XCHRX CIM CO. LTD. AND OTHERS v. KOO CHI YUN AND ANOTHER

HCA 14293/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14293 OF 1999

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D E C I S I O N

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Introduction

1. This is the plaintiffs' appeal against the Master's order made on 20 April 2001 (and dated 27 April 2001) whereby she:-

(a) discharged the order of another Master dated 7 August 2000 giving the plaintiffs leave to serve the Writ herein out of jurisdiction on the defendants;

(b) declared that the High Court of Hong Kong Special Administrative Region does not have jurisdiction to hear or determine this action, and set aside the purported service of Writ herein on the defendants with costs to them.

The plaintiffs ask in this appeal for the order given on 20 April 2001 to be reversed and the order of 7 August 2000 to be affirmed with costs to them.

The Plaintiffs' Case Regarding Their Claim and Service Out of Jurisdiction

The Plaintiffs' Claim

2. According to the Amended Statement of Claim, the plaintiffs' claim is based on the defendants' alleged breach of an oral loan agreement. The background leading to the making of the said loan agreement (the existence of the loan agreement is denied by the defendants) is said to be as follows.

3. The 1st plaintiff ("P1") is a Hong Kong company and was one of the 2 shareholders of Chinese Television Network (BVI) Limited ("CTN BVI"). P1 was also the controlling shareholder of the 2nd plaintiff ("P2"). P2 is itself also a Hong Kong company and was the other shareholder of CTN BVI. The 3rd plaintiff was P1's controlling shareholder and one of its directors. He was also the Chairman of the board of directors and the Chief Executive Officer of CTN BVI.

4. The 1st Defendant ("D1") was the sole director and shareholder of the 2nd defendant ("D2").

5. CTN BVI is a British Virgin Island company with a registered office there but a headquarters in Hong Kong controlling its business. Its business since 1993 has been satellite television production and broadcast to Taiwan, Hong Kong, the People's Republic of China, Thailand, the Philippines, Singapore, Japan, Australia, New Zealand, Vietnam and Malaysia.

6. In about October and November 1995, and at the plaintiffs' request made in Hong Kong, D1 procured one Mr. Yeh to lend a relatively substantial sum to P1. In about April and May 1996, at the plaintiffs' request also made in Hong Kong, D1 procured a Videoland Inc (and/or other companies controlled by D1) to provide 3 credit facilities to P1 and P2.

7. The financial situation of CTN BVI did not improve and the plaintiffs approached D1 (and companies under his control) for the injection of further working capital. After a series of discussions, D1 was agreeable to injecting more capital into CTN BVI but D1 wanted to obtain greater security for his investment. On the other hand, the plaintiffs did not want to completely give up their ownership in or management of CTN BVI.

8. In order to induce P1 and P2 to enter into the loan agreement upon which this action is based, D1 represented to them that the loan agreement would be by way of the sale of the shareholding in CTN BVI but with a right to buy them back at the original price (together with interest payable). D1 also represented to P3 that P3 could remain on the board of directors of CTN BVI. The plaintiffs aver that these representations were part of the terms of the loan agreement; alternatively, the plaintiffs relied on them to enter into the loan agreement.

9. The loan agreement was entered orally between the plaintiffs (through P3) and D1 (for himself and D2) in Hong Kong in about June 1996. Its terms included:-

(1) D2 would take up the plaintiffs' liabilities in respect of the loans from Yeh and the 3 credit facilities from Videoland Inc;

(2) D2 would take up the plaintiffs' outstanding indebtedness to Videoland Inc under a guaranteed refundable deposit agreement and Videoland Inc was to release:-

(a) one AIM Media (Taipei) Limited as the recipient of a deposit;

(b) the plaintiffs as guarantors;

(3) D1 agreed to repay a loan owed to Commerzbank (South East Asia) Limited ("Commerzbank"). P1 was a chargor of that loan;

(4) D2 agreed to repay Filmate International Incorporation ("Filmate") a refundable deposit which was paid to P1 earlier;

(5) D2 was to treat the ownership and management of CTN BVI as unchanged and P3 was to continue to manage CTN BVI;

(6) D1 was to provide funding to CTN BVI by subscribing convertible loan notes to be issued by CTN BVI and, before then, by loans to be advanced from time to time upon request.

In return for the above (and among other things):-

(a) P1 and P2 were to provide security to D2 by entering into a sale and purchase agreement for the sale of the shareholding in CTN BVI (to D2) ("the S & P agreement");

(b) P3 was to sign the S & P agreement as a covenantor;

(c) concurrent with the signing of the S & P agreement, P3 was to enter into a written agreement with D1 whereby a loan was recorded to have been advanced to P3 (when in fact there was no such loan);

(d) P1 was to waive a loan due from CTN BVI;

(e) the plaintiffs were to cause the board of directors of CTN BVI to write off an amount representing the preliminary expenses in the accounts;

(f) the loan under the loan agreement was to be repaid within 12 months from the date of the S & P agreement ("the Loan");

(g) upon such repayment, D2 was to transfer the shares of CTN BVI to P1 and P2.

10. The loan agreement was carried out by the parties thereto in the following manner (and to the following extent):-

(1) P3 recommended to P1's shareholders the sale of the shares (while indicating to them there would be a right to buy back the same and an issue of convertible loan notes) (see para. 8, 9(6) and 9(a) above);

(2) the plaintiffs caused the shareholders of CTN BVI to write off the preliminary expenses in the accounts (see para. 9(e) above);

(3) D1 repaid the sum due to Commerzbank (see para. 9(3) above);

(4) the plaintiffs and D2 signed the S & P agreement (which expressly provided that it was governed by Hong Kong law and that the Hong Kong courts should have non-exclusive jurisdiction) (see para. 9(a) above);

(5) a loan agreement was signed between D1 and P3 (see para. 9(c) above);

(6) P3 continued to be the Chairman of the board of CTN BVI and continued to manage its operation until March 1997;

(7) D2 caused Videoland Inc to sign a Deed of Release in favour of P1 and P2 (see para. 9(2) above);

(8) D2 paid Filmate the amount of the refundable deposit (see para. 9(4) above);

(9) P1 passed a resolution at its board meeting to waive the loan due to it by CTN BVI (see para. 9(d) above);

(10) P1 and P2 transferred the shares in CTN BVI to D2 (see para. 9(a) above);

(11) the board of CTN BVI appointed D1 and Yeh as directors while P3 and the existing board remained in office.

11. Wrongfully and in breach of the loan agreement:-

(a) D1 failed to procure CTN BVI to issue the convertible loan notes or to subscribe them;

(b) D1 failed to advance money to pay the salaries of the employees of CTN BVI;

(c) D1 (for D2) would only transfer the shares in CTN BVI if P3 repay the Loan together with an additional sum which was not provided for under the loan agreement;

(d) the defendants caused the board of CTN BVI to remove P3 from the board in March 1997;

(e) D1 demanded the repayment of the Loan before its due date.

In the event the aforesaid matters (sub-para. (a) to (e) above) did not amount to breach of the terms of the loan agreement, they were representations made by the defendants and (by reason of the above matters) the said representations were false. In either case, loss was caused to the plaintiffs.

The Plaintiffs' Case Regarding Service Out of Jurisdiction

12. According to P3's affirmation dated 3 September 1999, the ground on which the application for service of writ out of jurisdiction was made was RHC Ord. 11 r. 1(1)(d). Para. 6 of the affirmation stated that the claim is brought to recover damages in respect of the breach of the loan agreement which (1) was made in Hong Kong and (2) by its terms, or by implication, was governed by Hong Kong law.

13. P3's 2nd affirmation dated 13 March 2000 further stated that the ground on which the said application was made was Ord. 11 r.1(1)(d)(i) (a contract made within the jurisdiction), r. 1(1)(d)(iii) (a contract by its terms, or by implication, governed by Hong Kong law) and r. 1(1)(d)(iv) (a contract containing a term to the effect the High Court should have jurisdiction to hear and determine the claim).

14. P3's 2nd affirmation also relied on Ord. 11 r. 1(1)(f) (the claim is founded on a tort and the damage was sustained, or resulted from an acted committed, within the jurisdiction) based on the alleged misrepresentations by the defendants.

Should Leave to Service Out of Jurisdiction be Set Aside?

(a) The Contract Claim

15. By the time of this appeal, the plaintiffs only relies on Ord. 11 r. 1(1)(d)(iii). The other grounds (set out above) therefore no longer need to be considered or determined.

16. It does not appear to be disputed that the burden is on the plaintiffs to establish that the claim herein is within the letters and spirit of Ord. 11 r. 1(1)(d)(iii). In any event, I find that the burden of doing so is on them: see Atlantic Underwriting Agencies Ltd. v. Compagnia Di Assicurazione Di Milano SPA [1979] 2 Ll LR 240, 245; Hong Kong Civil Procedure 2001, para. 11/1/7 (para. (b) thereof).

(a)(1) Was There a Loan Agreement?

17. The defendants argue that the plaintiffs have failed to discharge the burden of proving that the loan agreement existed. They further argue, relying on Seaconsar Far East Ltd. v. Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438, 454H, that it is insufficient for the plaintiffs to establish that, if the loan agreement existed, it falls within Ord. 11 r. 1(1)(d)(iii). I am prepared to approach this aspect assuming the defendants' argument to be (but without actually deciding that it is) correct: see also Hong Kong Civil Procedure 2001, para. 11/1/8.

18. The plaintiffs' case on this point is in essence that the loan agreement was evidenced by many documents. These documents were referred to in para. 5 of P3's affirmation and para. 4 of P3's 2nd affirmation. In particular, para. 4 of P3's 2nd affirmation said:-

"The Loan Agreement was evidenced by many documents, though each in relation to part of [the Loan Agreement] and [the documents] have been referred to in paragraph 16 ... , paragraphs 17 and 18, ... paragraph 20 ... and paragraph 21 ... [of the Amended Statement of Claim]. These documents have already been exhibited to my earlier affirmation".

19. On the other hand, the defendants deny the allegation. At para. 7 and 8 of D1's affirmation he said:-

"... I refer to paragraphs 11 to 12 of the Statement of Claim where it is alleged that I met [P3] in 'mid-1996' and 'in or about June 1996' ... wherein I allegedly entered into an oral loan agreement and made certain representations. I deny that I ever met [P3] in Hong Kong during the Relevant Period. Indeed, I did not visit Hong Kong at all during the Relevant Period. There is now produced and shown to me marked 'KCY-2' a copy of my passport. This is the only passport I had during the Relevant Period.

... I also deny that I had reached any oral agreement with [P3] over the telephone during the Relevant Period".

20. P3 responded to the above at para. 4 to 8 of his 4th affirmation dated 11 January 2001 as follows:-

"... I agreed [sic] that I did not meet [D1] face to face in June 1996 in Hong Kong ... I made no comment as to the allegation by [D1] as to where he was at the material times. But I did speak to him on telephone [sic]. On those occasions he was in Taiwan.

... I did not say or cause my lawyer to say on the pleading that I met [D1] personally in Hong Kong during the relevant period ...

... To the best of my recollection, I accepted the offer by [D1] of the Loan on the terms as set out in paragraph 12 of the Amended Statement of Claim ... on the phone while I was in Hong Kong ...

... In saying that I accepted the offer from [D1] on behalf of [D2] and himself, I had to make it clear that there were many discussions, sometimes face to face with [D1] himself and sometimes with Mr. Yen, Mr. Yeh and Mr. Yeh's assistant ... and sometimes on the telephone prior to the conclusion of the Loan Agreement ...

... My recollection was that such series of discussions began with the face to face meeting between me and [D1] on 8th or 9th April 1996 at the Mandarin Hotel in Hong Kong and this discussion continued during our flight to Taiwan ... ".

Para. 9 onwards of P3's 4th affirmation dealt with the alleged capacity of Yen and Yeh to enter into the Loan Agreement on behalf of the defendants as well as their alleged ability to perform the same for the defendants.

21. The last-mentioned matter has not previously been pleaded or stated in earlier affirmations. It is not credible for that reason and is rejected. Leaving aside the credibility issue, that matter cannot assist the plaintiffs because it has not been expressly mentioned in the Amended Statement of Claim, nor was it relied upon in support of their ex parte application for leave to serve the writ out of jurisdiction: see Hong Kong Civil Procedure 2001, para. 11/1/7 (especially para. (d) thereof).

22. The documents relied upon by the plaintiffs (see P3's affirmation and 2nd affirmation quoted above) in support of their application for leave to serve the writ out of jurisdiction are:-

(1) the board resolution of CTN BVI to write off the amount of preliminary expenses (see para. 9(e) and 10(2) above);

(2) the S & P agreement regarding the sale of the shares in CTN BVI of P1 and P2 (see para. 9(a) and 10(4) above);

(3) the loan agreement between D1 and P3 (see para. 9(c) and 10(5) above);

(4) the Deed of Release from Videoland Inc (see para. 9(2) and 10(7) above);

(5) the Deed of Release from Yeh (see para. 9(1) above);

(6) the board resolution of P1 to waive the loan due to it by CTN BVI (see para. 9(d) and 10(9) above);

(7) minutes of the board meeting of CTN BVI approving the transfer of its shares by P1 and P2 to D2 (see para. 9(a) and 10(10) above);

(8) minutes of the board resolution of CTN BVI appointing D1 to be a director (see para. 10(11) above).

23. The defendants argue, first, that none of the above documents refer to the loan agreement itself (or any of its alleged terms). Secondly, (the defendants argue) there is an express denial by D1 of the loan agreement in his affirmation. In these circumstances, they submit that the plaintiffs have failed to discharge the burden of proving the existence of the loan agreement.

24. I have borne in mind the above arguments. However, whether the plaintiffs have established the existence of an oral loan agreement is ultimately a credibility issue. There has only been a bare denial by D1 of the existence of the documents relied upon by the plaintiffs (set out above). Some of these documents are per se inexplicable, for example:-

(1) why the board of CTN BVI has to resolve to write off the amount of preliminary expenses (para. 22(1) above);

(2) why a purported loan agreement has to be signed between D1 and P3 (para. 22(3) above);

(3) why Videoland Inc signed the Deed of Release (para. 22(4) above);

(4) why Yeh signed the Deed of Release (para. 22(5) above);

(5) why P1 resolved to waive the loan due to it by CTN BVI (para. 22(6) above).

The defendants have not explained why they came into existence whereas the plaintiffs have. Further:-

(a) the plaintiffs' explanation/account is consistent with the documents relied upon by them (especially those set out in sub-para. (1) to (5) above);

(b) their explanation/account is not inherently implausible or refuted by undisputed or indisputable evidence (in fact, apart from the bare denial, by any evidence at all).

25. By reason of the above matters, I am satisfied, at least for the purpose of this appeal, that the plaintiffs have established that there was a loan agreement.

(a)(2) Which System of Law Governed the Loan Agreement?

26. It is common ground that parties to the loan agreement did not expressly agree on the governing law of the loan agreement. The task of the court in such a case is to ascertain what the parties must have intended regarding this matter. The plaintiffs contend that the governing law has to be either that of Hong Kong or Taiwan.

27. The defendants do not accept the last-mentioned contention. Further, they argue that the court should infer the governing law to be the system of law which has the closest and most real connection with the loan agreement: Dicey & Morris on The Conflict of Laws (1987) 11th Ed., p. 1161 [referred to by the defendants] (equivalent to (1993) 12th Ed., p. 1189 [referred to by the plaintiffs]; (2000) 13th Ed., p. 1197); The Dong Do [1991] 2 HKLR 563, 565. Dicey & Morris stated that the "closest and most real connection" test applies when the parties' intention was not express and could not be inferred from the general circumstances of the case: p. 1162 (11th Ed.); p. 1189 (12th Ed.); p. 1197 (13th Ed.) and, very often, the same result can be reached by the application of either of these 2 tests.

28. It is also argued by the defendants that the burden of proof lies with the plaintiffs to show that there is a "strong case for argument" that the loan agreement falls within Ord. 11 r. 1(1)(d): Wo Fung Paper Factory Ltd. v. Sappi Kraft (Pty) Ltd. [1988] 2 HKLR 346; Vitkovice Horni A Hutni Tezirstvo v. Korner [1951] AC 869.

29. There appears to be no dispute that in trying to find out what system of law has the closest and most real connection with the contract, the courts have considered matters such as:-

(a) the place where the contract was made;

(b) the place where the contract was to be performed;

(c) the currency used in the contract:

see, for example, Bank of India v. Gobindram Naraindas Sadhwani & Others [1988] 2 HKLR 262, 281I.

(a)(2)(i) Where Was the Loan Agreement Made?

30. The defendants argue that the loan agreement was made in Taiwan. They submit that a contract is made at the place where the acceptance is complete. In the context of instantaneous communication, the contract is complete when the acceptance is received by the offeror; in other words, the contract is made at the place where the acceptance is received: Entores Ltd. v. Miles Far East Corporation [1955] 2 QB 327, 333; Brinkibon Ltd. v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34; Susanto-Wing Sun Co. Ltd. v. Yung Chi Hardware Machinery Co. Ltd. [1989] 2 HKC 504.

31. The defendants say that in this action, the plaintiffs deposed that the acceptance was received by D1 (the offeror) who was then in Taiwan. Para. 6 of P3's 4th affirmation reads:-

"... To the best of my recollection, I accepted the offer by [D1] of the Loan on the terms as set out in paragraph 12 of the Amended Statement of Claim ... on the phone while I was in Hong Kong ... " (emphasis supplied).

In these circumstances, the defendants submit, even on the plaintiffs' own case, the loan agreement must have been made in Taiwan. I agree with the above arguments of the defendants (which are not disputed by the plaintiffs).

32. Accordingly, I find that the loan agreement was made in Taiwan.

(a)(2)(ii) Where Was the Loan Agreement Performed?

33. The plaintiffs argue that the loan agreement was performed in Hong Kong. They ask the court not to take a limited view by looking at individual pointers but rather look at "the larger picture", and to consider the circumstances as a whole: relying on Century Yachts Ltd. v. Xiamen Celestial Yacht Ltd. [1994] 1 HKLR 385, 392.

34. They further say that the loan was for the express purpose of assisting CTN BVI to overcome its liquidity problem. It is undisputed that the headquarters and control of CTN BVI has been in Hong Kong. Further, it was part of the terms of the loan agreement that P3 was to remain (and for about 6 months he in fact was) in control of the management of CTN BVI. It is also undisputed that the plaintiffs have all been resident in Hong Kong.

35. On the other hand, the defendants argue that the loan agreement was to be performed in Taiwan because:-

(1) according to the Amended Statement of Claim, the Loan was to take the form of the defendants' assumption of various obligations and liabilities of P1 and P2 to Taiwanese companies and individuals, for example, KDC Limited (see the S & P agreement) and D1 (see the loan agreement between him and P3);

(2) in law it is for the debtor (that is, the plaintiffs) to seek out his creditor to pay him (that is, the defendants): see Staton v. National Coal Board [1957] 1 WLR 893.

36. I do not agree with point (2) above and do not consider the Staton case to be of help. That was a workmen's compensation case and involved the issue of whether an employee was acting in the course of his employment when he went to the employer's pay office to collect his wages. In that context, the court said:-

"It is quite true that the general rule of [the employee's] country is that the debtor must seek out his creditor to pay him, and it has always been accepted that, so far as the collection of wages is concerned, particularly in a big concern, there is a proper place to which the workman goes".

No discussion needed to be, or was, made by the court regarding the "location" of a debt where the creditor and debtor reside in different places. Further, in Dicey & Morris, 13th Ed., para. 22-026 (p. 925), the learned authors said:-

"Subject to the exceptions set out below, a debt is situate in the country where the debtor resides. The reason usually given is that the country of the debtor's residence is normally the place where the creditor can enforce payment ... "

(see also the cases referred to in footnote 57 of the above passage). None of the exceptions referred to therein are relevant to this action. The debtors herein are the plaintiffs which, for present purposes at least, are in effect resident in Hong Kong. This is because according to Dicey & Morris (13th Ed., para. 22-027, text to n. 66), a corporation resides where "it does business in the country concerned".

Other Matters

37. Relying on para. 12(A)(2), (3) and (5) of the Amended Statement of Claim, the defendants contend that the major portion of the currency of the Loan was expressed in Taiwanese dollars. The currency of the Loan set out in para. 12(A)(1) and (4) thereof was expressed in US dollars.

38. According to the plaintiffs, other relevant matters would include:-

(a) the S & P agreement expressly provided that Hong Kong law was to be its governing law;

(b) the loan agreement between D1 and P3 expressly provided that Taiwanese law was to be its governing law and Hong Kong court was to have non-exclusive jurisdiction.

The defendants ask the court to note (and this is undisputed by the plaintiffs) that the above documents were said to have been entered into "in pursuance of" the loan agreement: see para. 7 of P3's 2nd affirmation.

39. In relation to the plaintiffs' reliance on the above (post-loan agreement) documents, the defendants contend that it is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made: James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. [1970] AC 583, 603E; Rossano v. Manufacturer's Life Insurance Co. [1963] 2 QB 352, 362.

40. The plaintiffs, on the other hand, argue that while subsequent conduct cannot be used to interpret the terms of a contract, it is evidence for the purpose of determining what its full terms were: Chitty on Contracts (1999) 28th Ed., para. 12-124; Lewison: The Interpretation of Contracts (1997) 2nd Ed., para. 2.11.

41. I agree with the defendants' above contention because the exercise of ascertaining what system of law should be the governing law of the contract is more akin to the interpretation of a contract term than the determination of its full terms.

Conclusion Regarding the Governing Law

42. I consider this to be a borderline case in that there are matters in favour of the plaintiffs' arguments (that the loan agreement was to be performed in Hong Kong) as there are matters in favour of the defendants' arguments (that it was to be performed elsewhere (especially Taiwan)).

43. The matters in the plaintiffs' favour include:-

(1) the loan agreement was for the express purpose of assisting CTN BVI to overcome its liquidity problem. The headquarters and control of CTN BVI is in Hong Kong;

(2) the Loan is in law located in Hong Kong because the defendants (as creditors) are to enforce payment against the plaintiffs (as debtors) and the plaintiffs reside in Hong Kong.

44. The matters in the defendants' favour include:-

(a) the loan agreement was made in Taiwan;

(b) the Loan took the form of the defendants' assumption of various obligations and liabilities of P1 and P2 to a number of Taiwanese companies and individuals;

(c) the major portion of Loan was expressed in Taiwanese dollars.

45. Having considered all the circumstances, I conclude in the defendants' favour regarding this point. As a result, I find that the plaintiffs have not been able to establish that this application falls within Ord. 11 r. 1(1)(d)(iii).

(b) The Misrepresentation Claim

46. This is no longer relied upon by the plaintiffs in this appeal and accordingly there is no need for it to be considered or determined.

Conclusion

47. By reason of the above matters, the Master's order given on 20 April 2001 is correct. The appeal is dismissed.

Costs Order Nisi

48. There will be a costs order nisi pursuant to Ord. 42 r. 5B(6) that costs of this appeal be to the defendants to be taxed if not agreed.