assignment hk law

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.

Please see full publication below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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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
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• Video Clip: A Question of Ethics: The Right to Privacy and Confirmation Hearings Hyperlink: Biographies of the Current Supreme Court Justices KEY TAKEAWAYS EXERCISES
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• 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
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• Negotiation LEARNING OBJECTIVES Hyperlink: Rubbermaid’s Unequal Bargaining Power KEY TAKEAWAYS EXERCISES
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• 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
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• 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
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• 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
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• 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
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• Video Clip: Monstrous Obligations
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• Concluding Thoughts Hyperlink: A Class Divided
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• 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
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Conventus Law

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Hong Kong – Assignment, Novation Or Sub-Participation Of Loans.

April 28, 2022 by Balaram Adhikari

TRANSFERABILITY OF LOANS

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, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

METHODS OF TRANSFER

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

OFFSHORE SECURITY ARRANGEMENTS

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

DUE DILIGENCE AND BEYOND

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

For further information, please contact:

Fiona Chan , Partner, Appleby

[email protected]

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The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction , on the assignment of a receivable arising under that contract or any other contract between the same parties.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

• Financial institutions

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The Contracts (Rights of Third Parties) Ordinance – the Impact on Hong Kong Contracts

Introduction

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (the Ordinance ) came into force on 1 January 2016. It amends the doctrine of privity of contract, according to which “only a person who is a party to a contract can sue on it”. 1 The doctrine had long been criticised as unfair since it applied even when the contracting parties intended to benefit a third party. Under the Ordinance, a person who is not party to a Hong Kong contract (a third party ) now has the right to enforce a term of a contract if: (i) this is expressly provided for in the contract; or (ii) on a proper construction of the contract, the term purports to confer a benefit on the third party.

It is however possible to contract out of the effect of the Ordinance and this may be desirable in many cases given the potentially broad scope of “purports to confer a benefit” under the second limb of the enforceability test. In England, where similar legislation has been in place since 1999, contracts commonly include clauses excluding its operation and it is expected that this practice will be followed in Hong Kong. However, a blanket exclusion clause will not be appropriate where the contracting parties wish to give a third party the right to enforce a term of the contract, e.g. giving the benefit of an indemnity to a group company. In these cases, the contract should expressly identify the third party and the specific term(s) that it may enforce. The operation of the Ordinance can then be excluded with respect to all other third parties. It will therefore be important to identify at the drafting stage whether the operation of the Ordinance should be excluded completely or preserved in relation to specific terms for specified third parties.

Scope of Application

The Ordinance applies to contracts that are entered into on or after 1 January 2016. It does not affect contracts entered into prior to that date.

Certain contracts are excluded from the operation of the Ordinance, including bills of exchange, promissory notes and other negotiable instruments, letters of credit, covenants relating to land, contracts for the carriage of goods by air or sea, and a company’s articles of association having effect as a contract under seal (Section 3). The Ordinance does not confer a right on a third party to enforce a term of an employment contract against an employee, but is silent on whether a third party may enforce an employment contract against an employer.

Rights of Third Parties

Under the Ordinance, a third party may enforce a term of a contract (including a term which excludes or limits liability) if:

the contract expressly provides that the third party may do so; or

the term purports to confer a benefit on the third party, unless on a proper construction of the contract, the term is not intended to be enforceable by the third party (Section 4).

The Ordinance only confers the benefit of contractual terms on third parties – it does not impose any burden on the third party. Thus while the third party can enforce a contractual term which confers a benefit on it – a party to the contract cannot enforce a contractual term against a third party.

The third party must be expressly identified in the contract by name, as a member of a class (e.g. subsequent owners) or as answering a particular description (e.g. A’s nominee). 2 The third party does not have to be in existence when the contract is entered into (e.g. a company not yet incorporated). A third party does not need to have given consideration in order to enforce its rights.

A third party may seek any remedy that would have been available to the third party in an action for breach of contract if the third party had been a party to the contract. The Ordinance explicitly provides that this includes a remedy under the rules of equity, which would include injunctions and specific performance.

The enforcement of the term by a third party is subject to any other term of the contract relevant to the term. It is therefore possible to contract out of the effect of the Ordinance and this is discussed further below.

Rescission and Variation of Contracts

Where a third party has the right to enforce a term of a contract, the parties to the contract may not, without the third party’s consent, agree to rescind the contract or vary it so that the third party’s right under the term is altered or extinguished. This restriction on variation and rescission applies only once the third party’s rights have “crystallised”, which occurs when:

the third party has assented to the term and the promisor has received notice of the assent; or

the third party has relied on the term and the promisor is aware of the reliance, or can reasonably be expected to have foreseen that the third party would rely on the term.

The above requirement can be overridden by an express term in the contract which:

provides for the contract to be rescinded or varied without the third party’s consent; or

specifies circumstances in which the third party’s consent is required for the rescission or variation of the contract.

For the express term to prevail, before the third party’s rights are “crystallised”, either (a) the third party should be aware of the express term; or (b) one or more parties to the contract should take reasonable steps to make the third party aware of the term.

Where third parties are to be given a right to enforce specified terms of a contract, consideration needs to be given to whether the contracting parties wish to retain their right to rescind or vary the agreement without the consent of the third parties.

On application by a party to the contract, the court may make an order dispensing with the third party’s consent if: (a) the other party agrees to rescind or vary the contract; and (b) the court thinks it just and practicable to make the order.

The relevant section of the Ordinance (Section 6) applies to acts carried out “by agreement” between the parties, but it is uncertain as to its application to acts which are not carried out “by agreement” and affect the interests of a third party, for example termination by breach.

Rights of Defence and Set-Off

In proceedings brought by a third party, a party to a contract can raise a defence or set-off which would have been available to him:

if the proceedings had been brought by the other party to the contract, and:

the matter raised by way of defence or set-off arises from or in connection with the contract, and is relevant to the term to be enforced; or

an express term of the contract provides for the defence or set-off to be available to him in proceedings brought by the third party; or

if the third party had been a party to the contract.

A contracting party will have a counterclaim against a third party if that counterclaim would have been available if the third party had been a party to the contract.

An express term can be included in the contract to restrict the defences, rights of set-off or counterclaims available to the parties in an action brought by a third party.

Protection against Double Liability

The Ordinance protects a party to the contract from double liability in certain circumstances. If a party to the contract has wholly or partly performed its obligations to the third party, it is discharged from the obligations it owes to the other party to the contract to the extent of having performed the same obligations to the third party.

If one party to a contract has recovered from the other a sum for: (i) the third party’s loss in relation to the term; or (ii) the expense of making good to the third party the default of the other contracting party, then a court or arbitral tribunal must reduce any award to the third party to the extent it thinks appropriate to take account of the sum recovered.

Clauses Excluding or Limiting Liability

A contractual term excluding or limiting the liability of the contracting parties may expressly extend the benefit of the term to third parties such as group companies, employees, agents or sub-contractors. The third party’s right to enforce the term is subject to the Control of Exemption Clauses Ordinance (Cap. 71) under which liability for death or personal injury cannot be excluded and other types of exemption clauses are subject to a reasonableness test.

Assignment of Third Party Rights

A third party may assign its right to enforce a term of a contract to another person, unless: (a) the contract expressly provides otherwise; or (b) on a proper construction of the contract, the right is personal to the third party and is not assignable. In most cases, contracting parties will probably exclude a third party’s right to assign such rights. If they do not, the contract should require a third party to give notice to the contracting parties of any assignment.

Arbitration and Jurisdiction

If a third party’s right to enforce a term of a contract is subject to an arbitration agreement, the third party is treated as a party to the arbitration agreement for the purposes of the Arbitration Ordinance (Cap. 609) unless, on a proper construction of the contract, the third party is not intended to be so treated (Section 12).

If the contract contains an exclusive jurisdiction clause, the third party is bound by the exclusive jurisdiction clause in any dispute between the third party and a party to the contract relating to the enforcement of the term, unless on a proper construction of the contract, the third party is not intended to be so bound (Section 13).

Other Jurisdictions

The Ordinance aligns Hong Kong with other common law jurisdictions which have undertaken similar reform to the privity doctrine, including England and Wales, Canada (New Brunswick), Australia (Western Australia, Northern Territory and Queensland), New Zealand and Singapore. The Ordinance is modelled on the Contracts (Rights of Third Parties) Act 1999 of England and Wales. The English statute has not had a significant impact due to the use of contracting out provisions, which are discussed below.

The Benefit Test

The Ordinance gives a third party the right to enforce a contractual term if either the contract expressly provides for this, or the term purports to confer a benefit on the third party. Although there is uncertainty as to what classifies as purporting to confer a benefit, English case law may provide some guidance. Justice Christopher Clarke in Dolphin Maritime & Aviation Services Ltd stated that a “contract does not purport to confer a benefit on a third party simply because the position of that third party will be improved if the contract is performed”. Justice Clarke further stated that “purporting to ‘confer’ a benefit [benefit test] seems to me to connote that the language used by the parties shows that one of the purposes of their bargain (rather than one of its incidental effects if performed) was to benefit the third party”. In Prudential Assurance Co. Ltd , Justice Lindsay stated that the benefit test is “satisfied if on a true construction of the term in question its sense has the effect of conferring a benefit on the third party in question”, but there is “no requirement that the benefit on the third party shall be the predominant purpose or intent behind the term”.

Given the potentially broad application of the concept of purporting to confer a benefit, contracts should be carefully drafted to ensure that rights are not unwittingly conferred upon third parties. Where the intention is to confer a benefit on third parties, this should be explicit – the contract should name the third parties and state which terms they can enforce. The contract can then exclude the operation of the Ordinance in respect of all other third parties. If no third party rights are intended, the safest course is to contract out of the effects of the Ordinance completely.

Third Party Rights – Examples

Express terms as to the enforceability of contractual terms by third parties will be required whenever it is intended that a third party should benefit from the terms of a contract. Examples include:

Contracts conferring the benefit of an indemnity on a third party such as an indemnity which is given in favour of a company and its group companies (e.g. in relation to a share or business acquisition);

Contracts containing a confidentiality obligation which confers the benefit of non-disclosure on a third party, such as companies of a corporate group or other parties;

Contracts with restrictive covenants, such as service agreements, which confer the benefits of the restrictive covenant on companies in a corporate group; and

Contracts which confer the benefit of clauses limiting or excluding liability on third parties such as companies in the same corporate group or employees of the contracting party.

Assignees and successors in title are not usually parties to contracts, but under the Ordinance, they may acquire rights to enforce contractual terms. Contracts may expressly state that assignees and successors in title have the same rights as parties to the contract.

Negotiating Hong Kong Contracts

The Ordinance needs to be considered when negotiating contracts governed by Hong Kong law. Parties should examine the terms of the contract to determine whether the Ordinance will apply and to identify potential benefits conferred implicitly or explicitly on a third party. This is important to ensure that there are no rights that a party may want to protect before including a standard clause excluding the Ordinance.

In circumstances where parties wish to preserve the doctrine of privity and limit their liability to third parties, they should clearly and expressly exclude all provisions of the Ordinance in the contract and related contracts.

Where parties wish a third party to have the right to enforce a term of the contract, they should expressly identify the third party and state that the third party may enforce a specific term(s). The contract can also exclude the provisions of the Ordinance in relation to all other third parties.

Parties should also have regard to the following matters:

The third parties must be expressly identified. If only certain third parties to the contract are to be able to enforce a contractual term, this should be made clear.

The terms of the contract that are to be enforceable by the third parties should be clear. The Ordinance refers to enforcement of “a term of the contract”, rather than the contract as a whole.

Whether the benefit or right to enforce the contractual term is conditional. Although a contract cannot impose an obligation on a third party, a condition to enforcement by a third party is permitted.

Whether the parties should limit their liability to a third party and/or limit available remedies.

Whether the contracting parties should include a provision maintaining their right to vary or rescind the contract without the third party’s consent, or whether there are specified circumstances in which the consent of the third party is required before rescission or variation of the contract.

Whether the third party may assign their rights under the Ordinance. Contracting parties may wish for any assignment rights to be excluded.

Whether to include an express term specifying (or restricting) the defences, rights of set-off or counterclaim to be available to the contracting party in proceedings brought by a third party.

Whether to make the third party rights subject to an arbitration agreement or any other method for dealing with a dispute, such as mediation.

Whether the third party is to be bound by an exclusive jurisdiction clause. Under the Ordinance, the third party will be bound by an exclusive jurisdiction clause unless, on a proper construction of the contract, this is not intended.

B + B Construction Ltd v Sun Alliance and London Insurance Plc [2000] 2 HKC 295 at [301B]-[301F] quoting Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at [853]. ↩

Examples taken from Department of Justice < http://www.doj.gov.hk/eng/public/rightsofThirdParties.html >. ↩

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Contracts (Rights of Third Parties) Ordinance Hong Kong

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Factoring and Set off Rights – Some Practical Tips

Factoring is a widely used mechanism in the business world. This article discusses the law in relation to factoring and practical tips to be adopted by companies when it comes to factoring and set off rights.

What is factoring?

Factoring is a form of financing by which a company sells debts that are due to be collected from a customer to a third party (the Factor) at a discounted price, and in turn assigns its rights to collect the debts from the customer or customers to the Factor.

After the factoring arrangement is entered into between the company and the Factor, it is the usual practice for the Factor to send out to the relevant customers a letter giving notice that from the date of the letter and until further notice, all debts owed by the customers to the company are automatically assigned and become payable to the Factor. This letter is usually known as an introductory letter.

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 purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee…) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor .”

This means that when a customer receives (and/or acknowledges) a written notice of assignment (including an introductory letter) from the Factor, the assignment of debt to the Factor becomes effective in law.

Section 9 of the Ordinance provides that the Factor takes the assignment of debt subject to all equities which would have been entitled to priority over the rights of the Factor.  Cases have interpreted this wording to mean that:-

(a)        the Factor takes subject to the customer’s right of set off against the assignor; but

(b)        if the set off does not arise out of or is not closely connected with the same contract or the subject-matter of the assignment, the customer can only claim a set off against the Factor if the right of set off arose before the notice of assignment is given.

Where there is a prior contractual set off agreement in place between the company and the customer, the law is not as clear cut when it comes to deciding whether such an agreement will also be effective against the Factor where the transaction out of which the cross-claim sought to be set off arose was entered into after the notice of assignment is given. There are two competing views arising from the case law on this issue:-

(a)        One view is that the assignee (i.e. the Factor) takes the same interest and is subject to the same liabilities as the assignor (i.e. the company) at the date of the notice of assignment, and the prior agreement will allow the debtor (i.e. the customer) to set off cross-claims, both present and future, including claims which arise out of new transactions.

(b)        The competing view is that when the debtor receives notice, the debtor should regulate its conduct accordingly and should not rely on debts arising out of new transactions to diminish the rights of the assignee as they stood at the time of notice: in other words, set off is not available in respect of new transactions.

A set-off agreement entered into by the company and customer after the customer has notice of the assignment will not ordinarily be effective as against the Factor.

In summary, set off rights will continue to apply after assignment where:

(a)      the relevant cross-claim arose before the assignment;

(b)      the relevant cross-claim arose out of the same contract or is closely connected with it;

(c)      the factor expressly (or, depending on the facts, by implication) agrees to the continuation of a contractual set off right.

Practical Tips

Below are various measures which can be taken by a company to strengthen its position when it comes to factoring and set off rights:-

• It is prudent for a company to include a clause in their terms and conditions with the supplier providing that the set off rights which the company has under the contract will continue to be enforceable against the supplier and their assignees regardless of (a) any existing or future agreements entered into between the supplier and a third party assigning the right to the third party to collect its receivables or (b) any future notice of assignment of debt which may be received by the company in relation to the supplier’s debt.  Again, it is also prudent to get an acknowledgement from the Factor and the supplier that they will adhere to these terms.
• Set up measures to ensure that Factors are kept up to date with the set off arrangements which the company has in place with their customers e.g. by periodically sending letters to Factors (especially if the Factor is involved in a long term trading relationship) reminding them that the company’s set off rights against the customer and Factor will continue to apply to future assigned debts of the customer; and
• In the event the company’s right to set off crystallises (e.g. default by the supplier), the company should put the supplier and Factor on immediate notice that the company will exercise their set off rights against any assigned debts which are the subject of any existing or future invoices which may be issued by the supplier.

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Newsletter No. 149 (EN)

Securing and assigning claims in hong kong.

• Last updated:
• 31 January, 2023

I. Introduction

Security in the form of a charge over certain assets, such as receivables or “book debt” for instance, is of signifi­cant importance for international trade and loan transactions. In order for a creditor to minimize the risk of default by the debtor and obtain assurance that only secured rather than unsecured debts are held, the creditor must take several steps to reserve a preferential rank over other creditors.

This newsletter will discuss the assign­ment of receivables, in German called “Zession”, and what is required for a registration in Hong Kong to reserve a preferential rank in case of insolvency of the debtor. First, the relevant terms will be defined and then described in further detail in context of Hong Kong legisla­tion. The final part of the newsletter will explain what is required to register a blanket assignment of receivables in Hong Kong.

II. Definitions

1.       Assignment of receivables

Assignments of receivables are regulated in Germany in § 398 of the Civil Law Code ( B ürgerliche G esetz b uch, BGB ). The assignment of receivables is a common security for loans. The legal re­lationship usually consists of a party granting security, the grantor (e.g. per­son or entity taking a loan) who assigns receivables (e.g. receivables for goods supplied) to a secured party (e.g. entity or person giving a loan). The assignment of receivables makes the se­cured party the creditor of the receiva­bles.

2.      Types of assignment of receivables

Assignments generally can be distin­guished into single assignment (“Einzel­zession”), overall assignment (“Mantel­zession”) and blanket assignment (“Globalzession”). The blanket assign­ment is also sometimes re­ferred to as global assignment. The blanket assign­ment is differentiated from the single as­signment and overall assign­ment insofar, as the blanket assign­ment assigns all cur­rent and future receivables in favour of the secured person or entity. In contrast, a single assign­ment only assigns a specif­ic receivable while an overall assignment usually assigns only receivables that ex­isted at a certain point in time. Some­times, overall assignments are accompa­nied with an arrangement that all future receivables will be assigned through ad­ditional overall assignments. However, since such arrangement is very similar to the blanket assignment, usually in such circumstances the parties agree to pro­ceed with a blanket assignment.

3.      Absolute and undisclosed assign­ments

Independent of whether current or fu­ture receivables are assigned, or whether one specific receivable or a group of re­ceivables are assigned, the assign­ment can be either absolute or undisclosed. With an undisclosed assign­ment the se­cured party decides not to disclose the assign­ment to the third-party debtor, who continues to settle the receivables by payment to the grantor. With an absolute assignment, the assign­ment is disclosed to the third-party debtor and the debtor is only able to set­tle the receivables with discharging ef­fect by payment to the secured party, not the grantor.

In Hong Kong, no requirement exists that for an absolute assignment the third-party debtor has to only settle the receivables with discharging effect by payment to the secured party. It is how­ever common, if the secured party is a bank, that a special account is opened, which is used by the third-party debtor to settle the receivables. The money held in these accounts can only be accessed or transferred with the permission of the secured party (usually the bank).

III. Assignment of receivables in Hong Kong

Assignments of receivables such as the blanket assignment are generally possi­ble 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.

A fixed charge is a charge over assets which are specified (e.g. a machine or a specific receivable). With the effect of the assignment that the grantor (“char­gor”) is no longer free to deal with those assets. In contrast, a floating charge is an assignment of a type or group of assets (e.g. inventory, goods in a warehouse, undefined number of receivables, or the general under­taking or property of the company) which are not specifically identifiable and the chargor is able to continue to use the assets (processing and selling goods, collect receivables, etc.) while the secured person (“chargee”) retains certain rights in case of insolvency.

Charges are generally available to sole-traders as security instrument in business transactions while in practice “floating charges“ are primarily only granted by companies. The C ompanies O rdinance Chap. 622 ( CO ) does not define fixed and floating charges and so its definition is based on case law in alignment with common law principles. Assignments of receivables have generally been catego­rised as fixed charges. However, the conditions of what constitutes a fixed charge have changed significantly after the decisions in Agnew v IRC [2001] UKPC 28 and National Westminster Bank Ltd v Spectrum Plus Ltd [2004] 3 WLR 503.

A blanket assignment has the character­istic that the underlying assets, the re­ceiv­ables, constantly change (old receiv­ables are settled, and new ones are add­ed). Therefore, it is generally accept­ed that the blanket assignment is not treat­ed like a fixed charge, but as a float­ing charge. The classification is not up to the involved parties, but is determined by the relevant judge on a case by case basis (common law).

In case the grantor would like to classify the blanket assignment as a fixed charge, it would be necessary to open a bank ac­count, which is used for all settlement payments of the relevant receivables, and the grantor is unable to access or transfer any amounts from this account without the prior permission of the se­cured party. Since such arrangement is rather unpractical, it can be noted that the blanket assignment will most likely be characterised as a floating charge. With a floating charge, the secured party has only access to the charged receiva­bles, when they “concretise”. A floating charge will concretises if:

• the company winds-up;
• commences insolvency proceedings;
• ceases its business;
• any agreed terms of the charge.

The disadvantage of a floating charge is that the secured party is ranked after creditors that are in the possession of a fixed charge.

IV. Registration

To ensure that a party providing a loan becomes a secured creditor in compari­son to an unsecured creditor, it is neces­sary that the charge is valid and regis­tered. If an assignment of receiv­ables is not registered, it is invalid towards the liquidator and other creditors of the company. The registration of charges is regulated in Section 333 ff of the CO.

1.       Registration

Section 334 of the CO includes a list of charges that must be registered (inde­pendent whether they are considered fixed or floating charges). Among the listed charges are receivables.

2.      Registration period

Section 335 of the CO requires that a charge is registered within a month af­ter its creation.

3.      Registry keeping

Pursuant to Section 352 of the CO, a company must keep a registry at its reg­istered office. In case that the registry is not kept at the registered office, the Registrar of Companies must be in­formed. The registry must be kept in Hong Kong.

4.      Registration by the company or its creditors

In theory it is the duty of the company to register the charge. However, it is common that the registration is done by the creditor.

A blanket assignment of receivables is possible in Hong Kong and must be registered at the Companies Registry as charge. A registration is also possible (recommended) by the creditor. A blan­ket assignment of receivables is most likely categorised as a floating charge, which has the disadvantage that in case of insolvency, the secured party’s set­tlement of claims will be ranked after the creditors of fixed charges.

We hope that we have been able to assist you with this information. If you have any further questions, please contact us:

Lorenz & Partners Co., Ltd.

27th Floor, Bangkok City Tower, 179, S Sathorn Rd,

Thung Maha Mek, Sathon, Bangkok 10120

Email:  [email protected] www.lorenz-partners.com +66 (0) 2 287 1882

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