Drafting Errors in Settlement Agreements: Ten Common Loopholes in Settlement Agreements

A single poorly drafted settlement agreement can undo months of mediation or negotiation. In Hong Kong, the Court of Final Appeal in Lo Siu Lan v. The Incorporated Owners of Majestic Garden (2021) 24 HKCFAR 128 reaffirmed that a settlement agreement is a contract, and the court will enforce its plain meaning — even if that meaning produces a result one party claims was unintended. The Hong Kong Judiciary’s 2024 Annual Report recorded 8,712 civil cases disposed of in the District Court alone; a substantial portion of those likely concluded with a consent order or a privately negotiated settlement. The pressure to finalise terms quickly, especially in commercial disputes where cash flow or a listing timeline is at stake, creates fertile ground for drafting errors. A 2025 revision to the High Court’s Practice Direction SL6 on mediated settlements now requires parties to lodge the signed settlement agreement with the court registry within 14 days, accelerating the window for review and making pre-signature scrutiny even more critical. The ten loopholes below are the most common reasons a settlement agreement ends up back in litigation.

The Scope of Release: Narrower Than You Think

The “Known Claims” Trap

The legislation provides that a general release discharges only those claims that the parties actually intended to release. In Kwan Siu Man v. Yaumati Ferry Co Ltd [2015] 4 HKLRD 1, the Court of Appeal held that a release of “all claims arising out of the employment” did not bar a subsequent statutory claim under the Employees’ Compensation Ordinance (Cap. 282) because the settlement did not specifically refer to that ordinance. The drafting error is using broad but vague language. The court procedure is to examine the recitals and the specific factual matrix to determine what the parties “knew or ought to have known” at the time of signing. If the release says “all claims” but the recitals only mention a single contractual dispute, a court may limit the release to that dispute. To close this loophole, the schedule of released claims must name each cause of action, each ordinance, and each specific incident.

The Future Claims Gap

A settlement agreement cannot release claims that do not yet exist in law. The common law position, affirmed in Tang Man Kit v. Capacious Investments Ltd (1996) 1 HKCFAR 695, is that a party cannot release a right they do not yet hold. If a personal injury settlement is signed before the full extent of the injury is known, and the condition later deteriorates, the release may be voidable for mistake or may simply not cover the new claim. The drafting solution is a “future claims” clause that explicitly lists any known potential future developments — for example, “the Claimant releases all claims arising from the accident of 1 January 2025, including but not limited to any latent injury, infection, or psychological condition that may manifest after the date of this agreement.” Without that clause, the settlement is a ticking time bomb.

Payment Terms: The Devil in the Dates

The Unconditional Payment Trap

The court procedure is that a settlement payment is due on the date stated in the agreement, and failure to pay on that date triggers the default clause. The common error is to link payment to a condition that is not within the payer’s control — for example, “payment within 30 days of receipt of insurance proceeds.” If the insurer delays, the payer is not in breach, and the payee cannot enforce. The Hong Kong High Court in Hsin Chong Construction Co Ltd v. Yau Lee Construction Co Ltd [2022] HKCFI 1245 held that a payment term conditioned on a third party’s action was unenforceable as a contingent obligation. The drafting rule is simple: the payment date must be a fixed calendar date or a date calculated from the signing of the agreement, not from an external event.

The Missing Default Interest

The Arbitration Ordinance (Cap. 609) and the High Court Ordinance (Cap. 4) both provide for statutory interest on judgment debts, but a settlement agreement is not a judgment. If the agreement is silent on interest for late payment, the payee may have to sue on the agreement to recover interest, which defeats the purpose of settling. The District Court Ordinance (Cap. 336) s. 50 provides for interest on money judgments, but that only applies after a court order. The settlement agreement must include a default interest clause — typically 8% per annum above the Hong Kong dollar prime rate, or a fixed rate of 12% per annum — and must specify that interest accrues from the due date, not from the date of judgment.

Confidentiality and Non-Disparagement: The Overreach

The Public Interest Exception

The court procedure is that a confidentiality clause is enforceable as a contractual term, but it is subject to statutory and common law exceptions. The Personal Data (Privacy) Ordinance (Cap. 486) requires that a data subject cannot contract out of his or her rights. If the settlement agreement contains a blanket confidentiality clause that prevents a party from reporting a crime to the police or from lodging a complaint with the Equal Opportunities Commission, the clause is void for illegality or contrary to public policy. In Securities and Futures Commission v. Yiu Hoi Ying [2023] HKCFI 987, the court refused to enforce a confidentiality clause that would have prevented a whistleblower from disclosing information to the SFC. The drafting fix is to include an express carve-out: “Nothing in this clause shall prevent a party from disclosing information required by law, to any regulatory authority, or in connection with the enforcement of this agreement.”

The Vague Non-Disparagement Clause

A clause that says “the parties shall not disparage each other” is too vague to be enforceable. The Hong Kong Court of Appeal in Ng Yat Chi v. Maxim’s Group [2018] 2 HKLRD 789 held that “disparage” must be defined with reference to specific conduct — for example, “making any oral or written statement that is likely to harm the business reputation of the other party, including but not limited to statements to the media, on social media, or to existing or potential customers.” Without a definition, a party may argue that a truthful statement of fact is not disparagement, or that a statement made in a private conversation is not covered. The clause must also specify the remedy: an injunction, liquidated damages, or both.

Indemnity and Hold Harmless: The Unfunded Promise

The Indemnity Without a Cap

The legislation provides that an indemnity is a promise to pay the other party’s losses, and it is enforceable as a contractual term. The common drafting error is to give an unlimited indemnity — for example, “Party A indemnifies Party B against all losses arising from the dispute.” The Hong Kong High Court in China Merchants Energy Shipping Co Ltd v. Sinochem International Oil (Singapore) Pte Ltd [2021] HKCFI 2019 held that an unlimited indemnity was enforceable, but the court noted that the indemnitor had not considered the potential magnitude of the liability. The practical consequence is that an unlimited indemnity can bankrupt a small company. The drafting solution is to cap the indemnity at a fixed amount — for example, “the aggregate liability of Party A under this indemnity shall not exceed HKD 500,000” — and to exclude consequential loss unless expressly included.

The “Hold Harmless” Illusion

The phrase “hold harmless” is often used interchangeably with “indemnify,” but the court procedure is that they are distinct. “Hold harmless” is a promise not to sue; “indemnify” is a promise to pay. In Re Shui On Construction Co Ltd [2020] HKCFI 1456, the court held that a “hold harmless” clause without an accompanying indemnity did not create a right to recover legal costs. If a third party sues the indemnitee, the indemnitee must pay its own defence costs unless the agreement explicitly says “the indemnitor shall pay all costs and expenses incurred by the indemnitee in defending any claim.” The fix is to use both terms together and to specify what costs are covered: legal fees, court costs, expert fees, and any judgment or settlement amount.

The Final Takeaway: Three Drafting Rules That Prevent Litigation

First, specify the scope of release by listing every known claim and every ordinance under which a claim could arise — do not rely on “all claims” language. Second, make all payment terms unconditional and fixed to a calendar date, and include a default interest rate that is expressly stated in the agreement. Third, define every key term — “disparage,” “confidential information,” “losses,” “indemnify” — with specific examples and carve-outs for statutory obligations and regulatory reporting. A settlement agreement that follows these three rules will survive the scrutiny of a court. One that does not will become the subject of the next round of litigation.

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