Matter note: terminating or exiting a cross-border commercial relationship

Exiting a cross-border commercial relationship is rarely a single legal act. The governing-law clause, the forum selected at signing, and the structural position of the parties across multiple jurisdictions each shape what is possible – and what will be recognised where the assets or the counterparty actually sit. This note describes, in anonymised form, a matter in which those variables produced a conflict between the contractual exit route and the commercial reality on the ground.

The matter raised questions our corporate counsel desk encounters regularly: what the contract says is the starting point, not the answer. Where the relationship spans Hong Kong, a Mainland Chinese counterparty, and an offshore holding entity, the interaction between the governing instruments, the enforcement position, and the day-two operating reality determines whether a clean exit is achievable – or whether the exit triggers a second dispute more difficult than the first.

The situation and the constraint

A manufacturing and distribution arrangement had run across two jurisdictions for several years. One party was a group operating through a BVI holding entity, with the contracting entity incorporated in Hong Kong. The counterparty was based in the Mainland. The relationship had been governed by a written agreement providing for Hong Kong law as the governing law and designating Hong Kong courts as the agreed forum for disputes.

The grounds for exit were, on their face, clear. Performance had deteriorated. Notice had been given in accordance with the contract. The question was whether the contractual termination, properly served, would be recognised and acted upon – or whether the counterparty would continue to perform, or to assert performance obligations, in a way that created continuing legal exposure for our client.

The constraint was structural. The BVI holding entity was a counterparty to certain upstream arrangements – supply commitments, a long-term licence, and a set of inter-company payment flows – that were not governed by the same agreement. Terminating the primary contract would not, by itself, resolve those threads. The day-two position – what the group's legal exposure looked like the morning after termination – had not been mapped.

That gap is where the matter turned difficult. A group with cross-border commercial relationships of this kind frequently focuses on the exit right in the primary contract while underestimating the tail risk in ancillary arrangements. In our cross-border practice, we see this pattern consistently in Greater China–facing relationships where the holding and operating layers were built at different times, often under different legal advice.

The cross-border problem: governing law versus recognition

The agreement's Hong Kong governing-law clause was enforceable and, in principle, gave the client a strong position. The difficulty was not the governing law. It was the question of what a Hong Kong court judgment or a termination notice grounded in Hong Kong law would mean in the Mainland, where the counterparty's operations and assets were located.

Since 29 January 2024, the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) has been in force, replacing the earlier choice-of-court regime under Cap. 597. Under Cap. 645, a judgment of the Hong Kong Court of First Instance made on or after that date – including a judgment arising from a contractual dispute with a Hong Kong governing-law and forum clause – can be registered and enforced in the Mainland through the reciprocal-enforcement mechanism, provided the judgment falls within the scope of the Ordinance and does not fall within the specified exclusions.

That mechanism changed the calculus considerably. Before Cap. 645 came into force, the path from a Hong Kong court judgment to Mainland enforcement was narrower and required the earlier arrangement's stricter exclusive-jurisdiction trigger. The removal of that exclusive-jurisdiction condition under the current Ordinance meant that a judgment obtained in Hong Kong on the basis of the parties' non-exclusive forum agreement was, in principle, capable of recognition and registration in the Mainland.

The practical question was sequencing. A client seeking to exit cleanly has an interest in preserving, not accelerating, adversarial proceedings until the day-two exposure is mapped and the ancillary arrangements are resolved or protected. Moving directly to litigation to secure a declaration of valid termination risked triggering a counter-claim, freezing commercial flows that the client still needed to wind down, and exposing the BVI holding entity to proceedings it had not anticipated.

This is, in our experience, the most common misjudgement in cross-border exits: treating the legal question and the commercial sequencing question as the same question. They are not.

The strategy: sequencing the exit across instruments and jurisdictions

The strategy we recommended had four components, applied in sequence rather than simultaneously. Each component addressed a different layer of the cross-border structure.

First, an audit of the ancillary arrangements. Every instrument to which the BVI entity or the Hong Kong contracting entity was a party was reviewed against the termination of the primary contract. The purpose was to identify which arrangements would be automatically affected, which would survive, and which could be terminated independently. Several arrangements contained no explicit connection clause. Those required a specific termination notice framed under their own governing law – not the law of the primary contract.

Second, a review of the notice requirements across all relevant agreements. Notices given under the wrong instrument or to the wrong entity would not bind the counterparty under Hong Kong or BVI law. The matter involved a combination of written agreement provisions and a course-of-conduct issue: communications had been conducted informally for an extended period, which raised a question about whether informal statements had modified the formal notice mechanism. That question was resolved by reference to the Companies Ordinance (Cap. 622) and the agreement's own provision on amendments.

Third, a structured communication to the counterparty that preserved the contractual exit right while leaving open the possibility of a negotiated wind-down. The counterparty's cooperation in unwinding the supply and licence arrangements would materially reduce the client's tail risk. A communication that immediately asserted a hard legal position would have eliminated that possibility.

Fourth, and running in parallel, an assessment of the enforcement route. If the counterparty disputed the validity of termination or continued to perform in a way that created liability, the client needed a clear read on whether and how a Hong Kong court judgment could be registered in the Mainland under Cap. 645, and whether the pending arbitral arrangement in a related contract would create a conflict with that route. The interaction between the litigation route under Cap. 645 and the arbitration route under the Arbitration Ordinance (Cap. 609) – both potentially engaged by the structure – required careful mapping before any step was taken.

For a preliminary read on your cross-border exit position and the enforcement route, email info@lockhartyip.com.

The sequence and the turning point

The turning point in the matter was the audit of the ancillary arrangements. It revealed that one instrument – a long-term licence granted by the BVI entity to the Mainland counterparty – contained a termination provision that was inconsistent with the primary contract's exit mechanism. The licence contained a survivability clause: it survived termination of the primary commercial relationship unless separately terminated on a longer notice period.

Had the client proceeded with termination of the primary contract without addressing the licence, the counterparty would have retained a valid licence from the BVI entity to use the group's intellectual property in the Mainland, even after the primary relationship had ended. That exposure – continuing IP rights running in favour of a counterparty with whom the commercial relationship had been terminated – was not apparent from the primary agreement alone.

Identifying that issue early changed the sequence entirely. The termination notice for the licence was served first, under its own longer notice period. Only once the licence termination notice period had substantially elapsed was the primary contract termination completed. The sequencing meant that the licence would expire in close proximity to the primary contract exit, eliminating the window in which the counterparty could have exploited the gap.

The counterparty did not challenge the termination of the primary contract. It sought, initially, to negotiate a waiver of the licence termination. That negotiation was managed by reference to the group's commercial objectives for the wind-down period – a staged reduction in the counterparty's operating use of the IP, rather than an immediate hard stop, which would have risked disruption to the group's own Mainland operations during the transition. A short agreed wind-down period was documented as a variation to the licence, with explicit confirmation that the variation did not constitute a renewal or extension.

The variation was documented under Hong Kong law, with the same forum clause as the primary contract. That choice mattered: a variation documented under a different governing law would have created a fragmented enforcement position if any subsequent dispute arose.

If an earlier exit attempt or contract termination has produced an unresolved position, a structured second read can identify what remains open. Contact info@lockhartyip.com to discuss the current position.

Qualitative outcome and the transferable lesson

The exit was completed without adversarial proceedings. The ancillary licence was wound down on terms that protected the group's IP position. The BVI holding entity retained no ongoing exposure to the Mainland counterparty once the wind-down period closed. The enforcement position under Cap. 645 was not tested, because the matter resolved before litigation became necessary – but mapping that route in advance was what allowed the client to make credible, confident decisions at each step.

The transferable lesson is this: a cross-border exit is a sequencing problem before it is a legal problem. The governing law and forum clause establish the framework, but they do not determine the day-two position. In a relationship spanning Hong Kong, the Mainland, and an offshore holding entity, the ancillary instruments – licences, supply commitments, inter-company arrangements – each carry their own termination logic, and they must be read together before the first notice is served.

The second lesson concerns the enforcement route. Since Cap. 645 came into force on 29 January 2024, a Hong Kong court judgment in a commercial matter – including a judgment arising from a contractual exit dispute – is capable in principle of recognition and registration in the Mainland. That changes the weight of a Hong Kong forum clause in cross-border negotiations and in exit planning. A party that can credibly enforce in the Mainland through the reciprocal-enforcement mechanism is in a structurally different negotiating position from one whose remedy is limited to the Hong Kong jurisdiction.

In our cross-border practice, we regularly act on matters of this kind. The structure of the holding layer, the interaction between the primary and ancillary instruments, and the enforcement position in the Mainland are the three variables that determine whether a cross-border exit proceeds cleanly or escalates into a second dispute. Mapping all three before the first step is taken is the discipline that matters most.

For a structured assessment of your cross-border exit or termination position across the relevant jurisdictions, contact our corporate counsel desk at info@lockhartyip.com.

Related practices

• Corporate Counsel – cross-border corporate legal support for international groups operating through Hong Kong
• Disputes & Arbitration – enforcement, arbitration, and Mainland–HK judgment recognition across Greater China

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.