Updated: Nov 6
More than 120 countries have made face coverings compulsory in public. There is no question that personal protective equipment plays a central role in our strategies to confront the global COVID-19 pandemic. In particular, facemasks have taken centre stage in helping to prevent the transmission of tiny, unseen viral foe that could be lurking around any corner. This has caused a surge in demand for facemasks amid a dramatic global supply shortage.
In a race against time since around January 2020, many businesses have sought to procure high volumes of facemasks, usually urgently across borders over email or instant messaging through intermediaries or with manufacturers directly without following strict contractual formalities. This has left many buyers in legal limbo, contemplating the harsh realities of jurisdictional complications, monetary recovery difficulties and warehouses full of ‘faulty’ or non-compliant facemasks (if these have even been delivered at all). With this article, Hill Dickinson Hong Kong aims to offer some direction to buyers who have encountered difficulties in sourcing masks during the pandemic, particularly where the masks purchased are ‘defective’ or non-compliant with the standards agreed between the parties. Was there a contract and what were the agreed terms? The first key question to ask is whether there was a legally enforceable agreement between the buyer and the seller, namely whether a party has expressed a final unequivocal intention to be bound to specific terms (offer) and the acceptance of the offer communicated by the other party (acceptance). Generally, the agreement must involve some valuable consideration in order to be legally enforceable. Once the specific terms of the contract have been ascertained (perhaps by meticulous examination of WhatsApp messages if there is no more formal contemporaneous documentation), it is important to identify whether there has been a breach of a contractual term. For example, where the facemasks that were delivered are alleged to be defective or inconsistent with the type or quality of the facemask as agreed between the parties, the aggrieved buyer is generally advised to obtain an expert’s report in writing that sets out the details of the defects or inferior quality. Given that facemask transactions may have been concluded in chaotic circumstances, it is imperative that all materials, such as communications, purchase orders and invoices, be preserved, as these may be material evidence in establishing the existence of the contract and the terms thereof. Once it is clear that the facemasks delivered are defective or of a standard that was not agreed between the parties, it is important to identify the target of the claim. Naturally, this would usually be the direct seller who contracted to supply the facemasks, although it is not uncommon for the direct seller to allege that it only acted as an agent of the buyer and thus should not bear any responsibility for the defective facemasks. Also, the causes of action against any third party manufacturer or seller further up the supply chain must also be considered. However, it is generally difficult to successfully claim against a third party since there was no direct contract and proving a claim in negligence requires satisfying different (and more difficult) hurdles. Governing law and appropriate forum to handle the dispute Once the existence of a contract and the terms thereof are clear, the next step is to determine (i) which country’s law is the governing law of the contract (‘governing law’ or ‘proper law’), and (ii) which jurisdiction’s legal system (‘forum’) is the most appropriate forum to decide the dispute between the parties. A breach of a contract in one country may not necessarily mean that it is also a breach in another country. These are very common issues when the parties to a contract are situated in different countries and where negotiation and conclusion of the contract took place over electronic communications. The first step is to consider whether the parties have expressly agreed in the contract on the governing law and/or forum. In the absence of a clear agreement, then the following non-exhaustive factors are usually considered in determining which system of law the contract had its closest and most real connection. Governing law
Place of intended performance
Place where the contract was made
Governing law of any related contract
Place where negotiations were conducted
Place where payment was to be made
Place of the currency of the contract
Place of the legal terminology of the contract
Place where the parties are domiciled or resident; and
Place of the language of the contract
Clearly, there are many potential connecting factors that must be weighed against each other. Some factors carry greater weight than others and thus it is not as simple as merely counting the factors in favour of the two competing places with the winner being the one with the most factors in its favour. Forum For the trial to take place in Hong Kong, the Hong Kong court will have to accept that Hong Kong is the natural and appropriate forum for the trial and there is no other available forum which is clearly or distinctly more appropriate than Hong Kong. If there is another available forum, the court will then consider if a trial at the other forum will deprive the claimant of any legitimate personal or juridical advantages. If the answer to the second question is yes, a court has to balance these considerations having regard to whether justice will be done in the available appropriate forum. The governing law and forum are important considerations as they could lead to different interpretations of contractual terms, whether there was any breach thereof, increased legal costs in fighting for a favoured jurisdiction, strike out of an action, adverse cost consequences and security for costs being payable by a foreign party. What recourse is there against suppliers of defective masks? Interim remedies for scam While due diligence is always advised before conducting commercial transactions, especially amid such unprecedented hard times, it is increasingly difficult to guard against unscrupulous fraudsters who seize every opportunity to capitalize during global crises. Although this article focuses on contractual disputes relating to the quality of facemasks delivered, we will discuss the recourse in scam situations briefly, such as where monies were paid to a seller who then absconded with the funds. If you are involved in a scam you should consider making a report to the Hong Kong Police as soon as possible. The Hong Kong Police may issue a ‘no consent’ letter to the bank account held by the fraudster. In practice, this could lead to the freezing of the fraudster’s bank account. It is also possible to apply for an injunction to prevent the dissipation of assets by the fraudster and for disclosure to trace second-level recipients of the stolen funds. However, where the facemasks were actually delivered (albeit at a quality below what was agreed), the situation is likely to be more complicated. For example, in the absence of evidence of commercial immorality or dissipation of funds by the supplier, there are difficulties in obtaining an asset-freezing injunction. Civil action to recover the funds paid Firstly, where the claim concerns the recovery of a specific figure of at least HK$10,000 over a relatively simple undisputed set of facts, a creditor could consider evoking its statutory right to wind up a company (or to petition for the bankruptcy of a natural person) if the debtor is unable to pay its debts. In practice, the inability to pay debts is often evidenced through, inter alia, a creditor issuing a written demand for the payment of the debt that then remains unpaid for at least three weeks. However, it must be borne in mind that this procedure is not appropriate where there is bona fide dispute of the alleged debt. If the particular set of facts are disputed, the creditor could face challenges by the debtor who may apply for an injunction to prevent progress at winding up proceedings on the basis that the debt is disputed. Where the claim is unliquidated or where damages are sought, the standard writ process in the District Court or the High Court (depending on the claim amount) should be followed. The claimant should commence legal proceedings by way of issuing and serving a Writ of Summons on the defendant, who will then have to acknowledge service and to file a Defence within specified time limits. This judicial process will give both parties the opportunity to state their case in writing and to facilitate the disclosure of documents material to the dispute. This may even encourage the defendant to bring third parties (such as the manufacturer of the defective facemasks) into the action as a third party co-defendant in order to apportion any liability. Alternative Dispute Resolution Given that the cost of litigation is generally high, the Hong Kong legal system encourages the use of alternative dispute resolution such as mediation and arbitration to encourage parties to settle out of court. For example, parties may voluntarily submit to mediation whereby a mutually appointed third party guides the parties towards a mutually acceptable agreement. However, the mediator is not given any power to impose or force a settlement. In contrast, in arbitration the arbitral tribunal (appointed by mutual consent of the parties or by the institution facilitating the arbitration) decides the dispute and issues an award that is final and binding, and which is enforceable in a manner similar to court judgments. Arbitration can only take place by mutual agreement of the parties and such agreement is usually a part of the primary contract and reached before any dispute has arisen. The Hong Kong government has launched the COVID-19 Online Dispute Resolution Scheme whereby parties may attempt to resolve their dispute within a limited time through negotiation first, then mediation and subsequently arbitration. This scheme covers pandemic-related disputes amounting to not more than HK$500,000 and one of the parties must be a Hong Kong resident or company. The abovementioned legal processes might lead to the following outcomes:
The direct seller agrees to settle the dispute, such as by returning the full or partial funds paid by the aggrieved buyer.
The direct seller agrees to make a contribution to the buyer’s claim in return for a release from further liability and/or to assist the buyer in pursuing claims against the third party factory.
The director seller does not respond or co-operate in any way, and the buyer would have to try to recover its losses through commencing civil action. The seller may claim to be an innocent victim of sharp practice by the third party manufacturer, and that it acted as an agent of the aggrieved buyer and hence it should not bear the risk of the facemasks being defective.
As can be seen, there are a plethora of considerations for a hopeful buyer who has suffered loss in a faulty-facemasks transaction. Since the start of the pandemic, Hill Dickinson Hong Kong has represented and advised numerous buyers and sellers in the recovery of funds paid to sellers in relation to non-delivery of facemasks and delivery of defective facemasks. In order to ascertain your legal rights and to assess the strength of your case, it is highly recommended that you seek legal advice if you are involved in a faulty-facemasks transaction.
For further information, please contact: Damien Laracy, Partner, Hill Dickinson Hong Kong firstname.lastname@example.org Nicole Wong, Associate, Hill Dickinson email@example.com