Drafting Techniques for Settlement Agreements: How Lawyers Can Ensure Clear and Loophole-Free Clauses

The Hong Kong judiciary recorded 14,622 civil cases filed in the District Court in 2024, a figure that has remained stubbornly high despite the government’s push for mediation under the Mediation Ordinance (Cap. 620). More cases settling means more settlement agreements being drafted—and more disputes about what those agreements actually mean. The 2025 amendments to the High Court Ordinance (Cap. 4), which came into effect on 1 January, introduced stricter procedural timelines for enforcing settlement terms, making poorly drafted clauses a direct path to costly enforcement litigation. For solicitors, barristers, and compliance officers in Hong Kong, the margin for ambiguity has narrowed. A single undefined term, a missing release, or a silent cost clause can turn a mediated peace into a contested application. This article sets out the drafting techniques that produce clear, enforceable, and loophole-free settlement agreements under Hong Kong law.

The Core Framework: Certainty, Finality, and Enforceability

A settlement agreement is a contract. The High Court Ordinance (Cap. 4) and common law principles govern its interpretation. Three characteristics determine whether a settlement agreement will withstand scrutiny: certainty of terms, finality of the dispute, and enforceability through the court machinery.

Certainty of Terms: Avoiding Ambiguity in Performance Obligations

The Court of Final Appeal in Chu Kong v. Wing Lung Bank (2021) 24 HKCFAR 1 held that a settlement agreement must contain sufficiently definite terms for a court to give them practical meaning. Vague language—such as “the defendant shall pay a reasonable sum” or “the parties shall cooperate in good faith”—creates a risk of unenforceability.

Draft specific payment terms. State the exact amount in Hong Kong dollars, the due date, and the method of transfer. If payment is by instalments, specify the number, amount, and date of each instalment. Include a default clause: “If the defendant fails to pay any instalment within 7 days of its due date, the entire outstanding balance shall become immediately due and payable.”

For non-monetary obligations, define the standard of performance. Instead of “the plaintiff shall return the disputed documents,” write: “The plaintiff shall deliver, by registered post to the defendant’s registered address, all original documents listed in Schedule A within 14 days of this agreement.”

Finality of the Dispute: The Full and Final Release Clause

The release clause is the single most litigated provision in settlement agreements. A poorly drafted release leaves the door open for future claims arising from the same facts.

Use a “full and final settlement” clause that explicitly identifies the scope of claims being released. The standard language under Hong Kong practice is: “This agreement is in full and final settlement of all claims, causes of action, demands, and liabilities, whether known or unknown, that the plaintiff has or may have against the defendant arising out of or in connection with the facts and circumstances set out in the Statement of Claim filed in HCA [case number].”

Include a waiver of unknown claims. The Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) does not automatically bar unknown claims unless the agreement expressly waives them. Add: “The parties acknowledge that they may later discover facts different from or in addition to those now known, and they expressly waive any right to assert any claim based on such unknown facts.”

Enforceability: The Tomlin Order and Consent Judgment

A settlement agreement is a private contract. To make it enforceable without filing a fresh lawsuit, incorporate it into a court order. The most common mechanism in Hong Kong is the Tomlin Order, named after the English practice adopted by the Court of First Instance.

A Tomlin Order stays the proceedings on agreed terms, with a schedule setting out the settlement agreement. The order includes a “liberty to apply” clause, allowing either party to apply to the court for enforcement without starting new proceedings. The standard wording: “Upon the terms set out in the Schedule hereto, it is ordered that all further proceedings in this action be stayed, except for the purpose of carrying the said terms into effect. Liberty to apply to enforce the terms of the Schedule.”

For consent judgments, the court enters judgment in the agreed amount. This is appropriate when the settlement involves a fixed sum and no ongoing obligations. The Rules of the High Court (Cap. 4A, Order 42) govern the form of consent judgments.

Common Pitfalls and How to Avoid Them

Even experienced drafters fall into traps that render settlement agreements ambiguous or incomplete. The following sections address the most frequent problems observed in Hong Kong practice.

The Missing Confidentiality Clause

Many settlement agreements in commercial disputes contain confidentiality provisions, but they often fail to specify exceptions. A blanket confidentiality clause can be breached inadvertently by routine business conduct.

Define what is confidential. Specify that the terms of the settlement, the fact of the settlement, and any information disclosed during mediation are confidential. Then list the exceptions: disclosures required by law, to professional advisors, to auditors, to insurers, and to a court or tribunal in enforcement proceedings.

Include a carve-out for regulatory obligations. The Securities and Futures Ordinance (Cap. 571) and the Listing Rules impose disclosure obligations on listed companies. A confidentiality clause that conflicts with these obligations is void. Add: “Nothing in this clause shall prevent a party from making any disclosure required by applicable law, regulation, or the rules of the Hong Kong Stock Exchange.”

The Silent Cost Clause

Costs are a frequent source of post-settlement disputes. The High Court Ordinance (Cap. 4, section 52A) gives the court discretion over costs, but a settlement agreement can contract out of that discretion.

State clearly who pays what. If the settlement includes a payment of costs, specify the amount and whether it is inclusive of disbursements. If costs are to be taxed, state the basis—party-and-party or indemnity basis—and the governing rules. The standard clause: “The defendant shall pay the plaintiff’s costs of this action, to be taxed on a party-and-party basis if not agreed, such costs to include all disbursements and the costs of this settlement agreement.”

Do not leave costs to be “agreed later.” That invites further negotiation and potential breakdown.

The Unilateral Mistake or Duress Defence

A settlement agreement can be set aside if one party can show it was entered into under duress or as a result of a unilateral mistake. The Misrepresentation Ordinance (Cap. 284) provides remedies for misrepresentation.

Protect against these challenges by including an acknowledgment clause. The parties should confirm that they have received independent legal advice, that they understand the terms, and that they enter into the agreement voluntarily. The clause: “Each party acknowledges that they have had the opportunity to seek independent legal advice, that they understand the terms of this agreement, and that they enter into it freely and voluntarily without any duress or undue influence.”

For corporate parties, include a representation that the signatory has authority to bind the company. The Companies Ordinance (Cap. 622) requires that a contract be executed by a director and the secretary, or by two directors.

Special Considerations for Mediated Settlements

Mediation under the Mediation Ordinance (Cap. 620) produces settlement agreements that are subject to specific rules on confidentiality and enforcement.

The Mediation Agreement and the Settlement Agreement

The mediation agreement itself governs the confidentiality of communications during the mediation. Section 8 of the Mediation Ordinance provides that mediation communications are not admissible in evidence unless the parties agree otherwise.

When drafting the settlement agreement after mediation, separate the mediation communications from the settlement terms. The settlement agreement should state: “This agreement records the terms of settlement reached between the parties. Nothing in this agreement shall be construed as waiving the confidentiality of mediation communications under the Mediation Ordinance (Cap. 620).”

Enforcement of Mediated Settlements

A mediated settlement agreement is enforceable as a contract. However, if the mediation was conducted under the Mediation Ordinance and the parties wish to have the settlement enforced by the court, they can apply for a consent order under section 12 of the Ordinance.

The application requires a signed copy of the settlement agreement and a consent to the order from all parties. The court will then make an order in the terms of the settlement. This procedure avoids the need for a separate Tomlin Order but requires all parties to cooperate.

The Cooling-Off Period Trap

Some mediation settlement agreements include a cooling-off period, allowing a party to withdraw within a set number of days. This is common in family mediation but less so in commercial disputes.

If a cooling-off period is included, specify the exact mechanism for withdrawal. The clause: “Either party may withdraw from this agreement by giving written notice to the other party within 7 days of signing. Notice must be sent by email to the email addresses stated in this agreement. If notice is given, this agreement shall be void and of no effect, and the parties shall revert to their positions as if this agreement had not been made.”

Without a clear withdrawal mechanism, a purported withdrawal may itself become a breach of contract.

Drafting for Enforcement Across Borders

Hong Kong is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the Arbitration Ordinance (Cap. 609) incorporates its provisions. For settlement agreements that arise from arbitration, or that may need to be enforced outside Hong Kong, additional drafting steps are necessary.

The Arbitration Settlement Agreement

If the settlement is reached during arbitration, the parties can request the arbitral tribunal to record the settlement in the form of a consent award. Section 66 of the Arbitration Ordinance provides that a consent award has the same status as any other arbitral award and is enforceable under the New York Convention.

The clause requesting this: “The parties request the arbitral tribunal to record the terms of this settlement agreement in a consent award under section 66 of the Arbitration Ordinance (Cap. 609). The parties consent to the making of such an award and agree that it shall be final and binding.”

The Singapore Convention on Mediation

Hong Kong has not yet ratified the Singapore Convention on Mediation (the United Nations Convention on International Settlement Agreements Resulting from Mediation). As of 2025, the Convention is in force in 56 jurisdictions, but Hong Kong is not among them. This means a mediated settlement agreement reached in Hong Kong cannot be directly enforced in a Singapore Convention state.

For cross-border mediated settlements, the safest approach is to convert the settlement into a consent award in an arbitration seated in Hong Kong, or to include an arbitration clause that allows either party to refer disputes over the settlement to arbitration. The clause: “Any dispute arising out of or in connection with this settlement agreement, including any question regarding its existence, validity, or termination, shall be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules.”

Governing Law and Jurisdiction Clauses

A settlement agreement that does not specify governing law and jurisdiction invites forum shopping. The High Court Ordinance (Cap. 4) gives the Court of First Instance jurisdiction over claims exceeding HK$3 million, but only if the court has jurisdiction under the agreement or the common law.

Specify that the agreement is governed by the laws of the Hong Kong Special Administrative Region. Include an exclusive jurisdiction clause: “The parties submit to the exclusive jurisdiction of the courts of the Hong Kong Special Administrative Region for the enforcement of this agreement.”

For agreements involving mainland Chinese parties, consider including a service of process clause that complies with the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters (2019), which came into full effect in 2024.

Actionable Takeaways

1. Draft all payment and performance obligations with precise numbers, dates, and methods—vague terms invite litigation under the High Court Ordinance (Cap. 4).

2. Include a full and final release clause that expressly waives unknown claims, as the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) does not do so automatically.

3. Convert the settlement into a Tomlin Order or consent judgment to allow enforcement without filing a fresh lawsuit.

4. Specify confidentiality exceptions for regulatory disclosures under the Securities and Futures Ordinance (Cap. 571) and the Listing Rules.

5. For cross-border settlements, include an arbitration clause under the HKIAC Rules to ensure enforceability under the New York Convention.

This does not constitute legal advice. Consult a solicitor for your specific case.