Shipping & International Trade Law: Contracts Of Sale Of Goods.
Legal News & Analysis – Asia Pacific - Hong Kong – Shipping Maritime & Aviation
28 April, 2015
Jurisdiction / Proper Law
1. In the absence of express provision in a contract of sale, by what means will the proper law of the contract be determined?
Hong Kong does not have any legislative equivalent of England’s Contracts (Applicable Law) Act 1990. Therefore in the absence of an express choice of law/jurisdiction clause, the Hong Kong courts continue to apply the old English case law regarding the proper law of the contract in an international sale of goods scenario.
The almost one century old decision of the Privy Council in Benaim v Debono  AC 514 held that there is a presumption that the proper law of a FOB sale of goods contract is the lex loci solutionis, ie, the place of delivery. Benaim v Debono was recently cited with approval by the Hong Kong Court of Appeal in First Laser Ltd v Fujian enterprises (Holdings) Co Ltd  2 HKLRD 45, at , though not specifically on the presumption regarding FOB contracts point.
It has been suggested that no such presumption applies in the case of a CIF sale of goods contract (H Glynn (Covent Garden) Ltd v Wittleder  2 Lloyd’s Rep 409; and Ferromin Ltd v Nittetsu Shoji Co Ltd (Unreported, 29 Jan 1999, Court of First Instance, Stone J, HCCL 41/1998).
While the issue of proper law/jurisdiction in sale of goods contracts has been discussed in Hong Kong in several first instance authorities, there is no conclusive ratio that can be drawn from these cases. As such, the two rules pertaining to whether an implied choice of law/jurisdiction clause can be inserted into the sale of goods contract and the ‘closest and most real connection test’ discussed at section 1.1.1 above will have to be applied on a case-by-case basis to determine the proper law/jurisdiction of the contract. This present state of the law in Hong Kong in this regard has been criticised as undesirable and lacking in commercial certainty in legal academia (see Johnston, The Conflict of Laws in Hong Kong, 2nd edn (Hong Kong: Sweet & Maxwell 2012), paragraph 5.046).
2. Will a foreign jurisdiction or arbitration clause necessarily be recognised? In the event that proceedings can be commenced before your court notwithstanding such provisions, can such proceedings be challenged?
See Contracts Of Carriage, section 1.2.
3. In the event that an injunction or order preventing proceedings is obtained in the agreed jurisdiction (whether court or arbitration), will this be recognised by your court?
See Contracts Of Carriage, section 1.3.
1. What are the essential elements for the recognition of an arbitration agreement?
The essential elements for the recognition of an arbitration agreement under Hong Kong law are set out in the Arbitration Ordinance (Cap. 609).
The statutory definition of ‘arbitration agreement’ is in section 2(1) the Arbitration Ordinance. It is identical to the definition in Article 7 of the UNCITRAL Model Law:
‘(1) “Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.’
Arbitration agreements must be ‘in writing’ (Article 7(2) of the UNCITRAL Model Law). The criteria for what ‘in writing’ means can broadly be summarised as follows:
- the arbitration agreement itself need not be in writing. It is enough that the arbitration agreement’s content is recorded in any form. It matters not that the arbitration agreement or contract has been concluded orally, by conduct, or by other means (Article 7(3) of the UNCITRAL Model Law);
- electronic communications stored by electronic, magnetic, optical or similar means are sufficient to meet the ‘in writing’ requirement (Article 7(4) of the UNCITRAL Model Law);
- an arbitration agreement is also in writing where it is contained in an exchange of statements of claim and defence, and one party alleges its existence but the other party does not deny its existence (Article 7(5) of the UNCITRAL Model Law);
- reference in a contract to any contract containing an arbitration clause, so long as the reference is such as to make the clause part of the contract (Article 7(6) of the UNCITRAL Model Law) – see section 126.96.36.199 (supra);
- the document containing the arbitration agreement need not be signed – see section 188.8.131.52 (supra);
- the agreement, made otherwise than in writing, is recorded by one of the parties to the agreement (or by a third party) with the authority of each of the parties to the agreement (section 19(2)(b) of the Arbitration Ordinance).
Passing Of Title/Property/Risk
Hong Kong’s legislative provisions dealing with the passing of property, found in sections 19 – 20 of the Sale of Goods Ordinance (Cap. 26, ‘SOGO’), are carbon copies of sections 17 – 18 of the English Sale of Goods Act 1979 (‘SOGA’).
Thus, just like the law of England & Wales, property passes at the point in time when the parties intended it to pass (section 19 of the SOGO). There are a number of ‘rules’ for ascertaining that intention (section 20 of the SOGO). The discussion in section 8.3 of the chapter on England & Wales of this book is equally applicable to Hong Kong law – with one important caveat.
The presumption in section 18 rule 5(3) – (4) of the English SOGA, was inserted in 1995 upon the UK Law Commission’s recommendation. The ‘new’ presumption deals with sale of goods from a bulk, and it enables property in an undivided share of that bulk to pass before ascertainment of goods relating to a specific sales contract if three conditions are met (again, see the chapter on England & Wales of this work). No analogous provision has been inserted into Hong Kong’s SOGO.
This ‘new’ presumption under the English legislation might have had an effect on the outcome on cases such as Kerry Foodstuffs Co Ltd v Phulsawat Navy Co Ltd (Unreported, 27 September 2000, Court of First Instance, Cheung J, HCCL 1/1992), where it was held:
‘I agree … that property in the subject goods, being part of the bulk at the time of shipment, did not pass to Arumugam unless and until they had become ascertained by being separated from the bulk …. As the subject goods have not been separated from the bulk at the time of shipment, property therein did not pass to Arumugam.’
This is one of the rare instances in which Hong Kong’s Sale of Goods law differs from that of England & Wales.
In an international sale, where goods are shipped and a bill of lading is issued making the goods deliverable to the order of the seller or his agent, it is prima facie deemed that the seller reserved the right of disposal of property in the goods (section 21(2) of the SOGO).
1. What terms if any are implied by your rules as to the passing of:
2. Title (property) to the goods?
Section 22 of Hong Kong’s SOGO deals with the passing of risk. It is essentially the same as section 20 of the English SOGA (Hong Kong does not have an equivalent of section 20(4) SOGA, however, which is concerned with consumer contracts and is not the focus of this work in any event).
Simply put, risk prima facie passes to the buyer at the same time property is transferred to the buyer (unless the parties otherwise agree).
4. In relation to the passing of title and risk, do your rules apply even if the underlying contract applies another law?
The provisions of the SOGO only apply to sale of goods contracts that are governed by Hong Kong law.
Description And Quality
1. Do your rules imply terms on (a) the description of the goods and / or (b) their quality?
Section 15 of Hong Kong’s SOGO deals with sales by description. It was copied from what is now section 13 of the English SOGA.
For a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description.
Section 16 of the SOGO is concerned with the implied condition as to merchantable quality. The concept of merchantable quality itself originates from the English Sale of Goods Act 1893. While Hong Kong has copied the statutory definition of ‘satisfactory quality’ from what is now s 14(2A) – (2C) of the English SOGA, the Hong Kong legislation continues to use the old term of ‘merchantable quality’ (section 2(5) of the SOGO).
The condition of merchantable quality is implied into a sale of goods contract where a seller sells goods in the course of business, except where:
- the defects were specifically drawn to the buyer’s attention before the contract is made;
- the buyer examined the goods before the contract was made and he/she ought to have discovered those defects from the examination; or
- for a sale by sample, the defects would have been apparent on a reasonable examination of the sample by the buyer.
The statutory definition of ‘merchantable quality’ lists the following relevant considerations:
- whether the goods are fit for the purpose or purposes for which goods of that kind are commonly bought;
- the standard of appearance and finish;
- whether the goods are free from defects (including minor defects);
- if the goods are safe; and
- if the goods are durable.
These considerations are to be applied to any description of the goods, the price (if relevant) and other relevant circumstances. It should come as no surprise that when assessing a real life dispute concerning merchantable quality, the statutory definition outlined above may often not provide a concrete answer save for the most straightforward of cases. The Hong Kong courts continue to refer to old 19th – 20th Century English cases on merchantable quality (see, eg, Tung Ga Linen & Cotton (HK) Ltd v Winnitex Investment Co Ltd (Unreported, 21 July 2006, District Court, Judge CB Chan, DCCJ 7049/2003,  HKEC 1373), where the judge referred to Bristol Tramways etc Carriage Co Ltd v Fiat Motors Ltd  2 KB 831.) The Hong Kong courts tend also to use the term merchantable quality interchangeably with the new UK term of satisfactory quality (see, eg, Cheng Wo Hung v Yip Shing Diesel Engineering Co Ltd (Unreported, 12 December 2003, Court of Appeal, Chung J, HCA 19252 of 1999,  HKEC 1479).
1. Delivery: What provisions does your law make as to delivery of the goods (eg, on timing and method of delivery)?
Except for some minor formatting differences, the provisions dealing with delivery of the goods in section 31 of Hong Kong’s SOGO and section 29 of the UK’s SOGA are exactly the same.
Therefore it is for the parties to decide whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer. If there has been no such decision (impliedly or expressly), then it is assumed that the place of delivery is the seller’s place of business, if he has one, and if not, his residence. If the contract is for the sale of specific goods, which to the knowledge of the parties when the contract is made, are in some other place, then that some other place is the place of delivery (s 31(1)).
If no specific time for delivery is fixed, then the seller is bound to send the goods within a reasonable time (section 31(2)).
The discussion of delivery obligations under CIF and FOB contracts at section 8.6 of the England & Wales Chapter of this work is equally applicable under Hong Kong law.
For CIF contracts, see Anbest Electronic Ltd v CHU International Insurance Plc  4 HKLRD 202, at paragraph . In this case, the goods were stolen at the port of discharge. It was held that where the buyer is charged a CIF price, the risk (and property) only passes to the buyer when the shipping documents had been paid for and delivered, together with an assignment of the insurance policy.
See also New Optics Manufacturing Co Ltd v Lap Shing (Hong Kong) Freight Forwarding Ltd (Unreported, 28 April 2008, District Court, Judge Wong, DCCJ 5193/2005,  HKEC 736), where it was held that under a FOB contract, the seller had passed property and risk in the goods to the buyer upon delivering the goods to the buyer’s freight-forwarder (as agent).
2. Acceptance: When is the buyer deemed to have accepted the goods?
If a buyer accepts the goods, he/she will no longer be able to reject them.
Where there has not been actual or express acceptance by the buyer, acceptance may nevertheless be deemed under section 37(1) of the SOGO in the following circumstances:
- where the buyer intimates to the seller that he has accepted the goods; or
- after delivery, the buyer does any act in relation to them which is inconsistent with the ownership of the seller.
Intimation of acceptance, be it oral or written, must be clear. Writing a letter to the seller seeking an explanation (regarding an increase in the purchase price) has been held not to be clear intimation of acceptance (Vaswani v Italian Motors (Sales & Service) Ltd  2 HKC 753, at 762).
If the goods are delivered to the buyer, but he/she had not previously examined the goods, he/she is not deemed to have accepted the goods until he/she has had a reasonable opportunity to examine the goods for the purpose of ascertaining conformity with the contract and comparing the bulk with the sample for a sale by sample (section 37(2)).
Acceptance is also deemed where the buyer retains the goods but does not intimate to the seller that he/she has rejected the goods after a reasonable time has lapsed. What is a reasonable time is determined in conjunction with whether the buyer has had a reasonable opportunity to examine the goods (s 37(4) – (5)).
The mere fact that the buyer delivers the goods under a sub-sale or other disposition is not sufficient to amount to deemed acceptance (section 37(6)).
3. Payment: In the absence of express provision, by when must a buyer pay for the goods?
Unless otherwise agreed (and it is often otherwise agreed in the context of international sale of goods), the buyer must pay at the same time the seller makes delivery of the goods. Delivery and payment are described as ‘concurrent conditions’ (section 30 of the SOGO). Stipulations as to the time of payment, however, are not deemed to be of the essence unless a contrary intention appears from the terms of the contract. That is to say, late payment by the buyer would not normally be a repudiatory breach entitling the seller to cancel the contract (section 12 of the SOGO).
For an example of the parties expressly agreeing to a time of payment provision via documentary credit, and then subsequently agreeing to vary the terms of that provision, see Sinom (Hong Kong) Ltd v Swati International (Unreported, 30 May 2006, Court of Appeal, CACV 365/2005).
1. Classification Of Terms
1. Do your rules differentiate between warranties (breach of which only entitles the innocent party to damages) and conditions (breach of which also entitles him to terminate the contract), and if so what is the effect?
The differentiation between conditions and warranties in English law also exists under Hong Kong law.
For example, as mentioned above in section 8.4.1, the implied term that the seller’s goods must correspond with the description in a sale by description, is a condition. If the buyer finds that the seller’s goods do not correspond with the description, the breach of a condition allows the buyer to treat the contract of sale as having been repudiated, and reject the goods (section 13 of the SOGO).
The buyer may, however, elect to treat the seller’s breach as a breach of warranty instead and sue for damages arising from the non-correspondence with description (see, eg, AB Hellenic v Au Sing-Man trading as Foreign Manufacturers Company  HKLR 697).
2. In English law, we also have the concept of intermediate (or innominate) terms. Breach of such terms may have differing effects depending on the gravity of the consequences of the breach. Do you have a similar concept under your system?
Hong Kong law shares the concept of intermediate (or innominate) terms with England & Wales, as well as other common law jurisdictions. For example, see Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd  2 HKLRD 309, which followed the English Court of Appeal’s landmark decision in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (The Hongkong Fir)  2 QB 26.
2. Exemption Clauses
1. Do your courts recognise exemption (ie, exclusion) clauses, such as force majeure?
The common law doctrine of frustration of contract applies where some supervening event makes performance of the contract impossible, illegal, or something radically different from what the parties originally envisaged. In such circumstances, there has been no breach by either party, and the contract is treated as discharged.
The force majeure clause is a form of contractual risk allocation provision which circumvents the operation of the doctrine of frustration. Freedom of contract allows force majeure clauses to be broader in scope and more flexible than the doctrine of frustration.
See Euramin SA v Shangxiang Minmetals Limited (Unreported, 25 March 1997, Supreme Court, Findlay J, 1994, No. A 10274) where the defendant/seller unsuccessfully argued that floods in the PRC had frustrated its contract to sell antimony to the buyer CIF Rotterdam. The defendant then attempted to argue that the plaintiff’s/buyer’s indemnity claim was uncertain because the sub-sale contract between the plaintiff and the sub-purchaser contained a force majeure clause. The defendant suggested that the plaintiff’s alleged loss regarding the indemnity claim was not a given because the plaintiff could rely on the force majeure clause in response to a claim brought by the sub-purchaser. This also failed because the force majeure clause was not drafted widely enough to be triggered – the plaintiff was still obliged to source antimony from the market under the sub-sale contract, notwithstanding the fact that the defendant had not supplied to it.
Exclusion and/or limitation of liability clauses are also recognised by the Hong Kong courts, but they are subject the statutory restrictions, namely under the Control of Exemption Clauses Ordinance (Cap. 71, ‘CECO’), which is based on the UK’s Unfair Contract Terms Act 1977.
2. What are the key requirements for relying on an exemption clause?
In the sale of goods context, it is not possible for the seller to exclude his/her undertakings as to title, freedom from incumbrances and quiet possession (section 11(1) of the CECO).
The implied conditions regarding correspondence with description or sample, merchantable quality and fitness for purpose cannot be excluded for consumer sales (section 11(2) of the CECO). For non-consumer sales, the implied conditions can be excluded, but only so far as the exclusion term satisfies the requirement of ‘reasonableness’ (section 11(3) of the CECO). The burden is on the person relying on the exclusion clause to prove its reasonableness (section 3(6) of the CECO). Schedule 2 to the CECO sets out the statutory guidelines for the application of the reasonableness test. The relevant considerations for the court or tribunal are:
- the respective bargaining strengths of the parties;
- whether the customer was induced to agree to the term, or in accepting it had an opportunity to enter into a similar contract with someone else without such a term;
- whether the customer knew or ought to reasonably to have known of the existence and extent of the term;
- where the term excludes or limits liability if some condition is not met, whether it was reasonable to expect compliance with that condition; and
- whether the goods were manufactured, processed or adapted to the special order of the customer.
In May Tik Decoration Co Ltd v Ronacrete (Far East) Ltd (Unreported, 29 April 2009, District Court, Deputy Judge K Lo, DCCJ 384/2005,  HKEC 670)), an adhesives vendor had an exclusion clause in its standard terms and conditions which stated ‘The Company shall not accept any responsibility whatsoever towards the Customers or any other person whatsoever for any injury loss or damage to property caused by the Products sold or arising in any way from the use there of’. The court held that taken in isolation, this exclusion clause would apparently exclude all liability for the seller, and would definitely fail the reasonableness test in the CECO. The court, however, pointed out that the correct interpretation of the contract, which also required the buyer to undertake to use the adhesives in strict compliance with the seller’s instructions, meant that the exclusion clause was only an attempt to exclude liability in the event that the buyer failed to follow the seller’s instructions when using the adhesives (at paragraphs  – ).
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