No matter how careful or prudent your financial management, it is almost certain that you will eventually become involved in a financial dispute. That is, a dispute as to money and, in particular, who should be paying whom and how much. There are a number of common problems that arise in relation to financial disputes. Some of the most common problems and how they can be avoided are set out below.

Rights that are unenforceable in Hong Kong

Whilst many financial disputes are resolved by negotiation, it can often become necessary to enforce your rights (or threaten to do so). However if those rights can only be enforced in a place advantageous to your opposing party then this can be a significant disadvantage and a "Negotiation weak point."

Most businesses in Hong Kong have trading partners in many different countries. Some of those countries have well established legal systems, which will enforce a judgment from the Hong Kong courts and in which we can be confident of fair and equal treatment.

There are however a number of countries that will not recognize a judgment from the Hong Kong courts and in which we cannot always be confident of fair and equal treatment. One of these countries is, of course, our major trading partner -- Mainland China.

When engaged in trade with the Mainland (or other countries where you may have similar concerns) the problem or disadvantage described above, can be avoided by contractually providing for disputes to be resolved by Arbitration in Hong Kong. Unlike a judgment for the Hong Kong courts, a Hong Kong Arbitration award is enforceable in Mainland China.

Standard contractual provisions and other related information (in Chinese and English) can be found at www.hkiac.org, the Hong Kong International Arbitration Centers Web site. It will not be difficult to work a standard arbitration clause into your standard contractual documentation.

Standard terms and conditions do they apply?

Many businesses have a set of (usually favorable) standard terms and conditions, which are often printed on the reverse of purchase order and/or invoice documentation.

Problems often arise either because:

1. a business mistakenly assumes that its standard terms and conditions are applicable; or
2. a business does not realize that the standard terms and conditions of another party are applicable; or
3. both parties to the transaction have documentation with standard terms and conditions and nobody knows which terms apply.

As standard terms and conditions often contain provisions as to the fundamental obligations of payment, delivery, quality and warranties etc, any confusion as to application can result in an overly complicated dispute. At the very least these complications can lead to delays but they can often also effect the substantive outcome.

Problems as to the applicability of standard terms and conditions can, in the main, be prevented by the adoption of some minor extra generic language in the contract / order documentation and procedures.

For example: "By accepting this purchase order, seller agrees the standard terms and conditions overleaf will apply to this transaction [to the exclusion of any other standard terms and conditions]."

The company that we did business with doesn't even exist!

With increasing regularity businesses are being duped into entering a transaction with a fictitious company. When this occurs a business is left with little or no ready means of redress.

Problems of this kind can be avoided by conducting a little due diligence on all new business partners. The extent of your due diligence will depend upon circumstances, such as the amount of the likely transaction(s), the payment terms and the location of your new partner.

At a minimum, prior to entering any transaction which involves reliance on a new business partner, checks should be made to ensure that the new partner actually exists in the form and with name, which you intend to contract with.

There are a number of companies in Hong Kong which can provide this type of basic due diligence on companies in Hong Kong and China.

The costs of any recovery action would have exceeded the amount due

In transactions for relatively small amounts (which are nonetheless important to the cashflow of any business) it can be difficult to undertake recovery action on a cost effective basis. That is the costs of instructing lawyers to take action can be more than the amount due.

In this situation you may wish to consider mediation (mediation is also suitable for disputes involving larger amounts). Mediation is a voluntary, non-binding private dispute resolution process in which a neutral person helps the parties to reach a negotiated settlement. The advantages of mediation are that it:

• creates a supportive and constructive environment
• enables the parties to control the outcome of their dispute
• promotes communication between the parties
• uses time efficiently
• is cost effective
• is a confidential process
• helps to teach the parties an effective way of resolving disputes through co-operative decision making
• is not an imposed settlement

Mediation can be made a mandatory first step in any dispute resolution process by including a contractual term to that effect. Alternatively, mediation can occur at any time all parties to the dispute agree to participate. More information about mediation can also be found at www.hkiac.org.

Conclusion

There are a multitude of problems that can befall a company involved in a financial dispute. Some of the most common problems are outlined above together with some suggestions that may help you to avoid those problems. Of course, prudent financial management always has been and always will be the best way to avoid financial disputes.