Jonathan Gray and Geraint Ho discuss essential considerations that parties who wish to start litigation proceedings should bear in mind. While some are technical civil litigation issues, others might also involve commercial and reputation elements.
02:09 Initial assessment and contract terms
04:20 Variations and breaches of contract
08:36 Limitation or exclusion clauses
10:05 Jurisdiction and dispute resolution clauses
13:09 Limitation periods
15:05 Collecting evidence
17:54 Non-legal considerations
Tune in for Series 4 of The HIP Talks podcast: a series of discussions on legal issues hosted by Hugill & Ip Solicitors – an independent boutique law firm in Hong Kong providing bespoke legal services and exceptional client service to individuals, families, entrepreneurs and businesses, locally and internationally. Clients have diverse issues: some require immediate attention and speedy outcomes; others require the building of a long-term partnership between solicitor and client. In all situations and for all clients, Hugill & Ip provides clear practical advice to help achieve the best results. The firm has achieved outstanding recognitions in the most recent editions of the major legal directories, as well as remarkable results in the areas of Dispute Resolution, Corporate & Commercial, Trusts & Estates, Family, Employment & Business Immigration and Data Privacy.
Jonathan Gray 00:52
Hello, I’m Jonathan Gray, a litigation partner at Hugill & Ip.
Geraint Ho 00:56
And I’m Geraint Ho, an associate in the Litigation and Dispute Resolution team.
Jonathan Gray 01:00
In this podcast, we will be looking at initial considerations at the pre action stage when disputes first arise to assist in weighing the merits of various options, including whether or not to commence proceedings, and if so, where. Proceedings here might mean litigation or court proceedings or could entail arbitration proceedings. However, many of the considerations that we will be looking at will apply to both.
Jonathan Gray 01:29
While Commercial Disputes can cover many different types of claims, for the purposes of this discussion, we shall be focusing on contractual claims and matters that should be taken into consideration before commencing action. However, many of the considerations we’re talking about will also apply to other types of disputes.
Geraint Ho 01:49
Thanks, Jonathan. Most of the considerations we will be talking about apply most obviously to the parties with potential claims contemplating commencing proceedings, but many will apply equally to parties who may be defending potential claims. In most of not all cases, the decision to commence proceedings will require careful consideration.
Geraint Ho 02:09
Before launching into proceedings or considering defending potential claims, it is important that practitioners and clients make a careful assessment of all relevant matters, including to start with a thorough review of the facts surrounding your dispute to determine whether there is a valid claim to be brought.
Jonathan Gray 02:27
To this end, the very first step to take is to determine whether a contract exists in the first place. Contracts very often are in writing and signed by both parties, but this is not always the case. Contracts can be oral as well as a written or a combination of both. If in writing, they may be contained in formal contracts, in some cases, running too many pages, or recorded relatively informally, for example, in emails. But whatever form the contract takes, it is necessary to ensure that it satisfies all of the requirements for binding contract, including there being an offer, acceptance of such offer the intention to enter into a valid and binding contract. Certainty as to the contractual terms with sufficient consideration. In other words, that there was a valid and intentional offer made by one party, which has been accepted by the other party, in consideration of some form of payment, service or otherwise, that is enforceable in law. Such matters can be quite technical. For example, if you have an agreement that is partly written and partly oral, then even if you’re able to prove the existence of an oral contract, certain rules of evidence may operate to exclude such evidence in court. As such, it is important to seek legal advice in situations where the existence of a contract or the terms of a contract may not be clear or are ambiguous. It is also crucial to determine whether the contract has expired or whether there is a new or replacement contract, so that one does not make a claim based upon a contract that is already in effective or that has been superseded.
Geraint Ho 04:20
It is also important to check whether or not the contract has been varied. Even if the contract is in writing, variations could have been agreed orally, although some contracts may specify that any variations must be made in writing and signed by both parties before they become binding. Variations in writing will sometimes be found in supplemental agreements or side letters.
Geraint Ho 04:42
Many contracts are based on standard terms. There may be issues here over multiple versions of standard terms, or the contracting parties, each seeking to impose their own standard terms. This leads to what is often described as a battle of the forms and this entails ascertaining which standard terms prevail and are the terms upon which the contract ended up being based on. When it comes to oral contracts, it is, of course essential to understand precisely what the terms of the contract are that were already agreed. Sometimes this might be referenced to a previous course of dealing, either on the same or varied terms. In any event, it is important to locate the persons involved in making the contract and to ask them to tell you what happened and what was agreed in order to understand the agreed terms. For written contracts, some immediate considerations will be to check that it has been signed by both parties, whether or not there are any preconditions and if so, whether such preconditions have been met.
Jonathan Gray 05:39
Thank you, Geraint. Having ascertained the contract and its terms, when looking at potential claims, the next step will involve investigating whether there have been any breaches of the contract. This will usually require careful consideration of the contract’s terms. Some disputes may arise in relation to express terms of the contracts where it may be easier to see whether or not a breach has occurred. In many cases, however, there may be implied terms, and the dispute and potential claims may concern a breach or breaches of such implied terms. Some terms can be fairly readily implied. For example, an implied term that goods will be of merchantable quality, it may be less clear, however, whether other terms can or should be implied. Whether or not they should be implied into a contract may depend on various factors, including, for example, the industry concerned and previous dealings between the contractual parties. Having ascertained a breach or breaches it’s then necessary to consider whether such breaches are still continuing, and or whether such breaches have been rectified.
Geraint Ho 06:48
If it is ascertained that there is a breach or breaches of contract, whether as a potential claimant or potential defendant, the next consideration is what losses will flow from that breach. In some cases, for example, a breach of a contract involving nonpayment of goods or services provided may be quite straightforward. In other cases, there may be additional costs or liabilities incurred as a result of the contract or breaches for example, a loss of profits or penalties payable to third parties, following a failure to provide goods or services within a specified time. There may also be non-financial losses such as loss of goodwill or reputational damage. The party and breach may try to argue that it is not the one to blame or not wholly to blame for any breaches. For example, by arguing force majeure, which means unforeseeable events for which no party can be held liable, or contributory negligence by the plaintiff. If applicable, both of these should be considered. Many contracts will contain force majeure clauses, excluding liability, for example, for certain natural and unavoidable catastrophes, and even certain human actions such as armed conflict. Questions can arise about what is and is not foreseeable in a legal sense. A good example of this recently has been the foreseeability of pandemics post SARS and COVID-19, the latter of which in particular cause some issues and arguments about the context of force majeure. If the party in breach is raising contributory negligence as a defense, and this will need to be investigated and considered very carefully. Steps should be taken to understand the party’s respective obligations and the factual matrix in relation to any claims of contributory negligence.
Jonathan Gray 08:36
Thank you, Geraint. Now, some contracts may also seek to limit the amount of damages that may be recovered thereunder or exclude certain types of loss, or require claims to be made, say within a certain period of time. Such clauses are often called limitation clauses or exclusion clauses. Essentially, these clauses may limit or entirely exclude a party’s liability in the event of a specific type of breach. For example, a contract may provide that a party is not liable for losses which arise from a delay in delivery of goods, or it could impose a limitation on the amount of losses that are recoverable in the event that goods are lost or destroyed in transit, or require that any claims be brought within a specified period, which would typically be much shorter than the usual limitation periods under statute. The enforceability of such clauses will depend on the reasonableness of the clauses and the circumstances in each case, but such clauses are very often enforceable under Hong Kong law between two commercial parties. So, practitioners and clients should check the contract carefully to see if there are any such clauses or issues of this type. Of course, under common law, parties have an obligation to mitigate their losses and not do anything which would increase their losses, so this should also be clearly borne in mind.
Geraint Ho 10:05
Thank you, Jonathan. Now, assuming that a breach has in fact occurred, it is necessary to consider other terms in the contract before deciding to bring a claim to court. In particular, one should check whether the contract has governing law, jurisdiction and or any dispute resolution clauses. These are often the clauses that litigators will look for and review before anything else. Since a Hong Kong is an international financial and trading hub, it’s not uncommon for contracts to be governed by foreign law, and for foreign courts to have jurisdiction to hear disputes that involve parties and goods on an international level. The governing law clause, as its name suggests, sets out the law which governs the contract. It is one of the first clauses that a practitioner will look at in order to ascertain whether they are in a position to advise the client on the meanings and legal effects of the terms of the contract. Jurisdiction clauses sometimes called or included as part of dispute resolution clauses may designate specific courts or tribunals of specific countries as having jurisdiction in the event of a dispute, or they may impose alternative dispute resolution mechanisms on the parties for the resolution of disputes. For example, resolving disputes through arbitration or by way of an expert determination. The parties should therefore consider at the outset the appropriate forum for any claim. This might involve consideration of whether or not the jurisdiction can be challenged. For clients, if there is a foreign law or overseas element involved, or any other question or issue regarding the appropriate jurisdiction, they should speak to a solicitor and obtain legal advice.
Jonathan Gray 11:45
Yes, absolutely, Geraint. Commencing proceedings in the wrong jurisdiction or commencing litigation where the contract contains an arbitration agreement will very likely result in the jurisdiction being challenged, with the risk of the proceedings being struck out or stayed, or in the event that a judgment is obtained and the judgment then being unenforceable. If the contract has a dispute resolution clause, it’s very important to follow it in order to ensure that any judgment or award obtained is enforceable when it comes to the enforcement stage. Some clauses can contain what are called multi-tiered approaches to resolving disputes. For instance, prescribing negotiation, followed by mediation, and only then litigation or arbitration. Commencing litigation or arbitration without following the contractually mandated procedures will create problems, including cases being dismissed or stayed to require the parties to comply with the contractual requirements and or adverse costs orders made against the party in default. Likewise, commencing proceedings in the wrong jurisdiction, or litigation when the contract provides for arbitration will have similar consequences and – even if a judgment is obtained – may well result in the judgment being unenforceable when it comes to enforcement.
Jonathan Gray 13:09
Geraint, perhaps next you can speak about limitation periods.
Geraint Ho 13:14
Sure, Jonathan. Now, the position here is that the law provides that claims may not be brought after certain periods of time. These are limitation periods. These periods will vary depending on what kind of claim you’re bringing, and what the law governing your contract is. But for breach of contract under Hong Kong law, the limitation period is six years from which the date of the breach. When the six years have elapsed from the date of the breach, a defendant will have a complete defense to the claim, so it is very important to be aware of any limitation period issues. In many cases, where the dispute has just arisen and any breaches of contract only just occurred, limitation periods will not be an issue. However, in some cases, the dispute and or breaches may have occurred some time ago, which case it is very important to keep track of when any limitation periods expire. Here, parties will need to work out the nature of the dispute, the cause of action involved and the limitation periods applicable to the cause of action in question.
Jonathan Gray 14:16
Absolutely. And in cases where limitation periods are due to expire imminently, it may be possible to issue what’s called an endorsed writ. That is a writ simply endorsed with a very brief summary of the claims, rather than a fully pleaded statement of claim and file the statement of claim afterwards, in accordance with the relevant rules, pleading the full particulars of the claims. It is possible to amend pleadings after they’ve been filed and served. Care should be taken however, so far as amendments adding or substituting new courses of action are concerned. Such amendments may be allowed if the new course of action arises out of the same facts or substantially the same facts as a course of action in respect of which relief has already been claimed by the party applying for the amendment, but not otherwise.
Geraint Ho 15:05
Thank you, Jonathan. Now, regardless of the type of dispute, it is always important to investigate carefully and to collect and preserve all relevant information and evidence covering all matters which are or may be in dispute. Where applicable, this might include evidence about the existence or formation of the contract, any variations agreed and dealings between the parties, as well as evidence regarding the breaches and matters post breach. Such evidence includes not only hardcopy documents, but documents and information stored electronically, such as emails, computer files, soft copy documents, as well as any video or audio recordings. Another consideration here may be to identify what documents you might need to share with the other side at this early stage, and in order for them to make an informed decision on how to proceed. Clients should also be informed and warned that all documents relating to the subject matter of the dispute are potentially disclosable and courts may draw adverse inferences from documents being destroyed once the dispute has arisen and been acknowledged. The parties should also check whether they have any document destruction policies and ensure that these are halted. At the same time, practitioners and clients should take appropriate steps in relation to the creation of new documents, in particular, ensuring so far as possible that new documents are protected by privilege.
Jonathan Gray 16:31
Privilege is a very technical and fairly complex area of law, including questions of the different types of privilege, what can be protected by privilege, who can claim it and how it can be lost, which is outside of the scope of this podcast. There can be gray areas, for example, internal investigations may not necessarily be covered by privilege. However, it is definitely something that should be looked at early on, and proper protocols established to ensure that legal advice is properly protected, and privilege in privileged documents not waived or lost.
Geraint Ho 17:08
Besides ensuring the preservation of relevant documents, steps should be taken to identify relevant witnesses and to take down their evidence at an early stage. For corporate parties, the Human Resources team should be informed and appropriate flags or markers put down to give sufficient warning if potential witnesses give notice, or their employment is being terminated. When considering who your side might call as a witness also give some thought as to who the other side might call to give evidence. And one should also consider whether experts may be required, what expert evidence might be needed to support your case or to challenge the other side’s case. And also consider if it is worth getting a preliminary expert advice to properly assess the strengths and weaknesses of the case.
Geraint Ho 17:54
Now, Jonathan, do you have any non-legal considerations that you might want to talk about?
Jonathan Gray 17:59
I will next like to talk about commercial considerations because obviously, these will be of particular interest and importance to the client, in particular. And there are various factors to take into account when looking at this, including, firstly, the value of the claim: is the amount at stake really worth the time and energy required to continue the dispute, or commensurate to the legal costs involved? Bearing in mind that in most cases, there will always be some risk of losing and that even when a party wins and is awarded its own costs, they never recover 100% of the costs after they’ve been assessed. This can result in parties ending up bearing fairly significant amounts of their own legal costs, even if they win.
Jonathan Gray 18:48
Next, the ability of the other side to pay: check at the outset, whether the other side has the assets to pay any judgment or reward and/or costs. And check also whether such assets are located. How easy or difficult it might be to enforce the judgment or reward if the assets are located in another jurisdiction. Also, if you are a foreign plaintiff suing a Hong Kong defendant, you may be required to pay security to pay the Hong Kong party’s costs in the event that the foreign plaintiff loses. And this may involve paying money into court or providing an acceptable bond or guarantee.
Jonathan Gray 19:28
Finally, funding is there an insurance in place which might cover the potential claims or the defense? If so, there may be strict requirements and the terms of such insurance policies should be carefully checked. In Hong Kong, third party funding is currently only available for arbitration and not available for litigation except in very limited cases. Even if third party funding is available in theory, whether it is viable will depend on the size, nature and strength of the case.
Geraint Ho 20:02
Besides purely commercial considerations when considering and evaluating your strategy in relation to a dispute, very often there may be other considerations which in some cases will overlap with, or even outweigh the commercial aspects of a dispute, including, for example, regulatory issues, reputational or other sensitive issues. Now, breaches of contract may often give rise to regulatory breaches or issues, particularly for example, in certain industries, such as financial services, where the consequences of regulatory breaches – and this may involve reporting to the authorities – may be far more important than the commercial aspects of the matter. Clients might find themselves subject to or participating in or might anticipate potentially being involved in regulatory investigations arising out of the same matters subject to that commercial dispute. Here obviously, it is important to identify the primary objectives, which result in the regulatory aspects taking priority over the commercial aspects, and also to ensure that there is a consistent approach in terms of position where there are parallel litigation and regulatory proceedings. Another example might be data privacy breaches requiring reporting to the relevant regulatory authority and in Hong Kong, this is the office of the Privacy Commissioner for Personal Data.
Jonathan Gray 21:26
It is also important to understand if there are any sensitive issues which require careful handling, or any reputational issues. For example, documents referred to an open court, including in statements of claim, defenses, affidavits, or witness statements or other evidence are in the public domain and once in the public domain, are out of anyone’s control. So, you need to ask is this something that the business can withstand? The risks of disclosure of sensitive or confidential information, or the risk of adverse publicity may outweigh commercial considerations.
Geraint Ho 22:05
I will move on to talk about some pre action matters. In Hong Kong, a specific pre action protocol is prescribed only in personal injuries cases and is not required or mandatory for other types of claims. Nevertheless, even if not required in, for example contractual claims, before launching into litigation, a plaintiff should still consider writing a letter before action to the other side, setting out his case and demands and drawing attention to documents or matters to help the other side understand the plaintiff’s case. By the same token, responses from defendants to let these letters before action can help the plaintiff see things from the defendant’s perspective. Often it is difficult for the parties to see things from the other side’s perspective. But if they can, it can make it much easier to resolve issues, as this also enables lawyers to consider and analyze the issues before deciding whether or not to proceed. Sometimes clients can needlessly put pressure on their lawyers to issue proceedings as soon as possible. But this has the risk that some issues or considerations can be missed, and which may come back to bite you.
Geraint Ho 23:09
As far as correspondence is concerned, it is better to take a reasonable approach rather than engage in unnecessary posturing or playing tactical games are playing hardball for the sake of it or exaggerating claims. The courts might see this correspondence and a measured approach shouldn’t theory play out better than an unreasonable one. In particular, the court will not necessarily be impressed by parties playing tactical games.
Jonathan Gray 23:35
Thanks, Geraint. Pre action correspondence may and in many cases should open a dialogue with the other side, opening the door for negotiations to explore settlement. Parties can negotiate directly between themselves or – if they prefer – via lawyers. In order to have any chance of success however, it’s always better to negotiate realistically.
Jonathan Gray 24:03
An alternative to negotiation may be to consider mediation. Even though mediation is now more or less mandatory in litigation and is usually conducted as part of the litigation procedure in Hong Kong, it can be used for any type of dispute and conducted any time regardless of whether legal proceedings are already afoot or not. Depending on the nature of the dispute and the party’s objectives, there may be an advantage in attempting to resolve the dispute with the assistance of an independent, well qualified mediator before launching proceedings.
Geraint Ho 24:41
Thank you, Jonathan. I think that we have now covered the main pre action considerations when a dispute arises. Here I would just mention two further considerations. Firstly, if appropriate, consider getting specialist advice, if the case warrants it. Barristers or counsels can provide a useful sounding board when assessing the likelihood of a claim succeeding. Second, keep reviewing. Clients and practitioners will need to review and revisit the position regularly and check the strategy and reevaluate if necessary. New developments may arise throughout the case which may require a change in strategy and approach.
Jonathan Gray 25:20
Yes, and on a final note, regardless of the circumstances of any contractual dispute, the best way to manage potential disputes lies at the very beginning with the drafting of the contract. Contract drafting as a meticulous exercise, and a well drafted contract can save a lot of time and money in the event that a dispute arises.
Geraint Ho 25:42
That wraps up today’s podcast. Hopefully this has provided you with an understanding of some of the main initial pre action considerations when faced with a dispute. Thank you for your time, Jonathan.
Jonathan Gray 25:52
Thank you, Geraint.
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This podcast is for informational purposes only. Its contents do not constitute legal or professional advice.