Much has been written recently about perceived changes in the application of criminal law and national security law in Hong Kong. We do not address those issues in this article.
Rather, there is an impending development in Hong Kong commercial law that demonstrates that Hong Kong continues to adopt established global commercial law practices and conventions. That is to say, the UNCITRAL Convention on Contracts for the International Sale of Goods, also commonly known as the Vienna Convention, will come into force in Hong Kong on 1 December 2022 as a schedule (“Schedule”) to the soon-to-be Sale of Goods (United Nations Convention) Ordinance (Cap. 641) (“New Ordinance”).
Below we analyse the practical legal effect on contracting parties under four scenarios.
After 1 December 2022, parties to international sale of goods contracts governed by Hong Kong law may:
a. Expressly disclaim any application of the Vienna Convention / New Ordinance, in which case the current Sale of Goods Ordinance (Cap 26) (“SOGO”) may continue to apply to their bargain without variation – i.e. as it does now. This is permissible under Article 6 of the Convention; or
b. Be silent in their contract as to what Hong Kong sale of goods legislation governs their arrangement. Under this scenario, the Vienna Convention automatically applies to the sale contract, as the Convention has the force of law in Hong Kong by virtue of the New Ordinance; or
c. Expressly adopt, or “cherry pick”, only certain Articles or principles of the Vienna Convention, in which case those Articles or principles will apply as a function of freedom of contract. This is possible as Article 6 of the Convention allows the parties to “derogate from or vary the effect of any of its provisions”. To exercise this option, however, clear and unambiguous language is necessary; or
d. Specifically stipulate that the Convention is applicable, or adopted in full. If they do this:
i. the parties will be subject to an assumption that they agreed to contract in “good faith” (Art 7) – a concept not commonly seen in Hong Kong commercial law (aside the doctrine of “uberrimae fides”, or utmost good faith, in Insurance Law).
Article 7 provides (underlining added):
“(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.
(2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.”
ii. They will also be deemed to contract on terms consistent with custom and usage (Art 9(2)). When a dispute arises, this may result in:
– Additional reliance on expert evidence on the prevailing market practice; and
-Less need to argue about “commercial efficacy” and implied terms.
Article 9 provides (underlining added):
“(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.
(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.”
In terms of construing a contract to which the Convention applies:
a. The parties’ clear and express intentions, as recorded in their contract, remain paramount. For example, a “time is of the essence” provision is unlikely to be softened by the terms of the Convention;
b. However, if there is any ambiguity as to their intentions, a Court or arbitrator is to adopt a subjective test for assessing intention (Art 8(1)). The prerequisite nevertheless is that the other party must be aware of this intention. To assess the other party’s awareness, a certain degree of objectivity is introduced as reasonableness (Art 8(2)) and circumstantial evidence will all become relevant (Art 8(3)). This represents a very different approach to the contractual interpretation approach currently applied by Hong Kong Courts; that is, the Court must always look to the words of the contract, regardless of how tempting it may be to introduce extraneous evidence to assist with interpretation or construction (See for example: Sinoearn International Limited v Hyundai–CCECC Joint Venture (a firm) FACV No.22 of 2012, September 30, 2013, as per the Hong Kong Court of Final Appeal).
Article 8 provides (underlining added):
“(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware that that intent was.
(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.
(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.”
c. As foreshadowed earlier, duties of good faith and recourse to usage will also be relevant in determining whether a breach has actually occurred.
After 1 December 2022, there may be a learning curve for Hong Kong lawyers practising international trade law, and for the Judiciary, given the potential for more widespread relevance of concepts of “good faith” and “usage”. Those concepts may require increased recourse to expert evidence in international sale of goods disputes.
The Convention may however also bring with it increased efficiencies. For example, the operation of Article 9 (parties deemed to be bound by customary practices usages) may obviate the need for legal submissions in Court about “commercial efficacy” when a Judge is considering whether to imply terms regarding the relevance of custom, practice and usage.
What is certainly clear however is that, with 95 countries globally already signatories to the Convention, the optionality provided by Hong Kong’s embrace of the Convention’s civil law attributes brings us closer to international trade norms.
Amongst the exceptions to Hong Kong’s trading partners that have signed on to the Convention are England and India. The mainland China has been a signatory since 1988. Singapore has been a signatory since 1980, rectifying the Convention in 1995.
We submit that the adoption of the Convention in Hong Kong evidences the willingness of Hong Kong’s legislature to continue to respect and adopt global commercial law norms.
For further information, please contact:
Damien Laracy, Partner, Hill Dickinson