XU YI HONG v. CHEN MING HAN AND OTHERS

HCA 1109/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1109 OF 2005

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D E C I S I O N

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Background

1.  This is the Defendants’ application to have the proceedings against them stayed pursuant to section 6 of the Arbitration Ordinance and to have their dispute with the Plaintiff referred to arbitration.  As a fallback, the Defendants apply to have the Plaintiff’s Amended Writ of Summons set aside on the ground of forum non conveniens because Xiamen in the People’s Republic of China (the “PRC”) is the forum conveniens and not Hong Kong.

2.  The Plaintiff is a Hong Kong businesswoman with substantial business holdings in Xiamen where she is a public figure.  Her husband and business partner, Mr Xie Hongbin, had a company called Xiamen Hsin Zhong Hsia Property Development Company Limited (“Xie’s Company”) in the PRC.

3.  The late Mr Lim Por Yen of the Lai Sun Group and his wife, Ms U Po Chu (collectively the “Lims”), were the sole shareholders of Zenbo Limited(精寶有限公司)(“Zenbo”) which is a company registered in Hong Kong.  Zenbo is the sole shareholder of a PRC company called Lai Sun (Xiamen) Real Estate Development Company Limited (“Lai Sun Xiamen”). The sole asset of Lai Sun Xiamen is a piece of land in Xiamen for a development project known as Hong Kong Square Project (the “Project”).

4.  By a provisional agreement dated 21 January 2004, the Lims agreed to sell their shares in Zenbo to Xie’s Company for RMB 180 million.  Then by a supplemental provisional agreement dated 10 March 2004, the Plaintiff and her husband (the “Partners”) substituted Xie’s Company as the purchaser of the Zenbo shares with the share transfer agreement to be signed on or before 9 May 2004 when the balance of the purchase price would be paid (the “Partners/Lims Agreement”).  For reasons which need not concern me, despite repeated extensions of time granted by the Lims, the Partners/Lims Agreement was not signed and the Partners never paid.  Eventually, on 18 June 2004, it was agreed that the Partners had to make a further part payment of RMB 52 million on or before 5 July 2004.

5.  It was at this stage that the Defendants came into the scene.  They contacted the Plaintiff in July 2004 to discuss the possibility of their acquiring the Zenbo shares jointly with her.  They entered into two agreements with the Plaintiff on 7 August 2004.  The first one is a rights transfer agreement made between the Plaintiff as Party A on the one part and the Plaintiff jointly with the 1^st to 3^rd Defendants as Party B on the other part (the “Rights Transfer Agreement”).  Under that agreement, the Plaintiff as Party A would sell all the Zenbo shares which she would acquire from the Lims to herself, the 1^st Defendant, the 2^nd Defendant and the 3^rd Defendant in the proportions of 20%, 40%, 20% and 20% respectively.  Clause 9 of that agreement is an arbitration clause which provided that the parties unanimously agreed to refer any dispute arising from the agreement to arbitration by the Xiamen Arbitration Commission and that the decision of the Xiamen Arbitration Commission shall be binding on the parties.  Clause 9 is in the following terms:

「若因本協議發生糾紛，各方一致同意提交廈門仲裁委員會裁決，該裁決對任何一方均具約束力。」

 “If a dispute arises because of this agreement, the parties unanimously agree to refer the dispute to the Xiamen Arbitration Commission for adjudication, whose adjudication shall be binding on any of the parties.”  (English translation)

6.  The second agreement is a joint venture agreement made between the Plaintiff as Party A, the 1^st Defendant as Party B and the 2^nd and 3^rd Defendants jointly as Party C (the “Joint Venture Agreement”).  The agreement referred to the Rights Transfer Agreement, Zenbo and its shares.  It provided for the parties rights and obligations in relation to their joint venture in the Project. 

7.  Then on 18 August 2004, the parties together with the 4^th Defendant as an additional party entered into a Supplemental Agreement with the Plaintiff as Party A, the 1^st to 3^rd Defendants jointly as Party B and the 4^th Defendant as Party C (the “Supplemental Agreement”).  The preamble stated that the Supplemental Agreement was to set out the procedures for implementing the Rights Transfer Agreement and the Joint Venture Agreement.  In particular, Clause 2 of the Supplemental Agreement provided that upon fulfilment of certain conditions by the Plaintiff, the Defendants shall pay part of the purchase price for the Zenbo shares to the Lims.

8.  The four Defendants also signed a letter dated 18 August 2004 to the Plaintiff undertaking that upon fulfilment of the conditions in Clause 2 of the Supplemental Agreement by the Plaintiff, they will transfer RMB 90 million to the bank account specified by the Lims and failing which they would indemnify the Plaintiff of her loss (the “Undertaking Letter”).

9.  The Partners did not complete their sale and purchase with the Lims on 18 August 2004.  The Plaintiff’s case is that the Partners’ failure to complete the sale and purchase was due to the Defendants’ failure to pay the Lims pursuant to Clause 3 of the Supplemental Agreement.  The Defendants’ case is that they did not pay because the Plaintiff had failed to fulfil the conditions precedent under Clause 2 of the Supplemental Agreement.

10.  On 18 August 2004, the Lims’ solicitors wrote to the Plaintiff’s solicitors complaining about her breach of the Partners/Lims Agreement and asked for proof of the Partners’ ability to pay on or before 19 August 2004.  The sale and purchase between the Partners and the Lims was aborted.  On 20 August 2004, the Lims’ solicitors wrote to the Plaintiff’s solicitors and alleged that the Partners were in breach of the Partners/Lims Agreement and reserved the Lims’ right to sell the shares to others.  On 27 August 2004, the Lims’ solicitors wrote to the Plaintiff’s solicitors to place on record that the Partners had given up the purchase and that the Lims would sell the Zenbo shares to others.  In another letter, the Lims’ solicitors informed the Plaintiff’s solicitors that the Plaintiff’s deposit of RMB 38 million would be forfeited and the agreement with the Lims rescinded.  Then on 18 October 2004, the Defendants reached agreement with the Lims to purchase their shares in Zenbo.  In a letter dated 4 March 2005 from the Lims’ solicitors to the Plaintiff’s solicitors, they recorded the agreement between the Lims and the Partners that RMB 15 million be forfeited for the Partners’ breach of contract in completing the sale and purchase of the Zenbo shares under the Partners/Lims Agreement.

11.  On 13 June 2005, the Plaintiff commenced the present action against the Defendants.  The Plaintiff relied on two causes of action.  Firstly, she claimed that the Defendants had wrongfully and in breach of the Rights Transfer Agreement, the Joint Venture Agreement and the Supplemental Agreement bypassed her and acquired the Zenbo shares from the Lims.  Her second cause of action is in tort in that the Defendants procured breach by the Lims of the Partners/Lims Agreement.  The Defendants’ defence in respect of the first cause of action is that the Plaintiff had failed to satisfy the conditions precedent under Clause 2 of the Supplemental Agreement and in respect of the second cause of action is that it was after the transaction under the Partners/Lims Agreement had been aborted that they reached agreement with the Lims to purchase the Zenbo shares.

Stay of proceedings, the law and the issues

12.  The primary application of the Defendants is that the proceedings should be stayed and the parties’ dispute referred to arbitration. The Defendants’ case is that all the three agreements and the Undertaking Letter should be read as one composite agreement and Clause 9 of the Rights Transfer Agreement is an arbitration agreement which is applicable to all the three agreements and not just the Rights Transfer Agreement itself.  Hence Mr Li, counsel for the Defendants, submits that the proceedings in respect of both the contractual claim and the tortious claim should be stayed and the parties’ dispute referred to arbitration.

13.  On the other hand, Mr Cheung, counsel for the Plaintiff, does not dispute that Clause 9 of the Rights Transfer Agreement is an arbitration agreement but submits that that clause was only applicable to the Rights Transfer Agreement and in any event that clause in its entirety had been rescinded by the Joint Venture Agreement and/or the Supplemental Agreement.  He submits in the alternative that even if Clause 9 is applicable to all the three agreements and hence to the Plaintiff’s contractual claim, but not the tortious claim.

14.  The court’s approach to such an application for stay has been correctly set out by Ma J (as he then was) in Tommy CP Sze & Co v Li & Fung (Trading) Ltd Ors [2003] 1 HKC 418 at 425D - 426C.  The court shall ask itself the following four questions:

(1)    have the parties entered into an arbitration    agreement?

(2)    is the arbitration agreement null and void,   inoperative or incapable of being performed?

(3)    is there in reality a dispute or difference between the parties?

(4)    is that dispute or difference within the ambit of the arbitration agreement?

A stay of proceedings will be granted and the dispute referred to arbitration if the answers to questions (1), (3) and (4) are in the affirmative and the answer to question (2) is in the negative. 

15.  There is no dispute that Clause 9 of the Rights Transfer Agreement contained an arbitration agreement and that there is in reality a dispute between the parties.  Thus, the issues raised by this application are:

(1)    whether the Rights Transfer Agreement; Joint Venture Agreement; Supplemental Agreement and the Undertaking Letter together formed one composite agreement;

(2)    if yes, whether Clause 9 of the Rights Transfer    Agreement had been rescinded by the Joint Venture Agreement and/or the Supplemental Agreement;

(3)    if it had not been rescinded, whether that clause is null and void, inoperative or incapable of being performed;

(4)    if it is not, whether the dispute in respect of the  tortious claim is within the ambit of Clause 9 of the Rights Transfer Agreement.

16.  As for the standard of proof in an application for stay, it is well settled that the applicant only needs to demonstrate a good prima facie case or a plainly arguable case that the arbitration agreement is in existence and binding on the parties and it is for the arbitrator and not the court to determine the existence or otherwise of the arbitration agreement: see New Sound Industries Ltd v Meliga (HK) Ltd [2005] 1 HKC 41 at 47C - D and Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd [2003] 3 HKC at 662C - 663B.

Whether the three agreements and the Undertaking Letter together formed one composite agreement

17.  The Rights Transfer Agreement and the Joint Venture Agreement were entered into on the same day.  The former referred to the Partners/Lims Agreement in the preamble.  The Joint Venture Agreement expressly referred to the Rights Transfer Agreement.  The opening words of that agreement read as follows:

「… 就進一步明確各方的權利義務，務實解決目前的實際問題，以利轉讓順利進行的基礎上，達成以下協議：」

The expressed purpose of the Joint Venture Agreement was to further clarify and identify the respective rights and obligations of the parties under the Rights Transfer Agreement and to resolve practical problems in a pragmatic manner so as to facilitate the implementation of the Rights Transfer Agreement.  Clause 1 expressly referred to the Rights Transfer Agreement and provided that upon acquisition of the Zenbo shares pursuant to that agreement, the parties shall jointly possess Zenbo and the Project.  Under Clause 2, the parties revised the purchase price of the Zenbo shares under the Rights Transfer Agreement to RMB 190 million, the Plaintiff shall invest RMB 10 million for 20% of the Zenbo shares and in the Project, the 1^st Defendant and the 2^nd and 3^rd Defendants jointly shall each invest RMB 90 million for 40% of the Zenbo shares and in the Project in line with the Rights Transfer Agreement.  The effect of the revision was that the Plaintiff only had to pay RMB 10 million for 20% of the Zenbo shares in recognition of her contribution in bringing about the arrangement.  Clause 3 provided for distribution of profits and repayment of capital, i.e. capital would be repaid in accordance with the amount of capital injected while profit would be shared in accordance with the parties’ shareholding in the Zenbo shares.  Clause 4 provided for the obligations of the Plaintiff, which were to bring about the sale of the Zenbo shares and thereafter to liaise with banks and financial institutions in connection with the Project.

18.  From the opening words and Clause 1 of the Joint Venture Agreement, it is beyond dispute that the Joint Venture Agreement was to supplement the Rights Transfer Agreement.  The revision of the purchase price of the Zenbo shares under Clause 2, the provision for distribution of profits and repayment of capital under Clause 3 and the provision in respect of the Plaintiff’s obligations under Clause 4 were all meaningless without the Rights Transfer Agreement or without that agreement being carried out into effect.  Thus the Joint Venture Agreement could not stand on its own without the Rights Transfer Agreement.  It did not substitute but supplement the Rights Transfer Agreement.   

19.  The preamble to the Supplemental Agreement expressly referred to the Rights Transfer Agreement and the Joint Venture Agreement.  It stated that the Supplemental Agreement was made for the purpose of implementing the other two agreements.  The opening words reads:

「甲、乙雙方于2004年8月7日曾簽訂兩份與有關精寶有限公司股份買賣的協議(權益轉讓協議、協議書)。為落實有關協議，雙方同意如下：」

20.  Clause 1 of the Supplemental Agreement provided that the Plaintiff and the 1^st to 3^rd Defendants would form a company called 藝和投資有限公司 (“Yi He”) to take up the Zenbo shares and the parties’ shareholdings in Yi He would be in the same proportion as agreed in respect of their holding of the Zenbo shares under the Rights Transfer Agreement. 

21.  Under Clause 2 of the Supplemental Agreement, the Plaintiff and the 1^st to 3^rd Defendants agreed to further revise the purchase price for the Zenbo shares to be paid by Yi He to RMB 192.5 million plus HK$180,000.  According to the Plaintiff, the increase in RMB 2.5 million was to compensate the Lims for the loss in interest caused by further extension of time in paying the Lims for the Zenbo shares under the Partners/Lims Agreement, while the sum of HK$180,000 was to cover stamp duty payment in connection with the transfer of the Zenbo shares.  Under this clause, the Plaintiff undertook to provide the following confirmation to the 1^st to 3^rd Defendants on or before 18 August 2004:

(1)    the Plaintiff’s solicitors’ undertaking that the    Plaintiff had authority to transfer the Zenbo shares;

(2)    the Plaintiff’s solicitors’ confirmation that the Lims’ solicitors had agreed to the share transfer agreement entered into between the Plaintiff and the Lims and had agreed to transfer the Zenbo shares to Yi He; the Plaintiff’s solicitors’ confirmation that the 1^st Defendant shall hold 40% of the shares in Yi He while the Plaintiff, the 2^nd Defendant and the 3^rd Defendant each shall hold 20% of the shares in Yi He; and

(3)    the Lims’ solicitors’ confirmation that the balance due and payable on 19 August 2004 by the Plaintiff in respect of her purchase of the Zenbo shares from the Lims did not exceed RMB 132.5 million.

22.  Clause 3 provided that upon fulfilment of the conditions in Clause 2, the 1^st to 3^rd Defendants shall transfer RMB 132.5 million to an account of the Bank of China in Guangzhou specified by the Lims.

23.  Clause 4 provided that upon completion of the transfer of the Zenbo shares to Yi He, the 1^st to 3^rd Defendants shall transfer RMB 20 million and HK$180,000 to the Plaintiff’s bank account with Hang Seng Bank in Hong Kong and RMB 5 million to the bank account of a Xiamen company with the Commercial Bank nominated by the Plaintiff.  The balance of RMB 25 million shall be paid directly to the Plaintiff by the 4^th Defendant on behalf of the 1^st Defendant.

24.  Clause 6 provided that in the event of inconsistency or conflict between the terms of the Rights Transfer Agreement and those of the Supplemental Agreement, the terms of the Supplemental Agreement shall prevail, but all other terms of the Rights Transfer Agreement shall be unaffected by the terms of the Supplemental Agreement.  Clause 7 provided that the applicable law of the Supplemental Agreement is Hong Kong law.  Clauses 6 and 7 were read as follows:

「	6.	如果甲、乙雙方前述的權益轉讓協議書與本補充協議書的條款有任何不符或抵觸，一概以本補充協議書的條款為準，其餘條款則不受本補充協議書影響。
	7.	本補充協議書適用于香港法律。」
“	6.	If the aforesaid Rights Transfer Agreement between Party A and Party B is inconsistent or conflicts with the terms of this Supplemental Agreement, the terms of this Supplemental Agreement shall prevail, but all other terms [of the Rights Transfer Agreement] shall not be affected by this Supplemental Agreement.
	7.	The law of Hong Kong is applicable to this Supplemental Agreement.”  (English translation)

25.  The Undertaking Letter was signed by the four Defendants on the same date as the Supplemental Agreement.  By that letter, the four Defendants undertook to remit RMB 90 million to the account specified by the Lims before 8 pm on 18 August 2004 upon fulfilment by the Plaintiff of the conditions in Clause 2 of the Supplemental Agreement.

26.  The provisions in the Supplemental Agreement were detailed provisions made for the purpose of implementing the Rights Transfer Agreement.  The Undertaking Letter was an undertaking to that effect.  Except for Clause 2 of the Supplemental Agreement which provided for a revision of the purchase price of the Zenbo shares, all the provisions in the Supplemental Agreement were new provisions in which there were no equivalent in either the Rights Transfer Agreement or the Joint Venture Agreement.  Even in respect of the revision in the purchase price of the Zenbo shares, there was a reason for the revision, namely to make financial provision for payment of interest charged by the Lims as a result of the delayed completion and for stamp duty.  I find that the Supplemental Agreement and the Undertaking Letter were consistent with the Rights Transfer Agreement and the Joint Venture Agreement and should be read as one composite agreement.  The Supplemental Agreement should not be treated as having replaced the other two agreements.  Indeed, even in the Plaintiff’s statement of claim, she based her claim on all the three agreements.

Whether Clause 9 of the Rights Transfer Agreement had been rescinded

27.  Mr Cheung submits that the arbitration agreement contained in Clause 9 of the Rights Transfer Agreement had been rescinded by Clauses 6 and 7 of the Supplemental Agreement.  His argument is as follows.  As the Supplemental Agreement is silent on arbitration, the natural recourse of the parties in the event of a dispute would be to litigate their differences in the court unless they agree to resort to other modes of dispute resolution.  In this respect, Clause 9 of the Rights Transfer Agreement is in conflict with and repugnant to the Supplemental Agreement.   He argues that there is no choice of law provision under the Rights Transfer Agreement providing for arbitration in Xiamen as the mode for resolving dispute under that agreement.  Hence he submits that by inserting the choice of law provision in Clause 7 of the Supplemental Agreement but without providing for arbitration, the parties must have given careful consideration to the forum and jurisdictional issues when drafting the Supplemental Agreement and must have intended to eliminate their previous choice of utilizing arbitration in Xiamen as a venue for adjudicating their dispute.  He further argues that it is particularly significant that the Supplemental Agreement was executed in the presence of the parties’ Hong Kong lawyers.  He submits that in the circumstances it is not sensible or probable that the parties, considering their experience in business and the magnitude and subject matter of the transaction had intended to choose Hong Kong substantive law but the PRC procedural law to resolve their disputes.

28.  Mr Li disputes that the Supplemental Agreement was executed in Hong Kong in the presence of the parties’ solicitors.  He argues that the Supplemental Agreement was executed in China by the 1^st to 3^rd Defendants and in Hong Kong by the Plaintiff and the 4^th Defendant; and that only the execution by the Plaintiff and the 4^th Defendant was witnessed by their solicitors.  I do not think it appropriate to resolve disputes of fact here, nor is it necessary. 

29.  I accept it is unusual and it lacks business sense to opt for Hong Kong substantive law but the PRC procedural law to resolve disputes.  However, to be inconsistent a term must contradict another term or be in conflict with it such that effect cannot fairly be given to both clauses: see Pagnan SpA v Tradax Ocean Transportation SA [1987] 2 Lloyd’s Rep 342 at 350.  If a supplemental agreement is expressly made to implement an earlier or a principal agreement, the two agreements should be construed so far as possible consistently with each other so that they can co-exist together.  Every effort must be made to give effect to both agreements and no provisions in either of the agreements should be rejected unless it is manifestly inconsistent with or repugnant to the two agreements read together as a whole.  It needs unequivocal language for any provision in the supplemental agreement to override a provision in the principal agreement. 

30.  Mr Cheung cannot refer to any express provision abrogating Clause 9 of the Rights Transfer Agreement.  He says that it was the intention of the parties that the arbitration agreement be rescinded.  However, that is only a bare assertion which is disputed by the Defendants.  More fatally for that argument, it is trite law that construction of a contract is the ascertainment of the meaning of the agreement as would be understood by a reasonable reader having knowledge of the factual matrix surrounding the making of the agreement: per Lord Hoffmann, NPJ, in Jumbo King Ltd and Faithful Properties Ltd & Others [1999] 2 HKCFAR 279 at 296 and Investors Compensation Scheme Ltd and West Bromwich Building Society [1998] 1 WLR 897 at 912F - 913F.   Evidence of any expressed intention of the parties to a contract is not evidence admissible for the purpose of construing the contract.

31.  Mr Cheung seeks to rely on the absence of arbitration provision in the Supplemental Agreement and the introduction of a choice of law clause to raise the inference that Clause 9 was rescinded.  Even with the introduction of a choice of law clause in the Supplemental Agreement, I find it impossible for Mr Cheung to make the quantum leap from the absence of provision on arbitration in the Supplemental Agreement to the conclusion that an express provision in the Rights Transfer Agreement was thereby impliedly rescinded.  It is almost impossible to rely on inference to be drawn from mere silence in the supplemental agreement to override an express provision in the principal agreement.  There must exist some overwhelming and strong circumstances in order to raise such inference which has the effect of overriding an earlier express provision.  There are no such circumstances here.  In my view, the choice of law provision is not strong enough to displace the express arbitration agreement.  On the contrary, the Project is in Xiamen in the PRC and payment for the shares was substantially effected in the PRC.  There is nothing wrong or unusual for the parties to agree to resolve their disputes in the place where the dispute would occur with the procedural law of that place but using the substantive law of another place which the parties are more comfortable with.  There is nothing to suggest that the Xiamen Arbitration Commission would not be competent in applying Hong Kong law if properly advised by legal experts just as our own courts would be competent in applying foreign law if properly advised by experts on foreign law. 

32.  Accordingly, I find that the arbitration agreement contained in Clause 9 of the Rights Transfer Agreement had not been rescinded by the Joint Venture Agreement or Supplemental Agreement.

Whether the arbitration agreement was null and void, inoperative or incapable of being performed

33.  There is nothing to suggest that the arbitration agreement contained in Clause 9 of the Rights Transfer Agreement was null and void, inoperative or incapable of being performed.  The arbitration agreement is in writing and signed by the parties.  The Xiamen Arbitration Commission is a proper arbitration body.  There is nothing to suggest that an award properly obtained from the Xiamen Arbitration Commission will not meet with the requirements under Order 73 of the Rules of the High Court and be incapable of enforcement. 

34.  The only argument raised by Mr Cheung under this head is that the 4^th Defendant is not a party to the Rights Transfer Agreement which contained the arbitration agreement.  The 4^th Defendant is a party to the Supplemental Agreement which expressly referred to the Rights Transfer Agreement and the Joint Venture Agreement.  I have found that all the three agreements are to be read as one composite agreement.  By entering into the Supplemental Agreement, the 4^th Defendant joined in the scheme under the Rights Transfer Agreements, including the arbitration agreement.  He is therefore also a party to the Rights Transfer Agreement and is bound by the arbitration agreement.  Furthermore, under Clause 4(3), the 4^th Defendant had assumed the primary obligation of the 1^st Defendant to pay the Plaintiff RMB 25 million and the joint obligation with all the Defendants in respect of all damage suffered by the Plaintiff in the event of their breach of the three agreements.  He had assumed liability as guarantor for the performance by the 1^st to 3^rd Defendants of their obligations under the three agreements.  If the Plaintiff’s dispute with the 1^st to 3^rd Defendants in respect of their liability under the three agreements is to be resolved by arbitration, there is all the more reason that her dispute with the 4^th Defendant in respect of his liability arising from the liability of the 1^st to 3^rd Defendants should also be resolved in the same proceedings as well.  I am therefore satisfied that the arbitration agreement contained in Clause 9 of the Rights Transfer Agreement is valid and operative for and against all the Defendants and that the arbitration agreement is capable of being performed.

Whether the dispute is within the ambit of the arbitration agreement - the close connection test

35.  There is no dispute that the contractual claim is within the ambit of the arbitration agreement.  The Plaintiff’s contention is that the dispute in respect of the tortious claim, i.e. inducing the Lims to breach the Partners/Lims Agreement, is outside the ambit of the arbitration agreement.  Mr Cheung referred me to the Court of Appeal decision in New Sound Industries Ltd v Meliga (HK) Ltd [2005] 1 HKC 41 at 47.  In that case, Deputy High Court Judge Muttrie held at first instance that reference to ‘all disputes’ in an arbitration agreement is equivalent to a clause containing such words as ‘all disputes in relation’ or ‘in connection with’ the contract.  This definition was accepted and not argued by the parties on appeal.  On this basis, Mr Cheung submits that the arbitration agreement only encompasses disputes giving rise to a cause of action in contract and hence the dispute in respect of the tortious claim is not within the ambit of Clause 9 of the Rights Transfer Agreement. 

36.  With respect, I think that submission is an over-simplification of the legal and factual issue involved and it failed to address the question of what disputes are in connection or in relation with the contract.  I think in that case neither Deputy High Court Judge Muttrie nor the Court of Appeal took the very over-sweeping view as suggested by counsel, namely that a tortious claim must be un-related to or unconnected with the contract. Indeed in Getwick Engineers Ltd v Pilecon Engineering Bhd HCA 558/2002 (unreported) which was quoted by Deputy High Court Judge Muttrie, Ma J (as he then was) said at para 23(2):

“Where the words ‘in connection with’ are used, while every contract must of course be construed in accordance with its ordinary and natural meaning (and arbitration agreements are no exception), it seems to me that they are wide in nature.  They would in general cover all disputes other than one entirely unrelated to the transaction covered by the contract in question: see Mustill & Boyd: Commercial Arbitration, 2^nd Edition, at 119.”

I think this must be correct.  Those words are very wide in their nature and scope.  It is wrong to limit them to disputes giving rise to a cause of action in contract and ignore the wide meaning conveyed by the words ‘in connection with’ or ‘in relation to’.  I think the words ‘if a dispute arises because of this agreement’ as used in the Rights Transfer Agreement have the same effect.  Whether a dispute is in connection with or arises because of a contract is a question of fact which has to be answered by examining all the circumstances of the case and is not to be determined solely on the basis whether it is a claim in contract or otherwise.  Indeed, in Halsbury’s Laws of Hong Kong, Vol 1(2) para 25.022, the learned authors referred to a claim in tort which has a sufficiently close connection with the contractual claim as an example of the type of dispute that may be covered by an arbitration agreement in which the parties agreed to submit all disputes in connection with the contract to arbitration.

37.  These words in the context of jurisdiction in arbitration proceedings have been considered by the English Court of Appeal on a number of occasions.  The English Court of Appeal adopted the close connection test formulated by Mocatta J in Astro Vencedor Compania Naviera SA of Panama v Mabanaft G.m.b.H. (“The Damianos”) [1971] QB 588 at 595B-G as the test for determining whether a tortious claim is within the ambit of an arbitration clause.  The test is whether the tortious claim has a sufficiently close connection with the contractual claim.  In Astro Vencedor,the parties entered into an agreement containing a clause that any dispute arising during the execution of the charter-party shall be resolved by arbitration.  The owners referred their disputes which included the owners’ claim for damages for two arrests of the vessel to arbitration.  The charterers’ application by motion for a declaration that the claim for damages for the tort of wrongful arrest did not fall within the arbitration clause was dismissed by Mocatta J.  On appeal, Lord Denning MR held that although the claim for wrongful arrest was a claim in tort, it was within the scope of arbitration as that claim was simply a follow-up to the claim that the shipowners had wrongfully stopped the discharge of the vessel which was a claim which arose out of the contract and during the execution of the contract.  Lord Denning MR held at 595D:

“The arrest of the ship was the direct consequence of the charterers’ claim for damages against the shipowners.  The charterers arrested the ship so as to enforce their claim. Their claim - that the shipowners had wrongfully stopped discharging the oil - was certainly a claim which arose out of the contract during the execution of it.  It was plainly within the arbitration clause.  It had necessarily to be decided by the arbitrators.  The arrest was simply the follow-up to that claim. It was so closely connected with it that the rightness or wrongness of the arrest is also within the scope of the arbitration.  …

In this case the umpire found that the claim of the charterers was bad.  He dismissed it out of hand.  At once the question arises: Was not then the arrest unlawful?  It seems to me that the arrests were so much part and parcel of the inquiry that they come within the broad scope of the arbitration clause.  I agree with the way Mocatta J put it: If the claim or the issue has a sufficiently close connection with the claim under the contract, then it comes within the arbitration clause.”

Lord Denning MR approved the close connection test formulated by Mocatta J.  But it should be noted that the degree of closeness established in that case was a very high one.  To be within the scope of the arbitration clause, the tortious claim has to be part and parcel of the inquiry that the arbitrator had to undertake in relation to the contractual claim, i.e. the resolution of the contractual claim was necessary for a decision on the tortious claim.

38.  However, the English Court of Appeal adopted a more relaxed approach in its later decision in Empresa Exportadora de Azucar v Industria Azucarera Nacional SA (The “Playa Larga” and “Marble Islands”) [1983] 2 Lloyd’s Rep 171.  In that case, the parties entered into a contract for sale and delivery of Cuban raw sugar to a Chilean port and agreed to submit to arbitration by the Sugar Association of London in respect of any controversy that might arise from this contract.  The buyers, Iansa, had paid for the sugar and claimed in arbitration for damages in respect of undelivered sugar in contract and in tort for detinue or conversion.  The arbitrators found the vendor, Cubazucar liable for damages for breach of contract and for tort of conversion in respect of the cargo on board the Playa Larga but not in respect of the cargo on board the Marble Island.  The arbitrators stated their award in the form of a special case for the opinion of the court.  Mustill J upheld the arbitrators’ award.  Cubazucar appealed and Iansa cross-appealed.  On appeal, Ackner LJ accepted as correct the two-limb test as stated by Mustill J in the court below.  According to Mustill J, the close connection test is satisfied if it can be shown either the resolution of a contractual issue is necessary for a decision on the tortious claim as in Astro Vencedor or in the alternative that the contractual and tortious disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other as in Wolf v Collis Removal Services [1948] 1 KB 11.  I shall quote extensively from the judgment of Ackner LJ as both counsel took different views on the interpretation of the judgment as approved by the English Court of Appeal.

39.  InPlaya Larga, one of the arguments raised by counsel for Cubazucar, Mr Hallgarten QC, was that ‘dispute arising out of this contract’ meant and only meant, a dispute giving rise to a contractual cause of action.  This is exactly what Mr Cheung sought to argue on behalf of the Plaintiff in the present case.  Mr Hallgarten QC’s argument was rejected by the arbitrators.  Mustill J, having held there was a breach of contract by Cubazucar, found it unnecessary to express a firm conclusion on this issue.   But then he went on to consider the authorities, including Astro Vencedor, set out the two-limb close connection test and seemingly rejected the submission of Mr Hallgarten QC.  In the English Court of Appeal, Ackner LJ agreed with that view.  He explained at 182, quoting the judgment of Mustill J: 

“… Mr Justice Mustill, having held that there was a breach of the warranty implied by s 12(2) of the Act, accordingly found it unnecessary to express a firm conclusion on this point.  Having referred to a number of the cases cited to him, he did say this:

It seems to me that the claimant must show either that the resolution of a contractual issue is necessary for a decision on the tortious claim (as in Astro Vencedor v Mabanaft, [1971] 1 QB 588) or, that the contractual and tortious disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other: as in Wolf v Collis Removal Services, [1948] 2 KB 11, and the “Merita” (unreported). In the present instance, however, there is no need to examine the contract in order to ascertain the merits of the claim in conversion. The fact that Iansa had both title and constructive possession at the material time is indisputable; this is all they need show to establish their claim in conversion. The contract does, no doubt, form part of a narrative of the events leading up to the claim, but it need not be asserted when the cause of action comes to be pleaded.  Moreover, although the claims in contract and conversion are closely associated, it is hard to see how the assertion of a contractual claim which was (ex hypothesi) invalid could generate a jurisdiction in tort which would not otherwise have existed. 

That part of his judgment would appear to support Mr Hallgarten’s submissions.  However, he continued as follows: -

The wrongful acts relied upon as a breach of s 12(2) were the same as those which founded the claim in conversion.  The dispute is whether these acts entitled Iansa to a remedy, and, if so, for how much.  This was a single dispute, even though the argument upon it was put forward in different alternative ways; and in my judgment the whole of the dispute in all its aspects can properly be regarded as falling within the scope of the agreement to arbitrate.

Mr Hallgarten submits that the two propositions are not reconcilable.  We do not agree.  To our minds the learned Judge having concluded that Iansa had failed to show that the resolution of a contractual issue was necessary for a decision on the tortious claim, was nevertheless satisfied that they had passed the alternative test, namely that they had established that the contractual and tortious disputes were so closely knitted together on the facts, that an agreement to arbitrate on one can properly be construed as covering the other.  If that was his view, we agree with it.”

40.  In the first sentence of Mustill J’s judgment quoted above, the learned judge stated that the close connection test may be met by showing that the resolution of a contractual issue is necessary for a decision on the tortious claim or failing that by showing that the two disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other.   In the last paragraph of the judgment quoted above, Ackner LJ approved that statement as correct.  In the later part of his judgment, Ackner LJ indeed applied the second limb of the test and held that the tortious claim was within the scope of the arbitration agreement.

41.  However, Mr Cheung seizes upon the part of Mustill J’s judgment which immediately followed the first sentence of the judgment quoted above (which I have high-lighted) and argues that that is the test for deciding whether a tortious dispute is outside the arbitration clause.  He submits that the tortious claim is outside the ambit of the arbitration clause if it can be shown that the tortious claim is free standing on its own without having to plead or to examine the contract which was just part of the background, i.e. the claimant only needs to show he has a right that has been infringed.  With respect, that is a blatant distortion of the judgment of Mustill J.  Mustill J set out the two-limb test of close connection in the first sentence of the judgment quoted above.  Then he went on the deal with the facts of the case before him.  It was in relation to the facts of that case that he held it was not necessary to determine the contractual claim in order to determine the tortious claim.  In other words, Mustill J found Iansa failed under the first limb.  Then Mustill J continued, as observed by Ackner LJ, to hold that the wrongful acts relied on in the contractual claim and tortious claim were the same acts such that the dispute was just one dispute and the agreement to submit to arbitration in respect of the contractual claim covered the tortious claim as well.  This view was clearly expressed by Mustill J and if that is not clear enough, Ackner LJ’s further explanation must have put the matter beyond doubt.  Mr Cheung was advancing the same argument of Mr Hallgarten QC which was rejected by Mustill J and on appeal by Ackner LJ.  That argument is doomed to fail before me.

42.  The two-limb test is further affirmed in the following dicta of Ackner LJ at 183:

“We do find, however, that the approach of Mr Justice Mocatta, as approved by this Court in Astro Vencedor Compania Naviera SA v Mabanaft G.m.b.H., [1971] 1 Lloyd’s Rep 331, to be most helpful.  The claim in conversion had a sufficiently close connection with the claims under the contract that it came within the arbitration clause.  Adopting the words of Mr Justice Mustill, the contractual and tortious disputes were so closely knitted together on the facts, that the agreement to arbitrate on one can properly be construed as covering the other. Accordingly, we would have held, had the matter required a decision, that the whole of the dispute as reflected in the pleadings could be properly regarded as falling within the scope of the agreement to arbitrate.”

43.  The above dicta of Ackner LJ is clearly obiter.  The present case is one in which a decision is required as to what is the applicable test.  In his last attempt to argue for the free standing test, Mr Cheung sought to distinguish Astro Vencedor, Playa Larga and Wolf v Collis Removal Services from the present case on the basis that the parties to the tortious act in those cases were the same parties to the contract and to the arbitration agreement whereas in the present case the party who was procured to breach the contract, namely the Lims, was an outside party.  However, as the Lims are not a party to this action, I think the distinction is one of no difference.  The two-limb close connection test as stated by Mustill J in Playa Larga has stood for almost sixty years and has been approved by the English Court of Appeal.  I respectfully adopt that test as the proper test to determine whether a tortious dispute is within the ambit of an arbitration clause.  The burden of proof rests on the party seeking to rely on the arbitration clause, i.e. the Defendants in this case.

Whether the dispute is within the ambit of the arbitration agreement - the fact

44.  Mr Cheung submits that there is no close connection between the contractual claim and tortious claim as the tortious claim is free standing even without the contractual claim.  Again, with respect, that is not the proper test.  The test is whether resolution of the contractual claim is necessary for disposing of the tortious claim or whether the facts of the two disputes are so closely knitted together that the agreement to arbitrate on one can properly be construed as covering the other.  On the Plaintiff’s pleading, the contractual claim is based on the Defendants’ failure to pay the Lims on or before 19 August 2004 in accordance with Clause 3 of the Supplemental Agreement which resulted in the Lims rescinding the Partners/Lims Agreement and forfeiting part of the deposit.  The tortious claim is based on the Defendants’ knowingly offering a higher price to the Lims for their Zenbo shares which procured the Lims to breach the Partners/Lims Agreement.  On the Plaintiff’s pleaded case, the tortious claim is separate and distinct from the contractual claim.  But, as I shall demonstrate below, the Plaintiff’s pleaded claim in tort is problematic.

45.  Whether there is close connection is not to be determined solely on the basis of the pleading of one party.  Skilled draftsmanship can turn a positive averment negative and vice versa.  To determine whether the two claims are closely connected, the court must consider the substance and nature of the two disputes.  This, the court cannot do without also looking at the pleading of the other party.  The Defendants’ defence to the contractual claim is that they did not honour their payment obligation because the Plaintiff had failed to meet the conditions precedent under Clause 2 of the Supplemental Agreement by providing the necessary confirmations.  On these pleadings, the dispute under the contractual claim is clearly a matter within the ambit of the arbitration clause.  Counsel have no dispute about this.

46.  As for the defence to the tortious claim, the Defendants pleaded that they were approached by the Lims after the Partners/Lims Agreement was rescinded in August 2004 and they entered into the agreement with the Lims to purchase their Zenbo shares at the same price on 18 October 2004.  The Plaintiff was unable to say what was the price that the Defendants offered to procure the Lims to breach the Partners/Lims Agreement and averred that that will be pleaded upon completion of discovery.  But even assuming, in favour of the Plaintiff, that she can show that the price offered by the Defendants to the Lims for their Zenbo shares was higher than that under the Partners/Lims Agreement and that the Defendants had begun negotiation with the Lims for the purchase of the Zenbo shares prior to 18 October 2004, the central dispute in respect of both the contractual claim and tortious claim remains whether the Plaintiff had failed to meet the conditions precedent under Clause 2 of the Supplemental Agreement. 

47.  If the Plaintiff had failed to meet the conditions precedent, the Defendants had no obligation to pay.  The rescission of the Partners/Lims Agreement by the Lims was a matter of course and matter of right for the Lims.  The Plaintiff was responsible for that breach. There was no breach of the Partners/Lims Agreement on the part of the Lims.  The Plaintiff could not complain that the breach was procured by the Defendants.  The Defendants have a complete defence to both the contractual and tortious claims.  If, on the other hand, the Plaintiff had met the conditions precedent, the Defendants were in breach of their payment obligation.  Their breach clearly resulted in rescission of the Partners/Lims Agreement by the Lims.  They would be liable to the Plaintiff for breach of the Supplemental Agreement.  But even then, the Defendants could not have committed the tort of procuring the breach of the Partners/Lims Agreement by the Lims because the party who was in breach of that agreement was the Plaintiff for not being able to pay and not the Lims for having agreed to sell at a higher price to the Defendants.  The Defendants would have no defence to the contractual claim but would have a complete defence to the tortious claim.  That is why I indicated earlier that the Plaintiff’s pleaded case in respect of the tortious claim is problematic.  Immediately, it could be seen that this is a case falling within both limbs of the close connection test.  The single and common issue for the two claims is whether the Plaintiff had failed to satisfy the conditions precedent under Clause 2 of the Supplemental Agreement.  The resolution of the contractual claim is necessary for a decision on the tortious claim and the factual dispute in respect of both claims involved the same fact.

48.  In the circumstances, I am satisfied that there is a sufficiently close connection between the contractual claim and the tortious claim that the tortious claim also comes within the ambit of the arbitration clause.  I find that the Defendants have demonstrated a good prima facie case or a plainly arguable case that the arbitration agreement is in existence and binding on the parties.  Accordingly, I shall allow the application to have these proceedings stayed pursuant to section 6 of the Arbitration Ordinance for the dispute to be referred to arbitration by the Xiamen Arbitration Commission in accordance with Clause 9 of the Rights Transfer Agreement.

Setting aside the writ on the ground of forum non conveniens - the law

49.  Having reached the above conclusion, it is unnecessary for me to consider the Defendants’ fallback application.  But I shall nevertheless deal with that briefly.

50.  The law on this matter is very well established: see Hong Kong Civil Procedure 2006 Vol 1 para at 11/1/10, The Lanka Muditha [1991] 1 HKLR 741 at 744 and New Link Consultants Ltd v Air China & Others [2005] 2 HKC 260 at paras 52 and 53.  In considering an application to set aside a writ on the ground of forum non conveniens, the court asks itself the following three questions: -

(a)    is it shown that Hong Kong is not only not the natural and appropriate forum for the trial, but that there is another forum which is clearly and distinctly more appropriate than Hong Kong?

(b)    if the answer to question (a) is yes, will a trial at the other forum deprive the plaintiff of any legitimate personal and juridical advantages?

(c)    if the answer to question (b) is yes, the court has to balance the advantages in question (a) against the disadvantages in question (b).  Deprivation of one or more personal or juridical advantages will not necessarily be fatal to the applicant provided that the court is satisfied that notwithstanding such loss substantial justice will be done in the available forum. 

It is the plaintiff’s prerogative to choose the forum in which he wishes to institute proceedings.  If the defendant wishes to set aside the proceedings on the ground of forum non conveniens, he bears the burden of proof, save in respect of question (b) which is a matter solely within the knowledge of the plaintiff who should therefore bear the burden of proof in respect of that issue.

Question (a) - Whether another forum is more appropriate

51.  In considering this question, the court must bear in mind all matters pertaining to the trial of the action, including the place of residence of the parties and their witnesses, the nature of the claim, the defence, the evidence and the remedy sought and the law applicable to the dispute.

52.  The 1^st, 2^nd and 4^th Defendants are citizens of the PRC.  Not only that they are businessmen in Xiamen, they are also international businessmen.  There is nothing to suggest that any of them have difficulties coming to Hong Kong to conduct their litigation.  The large number of PRC litigants in our courts these days shows that travelling to Hong Kong or obtaining two way permits to come Hong Kong is no longer a consideration against Hong Kong as a forum conveniens.  The 3^rd Defendant is an Australian citizen.  The Plaintiff is a Hong Kong citizen, but she is also a businesswoman in Xiamen and a public figure there.  Her husband is also a PRC citizen in Xiamen.  Whether the trial is conducted in Hong Kong or Xiamen is of no difference to the 3^rd Defendant and the Plaintiff.  It is argued by Mr Cheung that the Defendants’ company, Excel Pearl (Hong Kong) Limited is a company incorporated in Hong Kong under the Company Ordinance and is indicative of the Defendants’ connection with Hong Kong.  However, the company is only an investment vehicle for the Defendants’ investment in the PRC.  I consider there is little significance to be attached to this company or its place of incorporation.

53.  On witnesses, the 1^st, 2^nd and 4^th Defendants, the Lims’ representative in Xiamen who negotiated the sale of the Zenbo shares to the Defendants and the Plaintiff’s husband are all residents in the PRC.  The Plaintiff, her solicitors and those of the Lims’ solicitors are resident in Hong Kong.  Though travelling to Xiamen by the Hong Kong witnesses or travelling to Hong Kong by the PRC witnesses is not a major consideration, having regard to the nature of the dispute and the nature of the evidence, it appears that the Plaintiff’s solicitors and the Lims’ solicitors will most likely be the most important witnesses in the trial.  The documents they will likely produce will most likely originate from Hong Kong and be more intelligible to the Hong Kong court than to the forum in Xiamen.  This consideration favours Hong Kong as the more convenient forum.

54.  As for the agreements, they were executed by the Plaintiff and the 4^th Defendants in Hong Kong and by the other Defendants in the PRC.  The execution of the agreements is not in dispute.  I do not think there is any significance to be attached to this fact as the parties have agreed that the proper law of the contract is Hong Kong law.

55.  As for the place of performance of the agreements, Mr Li submits that the place of performance is the PRC as payment of monies which is the crucial part of the performance of the agreements was to be substantially performed in the PRC.  He also argues that although the subject matter of the agreements was the Zenbo shares, in reality the subject matter was the shares of Lai Sun Xiamen, a PRC company holding the Project in Xiamen.  Be that as it may, I think Mr Li’s submission is only of superficial attraction.  Though the majority of the payment was to be remitted to the PRC, the payment obligations were never discharged and this is not in dispute.  Insofar as the dispute between the Plaintiff and the Defendants is concerned, nothing turned on the Zenbo shares or the Project.  The Plaintiff is not seeking delivery up of the Zenbo shares or of the Project.  There are no disputes about any breach of warranty in respect of the Project or of Lai Sun Xiamen.  There are no claims over the assets of the Project or of Lai Sun Xiamen.  The remedy sought by the Plaintiff is purely monetary.  Thus, the place where the contract was to be performed or where the subject matter was situated has no significance so far as issues pertaining to the trial in Xiamen or Hong Kong are concerned.

56.  In the ultimate analysis, the most important issues to be considered under this question are the place of residence of the crucial witnesses, the nature of the evidence and the choice of law clause.  The crucial witnesses are resident in Hong Kong.  The documentary evidence are likely to be more familiar to the Hong Kong court than to any forum in Xiamen.  The law to be applied to the contract is Hong Kong law.  Though there is nothing to suggest that the Xiamen forum would not be competent in Hong Kong law if properly advised by legal experts, there is nothing to suggest that forum is more appropriate than Hong Kong.  I find that the Defendants have failed to show that Hong Kong is not the natural and appropriate forum for the trial and that the forum in Xiamen is clearly and distinctly more appropriate than Hong Kong.  In view of this conclusion, there is no need to consider the question (b) and question (c).  If it becomes necessary for me to determine this application, for the reasons as stated above, I would dismiss it.

Conclusion

57.  Accordingly, I grant the Defendants’ application to have these proceedings stayed pursuant to section 6 of the Arbitration Ordinance for the dispute to be referred to arbitration by the Xiamen Arbitration Commission in accordance with Clause 9 of the Rights Transfer Agreement.  I also make a costs order nisi that the Plaintiff shall pay the costs of the Defendants, to be taxed if not agreed.