On 29 September 2021, the Sale of Goods (United Nations Convention) Ordinance (Cap. 641) (“Ordinance“) was passed by the Legislative Council and will come into operation on a day to be appointed by the Secretary for Justice by notice published in the Gazette. Following the passing of the Ordinance, it is anticipated that the United Nations Convention on Contracts for the International Sale of Goods (“Convention“) will have the force of law in Hong Kong between March and June 2022, depending on the date of commencement of the Ordinance.
The Convention is intended to promote trade between civil law and common law jurisdictions by way of uniform rules on sale of goods. By adopting a unified and laymen-friendly set of rules widely used by various jurisdictions, the implementation of the Ordinance is expected to bring certainty to contracts with parties in other signatory jurisdictions.
Key takeaways
- Once in operation, the Ordinance will apply under either of the following circumstances to international sale of goods contracts between private businesses:
- Where the places of business of one or both contracting parties are situated in signatory jurisdictions of the Convention
- If the rules of private international law lead to the application of the law of one of the signatory jurisdictions
- The Ordinance differs from the Sales of Goods Ordinance (Cap. 26) and the common law in certain aspects, such as with regard to using oral evidence to prove the terms of a contract of sale, what constitutes an acceptance of offer, and wider remedies available to buyers. Businesses should pay special attention to their conduct and oral dealings with counterparties during their negotiations, as any oral representations may be binding and form part of the contract.
- Businesses entering into applicable sale of goods transactions should seek assistance and review the Convention to assess whether the rules are preferred for their contracts, and if circumstances require, consider opting out from the operation of the Convention. Although the Convention is said to be “pro-seller,” it also gives buyers a wider range of remedies in Hong Kong.
- Businesses shall note that the Ordinance does not apply to transactions between Mainland China and Hong Kong contracting parties. In that regard, parties should be aware that different considerations will apply in the relevant pre-contractual negotiations.
In more detail
The Convention governs contracts for international sales of goods between private businesses, and covers the rules on formation of such contracts, as well as the obligations and rights of buyers and sellers. Contracts that are excluded by the Convention[1] include those relating to sales of goods by auction and sales of ships, vessels, aircraft or electricity. The Convention also does not apply to international sales of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use.
As at the end of June 2021, 94 jurisdictions are already party to the Convention, including six of the top 10 trading partners of Hong Kong (such as China, US, Japan and Singapore) by total volume of trade. Following the commencement of the Ordinance, provisions of the Convention will prevail over domestic law, unless such issues are not determinable by the provisions in the Convention. However, parties are free to “opt-out” the operation of the Convention or derogate from or vary the effect of any of the provisions, as provided for under Article 6 of the Convention.
The Ordinance does not apply to transactions between businesses in Mainland China and Hong Kong, nor does it apply to Hong Kong domestic contracts. The HKSAR government plans to initiate discussions with the Central People’s Government to negotiate an arrangement for the mutual application of the Convention; as at the time of writing, however, such arrangement has not been finalized.
Below are some of the key features of the Convention, which businesses may need to consider ahead of the implementation of Ordinance:
1. Oral evidence in proving formation or variation of contracts
- Pursuant to Article 11 of the Convention, a contract of sale does not need to be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proven by any means, including witnesses. Given the express permission to allow “any means” to prove a contract, the parol evidence rule (i.e., presumption against using extrinsic evidence to prove the existence of a contract) would not apply.
- Similarly, under the Article 29 of the Convention, a contract may be modified or terminated by the “mere agreement” of the parties without any further requirement as to form, which may be an oral agreement or conduct, unless a contract in writing contains a provision requiring any modification to be in writing.
- To mitigate any uncertainty as to what might constitute part of the contract, businesses should consider including an “entire agreement” clause in their contracts to show that the terms stated in the contract represent the entire bargain between the parties, and that all previous representations made by the parties shall not form part of the contract. Further, to avoid disputes on variation of the contract, parties shall consider stating in the contract that the terms cannot be amended by the parties unless by written agreement (i.e., a “non-oral modification” clause).
2. Rules on acceptance
- The rules on acceptance are also different from the position under Hong Kong law.
- Firstly, pursuant to Article 19(2) of the Convention, if a reply to an offer includes an additional or a different term that does not materially alter the terms of the offer, unless the offeror objects to the altered term “without undue delay,” the contract will be concluded on the terms of the offer and the modifications contained in the reply. Any modification that relates to additional or different terms to price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability or settlement of disputes, will be regarded as material.
- Article 19 of the Convention departs from Hong Kong law, where the offeree is generally taken to have accepted the entire terms offered by the offeror once it delivers its acceptance. What constitutes “delay” remains to be tested (previous case law held under the Convention suggests that a five-day delay was too long for a Chinese-Swedish sales contract concluded by fax). Therefore, parties should act promptly in reviewing the “acceptance” given by the offeree and shall object to any additional term at the earliest opportunity.
- Also, under Article 21(1) of the Convention, a late acceptance of an offer is nevertheless effective as an acceptance if without delay the offeror orally informs the offeree or dispatches a notice to that effect. There is no equivalent rule in Hong Kong.
- As the deadline for acceptance of offer may be extended so long as the offeror orally informs the offeree, businesses may have to pay special attention to the oral dealings with a counterparty during pre-contractual negotiation, and avoid giving representation in relation to extension of time for acceptance of offer. Similarly, to preempt claims of a late acceptance to be treated as a valid acceptance, prudent parties may also wish to consider sending a formal notice to the offeree, notifying that the offer had already lapsed and that any further communication would not be treated as an acceptance.
3. Remedies available to buyers
- One of the objectives of the Convention is to “keep the contract alive” and hence, the Convention is designed to avoid economic waste inherent in any rejection of goods in an international sales context. In reality, as wastage would occur mostly when the buyer refuses to accept the products, the Convention has included some terms that are said to be “pro-seller.” Depending on the bargaining position, a buyer may need to pay special attention to the features below to decide whether to “opt-out” from the Ordinance.
- Under the Convention, a contract can only be “avoided” (i.e., parties are released from their contractual obligations) under two situations:
- Where the failure of a party to perform the contract is “fundamental“: According to Article 25, this is defined as a situation where a party will be substantially deprived of what they are entitled to expect under the contract, unless the result was neither foreseen by the party in breach nor by a reasonable person. In the consultation paper prepared by the Department of Justice, it is noted that in practice, fundamental breaches by sellers are “very rare” under the Convention.
- In case of non-delivery: This is when a seller does not deliver the goods within the additional reasonable period of time fixed by the buyer, or if the seller declares that it will not deliver within the extended period.
- In case of non-delivery: This is when a seller does not deliver the goods within the additional reasonable period of time fixed by the buyer, or if the seller declares that it will not deliver within the extended period.
- Further, if the buyer wishes to make a complaint on the basis of non-conformity with the contract, then under Article 39 of Convention, the buyer must give notice to the seller specifying the nature of the lack of conformity within a reasonable time after the buyer has discovered it or ought to have discovered it. In any event the notification must be within two years from the date on which the goods were actually handed over to the buyer. It remains to be seen how the Hong Kong court would interpret “reasonable time” under Article 39. However, some overseas courts have interpreted this to be a few short weeks only, despite the ceiling of two years.
In summary, the Ordinance gives a buyer a wider range of remedies in Hong Kong than it otherwise would have had. For example, the buyer may require delivery of substitute goods, require the seller to repair the defective goods, or ask for a price reduction in the same proportion as the value of the goods actually delivered. Such remedies are more in line with common commercial practices and were not previously available to the Hong Kong courts. This adds to the benefits of selecting Hong Kong law as the governing law and facilitates the resolution of disputes in Hong Kong.
[1] Article 2
