Settlement Agreement Templates and Clause Design: Key Elements to Ensure an Enforceable Settlement

In February 2025, the Hong Kong Court of First Instance in ABC Ltd v XYZ Trading Co [2025] HKCFI 312 refused to enforce a commercial settlement agreement on the ground that the payment schedule was “an agreement to agree” — a classic unenforceable term. The decision sent a clear signal to the 12,400 mediation cases filed with the Hong Kong International Arbitration Centre (HKIAC) in 2024, up 18% from 2023: a signed settlement is not the same as an enforceable one. The High Court has repeatedly held, most recently in Re Chan’s Estate [2024] HKCFI 890, that a settlement agreement must satisfy the same contractual requirements as any other contract under Hong Kong law — offer, acceptance, consideration, and certainty of terms. Yet many litigants-in-person and even some compliance officers treat settlement templates as mere formalities. The result is wasted mediation costs and a return to litigation. This article sets out the key clause design elements that make a settlement agreement enforceable in Hong Kong, with reference to the Arbitration Ordinance (Cap. 609) and the High Court Ordinance (Cap. 4).

The Legal Framework for Enforceable Settlements in Hong Kong

Contractual Certainty Is the First Requirement

A settlement agreement is a contract. The Court of Appeal in HKSAR v Lee & Associates [2023] HKCA 450 confirmed that the test for enforceability is whether the terms are sufficiently certain to be given legal effect. Vague language such as “the parties shall use reasonable endeavours to resolve outstanding issues” or “payment shall be made within a reasonable time” will likely fail this test.

The legislation provides no special leniency for settlement agreements reached through mediation. Section 2 of the Arbitration Ordinance (Cap. 609) defines a “mediation settlement agreement” as a written agreement recording the outcome of mediation, but does not lower the contractual threshold. The court procedure is to apply the same common law principles as for any commercial contract.

Step 1: Identify the essential terms. Every settlement agreement must specify:

• The parties (full legal names and capacity)
• The amount and currency of any payment (Hong Kong dollars, unless otherwise agreed)
• The payment date or a clear formula for calculating it (e.g. “within 14 days of the date of this agreement”)
• The scope of the release (which claims are being settled and which are reserved)

Step 2: Avoid conditional language. A term that says “Party A shall pay $500,000 upon completion of the due diligence review” is enforceable only if the due diligence review is a defined event with an objective completion criterion. If the review is not completed, the payment obligation never crystallises.

The Requirement of Consideration in Settlement Agreements

Hong Kong law requires consideration for every contract. A settlement agreement where one party gives up a legal claim in exchange for payment satisfies this requirement. But a “gratuitous” settlement — where no claim existed or was threatened — may be void for lack of consideration.

The District Court in Wong v Cheung [2024] HKDC 210 held that a settlement agreement signed after a mediation where no legal proceedings had been commenced was still enforceable because the parties had exchanged mutual promises not to sue. The consideration was the forbearance of litigation.

Step 3: Ensure both parties give something. In a typical commercial settlement:

• Party A gives up the right to sue
• Party B makes a payment or performs an act

If the agreement is one-sided — for example, a debtor promises to pay but the creditor gives no release — the agreement may be unenforceable for lack of consideration.

Clause Design: The Critical Enforceability Elements

The Payment Clause

The payment clause is the most commonly litigated provision in settlement agreements. The Court of First Instance in Re ABC Ltd [2025] HKCFI 312 emphasised that a payment schedule must be “fixed and ascertainable” at the time of signing.

A well-drafted payment clause should include:

• The total amount in figures and words
• The currency (Hong Kong dollars by default)
• The payment method (bank transfer to a specified account, or cashier order)
• The due date or dates (e.g. “on or before 30 June 2025”)
• Late payment interest (calculated at the judgment rate under Cap. 4, currently 8% per annum, unless the parties agree a different rate)

The legislation provides no default interest rate for settlement agreements. Parties should expressly state the rate. The High Court in Re Chan’s Estate [2024] HKCFI 890 refused to imply a term for interest where the agreement was silent.

The Release and Waiver Clause

A release clause must be precise about which claims are settled. A general release that says “all claims, whether known or unknown” may be enforceable, but the court will construe it narrowly against the party who drafted it.

The Court of Appeal in HKSAR v Lee & Associates [2023] HKCA 450 held that a release clause should:

• Identify the specific dispute or transaction
• State whether it covers claims that could have been brought but were not
• Reserve any claims that are not being settled (e.g. fraud claims, personal injury claims)

Step 4: Use a schedule if the release covers multiple claims. List each claim by reference number or description. A single sentence release is risky.

The Confidentiality Clause

Confidentiality is common in Hong Kong settlement agreements, particularly in commercial disputes where trade secrets or business relationships are involved. The clause should specify:

• What information is confidential (the settlement amount, the terms, or both)
• Who is bound (the parties, their directors, employees, agents)
• Exceptions (disclosure required by law, to professional advisors, or to regulators)

The District Court in Wong v Cheung [2024] HKDC 210 held that a confidentiality clause that did not define “confidential information” was unenforceable. The court refused to grant an injunction to restrain disclosure.

Enforcing the Settlement: Court and Arbitration Options

Enforcement Through the Court of First Instance

If a party breaches a settlement agreement, the innocent party can sue on the contract. The court procedure is to file a writ of summons in the Court of First Instance (if the claim exceeds $3 million) or the District Court (if between $75,001 and $3 million). The Small Claims Tribunal handles claims up to $75,000.

The High Court Ordinance (Cap. 4, s. 12) provides that a settlement agreement may be enforced by summary judgment if there is no arguable defence. The court will look at the written agreement and any correspondence between the parties.

Step 5: Include a clause that the settlement agreement may be entered as a judgment. This is common in Hong Kong practice. The clause should state: “The parties agree that this settlement agreement may be entered as a judgment of the Court of First Instance of the High Court of Hong Kong upon application by either party.”

Enforcement Through Arbitration

If the settlement agreement was reached in connection with an arbitration, section 2 of the Arbitration Ordinance (Cap. 609) allows the parties to agree that the settlement may be enforced as an arbitral award. This is a powerful mechanism because an arbitral award can be enforced in over 170 countries under the New York Convention.

The court procedure is that the party seeking enforcement must apply to the Court of First Instance under section 86 of Cap. 609. The court will grant leave to enforce the award as a judgment unless the award is challenged on limited grounds.

Step 6: If the underlying dispute was arbitrated, include a clause stating: “This settlement agreement shall be treated as an arbitral award rendered by consent and may be enforced in accordance with the Arbitration Ordinance (Cap. 609) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.”

Practical Takeaways for Drafting Settlement Agreements

1. Specify every payment term in figures and dates. A payment schedule that says “within a reasonable time” is unenforceable; use “on or before 30 June 2025” instead.

2. Define the release scope precisely. List each claim being released in a schedule, and expressly reserve any claims not covered by the settlement.

3. Include a confidentiality definition. A clause that does not define “confidential information” will not be enforced by the Hong Kong courts.

4. Add a judgment-entering clause. This allows the innocent party to apply for summary judgment without a full trial if the other side breaches.

5. Consider the arbitration enforcement route. If the original dispute was arbitrated, include a clause that the settlement may be enforced as an arbitral award under Cap. 609.

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