Hong Kong Contract Liability Limitations
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Limitation of Liability by Contract
Hong Kong Contract Liability Limitations
In Hong Kong, the freedom of contract allows parties to limit or exclude their liability, but this freedom is significantly restricted by statutory safeguards—most notably the Control of Exemption Clauses Ordinance (Cap. 71) (CECO).
If you are drafting or reviewing a contract governed by Hong Kong law, here are the key limitations and rules you should know.
1. Absolute Prohibitions (Non-Excludable Liability)
Under Section 7 of the CECO, certain liabilities cannot be excluded or restricted at all:
Death or Personal Injury: A contract term cannot exclude or restrict liability for death or personal injury resulting from negligence. Any attempt to do so is legally void.
Title to Goods: In the sale of goods, the implied undertaking that the seller has the right to sell the goods (title) cannot be excluded.
Fraud: Under common law, you generally cannot exclude liability for your own fraud or dishonesty.
2. The "Reasonableness" Test
For other types of loss (such as financial loss or property damage), a limitation clause is only enforceable if it is "fair and reasonable." This applies specifically to:
Negligence: Liability for loss or damage to property caused by negligence.
Standard Form Contracts: When one party deals on the other's written standard terms of business.
Consumer Contracts: When a person deals as a consumer.
How the Court determines "Reasonableness": The court looks at the circumstances at the time the contract was made, considering:
Bargaining Power: Was there a significant imbalance between the parties?
Inducements: Did the customer receive a lower price in exchange for accepting the limitation?
Notice: Was the clause brought clearly to the other party's attention (e.g., legible font, clear language)?
Insurance: Could the party seeking to limit liability have easily insured against the risk?
3. Common Limitation Mechanisms
Parties in Hong Kong typically use the following structures to manage risk:
Financial Caps: Limiting liability to a specific sum (e.g., "the total fees paid under the agreement" or a fixed HKD amount).
Exclusion of Indirect/Consequential Loss: Clauses that state the party is not liable for "loss of profit," "loss of data," or "indirect/special damages."
Time Limits: Shortening the period during which a claim can be brought (though this must also pass the reasonableness test).
4. Incorporation Requirements
A limitation clause is only effective if it is properly incorporated into the contract. This can happen through:
Signature: Signing a document containing the terms.
Notice: Giving "reasonable notice" before or at the time of the contract (e.g., prominent text on a booking form).
Course of Dealing: A consistent history of previous transactions where the terms were used.
Summary Table
Type of Liability | Can it be limited? | Legal Authority |
Death / Personal Injury | No (if due to negligence) | CECO s. 7(1) |
Property Damage | Yes, if Reasonable | CECO s. 7(2) |
Consumer Goods Quality | No (usually) | CECO s. 11 |
Standard Business Terms | Yes, if Reasonable | CECO s. 8 |
Fraud / Dishonesty | No | Common Law |
Note: If a clause is found to be "unreasonable" or attempts to exclude something prohibited by law, the court may strike down the entire clause, leaving you with unlimited liability.
Sample limitation of liability clause for types of contract, such as a service agreement and a sale of goods
When drafting these clauses for use in Hong Kong, it is crucial to include a "savings" provision—a phrase like "to the extent permitted by law"—to ensure that if one part of the clause is found to be unreasonable under the Control of Exemption Clauses Ordinance (CECO), the rest of the contract might still survive.
Here are two samples tailored for different commercial contexts.
1. For a Service Agreement (B2B)
In service contracts (like IT consulting or professional services), the focus is usually on capping liability relative to the fees paid and excluding "loss of profits."
Sample Clause:
Limitation of Liability
No Exclusion: Nothing in this Agreement shall exclude or limit liability for: (a) death or personal injury caused by negligence; (b) fraud or fraudulent misrepresentation; or (c) any other liability which cannot be excluded or limited by the laws of Hong Kong.
Financial Cap: Subject to Clause 1, the Service Provider’s total aggregate liability to the Client for any claim arising out of or in connection with this Agreement (whether in contract, tort, or otherwise) shall be limited to [100%] of the total fees paid by the Client in the twelve (12) months preceding the claim.
Exclusion of Certain Damages: In no event shall the Service Provider be liable for any: (a) loss of profits; (b) loss of business or reputation; (c) loss of data; or (d) any indirect, special, or consequential loss or damage.
2. For a Sale of Goods Agreement
In a sale of goods context, the seller wants to limit the remedy to "repair or replacement" rather than allowing the buyer to claim for business interruption.
Sample Clause:
Warranties and Liability
Limited Warranty: The Seller warrants that the Goods will be of merchantable quality. All other warranties, express or implied by the Sale of Goods Ordinance (Cap. 26), are excluded to the fullest extent permitted by law.
Exclusive Remedy: The Seller’s sole liability for Goods that fail to meet the warranty shall be, at the Seller’s option, to: (a) replace the Goods; (b) repair the Goods; or (c) refund the price of the non-conforming Goods.
Maximum Liability: Subject to statutory prohibitions, the Seller's maximum liability for any delivery of Goods shall not exceed the invoice value of those specific Goods. The Seller shall not be liable for any loss of production, loss of use, or any incidental or consequential damages.
3. Checklist for Enforceability in Hong Kong
To ensure these clauses stand up in a Hong Kong court, keep these "Reasonableness" factors in mind:
Highlight the Clause: Do not hide these terms in "fine print." Use bold text or a separate heading so the other party cannot claim they weren't aware of it.
The "Insurance" Argument: Courts often ask if the party limiting liability was in a better position to get insurance. If you are a small provider dealing with a large corporation, a cap is more likely to be deemed "reasonable."
Negotiation: If you can show the other party actually negotiated this clause (e.g., they asked for a higher cap and you agreed for a higher fee), it is almost certainly enforceable.
Summary Comparison
Feature | Service Agreement | Sale of Goods |
Primary Cap | Multiples of fees paid (e.g., 1x or 2x fees) | Price of the specific defective batch |
Common Exclusion | Loss of data/intellectual property | Loss of production/manufacturing downtime |
Statutory Link | CECO Section 7 (Negligence) | Sale of Goods Ordinance (Implied terms) |
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