XCHRX CHINA SHANDONG INVESTMENT LTD. v. BONASEAL CO.LTD.

1995, No.A8403

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. This is an appeal against the decision of Master Jones dated 14 May 1996 granting summary judgment to the Plaintiff (Respondent) in the sum of US$500,000 claimed under a Loan Agreement together with interest and costs.

2. The Loan Agreement was entered into by the Plaintiff, the Lender, and the Defendant (Appellant), the Borrower, on 29 June 1993. The loan of US$500,000 was for a period not exceeding 120 days from the date of drawdown, the interest being 10% per annum (on the basis of 360 days). Clause 6 of the Agreement provided for repayment by the Borrower of principal and interest at the expiry of the loan period. The Loan Agreement also contained the following provisions :

" 9. Security The Borrower agreed to use its 30% shareholding in Weifang Huaguang Data-Tech Ltd. and its 25% shareholding in Long-Feng Piano Company Ltd. as security for the Loan. In case the Loan is not repaid at the expiry of the Loan Period, the Lender has the right to obtain the ownership of the Borrower's shareholding in the above 2 companies and dispose of the shares in order to recover the principal and interest. The Borrower will lose all its rights in the above 2 companies.

10. Breach In the event of the Borrower failing to repay the principal and interest according to the terms of this loan agreement, the Borrower's shareholding in the 2 joint venture enterprises secured to the Lender shall belong to the Lender.

11. Covenants The Borrower covenants that the execution and

by performance of this loan agreement and the charging of

Borrower the shares in Weifang Huaguang Data-Tech Ltd. and Long-Feng Piano Company Ltd. have been approved by its board of directors. The Borrower further covenants that China Shandong Investment Ltd. will be the first beneficiary of the said secured shares in the above 2 companies.

12. Applicable This loan agreement is governed by the laws of the

Law People's Republic of China."

Chronology

3. The writ of summons was issued on 19 August 1995. The Plaintiff's claim is based on the Loan Agreement under which the loan together with interest became due and repayable on 8 November 1993. In response to letters from the Plaintiff seeking repayment dated 14 and 30 December 1993, by letter dated 21 March 1994, the Defendant agreed to repay accrued interest by the end of April 1994 and the loan and all interest then accrued by the end of June 1994. Proceedings were commenced after the Defendant failed to make repayment. Foreign law was neither pleaded nor relied on in the Statement of Claim.

4. The Defendant filed its Defence and Counterclaim on 28 September 1995. It does not dispute the loan as pleaded in the Statement of Claim. Nor does the Defendant deny that it admitted its liability to repay the loan in its letter of 21 March 1994. It raised two defences to the Plaintiff's claim : first, that the Plaintiff is not a licensed money-lender so that the Loan Agreement is not enforceable in any court of law in Hong Kong; second, that the effect of clause 12 of the Loan Agreement was that the Hong Kong courts have no jurisdiction to hear the Plaintiff's claim.

5. On 9 October 1995, the Defendant issued a summons to strike out the Statement of Claim and to dismiss the action based on the jurisdiction point. The application was dismissed by Mr Registrar Betts on 4 January 1996. There is no appeal from that decision.

6. On 27 November 1995, the Plaintiff took out an O.14 summons for summary judgment. The first hearing took place on 22 January 1996 when directions were given for both sides to file expert evidence on PRC law. The substantive hearing took place on 14 May 1996.

Grounds of Appeal

7. The Defendant's appeal is based on two grounds which may be summarised as follows. It was submitted that first, because the Plaintiff's claim is based on a contract the governing law of which is foreign law, it may not proceed on an O.14 application and depose that there is no defence without proving that there is no triable issue under that governing foreign law. Second, even if Hong Kong law were to apply because of the insufficiency of evidence of PRC law, summary judgment ought not to be granted because a point of construction arises as to the effect of clause 10 of the Loan Agreement. The Defendant submitted that clause 10 had the effect of extinguishing the debt.

(1) Burden of proof : foreign law

8. The Defendant's expert opined that there is no Chinese law to govern the formation and the validity of the Loan Agreement. The Plaintiff's expert does not agree. In his opinion, the loan comes within Article 8 of the Economic Contract Law of the PRC : that article stipulates that the Economic Contract Law applies to, inter alia, "loans". The Defendant's expert made no reference to Article 8 in his affirmation but relied on Article 46 as the basis for excluding the application of the Economic Contract Law to the Loan Agreement. In his view, Article 46 provides that "economic contracts involving foreign interest ... shall be [governed] by the law of the People's Republic of China on Economic Contracts Involving Foreign Interest ... therefore the Economic Contract Law only applies to contracts without foreign interest ..."

9. It should be noted that there appears to be a difference between the actual provisions of Article 46 and the way in which it is expressed in the affirmation of the Defendant's expert. Article 46 in fact reads as follows :

"The Foreign Economic Contract Law of the People's Republic of China ... shall ... apply to foreign economic contracts ..."

It appeared to carve out from the purview of the Economic Contract Law contracts to which the Foreign Economic Contract Law applies. A Loan Agreement which is a "foreign economic contract" within Article 46 of the Economic Contract Law would of course be governed by the Foreign Economic Contract Law. It is pertinent to note that it is the opinion of the Defendant's expert that the Foreign Economic Contract Law does not apply to the Loan Agreement. Both experts appear to agree that the Foreign Economic Contract Law has no application, presumably because it is not a "foreign economic contract" which requires that one of the parties be a PRC entity : see Article 2 of the Foreign Economic Contract Law, cited but misdescribed as Article 26 in the affirmation of the Defendant's expert. If so, the basis for the Defendant's expert's conclusion that the Economic Contract Law does not apply to the Loan Agreement is obscure.

10. Be that as it may, it is not for me to resolve this apparent conflict of opinion between the parties' respective experts. But what is the relevance of this conflict to the O.14 application? Counsel for the Defendant submitted that the burden is on the Plaintiff to show that there is no triable issue. It is submitted that because the basis of the Plaintiff's claim is the Loan Agreement, the governing law of which is foreign law, the burden is on the Plaintiff to show that under the foreign law chosen by the parties, it has a valid claim entitling it to invoke summary judgment procedure.

11. In my judgment, the Defendant's submission is misconceived because pleading foreign law is entirely voluntary. Indeed, in any given case, the choice whether to introduce foreign law is entirely a matter for the parties however clear the foreign element is. The judge has neither the power nor the duty to do so ex officio. SeeAluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 WLR 676 (CA), where a dispute arising from a contract containing a Dutch governing law clause was decided entirely according to English domestic law because neither party relied on Dutch law.

12. The rule is stated in Dicey & Morris, 11th Ed. at p.226 as follows :

"Rule 18 -

(1) In any case to which foreign law applies, that law must be pleaded and proved as a fact to the satisfaction of the judge by expert evidence or sometimes by certain other means.

(2) In the absence of satisfactory evidence of foreign law, the court would apply English law to such case."

This principle is equally applicable in Hong Kong. The effect is that foreign law is a matter of fact that has to be established. The practical consequences flowing from this are discussed in Dicey & Morris and, adapted to Hong Kong, may be summarised as follows :

(i) If a party wishes to rely on a foreign law he must plead it. Unless this is done, the court will decide the case containing foreign elements as though it were a purely domestic case.

(ii) Foreign law must be proved because Hong Kong courts take judicial notice of the law of Hong Kong and of notorious facts but not of foreign law.

13. There is therefore no obligation on a party to plead foreign law even where that foreign law governs the contract if the party chooses not to rely on foreign law. This follows from the treatment of foreign law as a question of fact to be pleaded and proved by either or both of the parties. It means that the question of the applicability of foreign law in a case involving conflict of laws may ultimately depend on the rules of procedure and evidence since it is to that legal category that the question belongs. So even where there is an express choice of foreign law in the contract, if neither party relies on the chosen foreign law, the case will be decided exclusively by reference to English law. See Dicey op.cit. at pp.229-230. Claimants decline to plead foreign law for various reasons, for example, the absence of any clear legal advantage from so doing, costs implications, dangers inherent in the process of proof of foreign law even where there are apparent benefits and the nature of the conflicts of laws itself, being unpredictable in its operation : see Fentiman, Foreign Law in English Courts (1992) 108 L.Q.R. at 149-155; Muduroglu Ltd. v. T.C. Ziraat Bankasi; [1986] 1 Q.B. at 1246(C.A.).

14. In the section in Dicey & Morris (at p.238) on the burden of proof, it is stated that "the burden of proving foreign law lies on the party who bases his claim or defence on it. If that party adduces no evidence or insufficient evidence, of the foreign law, the court applies English law". The Plaintiff does not rely on foreign law : no reference is made to foreign law in its Statement of Claim. There is therefore no burden on the Plaintiff to prove foreign law. If the Defendant wishes to rely on foreign law as a defence, it must first plead that foreign law as a defence and, further, prove that a defence exists under that foreign law. As noted above, the Defendant's expert did not reach the conclusion that the Loan Agreement is in any way void or unenforceable under PRC law. In O.14 proceedings, it is the defendant who has the burden to show that it has a defence : see Bank of India v. Murjani [1990] 1 HKLR 586.

15. The fact that the parties' experts differ does not give rise to any valid defence. It does not render clause 12 meaningless as submitted by the Defendant andCompagnie d′Armement Maritime SA v. Compagnie Tunisienne de Navigation SA [1971] AC 572 is not relevant in the present context. Rather, if the Defendant believes it has a valid defence under PRC law, it has the burden of pleading it and proving that such a defence exists under that law to the satisfaction of the court. That it has failed to it.

16. So far as the cases of The Griesheim [1983] 1 HKC 251 andNational Shipping Corporation v. Arab [1971] 2 LL Rep.363 referred to by the Defendant are concerned, resolution of the conflict of expert evidence on foreign law in each of those cases was essential to the question that had to be determined. That is not the case here. As submitted by counsel for the Plaintiff, the apparent conflict is somewhat academic. Even assuming that the Defendant's expert's evidence is to be preferred, it still does not give rise to any valid defence.

17. The Defendant's appeal based on this ground accordingly fails.

(2) Construction of document

18. The other ground upon which the Defendant based its appeal is that if Hong Kong law were to apply to the Loan Agreement because of the insufficiency of the evidence of PRC law before the court, a question of construction arises under clause 10 of the Loan Agreement. It was submitted that leave to defend should be granted on the principle stated in Bowes v. The Caustic Soda and Chlorine Syndicate (1893) 9 TLR 328 and the Supreme Court Practice 1995 at 14/3 - 4/10, namely, where there is a fair dispute to be tried as to the meaning of the document on which the claim is based. It is the Defendant's submission that the effect of clause 10 interpreted in accordance with Hong Kong law is that upon a breach of the Loan Agreement by non-payment of the debt on its due date, the Defendant's shareholding in the two joint venture companies became vested in the Plaintiff with the effect of automatically extinguishing the debt. The question I have to determine is whether the construction put forward by the Defendant is arguable and not whether it is likely to succeed at the end of the day. Nevertheless this does not mean that leave must be given however hopeless the argument.

19. Can clause 10 have the effect contended for, that is to say that it automatically extinguishes the debt so as to give rise to a "fair dispute" as to the meaning of the Loan Agreement? As the proper construction of clause 10 requires that it be read in context and not in isolation, I will proceed to consider the relevant provisions in the Loan Agreement.

20. Clause 6 of the Loan Agreement contained the Borrower's covenant to repay the loan on the due date. Clause 9 not only created an equitable charge of the Borrower's interest in the two joint venture companies to secure repayment of principal and interest due under the loan which would entitle the Lender to apply to the Court for an order for sale in the event of default, it also conferred a right on the Lender to obtain ownership of the Borrower's shareholding and to dispose of the shares in order to recover the amount owing. It is to be noted that clause 11 refers to the "charging" of the shares. This reinforces clause 9 and read together it is clear that the parties' intention was to create a security for the debt. But the Lender's rights under clause 9 do not become exercisable until default is made at the expiration of the loan period. Clause 10 then provided that in the event of the Borrower failing to repay the principal and interest in accordance with the terms of the Loan Agreement (which event could only occur at the expiration of the loan period and not before), the Borrower's shareholding in the two companies "shall" belong to the Lender. On the Defendant's construction of clause 10, viz. that it has the effect of extinguishing the debt, clause 9 would be rendered completely redundant : there would not be a scintilla of time during which the rights conferred by clause 9 could possibly take effect. This is not a conclusion that a court would reach unless driven to it because no other meaning can fairly be attributed to clause 10.

21. On its face, clause 10 operates to transfer the Borrower's beneficial interest in the shareholdings to the Lender upon default. Counsel for the Plaintiff submitted (and I agree) that the transfer of the beneficial interest by way of a charge is a common feature in security contracts and its existence does not negate the borrower's duty to repay. He submitted that clause 10 merely improved the quality of the security given.

22. It is to be noted that contrary to the Defendant's submission, clause 10 does not automatically "vest" the Defendant's shareholding in the Plaintiff : the Plaintiff does not become the legal owner of the shares until they are registered in its name by the companies concerned. No notice of any equitable or beneficial interest in the shares can be entered in the register. The event of default does not of itself perfect the Plaintiff's title to the shares : the Plaintiff has to take steps to procure the transfer of the shares into its name.

23. If it were to do so, it would then have the choice of either proceeding under clause 9 by selling the shares and repaying itself out of the proceeds and suing for any shortfall that may arise, or proceeding under clause 10 by accepting the shares in satisfaction of the debt in which event the debt would be extinguished. There is thus a distinction, subtle though it may be, between the effect of clause 9 and clause 10. Whilst the result in the latter case is the same as that posited by the Defendant, viz. the extinguishment of the debt, there is a critical difference. This lies in the Plaintiff's right to elect first of all not to sue for repayment under the personal covenant in clause 6 to repay but to rely on the security furnished and in the latter event, to elect whether to proceed under clause 9 or clause 10. As noted above, they lead to different consequences. This is wholly consistent with the nature of security contracts and the rights of a chargee. The chargor has no right to insist on the chargee pursuing one of his remedies rather than another. It is the chargee who has the choice. Cheah Theam Swee v. Equiticorp Finance Group Ltd. [1992] 1 AC 472 at 476; Gough on Company Charges 2nd Edn. pp.8-9.

24. This reading would not have the effect of rendering otiose clause 9 of the Loan Agreement and negate the very essence of a charge, a consequence that must inevitably follow if the construction put forward by the Defendant were accepted.

25. In the circumstances, in the context of the Loan Agreement as a whole, the construction put forward by the Defendant cannot objectively be said to have any real prospect of success. The statement in the Supreme Court Practice which is based on the Bowes decision applies only where there is a "fair dispute". In Bowes, the claim to a sum was based on an agreement under (which the defendant which was a syndicate formed for the purpose of working a patent) were before a certain date to effect the sale of a patent or the allotment of shares to the plaintiffs or pay the sum claimed. The defence was that the syndicate had found that the patent could not practically or commercially be worked at a profit. Unconditional leave to defend was granted because there was a fair dispute as to the meaning of the document and questions might arise which the defendant had a right to submit to a jury.

26. The present case does not fall within the Bowes principle because it cannot be said that there is a "fair dispute" when the contention put forward has no real prospect of success; in the words of Lord Lindley, the defence raised can be described as "practically moonshine" : see Codd v. Delap (1905) 92 LT at 511 cited in Man Earn Ltd. v. Wing Ting Fong [1996] 1 HKC 225 at 228.

27. For these reasons, I will dismiss this appeal with costs.

28. The parties are agreed that so far as the form of the order is concerned, interest ought to run from 8 November 1993 until payment. No mention was made of any arrears of interest due under the Loan Agreement. Since the Plaintiff is plainly entitled to arrears of interest (if any) under the terms of the Loan Agreement, the sum to be paid should include arrears of interest (if any) with interest at 10% per annum from 8 November 1993 until payment.

29. I make an order nisi to that effect.

(Doreen Le Pichon)

Judge of the High Court