RICH VILLAGE LTD v. GRAND PRIDE HOLDINGS LTD

HCA 867/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 867 OF 2012

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BETWEEN

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D E C I S I O N

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Introduction

1.  There are three applications before me – an application by the plaintiff (“Rich Village”) to continue an ex parte injunction obtained against the defendants on 22 May 2012 (“the Injunction”); an application by the defendants to set aside the leave granted to Rich Village to serve on them a Concurrent Amended Writ of Summons out of jurisdiction; and an application by them to discharge the Injunction. 

2.  With some encouragement from the court, the parties have very sensibly agreed that the contest here will depend upon this court’s decision on the jurisdiction issue.  If I find against Rich Village on jurisdiction, these proceedings will come to an end and so will the Injunction.  On the other hand, should I find against the defendants on jurisdiction, instead of trying to have the multitude of disputes over the Injunction resolved on affidavits this action should proceed to a speedy trial and the only issue remaining pending trial is the amount of fortification which should be put in place to backup Rich Village’s undertaking as to damages in support of the Injunction.

3.  Before I deal with the jurisdiction issue, I should give a brief introduction to the factual background of this action. Both Rich Village and the 1^st defendant (“Grand Pride”) are BVI companies carrying on the business of real estate investment in the Mainland.  The 2^nd defendant (“Zheng”) is a Mainland resident and a shareholder and director of Grand Pride.  He is said to be the person controlling Grand Pride.

4.  On 29 April 2011, Rich Village and Grand Pride entered into a share transfer agreement in Chinese (“the Agreement”) by which the former agreed to transfer to the latter the shares of Rich City Development Ltd (“Rich City”), a Hong Kong company holding two PRC companies (for convenience I call them “Company A” and “Company B”) which were engaged in real estate development in the Mainland for RMB500 million. It is common ground that the value of Rich City vested in Companies A and B (“the Companies”) which owned substantial real estate projects in the Mainland.  Rich Village says that at the time of the Agreement Rich City was worth about RMB1.3 billion (that is not agreed). 

5.  Rich Village’s case is that the Agreement is in truth a loan agreement.  There are provisions in the Agreement which tend to support this assertion.  For instance, it provides for the buyback of Rich City’s shares by Rich Village after one year for RMB500 million plus interest at the annual rate of 22%; save for the deployment of two persons by Grand Pride to be appointed at senior management level of Company A and/or B to perform the function of supervision, the existing personnel of Rich City and the Companies would be retained; and the bank accounts, company chops, business registration certificates of the Companies would be jointly controlled by Rich Village and Grand Pride. 

6.  Further, it is Rich Village’s case that it was induced into making the Agreement by the fraudulent misrepresentations of the defendants.  Furthermore, when it tried to exercise the buyback option, in breach of the Agreement the defendants (Zheng is not actually a party to the Agreement) refused to return the shares to Rich Village.  In short, Rich Village is saying that the defendants are trying to deprive it of highly valuable assets by way of trickery.

7.  The defendants strongly disagree with Rich Village’s case and maintain that the Agreement is a normal contract for the sale of company shares.  Moreover, there was, say the defendants, no proper exercise by Rich Village of the option to buyback the shares.

8.  For completeness, I should mention that after the grant of the Injunction, the parties had endeavoured to reach an amicable settlement of their disputes.  However, the result was not only unsuccessful, numerous accusations had arisen from the attempted settlement.  Very sensibly, neither parties had pressed these matters at the hearing.  Plainly, those disputes cannot be resolved on affidavits.

The relevant contractual provisions

9.  For the purpose of resolving the arguments on jurisdiction, the following have been identified as the relevant provisions:

“Clause 1.4

本协议的标题仅为参考方便之用，不应影响对本协议的解释。

Clause 9.3

本协议签订后，除9.1和9.2 条款外，任何一方不履行本协议约定的义务，应向另一方支付违约金500 万 元 人民币，如违约金不足以弥补损失的，违约方应继续赔偿。

Clause 13.1

本协议适用中国香港特别行政区的法律。

Clause 13.2

本协议未尽事宜，双方协商解决，协商不成则向合同签订地法院起诉。”

Is Clause 13.2 a jurisdiction clause?

10.  Mr Sarony SC who appeared with Mr Wan for Rich Village, argued that Clause 13.2 is not a jurisdiction clause. His submission was based solely on the meaning of the words “本协议未尽事宜”.  It was submitted that those words referred to matters outside the parameters of the Agreement. 

11.  In support of its case, Rich Village has produced a report from a Mainland lawyer (“the Report”)[1].  Two propositions had been made in the report.  Firstly, there was an assertion that “本协议未尽事宜” referred to matters which had not been agreed in the Agreement.  Those words did not relate to disputes which had arisen from the Agreement.  Secondly, there were standard contractual provisions applied in the Mainland for the purpose of (a) reaching a supplemental agreement in respect of matters which had not been provided for in the original agreement and (b) jurisdiction in the event of unresolved contractual dispute:

“一般来说，中国的标准条文写法该为“本协议未尽事宜，双方协商解决，并另行签订补充协议”；及“因本协议发生的争议，双方应协商解决，协商不成，任何一方可向有管辖权的人民法院提起诉讼。”

12.  The defendants were represented by Mr Fung SC and Ms Wu.  On their behalf, it was submitted that those words meant “any cause of dispute not determined by the terms or provisions of the agreement itself or not catered for by the terms of the agreement”. Further, in the context of the Agreement, it is clear that Clause 13.2 is a jurisdiction clause.

13.  The exercise for this court is one of construction of the Agreement.  In carrying out the exercise, Hong Kong law (being the governing law of the Agreement) is to be applied.  There is no dispute that the Agreement was drafted by Mainland lawyers.  One of those involved was representing Grand Pride.  There is a dispute as to who the other lawyer was representing, whether it was Rich Village or the agent who strung together the deal between Rich Village and Grand Pride. 

14.  First and foremost, as a matter of language I do not believe that the words “未尽事宜” are free from ambiguity.  For the present purpose, the words “本协议” meaning this agreement can be put aside.  In my view, “未尽事宜” in the context of the Agreement can mean matters not covered in the Agreement or the unfulfilled contractual responsibilities.  The most important words are “事宜”.  I am unable to see why “事宜” must refer to matters not covered in the Agreement based on the language deployed.  Mr Sarony SC has rightly accepted that the Report did not go so far as suggesting that the words “本协议未尽事宜” constituted a term of art used by Mainland lawyers.  With respect, I therefore find the first proposition contained in the Report (see para. 11 above) to be of little assistance.

15.  I must try to resolve the ambiguity from the context in which the words were used and with the application of common sense.  Looking at Clause 13.2 in its entirety, it is reasonably plain (as Mr Sarony SC has fairly accepted) that it is a jurisdiction clause of some sort.  Obviously, it was intended that certain matters are to be referred to the court of the place where the Agreement was signed.  The issue is what those matters (未尽事宜) are.

16.  I certainly agree with Mr Fung SC that the fact that Clause 13.2 immediately follows a governing law clause (Clause 13.1) tends to suggest that it is a jurisdiction clause as those matters go hand in hand and are often provided for in the same section of an agreement.  However, that proposition may not resolve the issue as to what is covered by the jurisdiction clause. 

17.  I am alive to the fact that the terminology employed in Clause 9.3, dealing with compensation for breach of the Agreement, is different to that of Clause 13.2.  The terms used in Clause 9.3 for breach of contract are clear and explicit.

18.  When I asked Mr Sarony SC to give some examples of the matters not covered by the Agreement which may come within Clause 13.2, he was unable to do so.  As a general proposition, I can see that there may be a situation where certain steps are required to be taken for the performance of a contract and those steps were overlooked in the drafting of the same.  The obvious example which comes to mind is the execution of the necessary documents in a shares sale agreement.  In those circumstances, one can see the logic that the parties should try to resolve the matter by negotiation failing which the matter be decided by the court. 

19.  However, I am unable to see why there should be a distinction between matters not covered by the Agreement and unfulfilled contractual responsibilities in the context of Clause 13.2.  Why should the latter be excluded from the arrangement prescribed under Clause 13.2? With respect, Mr Sarony SC was unable to provide any answer to that question, and he very fairly accepted the illogicality for including one but excluding the other.

20.  Finally, in respect of the standard contractual provisions referred to in para. 11 above, Clause 13.2 appears to be a collision of the two standard provisions.  On this point, Mr Sarony SC could only say that it might have been a drafting mistake.  On balance, I do not believe that the Report is of assistance for the present purpose.

21.  Drawing upon the above analysis, I have little doubt that Clause 13.2 is indeed a jurisdiction clause which covers disputes arising out of the Agreement.  It is tolerably clear from the wordings deployed and the fact that it is meant to go hand in hand with the governing law provision. 

22.  Two further points should be mentioned.  In Rich Village’s evidence put before the court for its ex parte application for leave to serve out of jurisdiction, it was said that: “Despite Clause 13.2 stated that if there is any dispute, the parties should submit to the court where the Agreement was signed, namely, PRC Court in NingBo.  However, Clause 13.2 is not an exclusive forum”[2].  At the time, Rich Village was legally represented and it was accepted that Clause 13.2 was a non-exclusive jurisdiction clause and it covered “any dispute”.  Although I agree that this is a matter of law and for this court to decide, plainly Rich Village’s concession was not made without good reasons and very often the first impression as to what a clause means is the correct one.

23.  Secondly, as to the forum indentified under Clause 13.2 (合同签订地法院), one needs to refer to part of paragraph 5 the Preamble of the Agreement to find the answer.  The relevant provisions are as follows:

“现本协议双方经友好协商，就转让RICH CITY DEVELOPMENT LIMITED 100% 股权的相关事宜，于本协议签署日(2011 年4 月 29 日)在中国宁波市鄞州区达成本协议，以资共同遵守：”

24.  It is reasonably clear from reading Clause 13.2 and the above provisions in conjunction that the forum identified is Ningbo. Although it appears from the evidence that what in fact took place was that the representatives of Rich Village, Rich City and the Companies signed the Agreement in Tianjin, whereas the representative of Grand Pride signed it in Shanghai, I do not believe that it changes the picture.  What actually took place was plainly consensual and it would not change the forum which had been identified in the Agreement.

Is Clause 13.2 an exclusive jurisdiction clause?

25.  Next I need to determine whether Clause 13.2 is or is not an exclusive jurisdiction clause.  If the answer is in the affirmative, this action must come to an end because, quite rightly, Mr Sarony SC has accepted that there is no strong reason to justify bringing this action if there is such a jurisdiction clause in favour of the Ningbo court. 

26.  I believe that the starting point is the applicable principles which can be found in Yu Lap Man v Good First Investment Ltd [1999] 1 HKC 622 at 624 C-E:

“(1) The question whether the clause provides that the courts in PRC should have exclusive jurisdiction or non-exclusive jurisdiction is one of the construction of the agreement and nothing more: Sohio Supply Co v Gatoil (USA) Inc [1989] 1 Lloyd’s Rep 588.

(2) The question is whether on its true construction the clause obliges the parties to resort to the relevant jurisdiction, irrespective of whether the word ‘exclusive’ is used: Sohio v Gatoil.

(3)      While the matrix background or surrounding circumstances can be considered, the negotiations or the subjective intention of the parties in construing a contract should not be considered: Sohio v Gatoil.”

27.  First of all, in respect of the matrix background, I believe it is of some importance that the subject matter of the Agreement is the shares in, and with them the control of, a Hong Kong company. On the other hand, Rich City is merely a holding company (with a paid-up capital of HK$1), its assets are those held by the Companies.  The assets of the Companies are real estate developments in the Mainland. 

28.  I have no difficulty in agreeing with Rich Village that the transaction in question has little to do with Hong Kong:

(1) the parties are BVI companies and a Mainland resident;

(2) the negotiations and the making of the Agreement took place in the Mainland;

(3) the decision makers in the transaction are residents in the Mainland;

(4) the price was payable in RMB and paid in the Mainland;

(5) the buyback was intended to take place in the Mainland; and

(6) the management of Rich City (and the Companies) is based in the Mainland.

29.  On the other hand, the application of Hong Kong law to the Agreement, which is logical given the subject matter of the transaction, is of some importance.  When asked by the court, Mr Fung SC fairly conceded that a judgment by a Mainland court ordering a transfer of Rich City’s shares back to Rich Village would not be enforceable in Hong Kong.  That plainly is a matter of considerable significance.

30.  Further, as noted in paragraph 13 above, the Agreement was drafted by Mainland lawyers.  I infer from the evidence that even if Rich Village did not instruct its own lawyer for the purpose (this is a disputed issue), the lawyer instructed by its agent would have looked after its interest.  Otherwise, there would have been no reason to have more than one lawyer drafting the Agreement.  In the circumstances, the Agreement was one tailor made to meet the requirements of both sides.

31.  Having put together the factual matrix, I have of course to consider the terms of Clause 13.2.  The operative words (协商不成则向合同签订地法院起诉) are assertive instead of permissive (协商不成可向合同签订地法院起诉). 

32.  I must confess that having put together the factual matrix and considered the terms of the jurisdiction clause, the answer I have to arrive at is not altogether obvious.  I therefore turn to the authorities to see if there is any guidance or analysis which may assist in this difficult task.

33.  Amongst the host of authorities which I have been referred to, with respect the only one which is of assistance for the present exercise is S & W Berisford Plc & Anr v New Hampshire Insurance Co [1990] 2 QB 631, a decision of Hobhouse J (as he then was).  That case was concerned with a differently worded jurisdiction clause – “this insurance is subject to English jurisdiction”.  In a luminous analysis, the learned Judge held that in construing the clause in question three possibilities existed: either the parties intended to provide for the exclusive jurisdiction of the English court, or that the words were permissive, in the sense that the parties agreed that any action brought in England was properly brought and could not be objected to, or that the words were intended to be declaratory in that English court would in any event have jurisdiction on the particular facts of that case[3].

34.  First of all, the permissive possibility can be discounted.  Like S & W Berisford (see p.636F), there was no need for the parties to permit litigation in Ningbo. Applying the governing Hong Kong law, it appears to me that being the place where the contract was concluded Ningbo court clearly has jurisdiction over disputes arising under the Agreement.

35.  Secondly, the assertive terms of Clause 13.2 must be given proper weight.  That is probably the high watermark of Grand Pride’s case in this regard.  On the other hand, given the subject matter of the Agreement and the application of Hong Kong law, it requires a strong reason to come to the conclusion that the parties had agreed to Ningbo court having exclusive jurisdiction over the Agreement. 

36.  It appears to me to be a critical factor that an order by the Ningbo court for the return of the shares in Rich City to Rich Village cannot be enforced in Hong Kong.  Despite the assertive terms of Clause 13.2, to construe it as an exclusive jurisdiction clause would produce an unreasonable result.  It is a canon of construction that if the natural and ordinary meaning of the words used would produce an unreasonable result, then absence clear indication that such a result was intended by the parties, the natural and ordinary meaning would not prevail.  Otherwise, the court would be attributing to the parties an intention which they could not have had (See Chitty on Contracts, 30^th edn., vol.1, para. 12-055).  I therefore reject the suggestion that Clause 13.2 is an exclusive jurisdiction clause.

37.  Thirdly, it makes sense that Clause 13.2 is declaratory.  I readily accept that unlike S & W Berisford, where it was held that the clause in question was declaratory (see p.637H-638A), this case does not involve a printed form agreement (see p.636D-E&F). However, given that the parties must have more than one option as to forum in the event of dispute (eg., it is possible for an action to be brought in the BVI), it makes sense for them to have a contractual acknowledgement of the jurisdiction of the Ningbo court and a contractual agreement to the invocation of that jurisdiction notwithstanding that there is no obligation to sue only in Ningbo.

38.  For these reasons, I hold that Clause 13.2 is a non-exclusive jurisdiction clause.

Is Rich Village entitled to bring this action in light of Clause 13.2?

39.  There is a complaint of non-disclosure on the part of Rich Village in its ex parte application for leave to serve out of jurisdiction.  The complaint is based on the alleged failure to draw the court’s attention to Clause 13.2.  I can deal swiftly with this issue, which was not really pressed by Mr Fung SC.  Clause 13.2 was referred to the learned master hearing the ex parte application.  It was asserted that it was a non-exclusive jurisdiction clause in favour of Ningbo court.  I agree with that assertion and I am unable to see much substance in this complaint.

40.  Next I should make clear that for the present purpose the grant of leave to serve out of jurisdiction is reconsidered afresh (see HK Civil Procedure 2012, vol.1, para. 11/1/2).

41.  What is the legal effect of a non-exclusive jurisdiction clause?  I start with Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631 where the Court of Appeal had examined this area of the law in some depth and provided much helpful guidance.  It was a case concerned with a non-exclusive jurisdiction clause in favour of Hong Kong courts.  The principles, as set out in the headnotes, are as follows:

(1)     The only difference in principle between an exclusive jurisdiction clause and a non-exclusive jurisdiction clause was that in the former case both parties were contractually bound to the chosen forum whereas in the latter case neither party was bound to bring an action in Hong Kong, but each party agreed to submit to the jurisdiction if an action was brought against it.

(2)     The effect of a non-exclusive jurisdiction clause depended upon where proceedings had been instituted.  First, in O.11 proceedings, where proceedings were commenced in the very forum to which the parties had agreed to submit, the plaintiff could discharge the burden of showing that the named forum was clearly the appropriate one, by simply referring to the non-exclusive jurisdiction clause.  A party who sought to contest that jurisdiction had a very heavy burden to discharge to the extent of showing strong or overwhelming reasons or exceptional circumstances, in particular the existence of factors not contemplated by the parties at the time the relevant agreement was made.  Thus, in such situation, the effect of a non-exclusive jurisdiction clause, was in practice the same as an exclusive jurisdiction clause.

(3)     Second, where proceedings were instituted in a forum other than the named one, an altogether different approach might be required depending on the precise wording of the clause in question.  If the other forum was one to which the parties had also agreed to submit in the event of their being sued, there might be little difference between the two situations.  But where, as was more common, the other forum was merely one in which proceedings could be instituted without any obligation on the party sued to actually submit to that forum, the burden on the contesting party was less heavy.

42.  It may be helpful to deal firstly with the question of where the burden of proof lies.  Ms Wu, who addressed the court on this issue, argued that the burden rests with Rich Village, to which Mr Sarony SC disagreed and he submitted that the burden is on Grand Pride. 

43.  In support, Mr Sarony SC relied upon para. 33(3) of the judgment in Noble Power Investments Ltd which provided as follows:

“A sues B in Hong Kong. Again, Hong Kong is not named as the non-exclusive jurisdiction but the courts of Japan are. However, this time the parties have not agreed to submit to any jurisdiction other than the Japanese courts. In other words, while the parties have agreed to submit to Japanese jurisdiction in the event that they are sued there, and while they have also agreed that they are at liberty to institute proceedings in a jurisdiction other than Japan, no positive obligation exists for a party to submit to any jurisdiction other than Japan. Here, the burden on B is less heavy.”

44.  In para. 33, the Court of Appeal provided some simple illustrations on how the principles might operate.  With respect, I believe that the para. 33(3) illustration was not concerned with a case where B was not a Hong Kong resident and thus A did not institute proceedings against it in Hong Kong as of right.  In any O.11 case, the burden is on the plaintiff and I do not believe that there is anything in Noble Power Investments Ltd which suggests otherwise.  I therefore agree with Ms Wu. However, I do believe that this case turns upon where the burden rests.

45.  What is the proper approach in this case where Rich Village has instituted proceedings in Hong Kong not as of right and there is a non‑exclusive jurisdiction clause where Hong Kong court is not the named forum?  I believe it is reasonably clear from para. 44 of the judgment in Noble Power Investments Ltd that the court is to resort to forum non conveniens principles to resolve the matter.  In other words, I have to go through the well established exercise to identify the most appropriate jurisdiction where this case may be tried in the interests of all the parties and for the ends of justice: see Noble Power Investments Ltd, para. 38.

46.  In this exercise, I bear in mind the circumstances of this case which I hope are adequately identified above.  I bear in mind also the submissions of Mr Fung SC that the place of commission of the tort alleged by Rich Village was the Mainland and that the issues disclosed by the affirmations filed in this case are primarily factual and involve no complicated Hong Kong law.  I also agree that Rich Village’s complaint as regards the quality of justice in connection with the Mainland legal system is unpersuasive.

47.  I believe that the subject matter of the Agreement being shares in a Hong Kong company and that Hong Kong law applies to the Agreement are weighty factors.  On the other hand, the fact that witnesses based in the Mainland will have to come to Hong Kong to give evidence is not. 

48.  Ultimately, the fact that a Mainland judgment may not be enforceable in Hong Kong is a compelling factor in favour of Hong Kong courts as the appropriate forum for the trial of these matters. Bluntly put, it would be absurd for the parties to litigate in a place where a primary relief, if obtained, would be useless.

49.  For these reasons, I dismiss Grand Pride’s jurisdictional challenge.

Fortification of Rich Village’s undertaking as to damages

50.  Mr Fung SC has asked for fortification in the sum of RMB50 million.  Although there is no direct evidence of damage being suffered by Grand Pride, I am prepared to infer that, in light of the Injunction, there is a real risk of damage to Grand Pride.  Helpfully, Mr Sarony SC did not dispute the liability for fortification (the concession is clearly a sensible one given that, inter alia, Rich Village is a BVI company) but submitted that the appropriate sum should be HK$6 million. 

51.  I bear in mind that Rich Village had been paid RMB500 million by Grand Pride for the shares in question.  Although it is said that the assets owned by the Companies are now worth RMB3 billion, the dealing with the same is restricted by the Injunction.  Further, there was a deadline for the buyback of the shares by Rich Village (18 May 2012) and it was required to repay the purchase price of RMB500 million together with 22% interest, namely, a total sum of RMB610 million. 

52.  In these circumstances, and taking a rough and ready approach, I order that Rich Village is to pay into court a sum of HK$10 million as fortification within 21 days from the date of this decision.  I give liberty to apply.  The Injunction is to continue until trial or further order. Should Rich Village fail to meet the fortification requirement, the Injunction should be discharged. 

Speedy Trial

53.  I direct that there should be a speedy trial of this action.  I would only record here what the parties have so far agreed for purpose of a speedy trial:

(1)  the parties are to agree a set of directions for this purpose;

(2)  the time line for filing of pleadings should be shortened; and

(3)  trial is to be fixed without consultation with counsel’s diary.

Conclusion

54.  As stated in para. 52 above, I order the continuation of the Injunction subject to the fortification by Rich Village.  The defendants’ Summons filed on 29 June 2012 is dismissed.  I make an order nisi that the costs of the hearing be to Rich Village with a certificate for two counsel to be taxed if not agreed.