Shipping & International Trade Law: Contracts Of Sale Of Goods Part 2, General Formalities.
Legal News & Analysis – Asia Pacific - Hong Kong – Shipping Maritime & Aviation
14 May, 2015
What are the seller’s remedies where the buyer is in breach of contract?
The seller may bring an action for the price of the goods against the buyer in the following situations (section 51 of the SOGO):
- where property in the goods has passed, but the buyer wrongfully neglects or refuses to pay; or
- where property in the goods has not passed, but the purchase price is contractually payable on a day certain irrespective of delivery (see section 8.5.2 above), and the buyer wrongfully neglects or refuses to pay.
In the case of wrongful non-acceptance of the goods by the buyer (regardless of whether property has passed), the seller may sue for damages (section 52(1) of the SOGO). The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract (section 52(2) of the SOGO, being statutory codification of the first rule in Hadley v Baxendale (1854) 9 Exch 341 at 354).
If there is an available market for the goods in question, the measure of damages is prima facie the difference between the contract price and the market or current price at the time when the buyer ought to have accepted the goods. If no time was fixed for acceptance, then damages are to be assessed at the time of the buyer’s neglect or refusal to accept (s 52(3) of the SOGO).
The seller has a duty to mitigate.
The parties may also expressly agree to a liquidated damages clause (so long as it does not amount to a penalty clause), which would have the effect of bypassing the measures of damages discussed above.
Further, the unpaid seller has the following rights (section 41 of the SOGO):
- the right to assert a possessory lien over the goods for the price;
- in case of the insolvency of the buyer, a right of stopping the goods in transitu after he/she has parted with possession of the goods, by retaking actual possession or giving notice to the carrier or bailee to redeliver the goods;
- a right of resale, the exercise of which rescinds the contracts, reverts property back to the seller and disentitles him/her from bringing an action for the price. The seller may nonetheless still sue for damages.
Where property has not passed, the unpaid seller may also withhold delivery. This is in addition to the other remedies discussed above.
What are the buyer’s remedies where the seller is in breach of contract?
The buyer can sue for damages where the seller is in breach of contract.
If the seller wrongfully neglects or refuses to deliver the goods, the measure of damages is generally the estimated loss directly and naturally resulting in the ordinary course of events from the seller’s breach of contract (s 53(1) – (2) of the SOGO).
Where there is an available market for the goods, the measure of damages is prima facie the difference between the contract price and the market or current price of the goods at the time when the seller ought to have delivered. If no time was fixed, then damages are measured at the time of refusal to deliver (section 53(3) of the SOGO).
The buyer has a duty to mitigate, though he/she need not run unnecessary risks (see Tung Guan Company PTE Ltd v Jih Dong Enterprises Co (being sued as a firm)  2 HKLR 225, at 248.
Resale by the buyer gives rise to some problems. The courts will not simply presume in a sale of goods scenario that the contract of sale is contemplated by both parties to be for the buyer to resale the very same goods to a third party. Therefore damages suffered by a buyer as a result of a resale obligation in the case of non-delivery by the ‘head’ seller is normally too remote. To succeed, the buyer must show that at the date of the contract, both parties contemplated that the buyer would resell the same goods.
In commercial contracts, stipulations as to time are usually treated as being of the essence. Therefore late delivery by the seller would usually entitle the buyer to reject the goods and cancel the contract. If the buyer elects to accept late delivery, the seller may be liable for damages, with the measure of damages being what is required to put the buyer in the position he/she would have been in had the seller delivered on time.
The breach of any (implied or express) condition by the seller, no matter how slight, would entitle the buyer to cancel the contract. Sufficiently grave breaches of any intermediate (or innominate) terms by the seller would also entitle the buyer to cancel the contract.
For a breach of warranty, or where the buyer waives a condition or elects to treat such a condition as a breach of warranty (eg, by accepting the goods), the buyer cannot treat the contract as repudiated and must sue for damages instead (section 13 of the SOGO). The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty (section 55(2) of the SOGO). For a breach of warranty of quality, the measure of damages is the difference between the value of the goods at the time of delivery and the value they would have had if they had answered to the warranty, ie, been of merchantable quality (section 55(3) of the SOGO).
In United Chemicals Industries Co Ltd v Telemac (HK) Ltd  HKLR 420, the seller sued the buyer for the value of the goods supplied, but the buyer counterclaimed for a breach of warranty. Li J saw some difficulty with this as the damages counterclaimed by the buyer for its breach of warranty claim effectively cancelled out the seller’s claim. In the end, it was held:
‘It is appreciated that this course amounts to giving the defendant [buyer] the remedy of total rescission of the contract for a breach of warranty. However, owing to special circumstances in this case I will follow the decision in Poulton’s case, 9 B. & C. 259; 109 E.R. 96. Perhaps the severity of my decision is alleviated by the fact that the defendant is still in possession of the bulk of the materials supplied and is in a position to return them.’
Are there any general limitations on the remedies available?
As noted above, consequential loss can be recoverable if it was reasonably within the contemplation of the parties at the time of the contract.
See also Holiday Products (HK) Ltd v Polyproducts Industrial Co  HKLR 455 where it was held that the buyer could recover its loss of profits as well as advertising expenses arising from the seller’s breaches because those losses and expenses were within the contemplation of the parties at the time of the contract.
What is the statutory limitation period?
Hong Kong’s statutory time bar for claims founded on simple contract or tort is six years (section 4 of the Limitation Ordinance, Cap. 347). For contract claims, time usually accrues from the date of the defendant’s breach.
The limitation period is postponed in case of fraud or deliberate concealment by the defendant (section 26 of the Limitation Ordinance).
Do your courts uphold shorter contractual limitation periods?
Hong Kong courts will uphold shorter contractual limitation periods.
It was recently observed in Possehl Electronics Hong Kong Ltd v China Taiping Insurance (HK) Co Ltd (Unreported, 19 December 2013, Court of First Instance, Deputy Judge Whitehead SC, HCA 2354/2012,  HKEC 2050, at paragraph :
‘… I accept that it is well established that parties may stipulate in a contract that legal or arbitral proceedings shall be commenced within a shorter period of time than provided under the Limitation Ordinance (Cap 347), failing which the right of action may be barred or extinguished.’
Such contractual limitation clauses may however (depending on specific facts) be struck down as unconscionable if one party is a ‘consumer’ (see section 5 of the Unconscionable Contracts Ordinance, Cap. 458).
In what circumstances is it possible for your courts to prevent payment out under:
A letter of credit?
The Hong Kong courts apply the Uniform Customs and Practice for Documentary Credits to letters of credit. This means that credits are separate transactions from the contracts on which they are based (Article 3, also known as the ‘autonomy principle’) and all parties concerned with credit operations deal with the documents, not the goods (Article 4). Banks have no liability or responsibility for the genuineness of any documents or for the existence of the goods represented by any documents (Article 15).
Accordingly, a bank which has issued a letter of credit must pay against presentation of compliant documents. Payment out can only be prevented where there is clear and obvious evidence of fraud and of the bank’s knowledge of it at the time of payment (see Re Guang Xin Enterprises Ltd  HKLRD (Yrbk) 30).
The essential character of a performance has been characterised as akin to cash, letters of credit and promissory notes payable on demand. It is an irrevocable undertaking to pay a specified sum to the beneficiary in the event of a breach of contract, and is not a promise to the beneficiary that the contract will be performed (Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd  5 HKLRD 620).
The ‘autonomy principle’ is equally applicable to performance bonds under Hong Kong law. This means the performance bond is strictly distinct from the underlying contract, so it is not necessary to produce evidence or proof of any underlying breach in order to make a valid demand. The presumption is that a performance bond is to be conditioned upon documents, rather than facts (Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd  5 HKLRD 620).
Unless there is fraud, the Hong Kong courts will treat a performance bond as being equivalent of ‘cash in hand’ (Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd  5 HKLRD 620).
What does one have to show to prevent payment out?
For the above reasons, it is generally not difficult for a party seeking payment out pursuant to a performance bond or a letter of credit to obtain summary judgment.
In most cases, the bank’s only real defence is the defence of fraud. The test is as follows (Re Guang Xin Enterprises Ltd  HKLRD (Yrbk) 30, at paragraphs ):
- whether standing in the shoes of the paying bank at the time of payment, the fraud was clear and obvious to it;
- if fraud was clear and obvious, then the bank pays the beneficiary at its own peril and it is not entitled to reimbursement;
- but if fraud was not clear and obvious, then it is not for a banker to question why the businessmen involved in the underlying transaction had chosen to conduct their business in any particular way.
A bank that refuses to pay out on the ground of fraud must provide clear evidence and allege the fraud specifically with full particulars. It is not permissible for a bank to raise a vague unparticularised case of fraud in the hope of making it good after discovery (Re Guang Xin Enterprises Ltd  HKLRD (Yrbk) 30).
In Ever Eagle Co Ltd v Fortune Trading Co Ltd  HKLY 96, the suggestion that the underlying goods were the proceeds of crime from a robbery was held to be merely a ‘bare assertion’ and did not amount to clear evidence of fraud.
The circumstances under which the Hong Kong courts would intervene and prevent payment out are thus extremely limited.
What remedies are available to obtain security for the claim:
Where the substantive claim is being litigated
See Security And Arrest, section 9.
Where the substantive claim is not being litigated in your jurisdiction?
See Security And Arrest, section 9.
Must the applicant have already commenced substantive proceedings (whether by litigation or arbitration) to be able to obtain security?
See Security And Arrest, section 9.
Is there a distinction between the remedies available for a claim which is subject to litigation and one which is referred to arbitration?
Section 70 of the Arbitration Ordinance (Cap. 609) provides:
‘(1) Subject to (2), an arbitral tribunal may, in deciding a dispute, award any remedy or relief that could have been ordered by the Court if the dispute had been the subject of civil proceedings in the Court.
(2) Unless otherwise agreed by the parties, the arbitral tribunal has the same power as the Court to order specific performance of any contract, other than a contract relating to land or any interest in land.’
This work is not concerned with land. Therefore unless the parties agree to curtail the tribunal’s power to order specific performance, there is no distinction between the remedies available for court and arbitral proceedings so far as civil remedies go.
It should be noted however that arbitral tribunals do not have the power to commit a party/person to prison for contempt (of court).
In sum, the following remedies may be granted by arbitral tribunals under Hong Kong law:
- monetary awards;
- specific performance (not for contracts relating to land and not if the parties agree not to have specific performance as an available remedy);
- declaratory relief;
- indemnity; and
- interest (section 79 of the Arbitration Ordinance).
What tests are applied to establish a right to each remedy?
It is necessary to show a risk of dissipation of assets in order for one to obtain ‘security’ by way of a Mareva injunction. See Security And Arrest, section 9.
Is the applicant required to provide counter security, and if so by what means?
The applicant must give an undertaking as to damages. Technically, the court cannot compel the applicant to give an undertaking. Rather, the court would simply refuse to grant the Mareva injunction unless the applicant gives an undertaking.
What exposure does an applicant have for damages if the attachment is deemed wrongful?
The purpose of the undertaking as to damages is for the applicant to compensate the respondent for any loss sustained by reason of the injunction, through the payment of damages, if it subsequently transpires that the Mareva/section 21M HCO injunction ought not to have been granted.
The applicant’s exposure is therefore practically full.
When applying for the Mareva/section 21M HCO injunction, the applicant should provide information on his/her ability to meet damages pursuant to the undertaking. An additional condition may be that the applicant ‘fortify’ the undertaking by providing security. Fortification may come in the form of a bond from an insurance company, or payment into court by some other means (eg, by the applicant’s solicitors).
Is your country a signatory to the New York Convention?
Hong Kong (as a Special Administrative Region, rather than as a country), is a signatory to the New York Convention.
The Arbitration Ordinance (Cap. 609) makes specific reference to the ‘New York Convention’ as well as to ‘Convention awards’ (see sections 2 and 87 – 91).
To what extent is the New York Convention applied in practice?
In practice, the Hong Kong courts tend to apply the New York Convention with very little hesitation through the enforcement of Convention awards. Some commentators have even suggested that the Hong Kong courts do this to a fault.
Section 89 of the Arbitration Ordinance sets out the limited grounds on which a Hong Kong court may refuse to enforce a Convention award. Even where a respondent has managed to show that the Convention award in question falls within one of the grounds listed in section 89, the court nevertheless retains a discretion as to whether to enforce the award anyway. This is because section 89 is phrased as ‘Enforcement of a Convention award may not be refused except in cases mentioned in this section.’ Taking the double negatives away, this sentence could be read as ‘the Court may (still) enforce a Convention award even in cases mentioned in this section’.
In China Nanhai Oil Joint Service Corp Shenzhen Branch v Gee Tai Holdings Co Ltd  3 HKC 375, the defendant asked the Hong Kong court to refuse to enforce a PRC award (NB this was pre-1997, thus it was regarded as a Convention award, whereas today it would be treated as a ‘Mainland award’). The ground advanced, and proven, by the defendant was that the PRC tribunal was wrongly constituted in breach of the arbitration agreement. The Hong Kong Court held that it would exercise its residual discretion to enforce the Convention award despite the wrongful composition of the PRC tribunal, because the defendant’s rights had not been violated in any material way.
Is your country a signatory?
Hong Kong, like the UK, is not a signatory to the Vienna Convention.
Does a lawyer require a formal power of attorney to be able to act?
Hong Kong lawyers (solicitors and barristers) do not require a formal power of attorney to be able to act.
Do claim documents (and their translation) require notarisation?
Hong Kong claim documents do not need to be notarised. The plaintiff must sign a ‘statement of truth’, however.
Where a writ issued in Hong Kong is to be served abroad on a foreign defendant (the court’s leave is required), the laws of the place in which the foreign defendant is to be served may require notarisation of the claim documents and/or their translations. In such a case, legal advice should be sought from lawyers in the jurisdiction where service is intended.
This material was first published by Sweet & Maxwell in 2014 in “Shipping and International Trade Law – International Comparisons” (and is reproduced here by agreement with the Publishers)
For further information, please contact:
Damien Laracy, Partner, Laracy & Co in association with Hill Dickinson Hong Kong LLP
Mike Mallin, Partner, Hill Dickinson Hong Kong LLP in association with Laracy & Co
Michael Ng, Solicitor, Laracy & Co in association with Hill Dickinson Hong Kong LLP