Late payment interest
Late payment interest is not regulated by law and remains a matter of negotiation between the contractual parties. Therefore, failure to clearly state the parties' common position regarding late payment interest in a contract could complicate the debt collection process. In fact, many trades involve no written sales contracts and would in practice rely mainly on purchase orders, email orders or verbal orders which normally do not include a late payment interest clause.
Similarly, debt collection costs cannot be charged to the debtor unless a contractual agreement clearly mentions this possibility. In practice, collection costs are seldom paid by the debtor.
Orchestrated negotiation first
Although Hong Kong courts are reliable and swift in dealing with business claims, it is advisable to first consider amicable settlement opportunities as an alternative to formal proceedings. Indeed, although the law does not designate conciliation or mediation as prerequisites to formal legal action, in practice the courts increasingly encourage parties to have Alternative Dispute Resolution methods prior to commencing lawsuits. In fact, the courts also tend to impose financial sanctions on any party unreasonably refusing to undergo formal negotiation processes.
The legal system of Hong Kong is based on the British Common Law. Business claims tend to be settled efficiently, but courts can differ due to amounts at stake. Claims not exceeding HK$50,000 would fall under the jurisdiction of the Small Claims Tribunals, which usually treat claims quickly, informally and at a low cost insofar as legal representation is simply not available. Claims up to HK$1,000,000 would rather be treated by District Courts, whilst High Courts would deal with the largest commercial claims (intellectual property, real property, contract breaches, insolvency, insurance, etc.) in excess of HK$1,000,000. Since 2009, the Rules of the High Court have been improved to reduce complexity, delays and costs in civil litigation proceedings. Hong Kong finally has a Closer Economic Partnership Arrangement (CEPA) free trade agreement, as well as a Double Taxation Avoidance Agreement with Mainland China.
Having said this, legal dunning ought to start by serving a Writ of Summons recalling to the debtor its obligation to pay the principal together with late payment interests (as contractually agreed). Once served, the debtor may agree to settle the debt or decide to file a defence. In this case, the claim will be considered more extensively through formal legal proceedings. Ordinary legal action in Hong Kong is effective and fairly reasonable in terms of costs and timing, but it should only commence when amicable collection has failed. As previously mentioned, indeed, the judges increasingly encourage mediation in order to solve disputes 'Out-of-Courts', and tend to impose cost sanctions to parties which unreasonably reject amicable negotiation. Once summons are served to the debtor, the latter must acknowledge it within 14 days and bring a defence within 28 days. This process based on the exchange of a series of written claims and counterclaims between the parties may lead to a compromise, otherwise the claimant may request the court to take on a case management role and hearings shall be organized. Failure to bring a defence however entitles the claimant to request a default judgment, and summary judgments may also be available when the case is not disputed. The courts would usually order remedies in the form of damages, specific performance, injunctions, declarations, etc. Punitive damages are very rarely awarded.