It’s a fundamental legal principle that contracts which are freely entered into are legally binding and enforceable – the so-called sanctity of contract. The commercial world – and the world generally – could not operate without this principle.
Can you imagine the consequences if businesses and individuals could walk away from the contracts they had entered into, without any adverse consequences? The result would be chaos.
However, in a recent consultation paper (CP), the Government is proposing to break from the principle of sanctity of contract in the case of contracts with beauty and fitness centres. It proposes to give customers a statutory right to cancel their contracts with these centres (in form of a mandatory “cooling-off” period), without needing to give any reasons or having suffered any adverse consequences.
And this proposal is not just relevant to beauty and fitness centres. The Government is suggesting that a “relatively simple arrangement” could be included in the legislation to extend the compulsory cooling-off period to other sectors.
Cooling-off periods are not a new concept in Hong Kong – they apply to certain insurance and telecommunications contracts, for example. But these exist under industry-specific, non-binding codes of practice. In other words, they are essentially recommendations, not legal obligations.
The difference this time is that they would be imposed as a matter of law. That is, they would be compulsory. And with the “relatively simple arrangement” the Government is suggesting, this could easily be extended to other sectors.
The Government’s main justification for this proposal is the high proportion of customer complaints received by the authorities that relate to beauty and fitness services, in particular concerning unscrupulous sales tactics. But it was precisely to counter such tactics – by businesses generally, not just in certain sectors – that the Trade Descriptions Ordinance (TDO) was strengthened back in 2012.
One of the new criminal offences that was introduced is “aggressive commercial practices,” the definition of which is more than wide enough to catch the practices that Government appears to be concerned about.
The Government argues that compulsory cooling-off periods would provide an added deterrent to engaging in such practices. But it is difficult to see what could be a greater deterrent than serving jail time or paying a substantial financial penalty for treating customers badly, which the current legislation currently provides for.
Another Government argument is that many consumers who encounter aggressive commercial practices just want to get their money back, and do not wish to get involved in criminal investigation procedures. But there seems to be nothing in the TDO to stop the Customs and Excise Department (C&ED) – the main enforcer of the TDO – from requiring a trader which is suspected of having broken the law to reimburse the customer and cancel the contract, as an alternative (or in addition) to prosecution.
This is a fair balance between the interests of the consumer and trader respectively. In contrast, a statutory right for the customer to “walk away” from the contract, without any need to show that the business has done anything wrong, seems to tilt the balance unfairly in favour of customers who have simply changed their mind, made the wrong decision, or haven’t read the contract properly, through no fault of the business concerned.
While it is difficult to see the benefits of this proposal, it is easier to see the costs and other downsides. Some of these are recognised by the Government itself, in the CP:
- It makes business planning very difficult if businesses cannot estimate their prospective cash flows because they cannot predict how many customers are going to cancel their contracts. This is a particular concern for SMEs, which form the vast majority of businesses in Hong Kong. As the CP itself states “it may affect the operational efficiency of businesses or hinder their reasonable business operations.”
- It may encourage consumers to sign contracts without reading them properly. As the CP itself states “consumers may be less cautious then in making purchasing decisions.”
- It infringes the essential principle of “sanctity [or freedom] of contract.” As the CP itself states: “A requirement on cooling-off period cuts into the substance of contracts. Based on the fundamental principle of the freedom of contract, both contracting parties should enjoy the freedom to determine the terms and conditions of a contract. Providing consumers with a statutory right to cancel contracts unilaterally is, to an extent, an interference into the terms of contracts.”
- It would affect innocent businesses as well as those engaging in unscrupulous behavior, and is therefore unfair, and too blunt as an instrument to deal with such conduct.
- It would lead to arbitrary and unfair treatment, and stunt business growth to the detriment of consumers. For example, a ballet school with no exercise equipment would fall outside the definition of a “fitness centre.” But if it wished to invest in an exercise bike to help students, it would be caught by the mandatory cooling-off requirement. Equally, a business providing massage services would not be caught by the legislation, but if it wished to extend its services to nail treatment or hair removal services, it would be caught. The disincentives to business growth and market competition, and the consequent harm to consumers, are clear.
Instead of proceeding with this proposal, and imposing these harms for no apparent reward, the Government could achieve its objectives of tackling unscrupulous sales tactics in a number of other ways:
- Continued enforcement of the TDO. Successful prosecutions of offenders, with the publicity that this would generate, would act as a natural deterrent to engaging in unscrupulous practices. If, as the Government states in the CP, beauty and fitness services are its primary current concern, we note for example that, only very recently, C&ED announced that 14 persons had been arrested on suspicion of having engaged in aggressive commeContinuing outreach efforts by C&ED to businesses, in the form of education and training, to promote the importance of compliance.
These measures would promote the Government’s objective of curbing unscrupulous sales tactics more effectively than a statutory cooling-off period, which would unfairly apply to honest traders, not just guilty ones.