Current Legal Developments in


Hong Kong and China




April 2015





A l l  r i g h t s r e s e r v e d ©  L o r e n z  & P a r t n e r s 2 0 1 5


Although Lorenz & Partners always pays great attention on updating information provided in newsletters and brochures we cannot take responsibility for the completeness, correctness or quality of the information pro-vided. None of the information contained in this newsletter is meant to replace a personal consultation with a qualified lawyer. Liability claims regarding damage caused by the use or disuse of any information provided, in-cluding any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated de-liberately or grossly negligent.



In the following Newsletter we would like to inform you about the latest legal develop-ments in Hong Kong and Mainland China. The main focus of this newsletter are the re-cent developments in Arbitration and the rights in regards to Intellectual Property Law.


  • Arbitration


  • New HKIAC Procedures


The Hong Kong International Arbitration Centre (“HKIAC”) has introduced the new

HKIAC Procedures for the Administration of Arbitration under the UNCITRAL Arbi-tration Rules, effective as of 1 January 2015. The new Procedures provide a system that conforms to all versions of the UNCITRAL


Arbitration Rules, superseding the HKIAC’s previous procedures for the administration of arbitrations under the UNICITRAL Arbi-tration rules.


The key highlights of the new procedures are:


  • Serving Notice of Arbitration and Response to the Notice of Arbitra-tion


According to Articles 6 and 7, a party who wants to initiate recourse to arbitration must submit a notice of arbitration to the HKIAC and to the other party. The other party has to file a response to the HKIAC and to the other party within 30 days.


  • Procedure for Challenging Arbitra-tors


Article 10 allows the HKIAC to decide over a challenge of an arbitrator in accordance with the procedures in the applicable prac-tice note. The practice note stipulates details such as how and when a challenge must be


made, the need for payment of a registration fee, how the parties and the arbitrator may respond and that HKIAC is under no obli-gation to give reasons for its determination when it decides whether to allow or reject a challenge.


  • HKIAC’s Prima Facie Power to Pro-ceed


When there is a challenge to the existence, validity or scope of the arbitration agree-ment(s) or to the competence of the HKIAC to administer the arbitration, the HKIAC can accept an arbitration proceed if it is satisfied that – prima facie – an arbitra-tion agreement may exist.


  1. d) Deposit of Costs


The parties need to deposit an equal amount to the HKIAC as an advance for the costs of the arbitration and may be requested by the HKIAC to make further deposits.


  1. e) Exclusion of Liability


According to Article 19 certain parties are not liable for any act or liability in connec-tion with the arbitration, except for dishon-est acts or omission. These parties include the HKIAC, its personnel, other bodies des-ignated by the HKIAC, the arbitral tribunal itself, any tribunal-appointed expert, or a secretary of the arbitral tribunal


  • Hong Kong becomes a Host Country for Permanent Court of Arbitration proceedings


On 4 January 2015, the Permanent Court of Arbitration (“PCA”) and the Government of the People’s Republic of China signed a


Host Country Agreement and related Memorandum of Administrative Agree-





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ments. The result is the establishment of a legal framework in Hong Kong under which PCA-administered proceedings can be con-ducted in Hong Kong on an ad-hoc basis, without the need for a physical presence of the PCA, which is based in The Hague, Netherlands.


The PCA is an intergovernmental organisa-tion with 116 member states (amongst oth-ers: People’s Republic of China, Austria,


Germany, Singapore) which provides facili-ties and support services for PCA-administered arbitration, conciliation, media-tion and fact-finding commissions of inquiry between member states.


A Host Country Agreement secures the pro-vision by the host country of facilities and services required for PCA-administered pro-ceedings, such as office and meeting space and secretarial services, which may be of-fered at no cost to parties in such proceed-ings. Furthermore, Host Country Agree-ments regulate the privileges and immunities afforded by the host country to adjudicators and participates in such proceedings.


The PCA has concluded Host Country Agreements with other Asian countries in view of the increasing demand for arbitra-tion services for disputes between investors and states involving Asian parties. Hong Kong will be able to handle PCA-administered proceedings, including some of the 100+ cases currently outstanding. This will enhance Hong Kong’s position as an i n-ternational arbitration centre and amounts to a vote of confidence in Hong Kong and its legal system.


  1. Arbitration Ordinance to be amended


On 23 January 2015, the Arbitration (Amendment) Bill 2015 was introduced into the Legislative Counsel and had its first reading on 4 February 2015.


The purpose of the bill is


  • to remove some legal uncertainties about the opt-in mechanism for do-mestic arbitrations under Part II of the Arbitration Ordinance (Cap 609); and


  • to update the list of parties to the Convention on the Recognition and Enforcement of Foreign Arbitral


Awards 1958 (“the New York Con-vention”).


The amendments proposed in the Bill make it clear that parties can opt for domestic ar-bitration and decide on the number of arbi-trators and still retain their right to seek the ordinary courts’ assistance on those matters. The revisions once enacted should improve the opt-in provisions for domestic arbitra-tion and thereby enhancing Hong Kong’s status as international arbitration venue.


  • New Jurisdiction about the Seat of an Arbitration and the applicable Law


A recent Hong Kong High Court decision (Shagang South -Asia (Hong Kong) Trading Co. Ltd v. Daewoo Logistics) considered the posi-tion when a contract provides for the law of one jurisdiction to be applicable, but for the arbitration to take place outside that jurisdic-tion.


The parties entered into an agreement which provided for arbitration of their disputes and specified: “Arbitration to be held in Hong Kong. English Law to be applied.”


The Court concluded that the arbitration ought properly to have been subject to Hong Kong procedural law. It placed weight on the following points:


  1. It would be unusual for the parties to specify the applicable procedural law for the arbitration proceedings and even more unusual for them to wish to apply the procedural law other than that of the seat of the ar-bitration.


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  • By contrast, it is quite common for parties to apply different laws in re-spect of the substance of the dispute or the procedural aspects of the arbi-tration.

damage suffered in exchange for a sus-pended sentence. Through negotiations the Chinese company apologised for its behav-iour, paid compensation in the amount of RMB 380,000 (approx. EUR 55,000) and



  1. Clear words or indications are re- promised to pay RMB 1 million (approx. quired in order to displace the pre- EUR 148,000) as compensation in case of



sumption that the parties want the procedural law of the seat of the ar-bitration.


  1. The opinion of the court is based on numerous similar decisions of previ-ous cases.


This decision affirms the commonly ac-cepted opinion that the choice of an arbitra-tion seat implies a choice of the proce-dural law of that seat. Parties wishing, for whatever reason, to apply a different proce-dural law to that of the seat, must use clear and unambiguous words in their arbitration agreement. This decision also serves as a reminder of the importance of clear drafting, particularly in the context of dispute resolu-tion clauses.



  • Intellectual Property


  • Obtaining Damages through Nego-tiation in Criminal Proceedings in China


In criminal IP proceedings, the Chinese courts tend to not accept a civil claim collat-eral to criminal proceedings filed simultane-ously by the victim IP owner. Therefore, in criminal proceedings the victim and the in-fringer should seek to reach an agreement on damages through negotiations, since it will help the victim to obtain compensation and the infringer to obtain a commuted sen-tence.


In March 2014 a German trademark owner discovered that a Chinese company was en-gaged in the sale of counterfeit machinery and equipment in Guangzhou. After the oral hearing at the public prosecution, the court informed the trademark owner that the Chi-nese company wished to indemnify it for the


repeated infringement in the future.


In practice, if the victim files a civil action after the criminal case has been concluded, the Chinese court may, when deciding on the amount of damages, take into account the fact that the infringer has paid a fine or been sentenced to imprisonment, thus ren-dering a less satisfying judgment for the vic-tim. In such cases, it is advisable that the vic-tim seeks a considerable amount of compen-sation through negotiations, which has no substantial impact on the sentence in the criminal case.


  1. Hong Kong Court addresses Key As-pects of the Hong Kong Trademark Law


In the recent case Vita Green Health Products Company Limited v Vitasoy International Hold-ings Limited (HCMP 593/2014) , the Hong Kong Court of First Instance highlighted some important principles of trademark law which should be considered when applying for or opposing a trademark.


These principles are in particular:


  • While a mark may have an estab-lished reputation in respect of par-ticular goods, that does not mean that reputation will extend to other similar goods.


  • It is important to consider the pub-licc of Hong Kong when assessing whether a particular mark will be considered descriptive or distinctive. Decisions from other jurisdictions may not assist in this regard.


  • The Court will be slow to overturn a decision of a Registrar where the



  • Liability of Managing Director for Copyright Infringement in Germany


On 5 December 2014 the Cologne Higher Regional Court (6 U 57/14) ruled that the managing director of a German limited li-ability company (GmbH) is personably li-able for copyright infringement committed by the company.


The plaintiff operated an online shop for cosmetics and perfumes. On discovering il-legal use of its copyrighte-protected photo-graphs of its products by another online shop, the plaintiff asserted its claim against the infringing company and its managing di-rector seeking cessation, information and damages.


The Cologne Higher Regional Court stated that the managing director was personally li-able for the copyright infringement. Liability could be refused only if the director had not participated in the infringement and knew nothing about it. As such a lack of knowl-edge was not applicable in this case, the Court found the managing director liable to the same extent as the company.


The Court further noted that the managing director could not rely on a German Su-preme Court decision (I ZR 242/12) which increased the requirements for finding a managing director personally liable in the field of unfair competition law. The Su-preme Court had justified its decision by stating that the “liability of interference” will no longer apply in unfair competition law. However, the Cologne Higher Regional Court argued that the liability of interference will still apply in IP law, as it affects absolute rights.


The Cologne Higher Regional Court was the first Court to give a (negative) answer to this question. However, it remains to be seen whether other (higher) courts will take the same view.


  • New Chinese Law targets Tax Avoidance


The People’s Republic of China has stepped up its participation together with other countries in the G20’s fight against interna-tional tax avoidance by passing a law crack-ing down on the indirect sale of assets out-side the country to avoid paying taxes.


The new law addresses cases where a Chi-nese company sells an asset by its offshore company vehicle located outside China which owns the asset. Investors can use this method to avoid paying taxes in China by claiming the transaction took place outside China.


The law will mostly affect investment funds, including private equity funds and venture capital funds, which have investments in China, as well as multinationals that restruc-tured their mainland operations or sold mainland companies. It will further have a significant impact on Hong Kong, a major hub for cross-border deals involving China.


  1. Commercial Law


  • Mainland and Hong Kong Closer Economic Partnership


On 18 December 2014 an Agreement be-tween the Mainland and Hong Kong on Achieving Basic Liberalization of Trade Ser-vices in Guangdong was signed, and was implemented on 1 March 2015. This agree-ment was concluded under the framework of the Closer Economic Partnership Agree-ment (CEPA) between China and Hong Kong.


The three main concepts under the agree-ment are:


  1. a) National Treatment


Hong Kong service suppliers where national treatment applies will enjoy the same treat-



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ment as the Mainland enterprises, and there-fore now extending CEPA to service sec-tors.


  1. b) Positive Listing


Liberalization measures are set out for Hong Kong by the Mainland, indicating what type of access and what type of treatment for each sector the Mainland is prepared to con-tractually offer to Hong Kong service sup-pliers.


  1. c) Negative Listing


A negative list requires that discriminatory measures affecting all included sectors be liberalized unless specific measures are set out in the list of reservations.


For the first time, Hong Kong service sup-pliers can expect to receive national treat-ment in Guangdong, with exceptions on the negative list. The Agreement will further in-crease the liberalization of trade in services and facilitate economic cooperation between Guangdong and Hong Kong. It will open the Guangdong market in various service sectors to Hong Kong investors, consolida-tion Hong Kong’s position in international finance, trade and shipping.


  • Competition Law


  • New Competition Ordinance


The Hong Kong Government has issued three new regulations that take Hong Kong another step closer to fully implementing its new competition law, which is expected to come into full force later this year.


The Hong Kong Competition Ordinance uses the concept of “turnover” in a number of areas. The Competition (Turnover) Regu-lation clarifies how turnover is to be calcu-lated. Turnover of an undertaking will be the revenue derived by the undertaking from its


ordinary activities in Hong Kong, less sales discounts and less taxes directly related to such revenue.


Two of the regulations relate to who the Ordinance will apply to:


The Ordinance will apply to certain statutory bodies. The Competition (Application of Provisions) Regulation specifies a number of such statutory bodies. In addition the Com-petition (Disapplication o Provisions) Regu-lation specifies that the Conduct Rules and the Merger Rules, the enforcement powers of the Commission and the enforcement power of the Tribunal will not apply to companies involved in the operation of the Hong Kong stock and future markets.


It is a positive sign that the government is putting such regulations into place, so as to minimise any potential delay to the Ordi-nance coming into full effect, expected in the second half of 2015.


  1. Labour Law


  1. New MPF provisions in Hong Kong


On 30 January 2015 the Legislative Council passed certain changes to the Mandatory Provident Fund Schemes Ordinance


(“MPFSO”). The changes will enable the withdrawal of benefits on the terminal ill-ness of an employee and also enable a phased withdrawal of accrued benefits. In addition the MPFSO has been amended to enable MPF trustees to comply with certain reporting obligations due to overseas legisla-tion.


The MPF service providers will amend their documentation to cover the points referred to above. In practice, employers should not have to do anything.



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Newsletter No. 194 (EN)





Directors’ and Officers’ (D&O)


Liability Insurance in Hong Kong


December 2015




A l l r i g ht s r e s e r v e d © L o r e n z & P a r t ne r s  2 0 1 5


Although Lorenz & Partners always pays great attention on updating information provided in newsletters and brochures we cannot take responsibility for the completeness, correctness or quality of the information pro-vided. None of the information contained in this newsletter is meant to replace a personal consultation with a qualified lawyer. Liability claims regarding damage caused by the use or disuse of any information provided, in-cluding any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated de-liberately or grossly negligent.



  • Introduction


Directors’ and Officers’ Liability Insurance

(D&O Insurance) is a liability insurance which covers the directors and officers of a company on an indemnification basis for losses or defence costs in the event an insured (a director or officer of the company) suffers such loss as a result of a legal action brought for alleged wrongful acts in his or her capacity as director or officer. According to Section 2 Hong Kong


Companies Ordinance (Chapter 622), “offi-cer” is defined as a director, manager or corporate secretary of a company, and


“manager” is further defined as a person who performs managerial functions under the directors’ immediate authority.


The insurance is closely related to corporate governance, corporations’ laws, and the fi-duciary duty owed to shareholders or other beneficiaries. The D&O Insurance was first developed in the 1930s in the US, arising out of claims from shareholders against the di-rectors of companies, claiming for mis-management or other mistakes. Nowadays, over 90% of all companies on the NYSE have D&O cover, due to possible personal liability of their directors.


D&O Insurance in Hong Kong has been available for many years, but until recently, relatively few local companies sought cover, and many local insurance brokers were not very familiar with this subject.


This started to change in and after 1997 with the Asian financial crisis and the property market downturn in Hong Kong. This led to many companies with financial problems and negative equity, and shareholders and other stakeholders tried to aim at the direc-tors and other company officers to make


them personally responsible for their losses. Nowadays, around 65% of all public listed companies in Hong Kong have D&O cover.


  1. Threats for Directors


Hong Kong is still one of the leading worldwide financial centres, and certain legal and business aspects in Hong Kong make directors vulnerable for personal liability:


  • Many claims arise from shareholders in regard of IPOs and breaches of listing rules and other regulations of the securities and futures com-mission;


  • Hong Kong is a centre for M&A transactions in Asia, which might lead to claims after transactions have been concluded and turn sour;


  • Certain employment regulations bring personal liability for directors;


  • The stock market is relatively vola-tile, which might lead to losses and claims from shareholders.


  • Shareholder lawsuits


50% of all D&O claims result out of law-suits brought by shareholders against the di-rectors of their company for mis-management of the company. It is quite common in Hong Kong to name the di-rector personally as defendant in addition to the company. According to a recent survey, settlement costs in such cases average USD 7.6 million with defence costs for the company and the director adding an-other USD 1 million. These are amounts that can bring a small or medium sized entity to its financial limits and it might be the case





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that after settling with the plaintiff the com-pany does not have sufficient capital to con-tinue its business operation.


  • M&A Transactions


Other possible threats can arise out of mergers, where the board of directors de-cides to purchase another company. If this results in losses after the transaction, the di-rectors might be held personally liable for their decision to take over the target com-pany.


In a recent case in Hong Kong, a company reported a loss after taking over another company. The shareholders sued the company and its senior managers alleging they booked as goodwill the value of the target company which did not yet make any profit. The case was six years in court before the defendants were found not liable, and until this point, USD 2.6 million for de-fence costs had been accumulated. Even though most of these costs (approx. 70%) should be (in principle) able to be recovered from the other party, a substantial amount has to be borne by the defendants person-ally.


  • The new Companies Ordinance


In addition to the new statutory duty of rea-sonable skill and care, the new Companies Ordinance also imposes personal liability on directors to take all reasonable steps to en-sure the company keeps proper accounting records.


In insolvency cases, directors can be held li-able under Section 275 Companies (Winding Up and Miscellaneous Provisions) Ordi-nance for allowing the company to incur further credit knowing there is no reason-able prospect of avoiding insolvency.




  • Other Legislation


Other Hong Kong laws under which per-sonal liability of the senior management can arise are:


  • Directors can be held personally li-able for a fine if they employ some-one where they know the person’s wages cannot be paid (Sections 31, 63A Employment Ordinance). A failure to pay wages to an employee can also result in a fine or imprisonment for the director;


  • Under the MPF Scheme Ordinance, the directors can be held personally liable and be prosecuted for various offences, such as failing to enrol employees in an MPF scheme or failing to pay mandatory contribu-tions;


  • Under the Occupational Safety and Health Ordinance, every employer is required to ensure the safety and health at work of all employees and failure to do so can trigger fines and imprisonment and provides for di-rectors to be personally liable;


  • If a director (as agent of the com-pany) accepts an “advantage” from a third party in connection with the company’s affairs, he will be subject to ICAC investigation under the Bribery Ordinance;


  • Under the Hong Kong Discrimi-nation Ordinance, a director can be held personally liable if he commits an unlawful and discriminating act.



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III. The Development in Company Law


With the introduction of the new Com-panies Ordinance in March 2014, the new law did bring certain changes to the respon-sibility of directors, as well as the provision of D&O insurances.


  1. Standard of care


The new Companies Ordinance introduces a new statutory duty requiring a director to ex-ercise reasonable care, skill and diligence in his role as director. In exercising his duty, the director will be tested against both: the standard of a reasonable hypothetical dili-gent director (“objective test”), and a subjec-tive standard which takes into account the director’s own actual general knowledge, skill and experience (“subjective test”).


The objective test sets a minimum standard which all directors must meet, and the sub-jective test raises that standard for the par-ticular director based on his actual profes-sional experience and qualifications.


For instance, a director who is qualified as accountant or lawyer may be held liable to a higher standard, compared to a director without these qualifications. Or, a director who possesses vast experience in his field of business (e.g. sourcing, HR, etc.) needs to meet a higher standard under subjective test.


This subjective test is not completely new, but it replaces the previous “duty of reason-able care test”. It is important to note that the directors owe this duty primarily to the company and not to the company’s share-holders.


To comply with the new standard, directors should give thought to the higher standard to which they will be held by virtue of their specific expertise, qualifications, and experi-ence, and they should ensure that their focus and contribution in and outside board meet-ings reflects this standard.




  1. The old Companies Ordinance


Until 2004, Section 165 (1) of the old Com-panies Ordinance restricted the scope of in-demnities companies could provide for its directors. The law rendered void any con-tractual provision exempting a director from liability, not just under its Articles of Asso-ciation.


This held back the use of D&O Insurances in Hong Kong for many years and was completely outdated, because it prevented directors from relying on insurance cover taken out by the company. In 2004, Section 165 (3) was introduced and stated that it was legal for the company to buy a D&O Insur-ance for its directors, as far as negligence, default, breach of duty or breach of trust were concerned.

  1. The new Companies Ordinance


The new Companies Ordinance clarifies the limits placed on the ability of a company to indemnify a director for his liabilities out of company assets. Section 468 (3) provides a complete prohibition on a company to in-demnify a director out of company assets for any liability owed by a director to the company. This means a company cannot in-demnify a director out of the company as-sets for a breach of duty which is owed to the company itself. However, Section 469 al-lows a company to provide a limited indem-nity out of its own assets to a director for any liabilities owed to third parties under the following conditions:

  • The indemnity cannot cover a direc-tor’s liability for criminal fines or other regulatory penalties, defence costs incurred in criminal proceed-ings in which the director is convicted, and defence costs for the director in civil proceedings, brought by or on behalf of the company, in which judgment is rendered against the director;



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  1. The indemnity must be disclosed in the annual director’s report and be made available for inspection by any shareholder.


Section 468 (4) expressly states that the pro-hibitions on the company’s ability to indem-nify its directors out of the company assets does not prevent a company from pur-chasing and maintaining a D&O Insur-ance for the directors. Such insurance may also cover:


  • A director’s liability for damages in negligence, default, breach of duty in relation to the company (except fraud), and


  • The director’s liability for defence costs incurred by the director in de-fending any proceedings (civil and criminal) for any negligence, default, breach of duty or breach of trust (in-cluding fraud) in relation to the company.

With this, there is no restriction under the new Companies Ordinance on a company’s power to purchase D&O Insurance and the insurance can cover directors for liability which the company cannot cover by way of indemnity and the only restrictions might arise out of common law, based on public policy grounds.

Another advantage of the D&O Insurance is that it is not required to be mentioned in the director’s report.


  1. The Hong Kong Stock Exchange provisions


Meanwhile, the listing rules of the Hong Kong Stock Exchange (HKSE) require a listed company to arrange appropriate insur-ance for its directors or explain in its annual reports why it had not done so. This shows that purchasing a D&O Insurance is re-garded as corporate governance best prac-tice.




  1. Details of the D&O Insurance


  1. Cover of the D&O Insurance


A typical D&O Insurance policy covers a di-rector for liability which cannot be indemnified by the company, called Side A Cover.


Furthermore, the policy covers the company for its liability in respect of any indemnity provided to the director of the company, called Side B Cover, or “company reim-bursement cover”.


A policy can also provide for Side C Cover, or “entity cover”, which would cover the company itself against claims or employ-ment practices liability from third parties.


  1. Extensions of Cover


As directors’ exposures have grown, the possible extensions became more and more. An important extension is the coverage for a director’s legal costs in responding to regula-tory investigations (especially in Hong Kong, where the investigatory power of cer-tain regulators are quite extensive).


Another useful extension is the extension to cover risk-management add-ons which assist the company in mitigating such as covering the costs of a public relations consultant to protect them against potential public expo-sure and negative influence of the reputation of the company.


  1. Important Clauses


  1. Make sure that all regions are cov-ered in which the company is active and in which claims against directors can arise. This is especially true for the US. Many insurers try to exclude cover for claims in/from the US or arising out of the US due to the huge legal costs in the United States. However, only minimal ties to the United States are already sufficient



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to establish jurisdiction of a US fed-eral or state court. This can end up in a legal dispute of the company in the US, and trigger huge amounts of costs for overseas lawyers.


  • To avoid any conflict in terms of po-sition and coverage, make sure that the policy is worded so that it covers directors, officers and employees undertaking “those activities which can and are normally carried out by directors and officers”.


  • If the policy  does not  provide  for

“Side C Cover” (entity cover), the insurer will never respond to claims against the company itself, and if claims are made against the company and an individual director as well, the insurer will carve out the portion relating to the D&O policy and only provide cover for these costs. If no

“Side C Cover” is provided, then it is useful to include an arbitration clause in the policy which assists in resolving any arguments as to such apportionments.


  • When answering the questions dur-ing the policy application and upon every renewal, it is crucial to answer all questions thoroughly and disclose all relevant information so that the insurer later cannot refuse a claim.


  • Close attention must be given in case the company has subsidiaries in other jurisdictions and the policy should also cover those jurisdictions. These jurisdictions will often have different company laws which might affect the conditions under which companies can take out D&O Insur-ances and/or indemnify their di-rectors. It is essential the policy pro-vides cover in line with the various indemnification laws.



  • When a director is newly appointed to the board of directors, the com-pany should seek written confirma-tion from the insurer that such new director is covered by the existing policy. For a director leaving the board of directors, the director should make sure that the policy covers “present and past directors” to ensure that he is covered even af-ter retirement in respect of situations occurring after his period in office (run-off cover).


  • In case the company intends to ac-quire another company in the future, the policy should cover the newly acquired company as well.


  • It is essential to update the insurer about any material changes, es-pecially in circumstances such as the appointment of a new US based di-rector, which may fundamentally change the risk.


  • The insurer needs to be informed about any claim made immediately, whereas claim is defined as “a de-mand made in writing”. Anything else, e.g. a threat of legal action, has to be notified as “circumstance”.


  1. Summary


Personal liability of a director in Hong Kong can arise quickly and out of several laws and regulations, and it can be expected that the personal liability will be extended in the fu-ture.


Even though it is now possible for a com-pany to indemnify a director under certain preconditions, it is still strongly recom-mended to conclude a D&O insurance. This does not only provide additional cover for areas where the company cannot indemnify the director, it also helps avoiding problems between shareholders of the company and the company in respect of indemnification




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of the director, because the D&O insurance covers the expenses and the company does not have to use its own assets.


This potential conflict of interest between shareholders, the company and the directors




makes it advisable that the director and the company should be represented by separate law firms when negotiating the D&O policy, and the director’s law firm should be one who does not usually act for the company.





Newsletter No. 195  (EN)





Thailand about to introduce new law on Transfer Pricing




July 2015




All rights reserved © Lorenz & Partners 2015


Although Lorenz & Partners always pays great attention on updating information provided in newsletters and brochures, we cannot take responsibility for the completeness, correctness or quality of the information provided. None of the information contained in this newsletter is meant to replace a personal consultation with a qualified lawyer. Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent.



  1. Introduction


When independent parties contract with each other, the conditions, especially the pricing, will generally be determined by mar-ket forces. This is however not necessarily the case for associated enterprises. 1 Their conditions may differ for various reasons.2 If the transfer pricing of multinational en-terprises (“MNEs”) does not reflect free market conditions, the tax revenues of coun-tries may be distorted. In extreme cases, fraudulent transfer pricing may be used to artificially generate profits in low tax coun-tries or tax havens, thereby avoiding taxation in high (or higher) tax countries. As coun-tries try to minimize such practices, they re-quire enterprises to comply with the “arm’s length principle” (“ALP”).


The ALP requires associated enterprises to model the pricing of internal transactions according to the pricing of independent en-terprises. The application of the ALP there-fore relies on the comparison of transac-tions.3 Art. 9 of the OECD Model Tax Con-vention (hereinafter the “Convention”) states:


Where […] conditions are made or imposed be-tween [two associated] enterprises in their commercial



  • Remark: Associated enterprises may also be referred to as “affiliated enterprises” or “related parties” in contrast to “independent parties”; a transaction between such as-sociated enterprises is commonly referred to as “con-trolled transaction” in contrast to “uncontrolled transac-tion” between independent parties.


  • Apart from tax-related reasons, the OECD (Organiza-tion for Economic Co-operation and Development) names governmental pressure relating to customs valua-tions and cash flow requirements within multinational enterprises (Transfer Pricing Guidelines, July 2010, p. 32, No. 1.4).


  • OECD, Transfer Pricing Guidelines, p. 41, No. 1.33.

or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be in-cluded in the profits of that enterprise and taxed ac-cordingly.4


The critics of the ALP raise the concern that transactions of associated enterprises are fundamentally different from those of inde-pendent enterprises. They regard the ALP therefore as fundamentally flawed. Never-theless, the ALP has become a cornerstone of the transfer pricing discussion and – as far as the OECD can evaluate – has proven to be effective.5


Therefore enterprises need to be familiar with the basic statements of said principle and also with the various methods of assess-ing transfer prices arising thereof. The OECD has issued “Transfer Pricing Guide-lines for Multinational Enterprises and Tax Administrations” to help enterprises and tax officials with their task of determining if a specific pricing is in compliance with the ALP. 6


  1. Transfer Pricing in Thailand


Thailand, though not being a member of the OECD, models its legislation and admini-stration of transfer pricing after the OECD guidelines. Most of the actual regulations on transfer pricing come as guidelines7 (herein-after the “Guidelines”) issued by the Reve-



  • OECD, Transfer Pricing Guidelines, p. 34, No. 1.9.


  • Version 2010:


  • Departmental Instructions No. Paw. 113/2545, nsferPricing_en.pdf.



nue Department (“RD”). However, on 7 May 2015, the cabinet approved the draft of a new law on transfer pricing. The draft is currently in the legislative process and will need final approval by the National Legisla-tive Assembly. Thus, the final law may (and hopefully will) differ from the current draft, particularly in terms of documentation. However, it can be assumed that it will basi-cally put into law what is until now only regulated by internal guidelines. Further, it can be assumed that the Transfer Pricing as such will be put more into focus of the Revenue Department once the law is en-acted. It is therefore advisable for (particu-larly foreign) companies to start reviewing their intercompany transactions and building up some transfer pricing documentation based on the below guidelines.


  1. The Legal Basis


The Revenue Code (“RC”) gives tax officials authority to assess the intercompany pricing of companies. Regulations can be found in Sec. 65 bis (4) and (7), Sec. 65 ter and Sec. 70 ter RC.


Especially relevant is Sec. 65 bis (4) RC:


“In the case of transfer of assets, provisions of service or lending of money without remuneration, fee or in-terest that is lower than the market price without reasonable cause, an assessment official shall have the power to assess such remuneration, fee or interest in accordance with the market price on the date of transfer, provision or lending.”


This means: If the assessment official finds that the transfer price differs from the ALP, the transfer price may be adjusted accord-ingly and enterprises are liable to additional taxation as well as fines.


  1. The Guidelines


The Departmental Instruction No. Paw 113/2545 shall assist assessment officials and enterprises in determining arm’s length prices (named “market price” in the Guide-


lines). In case of a transfer price assessment the officials will conduct their task according to the Guidelines.


The RD defines Transfer Pricing as “price set between related contracting parties for goods or services which may deviate from the market price”.


The Guidelines also include information on necessary documentation enterprises should keep and on how to enter into Advance Pricing Agreements (APA) with the RD.


III. Methods Described in the Guide-



The guidelines explicitly propose three methods to determine arm’s length prices, all of which are referred to by the OECD as “traditional transaction methods”:


  • Comparable Uncontrolled Price Method (“CUPM”);
  • Resale Price Method (“RPM”);


  • Cost Plus Method (“CPM”).


While the Guidelines do not expressively mention “transactional profit methods” 8 , they generally still allow enterprises to use such methods.9


The RD does not recommend a certain method but leaves it to the enterprises to choose a method that is best suited to de-termine arm’s length prices.


  • Comparable Uncontrolled Price Method (“CUPM”)10


The CUPM compares the pricing of associ-ated parties (assessed transaction) with the pricing of a similar transaction of inde-pendent parties (similar transaction). Dif-


  • OECD, Transfer Pricing Guidelines, p. 77 et. seqq.


  • Clause 3 (4) Departmental Instructions No. Paw. 113/2545.


  • Clause 3 (1) Departmental Instructions No. Paw. 113/2545.



ferences may indicate a deviation from the ALP.


  • Difficulties and Area of Applica-tion


Enterprises using the CUPM face the chal-lenge of finding a transaction that is actually comparable with the assessed transaction.11 Minor differences may have a big influence on the final pricing.


However, the OECD finds that in case a comparable transaction is found, the CUPM applies the ALP in the “most direct and reli-able way”. Therefore, “in such cases the CUPM method is preferable over all other methods.”12 However, the Thai RD does not give such preference and all methods are ap-plicable.


  1. b) Example


Company A sells a good to the associated company B for USD 50 (assessed transac-tion).


Company C (not related) sells a similar good under similar circumstances to an independ-ent company D for USD 80 (similar transac-tion).


The price of the assessed transaction differs from the price of the similar transaction. This may indicate that the transfer price of the assessed transaction (A to B) is not an arm’s length price (please note that such conclusion is not compulsory).


Under Sec. 65 bis (4) RC tax officials have the authority to assess the price between A and B according to the arm’s length price.


  1. Resale Price Method (“RPM”)13


The RPM determines the arm’s length price by assessing the resale price of a good. It compares the transfer price of an assessed

  • OECD, Transfer Pricing Guidelines, p. 24, No. 2.15.
  • OECD, Transfer Pricing Guidelines, p. 24, No. 2.15.


  • Clause 3 (2) Departmental Instructions No. Paw. 113/2545.

transaction with the resale price of the same good.


First, the method notes the price of a sold product between two associated parties (Transaction 1 – Transfer Price A to B). Then, the RPM notes the resale price of the same good (Transaction 2 B to C or a totally different transaction with the same good, e.g. D to Z – Resale Price). An assumed profit margin is calculated by comparing the price B to C or D to Z. The result is the arm’s length price which is compared to the transfer price A to B.


  1. a) Proposed Area of Application


The OECD sees the RPM most useful when “applied to marketing operations”.14


The RD does not offer a recommendation regarding the area of application for the RPM.


  1. b) Example


Company A buys a good for 40 and sells it to the associated company B (Transaction 1). The price is USD 50 (Transfer Price). Company B resells the same good to the in-dependent company C (Transaction 2). The price is USD 100 (Resale Price). The gross


profit margin is 100%, while the gross profit of the first transaction is only 25%.


The gross profit generated by Company A seems unreasonably low compared to the gross profit of Company B. The officer has the right to adjust the selling price of party A (probably to 70, so that the profit is equally shared) and thus generating more profit and higher corporate income tax for party A, unless there is a reasonable cause to explain the difference, Sec 65. bis (4) RC.


  1. Cost Plus Method (“CPM”)15


To determine the arm’s length price, the CPM takes the costs of a good and adds an

  1. OECD, Transfer Pricing Guidelines, p. 25. No. 2.21.


  1. Clause 3 (3) Departmental Instructions No. Paw. 113/2545.


appropriate “cost plus mark up”. The CPM is based on the idea that enterprises can only sustain themselves if they cover their costs and create a certain profit. (Usually, a profit margin between 3 to 10 % is accepted, de-pending on the industry and transaction).


  1. a) Proposed Area of Application


According to the OECD, the CPM is suited best for the situation when associated parties trade “semi finished goods”, or associated parties have concluded “joint facility agree-ments” / “long-term buy and supply ar-rangements”, or where the controlled trans-action is the provision of services.16


The RD does not offer a recommendation regarding the area of application for the CPM but has so far widely accepted the concept, particularly in case of servicing af-filiates.


  1. b) Calculating the Mark Up


Enterprises (and tax officials) using the CPM have to calculate an appropriate cost plus mark up. Therefore, the RD proposes to de-termine such mark up by referencing a com-parable transaction of independent parties. The OECD guidelines name this approach “external comparable”.17


In addition to this approach, the OECD proposes a method named “internal compa-rable” which references the mark up the “same [enterprise] earns in a comparable un-controlled transaction”.18 The OECD finds this approach actually preferable over an ex-ternal comparison. However, the approach “internal comparable” is not being men-tioned by the Guidelines.


  1. c) Calculating Costs


The OECD divides the costs of goods in three broad categories: the direct cost of production (e.g. raw material), the indirect costs of production (e.g. the repair depart-

  • OECD, Transfer Pricing Guidelines, p. 29, No. 2.39.
  • OECD, Transfer Pricing Guidelines, No. 2.40.
  • OECD, Transfer Pricing Guidelines, No. 2.40.

ment that services the production process) and the operating expenses of an enterprise as a whole, i.e. administration and such.19


  1. d) Example20


Company A sells goods to the associated company B at a price of USD 100. The total all in costs of the goods are USD 80. Ac-cordingly, it generates a profit of 20.


Company C sells a similar kind of goods to the independent company D (this transac-tion is “external comparable”) for USD 120. The total all in costs for party C of the goods are USD 100. Therefore the net profit is USD 20, which is 20 percent of the selling price.


This profit margin (20%) is now used to as-sess the transaction between A and B. The costs of the sold goods are USD 80. The appropriate profit margin (as determined by the transaction C to D) is 20% of the costs of the goods, thus USD 16. Therefore, the arm’s length price is the sum of the costs of the goods plus the appropriate profit. In our example USD 80 plus USD 16 equals USD 96 and not USD 100.


Therefore, the transfer price of the transac-tion A to B (USD 100) is higher than the arm’s length price (USD 96). Under Sec. 65 bis (4) RC tax officials have the authority to assess the actual price according to the mar-ket price, but will probably not adjust it, since the price used in the intercompany transaction is higher than the arm’s length price. However, this may raise problems in the jurisdiction of company B because it pays more than the arm’s length price.




  1. OECD, Transfer Pricing Guidelines, No. 2.47.


  1. A more in depth example can be found in the OECD Transfer Pricing Guidelines, No. 2.53.



  1. Other Methods21


The Guidelines allow to use other than the above described methods under the condi-tion that


  1. the method is internationally ac-cepted and


  1. the method is appropriate for the transaction.


Generally all methods described in the OECD guidelines are acceptable as long as they are an appropriate instrument given the circumstances of the transaction.


  1. Establishing the Arm’s Length Price


The RD proposes a system of four steps to determine the arm’s length price. Please note that this system is neither mandatory nor does it, if applied, limit taxpayers’ liability. It remains the enterprises’ duty to establish the arm’s length prices.


  • Step 1: Characterisation of the inter-national dealings between the related parties


  • Step 2: Selection of the most appro-priate transfer pricing method
  • Step 3: Application of such method


  • Step 4: Review of the process.


  1. Documentation


As of now, Thailand does not (unlike Ger-many and other OECD member states) have a statutory filing requirement. However, the Guidelines offer an overview of documents companies should properly keep. In case of an assessment of the transfer pricing, such documentation must be presented within 7 to 15 days. Documents requested include:


  1. documentation on the structure and rela-tionship between business entities within the same group



21 Clause 3 (4) Departmental Instructions No. Paw. 113/2545.


  • budgets, business plans and financial pro-jections


  • documentation indicating the taxpayer’s business strategies as well as the reasons for adopting such strategies
  • documentation indicating sales and operat-ing results and the nature of the taxpayer’s transactions with business entities within the same group
  • documentation indicating the reasons for entering into international transactions with business entities within the same group
  • pricing policies, product profitability, rele-vant market information and profit sharing of each business entity (consideration should be given to functions performed, as-sets utilized and risks assumed of the related business entities)


  • documentation supporting selection of a particular pricing method
  • where several methods are considered, documentation indicating details of the method (document should be created at the same time the decision is made)


  • documentation used as evidence indicating the negotiation positions taken by the tax-payer in relation to the transaction with business entities within the same group and the basis for those negotiating positions


  • other related documentation in determining the transfer price (if any).


  • Advance Pricing Agreements (APA)


Taxpayers can enter into an advance pricing agreement (APA) with the RD for any trans-action with its affiliated contracting parties. APAs aim to avoid any disputes or problems because of double taxation caused by trans-fer pricing re-assessment. The RD issued a guide for the APA process.22


Interested taxpayers have to submit a writ-ten document of intent (APA proposal) to the Director-General of the RD. The docu-ments needed (the RD provides a list) have to be submitted in Thai and English lan-


22 Guidance on APA process ( UIDANCE-ON-APA-PROCESS-EN.pdf ).



guage. Taxpayers may use translators or APA experts to submit the request.


After that, a pre-filing meeting23 is held be-tween the taxpayer and the RD. In general this meeting has to take place six months prior to the intended effective date of the APA (i.e. normally six months prior to the last day of the first accounting period for which the APA shall apply). Approval notice shall be issued within three months, but de-lays are common.


The RD remains the right to cancel or re-voke the APA prior to its termination if the taxpayer is not fulfilling its duties with the RD (false information given, non-compliance with regulations of the APA etc.).


There is no filing fee for the APA and the RD will keep all the data strictly confidential.


  1. Transfer Pricing Law


On 7 May 2015, the cabinet approved a draft amendment of the RC. The draft is currently in the legislative process and will need final approval by the National Legisla-tive Assembly. Thus, the final law may differ from the draft.


If approved, the law will amend the RC, es-tablishing rules on transfer pricing between associated parties.


It basically transforms the (internal) guide-lines of the RD explained above into mate-rial law.


Additionally, the current draft requires tax-payers from now on to keep necessary


documentation on their transfer pricing and they will have to file such documentation together with their tax return. If taxpayers do not comply with this requirement, they may be liable to a penalty not exceeding THB 400,000. (approx. EUR 10,000)


The documentation will have to show the relation to other entities, e.g. details on man-agement, capital and other necessary infor-mation. Furthermore, taxpayers will have to provide documentation on the methods be-ing used to determine the pricing between related parties, e.g. details on the computing of the prices and details on the method be-ing used.


Tax officials will have the authority to reas-sess the transfer pricing between related par-ties. If the transfer pricing assessment leads to double taxation in different countries in-volved, the taxpayer is entitled to claim for refunds. Taxpayers have to file their claims within 60 days after having received the as-sessment notification or three years after the due date of the tax return.


VII.   Conclusion


So far, transfer pricing has not been closely monitored in Thailand and therefore was of-ten a topic being raised during tax audits with no clear guidelines given and the inter-pretation of the Guidelines varying from au-dit team to audit team. The amendment of the RC now appears to turn this around im-plementing comparably high requirements for companies. Particularly, the requirement of submitting transfer pricing documenta-tion together with the tax return appears rather unusual and will hopefully be revised once coming into effect.




Newsletter No. 196 (EN)





Acceptance of Gifts by State Officials in Thailand


August 2015



A l l r i g ht s r e s e r v e d ©  L o r e n z & P a r t ne r s  2 0 1 5


Although Lorenz & Partners always pays great attention on updating information provided in newsletters and brochures we cannot take responsibility for the completeness, correctness or quality of the information provided. None of the information contained in this newsletter is meant to replace a personal consultation with a qualified lawyer. Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent.




  1. Introduction


When business is done with the public sec-tor, special caution should be given to the provisions that govern the acceptance of gifts and other benefits by officials.


Complying with the national laws and regu-lations with regards to counter-corruption measures is of major importance for enter-prises and individuals doing business with the public sector in any country. Firstly, granting officials with presents may come with criminal and civil consequences. Sec-ondly, affected entities may face corporate liability issues.


In order to prevent these and other legal consequences, special caution should be given to complying with the respective coun-try’s legislation on counter -corruption. This newsletter’s intention is to give a better u n-derstanding of Thailand’s legal framework in this regard.


  1. Legal Framework


Thailand’s legal framework concerning counter-corruption measures is largely based on


  • The Act Promulgating the Criminal Code, B.E. 2499 (1956) (the “Criminal Code”): The Criminal Code lays out the primary offences, such as bribery and corruption:


  • Demanding, accepting or agreeing to accept property or other benefits in


return for inducing an official, by dishonest or unlawful means or by using influence, to exercise or to not exercise his functions to the




advantage or disadvantage of any person (Sec. 143 Criminal Code);


  • Giving, offering or agreeing to give property or any other benefit to any official in order to induce him to (not) perform or to delay an act, contrary to his functions (Sec. 144 Criminal Code);


  • Coercion or inducement of any per-son by an official, in wrongful exer-cise of his functions, in order to pro-cure a property or any other benefit for himself or any other person (Sec. 148 Criminal Code);


  • Wrongfully demanding, accepting or agreeing to accept any property or any other benefit in return for exer-cising or not exercising any func-tions, whether or not such exercise or non-exercise is itself wrongful (Sec. 149 Criminal Code);


  • Giving, offering or agreeing to give property or any other benefit to a public prosecutor, an official to con-duct cases, an inquiry official or any official holding a judicial post so as to induce such person to wrongfully (not) perform or to delay any act (Sec. 167 Criminal Code).


  • The Act on Offences Relating to the Submission of Bids to State Agencies B.E. 2542 (1999) (the “Submission of Bids Act”): The Submission of Bids Act covers and punishes actions of bidders and any intermediaries who influence state officials by granting them advan-tages.



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Ø The Act Supplementing the Constitution relating to Prevention and Suppression of Corruption B.E. 2542 (1999) (the “CounterCorruption Act”): The Counter-Corruption Act mainly regulates the prevention and detection of corrupt acts. Among other things, the provisions under the Counter-Corruption Act cover the following issues:


  • Declaration of an account showing particulars of assets and liabilities of persons holding political positions and high raking state officials;


  • Prohibiting state officials and their spouses from being a party to or having interest in a contract made with a Government agency or being a partner or shareholder in a partner-ship or company which is a party to a contract made with the Govern-ment agency where such state official performs duties in the capacity as a state official who has the power to conduct supervision, control, inspec-tion or legal proceedings;


  • Prohibiting state officials and their spouses from being a party to a con-tract of a (directly or indirectly) mo-nopolistic nature with or being a concessionaire of the state, a state agency, state enterprise or local ad-ministration, or being a partner or shareholder in a partnership or com-pany which is a concessionaire or a contractual party in such manner;


  • Prohibiting state officials and their spouses from being interested in the capacity as a director, counsel, repre-sentative, official or employee in a private business which is under su-pervision, control or audit of the State agency to which such state of-ficial is attached or where such state official performs duties in the capac-ity as state official, provided that the nature of the interest of the private



business may be contrary to or in-consistent with public interest or the interest of the government service or may affect the autonomy in the per-formance of duties of such State of-ficial; and


  • Prohibiting state officials from re-ceiving property or any other benefit from any person other than legiti-mate property or benefit.


The Counter-Corruption Act has been specified by:


Ø The Regulation of the Office of the Prime Minister on Giving or Accepting of Gifts by Government Officials B.E. 2544 (2001) (the “Regulation”); and


  • The Notification of the National Counter-Corruption Commission con-cerning the Provisions of the Accep-tance of Property or any other Benefits on an Ethical Basis by Government Of-ficials B.E. 2543 (2000) (the “Notifica-tion”).


Apart from the aforementioned laws, regula-tions and notifications, there are numerous other legal measures in force, dealing with the punishment and prevention of corrup-tion in Thailand. This newsletter, however, mainly focuses on the consequences with regards to the Counter-Corruption Act.


  1. The Counter-Corruption Act


The Counter-Corruption Act applies with regards to state officials, foreign state offi-cials, international organisation officers, and persons who have resigned or have been removed from a state official position less than 2 years ago (“State Official”), includ-ing the following persons:


  • Holders of political positions;


  • Government officials;


  • Local officials;





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  1. Officials or persons performing duties in a state enterprise or a state agency;


  1. Local administrators and members of a local assembly who are not holders of political positions;


  1. Officials under the law on local ad-ministration;


  1. Members of a board, commission, committee or of a sub-committee, em-ployees of a government agency, state enterprise or state agency; and


  1. Persons or groups of persons exercis-ing or entrusted to exercise the state’s administrative powers in the perform-ance of a particular act under the law, whether established under the gov-ernmental bureaucratic channel or by a state enterprise or other state under-taking.


  1. The Regulation


Apart from the persons prescribed in the Counter-Corruption Act, the Regulation also applies to “family members” of State Officials. Under the Regulation


a “family member” is a spouse, child, fa-ther, mother, brother or sister of full or half blood of the State Official.


  1. The Notification


The Notification was introduced on the ba-sis of Sec. 103 of the Counter-Corruption Act. The Notification shall also apply to every State Official under the Counter-Corruption Act.


III. Restrictions and Exceptions


The Counter-Corruption Act lays out the following restrictions and exceptions:


  1. Restrictions


According to Sec. 103 of the Counter-Corruption Act, State Officials are prohib-ited from accepting property or any other



benefits from any person, unless such prop-erty or other benefit is given on a legitimate and ethical basis as prescribed by the National Anti-Corruption Commission (“NACC”).


Moreover, according to Art. 7 of the Regula-tion, State Officials are also prohibited to al-low or connive their family members accept-ing gifts from persons who have a business relationship with government officials, or benefits for the performance of the State Official’s duty unless such gift or benefit complies with societal conventions and does not exceed the amount as prescribed by the NACC (see below). Under the Regulation,


  • a “family member” is a spouse, child, father, mother, brother or sister of full or half blood of the State Offi-cial; and


  • gifts” include money, property, or other benefits that have been given, including any prize, gratuity, subven-tion, reward, discount, service or en-tertainment, as well as any advance payment or reimbursement for transportation, travelling, accommo-dation, or food expenses, which is not granted to the general public.


  • Exceptions


However, the Counter-Corruption Act and the Regulation have both prescribed excep-tions for State Officials to accept gifts, property, or other benefits if they are in compliance with the NACC’s prescription.


According to Art. 5 of the Notification, State Officials are allowed to receive prop-erty or other benefits on an ethical basis and only in a limited amount. According to Art. 5 of the Notification,


  1. other benefits” means anything that has value such as discount, accep-tance of entertainment, service, training, or other similar things; and




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  1. on an ethical basis” means receiving on a traditional, customary, or cul-tural occasion or on an occasion where the societal manners require such giving.


The property or benefits allowed to be ac-cepted by State Officials include the follow-ing:


  • Acceptance of property or other bene-fits from relatives as a gift in appro-priate circumstances.


Relatives” under the Notification includes ancestors, descendants, brothers or sisters of full or half blood, uncles, aunts, spouses, ancestors or descendants of spouses, adopted children, or adoptive parents.


The term “appropriate circumstances” is not clearly defined. However, in our opinion, it shall be considered with regards to the respective official’s professional or social position.


  • Acceptance of property or other bene-fits from any person other than rela-tives not exceeding a value of THB 3,000


  • Acceptance of property or other bene-fits not connected to the function as State Official


If State Officials or their family members re-ceive property or other benefits that is not within the allowed scope, they will be re-quired under Art. 7 of the Notification to report such acceptance to their superior for further consideration. If it is found to be in-appropriate, such property or other benefits must be returned to the grantor immediately.


  1. Penalty


In case of a violation of Sec. 103 of the Counter-Corruption Act, the State Official shall be subjected to imprisonment for up to



3 years or to a fine of up to THB 60,000, or both.


According to Sec. 123/5 of the Counter-Corruption Act, the grantor shall be impris-oned for up to 5 years or fined for up to THB 100,000, or both if it is found that the grantor’s intention to induce the State Offi-cial is to perform, not perform or to delay the execution of any act contrary to the State

Official’s duty.


If the grantor is affiliated to a juristic entity (e.g. as employee, agent or authorized repre-sentative of the entity or an affiliated entity) and such violation has been committed for the benefit of the juristic entity and the juris-tic entity does not have proper internal regu-lations to control such wrongful act, the ju-ristic entity is guilty under Sec. 123/5 of the Counter-Corruption Act and shall be sub-jected to a fine from one-time up to two-times the damages occurred or benefits re-ceived from such wrongful act (corporate li-ability).


Finally, it is worth mentioning that the new amendment to the Counter-Corruption Act (Sec. 123/2), which became effective on 10 July 2015, State Officials (domestic or in-ternational) who violate the law by demand-ing, accepting or agreeing to accept property or other benefits for themselves or others in return for (not) exercising their functions, whether or not such exercise or non-exercise is itself wrongful, may face the death penalty – depending on the severity of the offence. This is an attempt by the current military government to eliminate corruption.


  1. Conclusion


In case of giving property or gifts to State Officials, it is recommended to restrict such action to certain occasions and values in or-der to comply with the legal situation in Thailand:


  1. Granting property or other benefits should only be done on traditional, cus-



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tomary, or cultural occasions or in ac-cordance with societal manners, such as New Year’s gifts;


  • However, since from a non-Thai per-spective it may from time to time be dif-ficult if not impossible to properly define what the societal rules, the ethical basis or the appropriate circumstances require, it is recommended to comply with the NACC’s maximum value of THB 3,000.


Further, in order to avoid later entan-glements it is advisable holding on to the respective bills.


  • Finally, special caution should be given when making gifts to family members of State Officials.



Newsletter No. 197 (DE)






Aktuelle rechtliche Entwicklungen in Hongkong und China


Juli 2015





A l l r i g ht s r e s e r v e d © L o r e n z & P a r t ne r s 2 0 1 5


Obwohl Lorenz & Partners große Sorgfalt darauf verwenden, die in diesen Newslettern bereitgestellten Informationen auf aktuellem Stand für Sie zur Verfügung zu stellen, möchten wir Sie darauf hinweisen, dass diese eine individuelle Beratung nicht ersetzen können. Lorenz & Partners übernimmt keinerlei Gewähr für die Aktualität, Korrektheit oder Vollständigkeit der bereitgestellten Informationen. Haftungsansprüche gegen Lorenz & Partners, welche sich auf Schäden materieller oder ideeller Art beziehen, die durch die Nutzung oder Nichtnutzung der dargebotenen Informationen bzw. durch die Nutzung fehlerhafter und unvollständiger Informationen verursacht wurden, sind grundsätzlich ausgeschlossen, sofern seitens Lorenz & Partners kein vorsätzliches oder grob fahrlässiges Verschulden vorliegt.



  • Einleitung


Mit dem folgenden Newsletter möchten wir Sie über die neuesten rechtlichen Entwick-lungen sowie aktuelle Rechtsprechung in Hongkong und China informieren. Dabei wird insbesondere auf neuere Entscheidun-gen zum Schiedsverfahren und Arbeitsrecht sowie auf die Einführung des „Vertrags zu-gunsten Dritter“ in Hongkong Bezug genom-men.


  1. Schiedsverfahren


Die Beilegung von Rechtsstreitigkeiten, ge-rade im internationalen Geschäftsverkehr, erfolgt in Hongkong und China oft im Wege der Durchführung eines Schiedsverfahrens, vor allem bei Streitigkeiten mit hohen Streitwerten (über 200.000 USD). Eine In-anspruchnahme staatlicher Gerichte stellt oftmals keine geeignete Alternative dar, da dies meist mit höherem Kosten- und Zeit-aufwand verbunden ist. Ein weiterer Vorteil des Schiedsverfahrens ist der Ausschluss der Öffentlichkeit und die Vertraulichkeit der Verhandlungen und des Urteils. Dadurch können Geschäfts – und Betriebsgeheimnisse effektiv geschützt werden. Die wachsende Bedeutung des Schiedsverfahrens spiegelt sich auch in der aktuellen Rechtsprechung wider.


  1. Schiedsgerichtsklausel


  1. a) Hintergrund


Im Fall „Judger vs. Kroman(Az. HCCT 6/ 2015) hatten die Parteien (ein Hongkonger Schiffseigner und ein türkisches Unterneh-men) vertraglich vereinbart, dass Rechtsstrei-tigen vor einem Schiedsgericht in Hongkong ausgetragen werden sollen (sog. „arbitration

clause“). Das türkische Unternehmen machte nach Empfang der Schiffsladung Schäden der gelieferten Ware geltend und erhob Klage vor einem türkischen Gericht. Daraufhin beantragte der Schiffseigner beim Hongkonger Court of First Instance („CFI“) den Erlass einer einstweiligen Un-tersagung der vertragswidrigen Prozessfüh-rung im Ausland (sog. „anti-suit injunc-tion“).



  1. b) Entscheidung


Der CFI musste zunächst die strittige Frage der eigenen Zuständigkeit klären. Da Streit-gegenstand die vereinbarte Schiedsgerichts-klausel war, wurde die eigene Entschei-dungskompetenz auf zwei verschiedene na-tionale Rechtsquellen gestützt, einmal auf das speziell für Schiedsverfahren geltende Gesetz, die sog. Arbitration Ordinance (Section 45(2)) (Cap. 609), sowie auf allgemeines Ver-fahrensrecht, die sog. High Court Ordinance (Section 21 L) (Cap. 4).


In der Sache selbst gab der CFI dem Antrag statt und untersagte dem türkischen An-tragsgegner die Prozessführung außerhalb Hongkongs, da dies der ausdrücklich ver-einbarten Schiedsgerichtsklausel wider-sprach. Da das Urteil des Hongkonger Ge-richts allerdings keine exterritoriale Wirkung hat, steht es dem türkischen Partner frei, die Klage in der Türkei weiter zu betreiben, was unter Umständen zu dem Ergebnis führen kann, dass am Ende ein Urteil eines türki-schen Gerichts steht sowie (sollte der Hong-konger Schiffseigner ein Schiedsverfahren in Hongkong durchführen) eine Schieds-gerichtsentscheidung.






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  • Vollstreckung chinesischer Schieds-sprüche in Hongkong


  1. a) Hintergrund


Nach Abschluss eines Kaufvertrages bzgl. einer in China belegenen Immobilie veräu-ßerte die Verkäuferin (Frau Ho) vertragswid-rig das Kaufobjekt an einen Dritten. Sowohl der ursprüngliche Käufer als auch der betei-ligte Immobilienmakler führten daraufhin ein Schiedsverfahren gegen Frau Ho vor ei-nem chinesischen Schiedsgericht, der Guangz-hou Arbitration Commission. Dieses erließ zu-gunsten der beiden Antragssteller zwei Schiedssprüche, sog. mainland awards, da die Antragsgegnerin zu der Verhandlung nicht erschienen war. Die Antragsteller be-gehrten sodann die Vollstreckung dieser beiden Titel gegen Frau Ho in Hongkong.


Eine solche Vollstreckung chinesischer Schiedssprüche ist nach Hongkonger Recht grundsätzlich möglich und ausdrücklich ge-regelt, vgl. Section 92 ff. Arbitration Ordinance. Voraussetzung ist hiernach, dass zunächst ein Vollstreckungsbescheid (sog. „enforce-ment order“) beim Hongkonger CFI bean-tragt wird.


Ein solcher Vollstreckungsbescheid wurde vorliegend vom CFI antragsgemäß erlassen. Frau Ho wendete sich sodann gegen die Schiedssprüche selbst, indem sie Klage beim zu-ständigen chinesischen Gericht einlegte, dem


Guangzhou Intermediate People`s Court. Sie machte geltend, dass ihr aufgrund fehlerhaf-ter Bekanntmachung des Anhörungstermins (falsche Adresse) eine Teilnahme am Schiedsverfahren nicht möglich gewesen sei. Aufgrund dieses Verfahrensfehlers seien die Schiedssprüche aufzuheben.


Die Klage wurde abgewiesen, da die Beklag-te tatsächlich Kenntnis von der Mitteilung erlangt hatte, was nach chinesischem Schiedsverfahrensrecht zur Heilung des Zustel-lungsmangels führt.



Daraufhin legte Frau Ho Rechtsbehelf gegen den erlassenen Vollstreckungsbescheid beim Hongkonger CFI ein.


  1. b) Entscheidung


Der CFI gab dem Rechtsbehelf statt und verwarf den Vollstreckungsbescheid. Dabei stützte das Gericht seine Entscheidung auf


Hongkonger Schiedsverfahrensrecht. Nach Section 95(2)(c) Arbitration Ordinance kann die Voll-streckung chinesischer Schiedssprüche u.a. dann abgelehnt werden, wenn einer Partei des Schiedsverfahrens nicht ausreichend rechtliches Gehör gewährt wurde. Der CFI sah vorliegend diese Voraussetzungen als gege-ben an und traf damit eine den chinesischen Gerichten widersprechende Entscheidung.


Die beiden Schiedssprüche gegen Frau Ho konnten somit, jedenfalls in Hongkong, nicht vollstreckt werden.


  1. c) Bedeutung


Um chinesische Schiedssprüche in Hong-kong vollstrecken zu können, sollten diese im Einklang nicht nur mit chinesischem, sondern auch mit Hongkonger Schiedsver-fahrensrecht ergehen. Denn der Fall zeigt, dass ein und derselbe Sachverhalt von chine-sischen und Hongkonger Gerichten unter Umständen unterschiedlich beurteilt wird. Insbesondere ist daher auf eine ordnungs-mäße Bekanntmachung des Anhörungster-mins zum Schiedsverfahren zu achten.


  1. Sicherung der Vollstreckung einer Seeforderung trotz Schiedsspruch


  1. a) Hintergrund


Der Kläger (ein Schiffseigner) und der Be-klagte schlossen einen Schiffsmietvertrag über 5 Jahre. Vereinbart wurde, dass Rechts-streitigkeiten vor einem Londoner Schieds-gericht ausgetragen werden sollen. Der Be-klagte kam mit Zahlung der Schiffsmieten in Rückstand, woraufhin der Kläger ein Schiedsverfahren anstrengte und schließlich




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einen Schiedsspruch zu seinen Gunsten er-hielt.


In der Folge beantragte er beim CFI, ein in Hongkong vor Anker liegendes Schiff des Beklagten im Wege des dinglichen Arrests zu beschlagnahmen, um so die Vollstreckung sei-ner Mietforderung zu sichern. Die sachliche Zuständigkeit des Gerichts stützte er auf


Section 12A(2)(h) High Court Ordinance, wo-nach für bestimmte Forderungen mit mari-timem Bezug (sog. Seeforderungen oder „maritime claims“) der CFI zur Entschei-dung befugt ist (sog. „admiralty jurisdic-tion“).


Der Beklagte wendete sich gegen den Antrag auf Anordnung der Beschlagnahme. Er machte geltend, mit Erteilung des Schieds-spruchs habe die ursprüngliche Seeforde-rung keinen Bestand mehr. Diese sei viel-mehr im Schiedsspruch aufgegangen. Damit liege auch keine Forderung nach Section 12A(2) HCO mehr vor, sodass bereits die sachliche Zuständigkeit des CFI für derartige Anordnungen nicht mehr bestehe. Zudem sei das Recht auf vorläufige Sicherungsmaß-nahmen nur bis zur Erteilung eines Schieds-spruches gegeben und entfalle danach.


  1. b) Entscheidung


Das Gericht entschied, dass die ursprüngli-che Seeforderung trotz Schiedsspruchs bis zur Befriedigung des Gläubigers fortbestehe. Daher sei sowohl die Zuständigkeit des Ge-richts als auch die Möglichkeit eröffnet, zur Vollstreckungssicherung erforderliche Maß-nahmen, wie vorliegend die Beschlagnahme von Gütern des Beklagten, zu beantragen.


  1. c) Bedeutung


Diese neue Entscheidung verschafft Inha-bern von maritimen Schiedssprüchen ein er-hebliches Druckmittel zur Durchsetzung ih-rer Forderungen. In der Vergangenheit scheiterten derartige Begehren der Gläubiger deshalb, weil die jeweiligen Arrestanträge fälschlicherweise auf die Schiedssprüche und


nicht auf die ursprüngliche Seeforderung gestützt wurden.


III.    Vertrag zugunsten Dritter


Das nach deutschem Recht bestehende Rechtsinstitut des Vertrages zugunsten Drit-ter gem. §§ 328 f. BGB wird in ähnlicher Form auch Bestandteil der Hongkonger Rechtsordnung. Ein im Dezember 2014 ver-abschiedetes Gesetz, die sog. Contracts Ordi-nance No. 17 (Cap. 623), soll im Laufe des Jahres 2015 in Kraft treten.


  1. 1. Bisherige Rechtslage


Bisher galt der im Common Law geltende Grundsatz, dass Verträge nur Rechtswirkun-gen zwischen den Vertragsparteien entfalten können („privity of contract“). Es war den Parteien somit nicht möglich, einem Dritten durch Vertrag Rechte zu gewähren.


Folglich konnte eine gewollte Drittbegünsti-gung bisher nur über Hilfskonstruktionen erreicht werden, wie z.B. durch einseitige Absichtserklärungen, Vertreterverträge, ver-bundene Verträge etc.


  1. Neue Rechtslage


Nunmehr können Parteien eines Vertrages unter bestimmten Voraussetzungen Rechte zugunsten Dritter begründen.


  1. a) Voraussetzungen


Ein Dritter kann vertragliche Rechte geltend machen, wenn


  • dies ausdrücklich im Vertrag vorgesehen ist, oder


  • alleiniger Zweck des Vertrages die Dritt-begünstigung ist und


  • eine genaue Bezeichnung des Begünstigten Dabei kann u.U. eine Gruppen-bezeichnung ausreichen sofern eine In-dividualisierung möglich ist, so z.B. bei allen Arbeitnehmern eines Betriebes, Bewohnern eines Gebäudes, Nutzern einer Software etc.


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  1. b) Rechtsfolge


Der Dritte wird wie eine Vertragspartei behan-delt. Neben den ausdrücklich bestimmten Primäransprüchen kann der Dritte ggf. auch Sekundäransprüche geltend machen (z.B. auf Schadensersatz). Zur Durchsetzung dieser Rechte stehen dem Dritten dieselben Mög-lichkeiten wie den Vertragsparteien zur Ver-fügung (Klage, einstweiliger Rechtsschutz etc.). Der Dritte ist jedoch auch an die übri-gen Regelungen des Vertrages gebunden, die beispielsweise ein bestimmtes Verfahren bei Rechtsstreitigkeiten vorschreiben (Gutach-ter, Mediator, Schiedsverfahren, Gerichts-stand etc.).


  1. c) Einschränkung der Drittrechte


Sollten die Vertragsparteien ursprünglich eingeräumte Drittrechte nachträglich ändern oder einschränken wollen, so kann ggf. die Zustimmung des Dritten erforderlich sein. Dies gilt u.a. dann, wenn


  • der Dritte die Begünstigung bereits gebil-ligt hat und


  • die Billigung der versprechenden Ver-tragspartei mündlich oder schriftlich mit-geteilt


Für die Praxis ist daher empfehlenswert, dass der Dritte seine Rechte frühzeitig absi-chert, indem er unmittelbar nach Vertrags-unterzeichnung und Kenntnisnahme von der Begünstigung dem Versprechenden eine ausdrückliche Mitteilung in Schriftform zu-kommen lässt.


  1. d) Keine Verpflichtung zulasten Dritter


Verpflichtungen zulasten Dritter sind dagegen, genau wie nach deutschen Recht, nach wie vor unzulässig.


  1. e) Ausschluss


Für bestimmte Vertragstypen sind die neuen Regelungen ausgeschlossen. Dies gilt z.B. für Wechsel, bestimmte See- und Luftfrachtver-


träge, oder Verträge betreffend Grundeigen-tum.


  1. Praxisfolgen


Mit der Einführung des Rechtsinstituts des Vertrages zugunsten Dritter werden die ver-traglichen Gestaltungsmöglichkeiten künftig erweitert:




  • Ein Lieferant kann z.B. nicht mehr nur die eigene Haftung, sondern auch die der Mitarbeiter, Vertreter und Vertragshänd-ler etc. gegenüber dem Empfänger durch Vertrag ausschließen.


  • Schenken Kinder ihren Eltern eine Ur-laubsreise, so können die Eltern bei Schlechtleistung des Reiseveranstalters zukünftig selbst klagen.


  • Krankenversicherungen von Arbeitge-bern zugunsten der Arbeitnehmer bezie-hen oft auch deren Angehörige mit ein. Die Angehörigen können nun ihren An-spruch gegen den Versicherer selbst im eigenen Namen geltend machen, was bisher nicht möglich war.


Beabsichtigen die Vertragsparteien dagegen keine Drittbegünstigung, so sollte das neue Regelwerk künftig durch entsprechende Klauseln ausdrücklich ausgeschlossen wer-den.


  1. Arbeitsrecht


  1. „Implied Terms“ im Arbeitsver-tragsrecht


  1. a) Hintergrund


Im Fall „Tadjudin Sunny vs. Bank of America(Az. HCA 507) war die Klägerin mehrere Jahre als Angestellte der beklagten Hong-konger Bank beschäftigt. Der Arbeitsvertrag sah u.a. vor, dass die Beklagte berechtigt sein sollte, am Bonusprogramm der Bank teilzu-nehmen. Gerade im Hongkonger Finanzsek-




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tor stellen leistungsabhängige Bonuszah-lungen einen wesentlichen Teil der Gesamt-vergütungen dar. Das speziell für Arbeits-verhältnisse geltende Gesetz, die sog.


Employment Ordinance (Cap. 57), sieht diesbe-züglich jedoch keine Regelungen vor.


Am 28. August 2007 wurde der Klägerin ge-kündigt. Die jährliche Bonuszahlung für 2007 wurde ihr vollständig verwehrt. Da-raufhin erhob sie Klage beim CFI und machte geltend, die Ausübung des vertrag-lich vorgesehenen Kündigungsrechts habe dem alleinigen Zweck gedient, ihren An-spruch auf die zum Jahrsende anstehende Bonuszahlung zu vereiteln. Die Kündigung verstoße daher gegen das stillschweigend verein-barte Umgehungsverbot (sog. „implied term of anti-avoidance“) und sei daher unwirksam.


Entsprechend den Grundsätzen des Com-mon Law sieht das Hongkonger Vertrags-recht für bestimmte Vertragsarten sog. implied terms vor, also Bestimmungen, die auch ohne ausdrückliche Regelung Vertrags-bestandteil werden können. Für den Ar-beitsvertrag gilt z.B. das Gebot gegenseitigen


Vertrauens („implied term of mutual trust and confidence“). Voraussetzung für die Geltung solcher stillschweigenden Regelun-gen ist, dass


  • sie vernünftig und gerecht sind,


  • sie notwendig sind, um die dem Vertrag zugrundeliegende Geschäftstätigkeit zu fördern,


  • ihre Geltung für die Parteien offensichtlich ist,


  • ihr Inhalt einer klaren Formulierung zugäng-lich ist und


  • sie nicht im Widerspruch zu ausdrücklichen Vertragsregelungen


  1. b) Entscheidung


Das Gericht gab nach einer Verhandlungs-dauer von ca. vier Jahren der Klage statt. Zunächst wurde festgestellt, dass vorstehen-de Voraussetzungen vorliegen und der im-plied term of anti-avoidance mithin Vertragsbe-standteil wurde:


Die Beklagte konnte vernünftigerweise da-rauf vertrauen, dass sie einen Anspruch auf die vertraglich eingeräumte, jährliche Bonus-zahlung hat, entsprechend ihrer bisherigen Leistungen im Jahre 2007.


Die Bank würde, so das Gericht, zudem ihre Leistungsträger verlieren, wenn diese ständig befürchten müssten, vor Erreichen des Bo-nus-Stichtages entlassen und damit um die Früchte ihrer Leistungen gebracht zu wer-den. Ohne die Sicherheit des implied terms of anti-avoidance würde die Bank mithin ihre Ge-schäftstätigkeit beeinträchtigen.


Daher steht der implied term, entgegen der Ansicht der Beklagten, vorliegend auch nicht im Widerspruch zu ausdrücklichen Regelun-gen des Arbeitsvertrages, obwohl dieser eine kurzfristige Kündigung ohne Grund aus-drücklich zuließ.


Die Beklagte konnte sodann einen Verstoß gegen die einbezogene Regelung darlegen und beweisen. So ergab die Beweisaufnah-me, dass die Kündigung allein durch die an-stehende Bonuszahlung i.H.v. 500.000 USD veranlasst war. Dieser Betrag wurde der Klägerin letztlich zugesprochen.


  1. Haftung bei Arbeitsunfällen


  1. a) Hintergrund


Der Kläger war als Arbeitnehmer des be-klagten Hongkonger Unternehmens tätig und für die Verladung von Gütern zustän-dig. Während der Arbeit traten beim Kläger verschiedene körperliche Beschwerden auf. Durch ärztlichen Befund wurde sodann eine Rückenmarksverletzung mit teilweiser Quer-schnittslähmung festgestellt. Der Kläger forderte von der Beklagten eine Entschädi-gung i.H.v. 1,6 Mio. HKD.


Nach Section 5(1) Employees Compensation Ordi-nance (Cap. 282) ist der Arbeitgeber zur Zah-lung einer Entschädigung verpflichtet, wenn


  • die Verletzung des Arbeitnehmers auf einem Unfall beruht, also unerwartet war und nicht freiwillig erfolgte,


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  1. sich der Unfall in Ausübung der Arbeit er-eignete und nicht nur bei Gelegenheit, und


  1. der Unfall auch kausal für die Verletzung war.


  1. b) Entscheidung


Das Gericht sah diese Voraussetzungen als gegeben an und gab der Klage statt. Die Entscheidung weist einige besondere As-pekte auf:


  • So gab es zur Frage der Kausalität zwei ärztliche Gutachten. Keines konnte mit letzter Sicherheit die genaue Ursache der Rückenverletzung bestimmen. Nichts-destotrotz entschied das Gericht, eine gewisse Wahrscheinlichkeit sei ausreichend, um eine Kompensationspflicht zu be-gründen.


  • Der Arbeitgeber haftet auch dann für Arbeitsunfälle, wenn diese nicht auf Pflichtverletzungen des Arbeitsgebers zurückzuführen sind. Dies gilt selbst dann, wenn der Arbeitnehmer entgegen einer ausdrücklichen Weisung des Ar-beitgebers gehandelt hat.


  1. Verschiedenes


  1. Markeneintragung in China – Ni-col(e) Kidman


  1. a) Hintergrund


2006 beantragte ein Chinese beim Chinesi-schem Patent- und Markenamt („China Trademark Office“) die Registrierung der Handelsmarke „NICOL KIDMAN“ zur Verwendung für verschiedene Produkte (Regenschirme, Taschen etc.). Diesem An-trag wurde 2009 stattgegeben. Die Schau-spielerin Nicole Kidman beantrage daraufhin bei der übergeordneten Behörde, dem Tra-demark Review and Adjudication Board


(„TRAB“) die Ungültigerklärung der Mar-keneintragung. Sie machte geltend, die Ein-tragung verletze ihre Persönlichkeitsrechte, insbesondere das Recht am eigenen Namen. Zudem diene die Eintragung allein dem


Zwecke, wirtschaftliche Vorteile aus ihrer Bekanntheit zu erlangen. Es liege daher ein Verstoß gegen den Gutglaubensgrundsatz


(sog. „good-faith principle“) sowie ein Akt un-fairen Wettbewerbs vor.


  1. b) Entscheidung


Das TRAB entschied zugunsten von Frau Kidman. Demnach erfolgte die Eintragung entgegen Article 32 PRC Trademark Law, wo-nach bei Verletzung bestehender, vorrangi-ger Rechte die Markeneintragung zu unter-bleiben hat. Eine Verletzung von Namens-rechten setzt grundsätzlich voraus, dass Name und Handelsmarke identisch sind. 2014 hat der Pekinger High People`s Court jedoch Richtlinien für die Verwaltung von Han-delsmarken aufgestellt. Danach ist es ausrei-chend, wenn die streitgegenständliche Marke dazu geeignet ist, bei der Öffentlichkeit einen Bezug zu einer bestimmten natürlichen Person herzustellen. Die Berühmtheit einer Person kann zu einer solchen Inbezugnahme führen. Kleinere Abweichungen in der Markenbezeichnung


(wie vorliegend das fehlende „e“) sind un-schädlich, solange nach den jeweiligen Um-ständen des Einzelfalls eine Verwechse-lungsgefahr besteht.


Da Frau Kidman durch Vorlage diverser Filme, Preisverleihungen, Magazinberichte etc. ihre Bekanntheit auch bei der relevanten chinesischen Zielgruppe zum Zeitpunkt der Eintragung belegen konnte, wurde die Ein-tragung für ungültig erklärt.


  • Neues Steuerabkommen zwischen Hongkong und China


Am 1. April 2015 wurde zwischen Hong-kong und China eine umfassende Neurege-lung des zwischen beiden Ländern beste-henden Doppelbesteuerungsabkommens vereinbart. Diese sollen im Laufe des Jahres 2015 in Kraft treten und sehen u.a. folgende Steuererleichterungen für Gesellschaften mit Sitz in Hongkong und Geschäftstätigkeit in China vor:



  • Hongkonger Unternehmen und In-vestmentfonds werden von der Besteue-rung in China bzgl. solcher Gewinne be-freit, die aus dem Verkauf von Anteilen an in China börsennotierten Unterneh-men stammen.


  • Für Hongkonger Unternehmen, die Schiffe und Flugzeuge in China ver-leasen, wird der Steuersatz für die Be-steuerung diese Erträge in China von 7% auf 5 % gesenkt.





Newsletter No. 197 (EN)




Current Legal Developments in


Hong Kong and China


August 2015




A l l r i g ht s r e s e r v e d © L o r e n z & P a r t ne r s  2 0 1 5


Although Lorenz & Partners always pays great attention on updating information provided in newsletters and brochures, we cannot take responsibility for the completeness, correctness or quality of the information provided. None of the information contained in this newsletter is meant to replace a personal consultation with a qualified lawyer. Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent.



  • Introduction


In the following newsletter, we would like to inform you about the latest legal develop-ments in Hong Kong and Mainland China. The main focus of this newsletter is on re-cent decisions regarding Arbitration, Labour Law as well as the implementation of “Rights of Third Parties” in Hong Kong.


  1. Arbitration


In Hong Kong and Mainland China, legal disputes, particularly in international busi-ness transactions with large amounts in dis-pute (over USD 200,000), are regularly re-solved through arbitration. The use of state courts is normally not a suitable alternative, as this procedure often leads to higher costs and time requirements. Another advantage of arbitration is the exclusion of the public as well as the confidentiality of proceedings and judgment. As a result, company secrets can be protected more efficiently. The grow-ing importance of arbitration is reflected in the latest court rulings.


  1. Arbitration Clause


  1. a) Background


In “Judger vs. Kroman(Az. HCCT 6/ 2015)

,the parties (a Hong Kong ship owner and a Turkish company) agreed by contract to re-solve any legal disputes through an arbitration court in Hong Kong. Nonetheless, the Turkish company then asserted a claim due to al-leged damage of the cargo and commenced litigation in a Turkish court against the ship owner. After that, the ship owner applied to the Court of First Instance (“CFI”) for an injunction to restrain further conduct of the Turkish litigation against him.


  1. b) Decision


At first, the CFI had to clarify the question of its own jurisdiction to grant the requested injunction. Because an arbitration-clause was the matter in dispute, the CFI pointed to two possible sources of authority, Arbitration Ordinance (Section 45(2)) (Cap. 609) as well as general procedural law, High Court Ordinance (Section 21 L) (Cap. 4).


In its judgement, the CFI ordered an injunc-tion to restrain the Turkish company from further conduct of the Turkish litigation, as this procedure clearly was a breach of the contractually agreed arbitration clause. Nev-ertheless, because this judgement did not have any exterritorial effect, the Turkish company was free to continue court pro-ceedings in Turkey. This may lead to the re-sult of two different awards, the Turkish judgement as well as a Hong Kong arbitra-tion award.


  • Enforcement of mainland awards in Hong Kong


  1. a) Background


The underlying dispute arose out of a con-tract for sale of a property in Guangzhou, PRC between Ms Ho (a Hong Kong resi-dent) as the seller, and on the other side the buyer and a PRC incorporated real estate agent. The dispute resolution clause in the sales contract provided for arbitration ad-ministered by the Guangzhou Arbitration Commission. The buyer and real estate agent subsequently initiated arbitration proceed-ings against Ms Ho after she had sold the property in question to a third party. The Chinese Arbitration Commission ruled in favour of the applicants and granted two so-called Mainland awards. After that, the ap-



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plicants sought to enforce these awards in Hong Kong.


The proceeding of enforcing Mainland awards is explicitly regulated in Section 92 ff. Arbitration Ordinance. According to these rules, the applicant at first has to apply for an enforcement order at the Hong Kong Court.


In the present case, such an order was issued by the CFI. Subsequently, Ms Ho applied to the Chinese Intermediate People’s Court of


Guangzhou to set aside the two arbitral awards. She argued that she was not given proper notice (wrong address) of the arbitral hear-ing.


Her application was rejected on the grounds that Ms Ho had actual knowledge of the hear-ing. And according to Chinese Arbitration Law this leads to the cure of a defect in service.


Ms. Ho then contested the Hong Kong Court’s enforcement order at the CFI.


  1. b) Decision


The CFI granted the application and set aside the enforcement order. It based its ar-guments on the Hong Kong Arbitrations Ordi-nance. Under Section 95(2)(c) Arbitration Ordi-nance, enforcement of a Mainland award may be refused if the person against whom it is invoked proves that she


  • was not given proper notice of the ap-pointment of the arbitrator or of the ar-bitral proceedings; or


  • was otherwise unable to present her case.


In this case, the CFI was of the opinion that these requirements were met and conse-quently judged contrary to the Chinese courts.


As a result, the applicants were not allowed to enforce the Mainland awards, at least in Hong Kong.



  1. c) Comment


Parties to arbitral proceedings should be-ware of service requirements in respect of any documents involved. This must not only be in accordance with the applicable set of rules for arbitration agreed on by the parties, but also the law of the jurisdiction where en-forcement is sought. The present case shows that the same situation can be judged differ-ently by Chinese and Hong Kong authori-ties.


  • Enforcing a maritime arbitration award by arresting a ship


  1. a) Background


The claimant chartered a motor tanker to the defendant charterers for five years un-der a charter contract which con-tained a London arbitration clause. The de-fendant failed to pay hire on time in full and the dispute between the parties was referred







tained a final award in his favour.



Subsequently, the claimant applied to the CFI to arrest the defendant’s vessels an-chored in Hong Kong as security for his claims. He highlighted to the court that the claim was put as one falling under section 12 A(2)(h) High Court Ordinance, being a claim “arising out of any agreement relating to…the use or hire of a ship” (i.e. a maritime claim). There-fore, the claimant asserted the court’s com-petence to take such measures (i.e. Admi-ralty jurisdiction).


The defendant applied to the court to strike out the arrest of the vessel on the grounds that the proceedings and the arrest were in the nature of an application to enforce the award, and therefore an abuse of proc-ess. He submitted that the procedure of ar-rest was not available once the maritime claim had merged into a judgment or arbitra-tion award, so that the claimant no longer had a maritime claim pursuant to section 12


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A(2) HCO after the final award had been is-sued.


  1. b) Decision


The court rejected the defendant`s submis-sion and held that the maritime claim con-tinues to exist as long as the award remains unsatisfied. For that reason, the claimant was entitled to arrest the vessel because the claim as pleaded was still a claim under sec-tion 12A(2)(h) HCO.


  1. c) Comment


A claimant in arbitration proceedings who obtains a maritime award in its favour should be aware of the option of arrest-ing a ship in Hong Kong. Such arrest will impose enormous pressure on the owner because he cannot use the ship and substan-tial costs arise.


The reason why previous cases have failed is because they sought to arrest on the basis of the arbitration award. What should have been done was the opposite, i.e. arrest on the basis of the maritime claim. Great care needs to be taken when preparing the arrest papers and this ought to be done by lawyers experienced in the arrest of ships.


III. Rights of Third Parties


The legal idea of the contract to the benefit of a third party, under German law regulated in §§ 328 f. BGB, will be implemented in Hong Kong, too. The Contracts (Rights of Third Par-ties) Ordinance No.17(Cap. 623) was passed in December 2014, and is expected to come into force in 2015.


  1. Present legal status


Until now, as a principle of common law, in Hong Kong a person can only enforce a contract if he is a party to it (“privity of contract” rule).



This means traditionally lawyers have had to come up with alternative devices for confer-ring contractual benefits on third parties such as


  • a deed poll – a type of deed made by and expressing the intentions of one party only, such as a power of attorney or a loan note instrument;


  • agency arrangements – where a party enters into a contract as agent for its disclosed or undisclosed principal;


  • collateral contracts/warranties – a con-tract between two parties may also be accompanied by a collateral contract or warranties between one of them and a third party in relation to the same sub-ject-matter. Collateral warranties are ex-tremely common in the construction industry.


  • New legal situation


The new rules provide a mechanism for par-ties to a contract expressly to agree in that contract that persons who are not parties to it will have rights under it.


  1. a) Requirements


Therefore giving benefits to a third party is possible if:


  • The contract expressly states so; or


  • The contract purports to confer the benefit of that term on such person; and


  • Such person is expressly identified in the contract by name or as a member of a group, such as all the employees of a business, all occupants of a building, all members of a group of companies, or all users of licensed software.


  • Legal consequence


In consequence, the third party is treated as if they were actually a party to the contract itself. This means the third party will be entitled to



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claim damages and seek injunctions and spe-cific performance. The availability of reme-dies will be subject to the usual rules govern-ing their application under general law. However, the third party cannot enforce a term of a contract otherwise than in accor-dance with the other terms of that contract. For example, if there is a term which re-quires contractual disputes to be dealt with in a particular way (e.g., by reference to an expert, mediator, arbitrator), the third party will be bound to follow that route.


  1. c) Revoking the benefits


To prevent contracting parties from under-mining the rights granted to a third party, revoking or varying the terms of a contract requires the third party`s consent under the fol-lowing circumstances:


  • the third party has assented to the term and


  • the promisor has received notice of the as-sent (whether in writing or orally).


In practice, the safest course for third parties will be to send a clear and unambiguous written notice to the promisor as soon as the contract is signed and the third party is aware of the benefit.


  1. d) No burdens


The new rules do not provide to impose any burdens. Therefore, a third party cannot be bound by a contract or have obligations im-posed on it against its will.


  1. e) Exclusion


The following categories of contract are ex-pressly excluded from the ambit of the new rules:


  1. a bill of exchange, promissory note or any other negotiable instrument;


  1. a deed of mutual covenant;


  1. a covenant relating to land;


  • a contract of carriage by sea or by air under the Bills of Lading and Analo-gous Shipping Documents Ordinance (Cap. 440) and the Carriage by Air Or-dinance (Cap. 500);
  • a letter of credit.


  • Consequences for practice


With the implementation of the contract to the benefit of a third party the scope of contractual arrangements will be extended.




  1. A supplier of goods may purport in its supply contract to exclude liability for the negligent acts not only of itself, but of its employees, agents and sub-contractors.


  1. If a person enters into a contract with a tour company for a holiday package for its parents, and the tour company fails to honour the contract, then the new rules could enable the parents to sue the tour company directly for breach of contract.


  1. Health insurances of employers in fa-vour of its employees often also cover the employee`s relatives. Because of the new rules, relatives will be able to assert their claims against the insurer on their own behalf.


If the contracting parties do not intend to benefit third parties, they should, for safety, include in their contract a blanket exclusion of the new rules.


  1. Labour Law


  1. Implied Terms in law on employ-ment contracts


  1. a) Background


In the case of „Tadjudin Sunny vs. Bank of America (Az. HCA 507), the plaintiff worked for several years for the defendant, a



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bank in Hong Kong. The contract provided that the plaintiff was eligible to be consid-ered for a bonus under the defendant’s per-formance incentive programme. In Hong Kong’s finance sector, bonus payments are an essential part of the total remuneration. Nonetheless, the Employment Ordinance (Cap. 57) does not provide any rules to that. On 28 August 2007, the defendant terminated the plaintiff’s employment without paying her any bonus or pro-rata bonus for 2007. Thereupon, the plaintiff claimed against the defendant damages for wrongful termination of employment with the intention of depriv-ing her of the performance bonus and thereby breaching the implied term of anti-avoidance.


According to the principles of common law, terms can become an integral part of a con-tract without explicit agreement, so called implied terms. The law on employment contracts e.g. recognises the implied term of mutual trust and confidence.


A term may only be implied into a contract if:


  • it is reasonable and equitable;


  • it is necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective with-out it;


  • it is so obvious that “it goes without saying”;


  • it is capable of clear expression; and


  • it does not contradict any express term of the contract.


  • Decision


After four years of proceedings, the court ruled in favour of the plaintiff. First, it held that the above requirements were fulfilled and therefore, the implied term of anti-avoidance became part of the employment contract.


The judge argued that the plaintiff could rea-sonably expect a bonus payment based on her performance in 2007 and that no talent



would stay if he was under the constant fear that his employer would deprive him of the fruits of his effort by terminating him before the date of payment of the bonus. Without the assurance given by the implied term, the purpose of the bonus programme would be defeated. The defendant would be unable to retain talent and profit would suffer.


For that reason, the implied term of anti-avoidance did not contradict the expressly agreed term, which provided a short-period termination of the employment without the need of giving grounds for dismissal.


The plaintiff then proved that the defendant violated the implied term of anti-avoidance. It became apparent that the defendant had no other rational reason for termination than to avoid the upcoming bonus payment in December 2007 in the amount of USD 500,000.


  1. Liability for occupational accidents


  1. a) Background


The employee was employed by a Hong Kong company as a labourer on a construc-tion site. As part of his responsibilities, the employee was required to unpack goods from crates and move them to the required location. During the performance of this work, the employee suffered several physical problems. He was admitted to hospital where he was diagnosed with spinal cord in-farct with paraplegia. He subsequently asked his employer to pay HKD 1.6 million in compensation.


According to Section 5 (1) Employees Compensa-tion Ordinance (Cap. 282), an employer has an obligation to compensate an employee, if:


  1. the injury is suffered through an accident (i.e. unexpected and not deliberate),


  1. the accident arose out of or in the course of his employment and


  1. the accident was the cause of the injury.



b)  Decision

b)  Decision


The judge was of the view that these re-quirements were given and ruled in favour of the employee. The decision contained some notable points:


  • Regarding the issue of causation, medical evidence was submitted by doctors for both parties. Neither was able to con-clude with medical certainty the exact cause of the employee’s injury. None-theless, the court considered that it is sufficient that the injury was probably caused by work activities.


  • The employer has to compensate em-ployees for personal injuries arising from workplace accidents even where the accident occurs through no fault of the employer or in circumstances in which the employee acted contrary to his employer’s orders.


  • Miscellaneous


  • Trademark registration in China – Nicol(e) Kidman


  1. a) Background


In 2006, a Chinese filed an application for registration of the trademark NICOL KID-MAN with the China Trademark Office. In 2009, the Trademark Office approved the registration of the trademark for umbrellas, purses etc.


The actress Nicole Kidman then filed an ap-plication for invalidation of the trademark with the Trademark Review and Adjudica-tion Board (“TRAB”), claiming that the reg-istration infringed her prior personal name rights and that the only intention in register-ing the mark was to take advantage of her reputation. This violated the good-faith principle and constituted an act of unfair competition.


In 2014, the TRAB ruled in favour of Ms Kidman and declared that the disputed trademark was invalid. The registration vio-lated Article 32 PRC Trademark Law: „No trademark application shall infringe upon another party’s existing prior rights. …”.


Generally, an infringement of name rights requires that the name is identical to the trademark. However, in 2014 the Beijing High People’s Court issued its Guide Con-cerning the Trial of Administration Cases of Trademark Authorisation and Confirmation, which clarifies that “an identifying sign that is capable of being used in a corresponding relationship with a specific natural person may be considered as that person’s name. … Fame may be a factor to as-sume such a corresponding relationship.


Therefore, small deviations (in this case the missing “e”) shall be disregarded as long as there is a risk of confusion due to the cir-cumstances.


Ms Kidman proved through various evi-dences such as movies, award ceremonies, magazine advertisements etc. that her name had a high reputation in China before the fil-ing date of the disputed trademark.


  • New tax treaty between Hong Kong and Mainland China


On 1 April 2015, Hong Kong and Mainland China signed the Fourth Protocol to the comprehensive double taxation agreement. It will take effect in the course of this year and provides some tax benefits for Hong Kong companies/investment funds which operate in Mainland China:


  • Tax exemption in China on gains de-rived from disposal of shares listed on a Chinese stock exchange.


  • reducing the withholding tax rate for rentals from aircraft leasing and ship chartering from 7 percent to 5 percent.


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