Antitrust Is Boring? Not Hollywood!
- Environmental Crimes Hyperlink: Federal Environmental Criminal Convictions
- Blue-Collar Crime KEY TAKEAWAYS EXERCISES
- Minimizing Corporate Criminal Liability and Losses Attributed to Crime LEARNING OBJECTIVES Hyperlink: Whistleblower Law Blog KEY TAKEAWAYS EXERCISES
- Sole Proprietorships LEARNING OBJECTIVES Hyperlink: Doing Business As Hyperlink: Small Businesses Squeezed as Banks Limit Lending KEY TAKEAWAYS EXERCISES
- Partnerships LEARNING OBJECTIVES Hyperlink: A Law Firm Partner Is Fired KEY TAKEAWAYS EXERCISES
- Video Clip: Monstrous Obligations
- Video Clip: The Pathology of Commerce
- Video Clip: Activist Shareholders at Wal-Mart KEY TAKEAWAYS EXERCISES
- Limited Liability Entities LEARNING OBJECTIVES KEY TAKEAWAYS EXERCISES
- Overview of Title VII of the Civil Rights Act of 1964 LEARNING OBJECTIVES Hyperlink: Kennedy Calls for Legislative Action on Civil Rights Hyperlink: Men and Hooters Hyperlink: The Employment Non-Discrimination Act KEY TAKEAWAYS EXERCISES
- Enforcement of Title VII LEARNING OBJECTIVES Hyperlink: Diversity Day at The Office Hyperlink: Sikhs Regain Right to Wear Turbans in U.S. Army KEY TAKEAWAYS EXERCISES
- Other Federal Antidiscrimination Laws LEARNING OBJECTIVES Hyperlink: Despite New Law, Gender Salary Gap Persists KEY TAKEAWAYS EXERCISES
- Concluding Thoughts Hyperlink: A Class Divided
- The Basics of International Law between Nation-States
- The Nature of Law as It Applies to Businesses Operating in the International Arena KEY TAKEAWAYS EXERCISES
- Trade Regulations Hyperlink: Exporting? Hyperlink: President Obama Discussing the Importance of Export and the Creation of the National Export Initiative Hyperlink: What? These Old Rocks?
- Employment Law and Human Rights
- Prohibited Activities Hyperlink: Prohibited Parties KEY TAKEAWAYS EXERCISES
- Back Matter
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Priority of Floating Charges
1. A floating charge is a type of security which may be created over a class of moveable assets (such as current assets, trading stock or cash on hand), and are commonly sought by banks and other credit-providers as security for money which has been lent to a borrower. Under a floating charge, the borrower (or chargor) may continue to deal with its assets subject to the charge in the ordinary course of business until the charge crystallises and the creditor takes steps to enforce it. However, a creditor holding a floating charge over some or all of a borrower’s assets may find such security challenged by other secured creditors in the event of the borrower’s insolvency, giving rise to questions of priorities between them.
2. Under Hong Kong law, priorities between competing interests over the same property of an insolvent company are determined in accordance with a complex set of priority rules. These priority rules vary depending on the type of property involved, as well as the type(s) of security which have been granted in respect of such property.
3. In this note, we provide an overview of the general Hong Kong law priority position of a bank (“ Bank “) which holds a floating charge (“ Floating Charge “) over all of a Hong Kong company’s assets, where the company (“ Borrower “) has also granted to a third party creditor (“ Other Creditor “) a later:
- legal assignment of receivables owed to the Borrower by its customers (i.e. receivables assigned in accordance with s9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) (“ LARCO “)
- pledge of (i) bills of lading, and (ii) warehouse receipts, in respect of goods (located in Hong Kong) owned by the Borrower, in each case where the Other Creditor is in possession of them; and
- fixed charge over cash margin held in an account in Hong Kong with the Other Creditor (which is a bank);
and the Borrower subsequently becomes insolvent.
I. Floating charge v. subsequent legal assignment of receivables
(a) General position
4. Where the Borrower has granted the Floating Charge over all of its assets (including receivables owed to it by its customers) to the Bank, and has also subsequently legally assigned the same receivables to the Other Creditor, a question of priority between the competing interests of the Bank and the Other Creditor with respect to such receivables may arise.
5. Under Hong Kong law, the general rule governing priority between assignments or charges over the same debts or receivables is the rule laid down in the English case of Dearle v Hall (1828) 3 Russ 1 (“ Dearle v Hall “) : that is the assignee/chargee whose notice to the debtor is the first in time has priority, provided that at the time of the assignment/creation of the charge, he did not have notice of any earlier assignment/charge to any other assignee/chargee and he was acting in good faith and gave good value in return for his charge/assignment.
6. However, where receivables subject to a floating charge are disposed of by way of a legal assignment, in the absence of any restrictions in the terms of the floating charge against doing so, the rule in Dearle v Hall does not apply to determine priorities. Rather, the general position appears to be that, as the chargor under the floating charge is permitted to deal with its assets subject to the charge in the ordinary course of business until crystallisation (which would include selling or assigning receivables), the legal assignee of such receivables would take free of the prior floating charge. The rule in Dearle v Hall would not apply since the floating chargee will be taken to have impliedly authorised the chargor to effect the legal assignment. Accordingly, in the absence of any restrictions under the terms of the Floating Charge, the Borrower (as chargor) would prima facie have been permitted to sell/assign the charged receivables to the Other Creditor, provided no crystallisation event had occurred, so that the Other Creditor’s interest in the receivables would have priority over that of the Bank’s. This would be the position even where the Other Creditor had notice (whether actual or constructive – see para. 12, below) of the existence of the Bank’s prior Floating Charge as its interest would be taken to have been created with the implied authorisation of the Bank.
7. However, in practice, floating charges in Hong Kong almost always contain restrictive covenants prohibiting chargors from assigning or otherwise encumbering charged assets with interests ranking in priority to, or pari passu with, the charge (“ negative pledge clause “). Additionally, floating charges commonly contain clauses stipulating that the charge will automatically crystallise upon the happening of certain events which may not require the intervention of the chargee (“ automatic crystallisation clause “). The effect which such clauses may have on the Bank’s priority position is discussed as follows.
(b) Negative pledge
8. If the Bank’s Floating Charge contains a negative pledge clause, such clause would generally not affect the Other Creditor except where the Other Creditor had actual notice (see paras. 12-15, below) of the clause at the time it took its legal assignment. If, at that time, the Other Creditor did have actual notice of such a clause, the Bank’s interest in the receivables would likely gain priority. The Other Creditor could also be liable to the Bank for procuring the Borrower’s breach of the clause, and the courts could restrain it from enforcing its rights so as to cause a breach of a prior agreement of which it had knowledge.
(c) Automatic crystallisation
9. A typical automatic crystallisation clause in a floating charge instrument will provide that if the chargor acts in breach of a negative pledge clause and creates, or attempts to create, a subsequent interest without the consent of the prior floating chargee, the floating charge will automatically crystallise, and rank ahead of any subsequent interest. If the Bank’s Floating Charge contains such an automatic crystallisation clause, it is possible that the Floating Charge will have crystallised before the Other Creditor’s legal assignment of receivables was effected, as any attempt to create a prior ranking interest would cause the Floating Charge to crystallise.
10. Where the Other Creditor’s legal assignment is effected after crystallisation of the Bank’s Floating Charge, it would seem that the Bank’s interest in the receivables would take priority being first in time, as from crystallisation, it will no longer be taken to have impliedly authorised the Borrower to dispose of the receivables to the Other Creditor. Thus, as between a crystallised floating charge (which takes effect as an equitable fixed charge) and a subsequent equitable assignment of receivables (i.e. a legal assignment which has not yet been perfected by notice to the contract counterparty, notice being one of the requirements for a legal assignment under s9 LARCO ), the rule in Dearle v Hall can still apply.
11. Accordingly, priority between the Bank’s and the Other Creditor’s interests in the receivables would be determined according to the order in which notice is given to the customers (i.e. the contract counterparties). If the Other Creditor perfects its legal assignment by giving notice of its assignment to the customers first in time, and does not have notice of the crystallisation of the Bank’s Floating Charge, the Other Creditor would take priority under the rule in Dearle v Hall . However, if it is the Bank that gives notice of crystallisation of its Floating Charge first in time, the position would be reversed and the Bank would take priority instead (note that the holder of a floating charge can only give notice of its charge to contract counterparties upon crystallisation, as only at that time does the charge attach/fasten to the assets subject to the charge).
(d) Does registration of a charge confer notice of a negative pledge clause or automatic crystallisation clause?
12. Under the Companies Ordinance (Cap. 32) , certain types of charges (including floating charges) created by Hong Kong companies and non-Hong Kong companies with a place of business in Hong Kong must be registered with the Companies Registry within 5 weeks of creation. Registration of a charge will generally constitute at least constructive notice of the existence of that charge to any subsequent chargee/assignee. Constructive notice means that in the absence of actual notice (i.e. personal knowledge), a subsequent chargee/assignee will generally be taken to have constructive notice of an earlier registered interest.
13. A common practice has arisen in Hong Kong whereby negative pledge and automatic crystallisation clauses in charge documents are included in the particulars which are submitted to the Companies Registry upon registration. The existence of such registered negative pledge and automatic crystallisation clauses may therefore be revealed by way of a company search conducted by any member of the public.
14. Previously, it was unclear as to whether the doctrine of constructive notice by registration extended to notice of all particulars (including negative pledge and automatic crystallisation clauses) which had been registered with the Companies Registry. That area of the law has now been clarified in the Hong Kong case of ABN Amro Bank NV v Chiyu Banking Corp Ltd & Ors [2000] HKC 3 381 (“ ABN Amro “) in which it was held that registration of a negative pledge or automatic crystallisation clause does not confer constructive notice of such clause on a subsequent assignee/chargee. In that case, the court held that the doctrine of constructive notice by registration only operates in a narrow sense – it means constructive notice is only of (i) the existence of the prior interest; and (ii) the particulars of the prior interest statutorily required to be registered. Inclusion of particulars of a negative pledge or automatic crystallisation clause which is contained in a charge document is not a statutory requirement. Accordingly, the practical effect of the decision in ABN Amro is that, for a subsequent chargee/assignee to have notice of any negative pledge or automatic crystallisation clause contained in a prior floating charge document, it must have had actual notice of it (constructive notice of registered particulars of the prior floating charge will not be sufficient).
15. However, with the commencement of the new Companies Ordinance (Cap. 622) (“ new CO “) on 3 March 2014, certified copies of the charge instruments, together with a statement of the particulars, of registrable charges, must be registered with the Companies Registry and made available for public inspection ( Part 8 of the new CO ). As the doctrine of constructive notice means constructive notice of (i) the existence of a prior interest; and (ii) the particulars of the prior interest which are statutorily required to be registered, for charges which are registered in accordance with the new CO , subsequent chargees/assignees will likely be deemed to have constructive notice of all of the terms of the relevant charge instruments, including any negative pledge and/or automatic crystallisation clauses (since the entire charge instruments will be statutorily required to be registered).
II. Floating charge v. pledge of bills of lading and warehouse receipts
(a) Bills of lading
16. Under Hong Kong law, a bill of lading is a document of title to the underlying goods it represents at common law. Thus, assuming that the Borrower’s pledge of bills of lading to the Other Creditor has the effect of transferring constructive possession of the underlying goods they represent to the Other Creditor (and provided such goods are situated in Hong Kong), it seems likely that such pledge of bills of lading would be recognised in Hong Kong as a pledge of the goods themselves.
17. In the absence of any restriction in the terms of the Floating Charge against creation of subsequent pledges, as between the Bank’s prior Floating Charge over the Borrower’s assets (including goods owned by the Borrower) and the Other Creditor’s pledge of bills of lading (representing pledged goods), the Borrower (as pledgor) would have been impliedly authorised by the Bank to pledge the bills of lading to the Other Creditor prior to crystallisation of the Floating Charge as this would be in the ordinary course of its business (see para. 6, above). Alternatively, it may be argued that the time of crystallisation is not relevant, as a pledge (a legal interest) will always take priority to a floating charge (an equitable interest) provided that the pledgee did not have notice of crystallisation of the floating charge (see para. 18, below). Accordingly, the Other Creditor’s interest with respect to the bills of lading and underlying goods (as pledgee) would take priority ahead of the Bank’s interest (as floating chargee), as long as it retained possession of the pledged bills of lading (possession being an essential element of a pledge under Hong Kong law).
18. However, if the Bank’s Floating Charge contains a negative pledge clause, the Other Creditor may lose priority where it had actual notice of such clause (see paras. 8, 12-15, above). If the Floating Charge had crystallised before the creation of the Other Creditor’s pledge (e.g. by the joint operation of a negative pledge clause and automatic crystallisation clause), it is likely that the Other Creditor would retain priority with respect to the pledged bills of lading (provided that it did not have actual notice of the negative pledge and automatic crystallisation clauses). This is because a floating charge takes effect as a fixed charge as at the time of crystallisation (an equitable interest), and as between an equitable charge and a subsequent pledge (a legal interest), the general rule is that the subsequent pledgee’s interest will take priority as a legal purchaser for value, provided that he did not have notice of the crystallisation of the prior equitable charge.
(b) Warehouse receipts
19. For Hong Kong law purposes, warehouse receipts are not documents of title to the underlying goods they represent at common law. Accordingly, under Hong Kong law, a pledge of a warehouse receipt by itself is not sufficient to create a pledge of the underlying goods it represents as there is no delivery of possession of the goods (unlike a bill of lading). However, a valid pledge of the underlying goods to a warehouse receipt may still be created by other methods, such as by way of “attornment”. Creation of a pledge by way of “attornment” was described in Official Assignee of Madras v Mercantile Bank of India [1935] AC 53 (“ Madras “) , where was held that “ If…the goods [are] in the custody of a third person, who held for the bailor…the pledge could be effected by a change of the possession of the third party, that is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third party attorning to the pledgee, that is acknowledging that he thereupon held for him; there was thus a change of possession and a constructive delivery “.
20. If the Other Creditor has a valid pledge of goods under pledged warehouse receipts, its priority position as against the Bank would likely be the same as that under pledged bills of lading (see paras. 16-18, above)
(c) What is the position where the Other Creditor does not have a perfected pledge of underlying goods?
21. If the Other Creditor for any reason does not have a perfected pledge of the underlying goods under pledged bills of lading or warehouse receipts (e.g. where the bill of lading is not negotiable, or a third party bailee is found not to have properly “attorned” the goods to the Other Creditor), it may nevertheless still have a pledge of the paper bills of lading or warehouse receipts. In that situation, the Other Creditor would generally be able to retain the bills of lading or warehouse receipts, but would not be able to use them to dispose of the goods for value (since it would not be able to pass constructive possession of the goods to a purchaser). However, if the Other Creditor is named as consignee on the bills of lading or warehouse receipts it would be entitled to call for delivery of the goods. Upon taking delivery of the goods, the Other Creditor’s pledge of such goods would then likely be perfected (as it will have taken actual delivery), and its priority would likely be determined as above (see paras. 16-18, above).
III. Floating charge v. fixed charge over cash margin
22. As the Bank’s Floating Charge covers all of the Borrower’s assets, the Bank would also have a floating charge over all of the Borrower’s cash. However, where the Borrower grants a later fixed charge over cash which has been deposited with another banking institution such as the Other Creditor, particular issues with respect to priority may arise.
(a) Where cash subject to a fixed charge
23. In the absence of any restriction under the terms of the Floating Charge prohibiting the Borrower from granting subsequent interests, as between the Bank’s Floating Charge over the Borrower’s cash (including cash deposited with the Other Creditor), and the Other Creditor’s fixed charge over such cash, prima facie , the Borrower would have been impliedly authorised to grant the subsequent fixed charge to the Other Creditor, as this would have been in the ordinary course of its business (see para. 6, above). Accordingly, the Other Creditor’s fixed charge would have priority ahead of the Bank’s Floating Charge in the event of the Borrower’s insolvency.
24. If the Floating Charge instrument contains a negative pledge clause, as with the scenarios mentioned above, the Other Creditor may lose priority where it had actual notice of such clause (see paras. 8, 12-15, above).
25. However, if the Floating Charge had crystallised before the creation of the Other Creditor’s fixed charge (e.g. by the joint operation of a negative pledge clause and automatic crystallisation clause), the Other Creditor’s fixed charge should still take priority (provided that it did not have actual notice of the negative pledge clause). Although the general position is that the rule in Dearle v Hall will apply to determine priority between the Bank and Other Creditor (see para. 10, above), since the Borrower’s cash is held in accounts with the Other Creditor, there is no need for the Other Creditor to give notice to itself (as the account debtor) and such notice will generally be presumed. Accordingly, provided that the Other Creditor did not have notice of crystallisation of the Bank’s Floating Charge at the time it took its fixed charge over the Borrower’s cash, the Other Creditor will have priority under the rule in Dearle v Hall . (b) Where not subject to any security
26. As regards the Borrower’s cash which is held in an account with the Other Creditor, but with respect to which the Other Creditor has not taken any security over, the relationship between the Borrower and the Other Creditor (as banker) would be that of an ordinary creditor and debtor. However, where such cash is “collateral” for any amounts which may become owing to the Other Creditor (“ cash margin “), upon the Borrower’s insolvency, the Other Creditor would normally be able to assert a claim over such cash margin pursuant to the mandatory insolvency set-off rules under s35 of the Bankruptcy Ordinance (Cap. 6) (“ BO “) to set-off the cash margin against debts owed to it by the Borrower.
27. Under s35 BO , insolvency set-off is available where:
- there have been credits, debts and other dealings between a company in liquidation and a creditor which permit a financial balance to be struck;
- the credits, debts and other dealings must have been mutual, meaning they must be between the same persons and in the same right;
- the claim must be provable in liquidation; and
- the creditor did not, at the time of giving credit to the insolvent company, have notice that the winding up had commenced.
28. However, as the Borrower has granted the Floating Charge to the Bank, upon crystallisation, the Floating Charge would operate to transfer the beneficial ownership in the cash margin to the Bank. This means that crystallisation will likely destroy the mutuality of claims required for a set-off to take place between the Other Creditor and the Borrower under para. 27 b., above, and the Bank will take priority free of the Other Creditor’s set-off right under s35 BO .
IV Conclusion
29. The above analysis illustrates some likely priority outcomes where creditors have taken competing security interests over the same property of a borrower. In particular, the analysis demonstrates the importance of including negative pledge and automatic crystallisation clauses in floating charge instruments.
30. The effect of the new CO remains to be seen. However, based on the existing legal principles under Hong Kong law, it appears likely that banks and other creditors seeking to take security over a borrower’s assets will be deemed to have constructive notice of all the terms of any existing security taken over such assets (where such security is registered pursuant to, and in accordance with the new CO ). Banks and creditors should therefore conduct thorough searches and review the terms of any pre-existing registered charges carefully so that they will not be caught unaware by any terms which they would be deemed to have notice of.
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Ho & Hall's Hong Kong Contract Law - Sixth Edition
Author: Professor Stephen Hall
Ho & Hall's Hong Kong Contract Law Sixth edition comprehensively updates the law of contract as it applies in Hong Kong and revises and clarifies statements of the law in a number of areas. It incorporates significant developments in all areas including, most notably, implied terms, offer and acceptance, contractual intention, interpretation of terms, implied terms, misrepresentation, rectification, economic duress, severance of restrictive covenants, third party rights, negotiating damages, penalties, and promissory estoppel.
Publication Date: July 2022
Publisher: LexisNexis
| Product Format | Details | Qty |
|---|---|---|
| Book (Soft cover) | In Stock ISBN: 9789888799862 |
Ho & Hall's Hong Kong Contract Law authored by Stephen Hall, is a comprehensive work which expertly identifies the unique local characteristics of Hong Kong contact law. The text balances theoretical and policy discussion with practical considerations, including clear illustrative examples of the law at work. The late Professor Betty M Ho was the author of this work’s influential first and second editions (titled Hong Kong Contract Law). The sixth edition continues to build on Professor Ho’s legacy.
1 Introduction
2 Agreement
3 Consideration
4 Intention
5 Form of Contract
6 Contents of a Contract
7 Misrepresentation
9 Duress, Undue Influence and Unconscionability
10 Incapacity
11 Illegality
12 Joint Obligations and Joint Rights
14 Assignment
15 Performance
16 Discharge and Variation by agreement
17 Discharge by frustration
18 Discharge by breach
19 Remedies For Breach Of Contract
20 Limitation of actions
21 Estoppel
22 Unjust enrichment
23 Conflict of laws
Featured Authors
Professor stephen hall.
Stephen Hall is Professor of Law at The Chinese University of Hong Kong, where he is an award-winning teacher and researcher. He previously taught at the Faculty of Law, University of New South Wales, where he was the Director of the European Law Centre. Before turning to academic life, he spent nine years with the Australian Attorney-General's Department, where he advised government ministers and officials. He holds a doctorate in European Union Law from the University of Oxford.
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A legal assignment can relate only to past debts. In an equitable assignment, the debtors are not given notice of the assignment and the assignee has no right to ... Banking Practice and Guidance of the Law Society of Hong Kong are complied with in relation to personal guarantors so as to reduce the risk of challenge later, for example, for ...
Assignments of receivables such as the blanket assignment are generally possi-ble and are regulated under the broader term "charges". In Hong Kong and many other common law jurisdictions a distinction is made between "fixed" and "floating" charges. fixed charge is a charge over assets which are specified (e.g. a machine or a ...
Hong Kong Law Contract Guide Contents Introduction Formation of contract Terms, representations, and warranties Best endeavours/ reasonable endeavours Limitation and exclusion of liability clauses ...
A Q&A guide to finance in Hong Kong. The Q&A gives a high-level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the ...
LEARNING OBJECTIVES. Understand what an assignment is and how it is made. Recognize the effect of the assignment. Know when assignments are not allowed. Understand the concept of assignor's warranties. The Concept of a Contract Assignment. Method of Assignment. Effect of Assignment.
Law on factoring and its effect on set off rights. Under Hong Kong law, the assignment of debts is governed by both statute and common law principles. Section 9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) (the Ordinance) provides that:-. " Any absolute assignment, by writing under the hand of the assignor (not ...
Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpatory clauses are often ...
Chapter 2 Sources of Hong Kong Contract Law 26 Overview 26 2.1 Hong Kong Contract Law before 1997 27 2.2 The Effect of the "Handover" and the Basic Law: Hong Kong's Present System 31 2.3 The Declaratory Theory of Judicial Precedent 38 2.4 The Continuing Influence of English Law in Practice 40 Chapter 3 Agreement 43 Overview 43
Subsidiary Legislation. Others. [ Switch to complete mode] Cap. 23 Law Amendment and Reform (Consolidation) Ordinance. Timeline. Match case. Enable word stemming. Search: e.g. "Apple is good" means to find documents having the exact phrase "Apple is good".
Chapter 1. The Nature of Contract Law in Hong Kong 1 Overview 1 1.1 What Contract Is 3 1.2 The Function of Contract Law 9 1.3 Is Hong Kong's Contract Law "Special"? 24 Chapter 2. Sources of Hong Kong Contract Law 27 Overview 27 2.1 Hong Kong Contract Law before 1997 28 2.2 The Effect of the "Handover" and the Basic Law: Hong Kong's
Author: Stephen Hall. Foundations of Contract Law in Hong Kong - Eighth Edition includes crucial updates, as follows: Among the many important changes that Hong Kong has experienced or endured over the past three decades is the gradual and continuing emergence of the distinctively local common law. The common law of contract is no exception.
3. In this note, we provide an overview of the general Hong Kong law priority position of a bank ("Bank") which holds a floating charge ("Floating Charge") over all of a Hong Kong company's assets, where the company ("Borrower") has also granted to a third party creditor ("Other Creditor") a later: legal assignment of ...
HK$ 2,400.00. In Stock ISBN: 9789888799862. Qty: minus. plus. Add to Cart. Product description. Ho & Hall's Hong Kong Contract Law authored by Stephen Hall, is a comprehensive work which expertly identifies the unique local characteristics of Hong Kong contact law. The text balances theoretical and policy discussion with practical ...
The Hong Kong Commercial Law Notes are formatted into a step-by-step guide, which you can use as a checklist in your exams to ensure that every element of the exam question is answered. You may find the Table of Contents to be a quick and useful overview of the law to be applied. You should also answer the exam question using the ILAC method ...
6-4. 6-4 To. consolidate. Ordinances relating to interests in land, assignments, contract, tort, breach of promise and foreign corporations; and to amend the law relating to the defence of tender before action. (Amended 3 of 2008 s. 7) [1 July 1901] 1.
Hong Kong - Assignment, Novation Or Sub-Participation Of Loans. April 28, 2022 by Balaram Adhikari. The legal analysis regarding the transferability of loans can be complex. The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and ...
An assignment is a document through which title to a property is legally assigned by the vendor to the purchaser. An assignment has to be in the form of a deed and is prepared by the purchaser's solicitors for the approval of the vendor's solicitors. The date of execution of an assignment is the same as the date of completion for the sale and ...
Our dedicated law assignment help services in Hong Kong are tailored to provide comprehensive support to students pursuing legal studies. From analyzing complex cases to crafting persuasive arguments, our team of experienced experts possesses in-depth knowledge of legal principles and practices. With their guidance, you can submit well ...
(3) If such an assignment is made, the mortgagee shall hold a lien on the rents, and the lien created by the assignment shall be perfected and effective against the mortgagor and third parties upon recordation of the mortgage or separate instrument in the public records of the county in which the real property is located, according to law.
03618101001. Website. www .gorod-kropotkin .ru. Kropotkin ( Russian: Кропо́ткин) is a town in Krasnodar Krai, Russia, located on the right bank of the Kuban River .
by Paul Starr, Felicity Ng, and Sian Knight, King & Wood Mallesons. A Q&A guide to general contract formation and enforcement in Hong Kong. The Q&A gives a high-level overview of key concepts of contract law, including contract formation with general information on authority and capacity, formal legal requirements, preliminary agreements and ...
Krasnodar Krai is located in the southwestern part of the North Caucasus and borders Rostov Oblast in the northeast, Stavropol Krai and Karachay-Cherkessia in the east, and with the Abkhazia region (internationally recognized as part of Georgia) in the south. [14] The Republic of Adygea is completely encircled by the krai territory. The krai's Taman Peninsula is situated between the Sea of ...
I spent time in Krasnodar, Simferopol, Sevastopol, last summer. The only danger or annoyance is the sun. From 15°C with rain home to 35°C sunny, it was a shock.
Primorsko-Akhtarsk (Russian: Примо́рско-Ахта́рск) is a port town and the administrative center of Primorsko-Akhtarsky District of Krasnodar Krai, Russia, located on the coast of the Sea of Azov, 151 kilometers (94 mi) northwest of Krasnodar, the administrative center of the krai.Population: 32,257 (2010 Russian census); [2] 32,677 (2002 Census); [6] 30,047 (1989 Soviet census).