LI WENJUN v. CHEN CHUNHUI AND ANOTHER

HCA 1151/2021

[2023] HKCFI 405

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1151 OF 2021

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D E C I S I O N

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1.  This is the Summons, filed on 19 September 2022, of the 1^st Defendant (“Chen”) for a stay of these proceedings in favour of arbitration pursuant to s. 20 of the Arbitration Ordinance, Cap 609 (“Ordinance”) or the inherent jurisdiction of the court. The arbitration clause in question (“Clause”) is cl.14.1 of a Share Transfer Agreement dated June 2018 (“Agreement”), which was signed by, inter alios, the Plaintiff (“Li”) and Chen.

Pleadings

2.  This action was started by the issuance of a specially endorsed writ on 2 August 2021 by which Li brings a case of deceit and conspiracy against Chen and the 2^nd Defendant. The Amended Statement of Claim may be summarized as follows.

3.  Li met Chen in around 2003, and they developed a friendship. In around the end of 2017, Chen suggested to Li that they should both invest in Huiyin Holdings Group Ltd (“Company”), which was at that time a listed company. Li and Chen then acquired respectively 1,211,570,000 and 450,950,000 shares in the Company.

4.  In or around June 2018, Chen represented to Li, inter alia, that :

(a)  Li should transfer her shares to him or a company owned or controlled by him so that he could manage the Shares for her and could exert influence in the operation and management of the Company (“Arrangement”);

(b)  Chen would enter into a written declaration of trust with Li in respect of the Arrangement; and

(c)  In the event that Chen decided to sell his own share and Li’s Shares for profit or if the Company got taken over by another company, Chen would account to Li her share of profits or proceeds arising therefrom.

5.  Chen further represented to Li that she should transfer her shares to a company owned or controlled by him, the name of which contained the word “Smart”.

6.  In reliance on the above (and other implied) representations, Li signed various documents handed to her by Kingston Securities Ltd (“Kingston”), the broker who handled the transfer, under Chen’s arrangement.

7.  In around May 2019, Li discovered that her shares had in fact been transferred to Eight International Group Ltd (“Eight”), a company in which Chen had no interest and that the representations made by Chen were false and were made only to induce her into parting with her shares.

8.  Upon discovering the falsity of Chen’s representations, Li made numerous requests to Chen to pay or compensate her for her shares, or to honour the Arrangement. Chen has failed and/or refused to do so.

9.  By his Defence filed on 25 November 2021 and amended on 8 February 2022, Chen asserted, inter alia, that he was only a passing acquaintance of Li, and he never had any communication or contact with Li concerning her shares in the Company or their transfer by her. In short, Chen denies that he had anything to do with Li’s shares in the Company.

10.  Subsequently, Li was able to obtain, inter alia, a copy of the Agreement. By the Amended Statement of Claim filed on 25 May 2022, the Agreement was introduced under particulars of fraud. According to the Agreement, Li (as one of the vendors) purported to sell her shares in the Company to Eight as purchaser for consideration. Although the Agreement bore a signature that appeared to be hers, Li was not aware of the content of the document and never agreed to it. She had been informed that the Agreement was prepared by Chen.

The Clause

11.  The Clause provided as follows :

“因履行本协议所发生的争议，各方应友好协商解决：协商解决不能的，任一方均有权向香港国际仲裁中心按照其在本协议签署时现行有效的仲裁规则提起仲裁解决。”

Applicable principles

12.  The applicable principles are trite and uncontroversial. Section 20 of the Ordinance, which incorporated Art. 8 of the UNCITRAL Model Law, provided that if the matter in the action is the subject of an arbitration agreement, the court shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. If these requirements are satisfied, the stay is mandatory.

13.  There are 4 questions which fall to be considered by the court in determining a stay application (see Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, [19]-[22]) :

(1)  Is the clause in question an arbitration agreement?

(2)  Is the arbitration agreement null and void, inoperative or incapable of being performed (“Question (2)”)?

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

(4)  Is the dispute or difference between the parties within the ambit of the arbitration agreement (“Question (4)”)?

Issues

14.  In this application, there are in truth only 2 issues, namely, whether Questions (2) and (4) are to be answered in favour of Chen. There is also an issue whether this application was made after Chen had submitted his first statement on the substance of the dispute (see 12 above). It is, however, clear from the submissions advanced on behalf of Li that this issue adds little to the arguments under Question (2).

Question (4)

15.  I propose to deal with this issue first because the answer is reasonably clear and determinative of this application. Ms Sit SC, who appeared for Chen with Mr Wong, had fairly accepted that where this issue is decided against Chen there is no question of invoking the inherent jurisdiction of the court.

16.  It is common ground that the construction of the Clause is governed by PRC law and the issue turns upon whether, on proper construction, Li’s causes of action in this action fall within the scope of disputes embraced by the Clause.

17.  I start with a few words about the threshold requirement which has to be met by Chen who bears the burden of proof in this application. Chen has to show that there is a prima facie or plainly arguable case that the parties are bound by the Clause, and unless the point is clear, the court should not resolve the issue, and the matter should be stayed in favour of arbitration for the arbitral tribunal to determine its own jurisdiction: Mice Engineering Ltd v Johnson Controls Hong Kong Ltd [2022] HKCFI 2768, [18].

18.  It is, however, uncontroversial that when approaching expert evidence on foreign law, the court must look at the basis of legal reasoning to determine what weight, if any, should be attached to the opinion. If neither opinion renders useful assistance, the court is left with a “linguistic and common sense interpretation”: China Railway (HK) Holdings Ltd v Chung Kin Holdings Co Ltd [2023] HKCFI 132, [42].

19.  On the face of it, the threshold of prima facie or plainly arguable case is not a high one. On the other hand, even if the court only has PRC legal expert evidence from the applicant, it does not follow that the court would accept the evidence without evaluation of the legal reasoning.

20.  In this case, the evidence Chen’s legal expert (“Pan”) is contradicted by that adduced on behalf of Li (“Ye”). There can be no escape that such evidence will have to be assessed and the court will have to come to a view whether Chen’s case is properly grounded. Put another way, once the PRC law evidence is contested, the court has to come to a view whether the prima facie or plainly arguable case is properly supported.

21.  The critical part of the Clause is the first sentence: “因履行本协议所发生的争议”. It is common ground between Pan and Ye that the disputes in this action are tortious in nature[1] (侵权之诉). The question over which they differ is whether the tortious disputes fall within the scope of the Clause.

22.  With a detailed analysis in support, Ye answered the question in the negative. According to Ye, “因履行本协议所发生的争议” should be construed to mean disputes arising from a party’s failure to perform his obligations under the Agreement or to comply with its terms :

“因履行《股份转让协议》所发生的争议，限定为：《股份转让协议》中的一方当事人 (违约方) 不履行《股份转让协议》义务或者履行《股份转让协议》不符合约定，《股份转让协议》中的另一方当事人 (守约方) 要求该违约方承担继续履行、采取补救措施或者赔偿损失等违约责任，从而引发的争议。”[2]

23.  Ye’s opinion is supported by the case of (2020) 最高法知民辖终111号, where the Supreme People’s Court (“SPC”) held that a practically identical arbitration clause did not cover a tortious dispute :

“如何理解 “因履行合同而发生的争议”，《最高人民法院关于适用<中华人民共和国仲裁法>若干问题的解释》第二条规定：“当事人概括约定仲裁事项为合同争议的，基于合同成立、效力、变更、转让、履行、违约责任、解释、解除等产生的纠纷都可以认定为仲裁事项 … [原告人]的诉请，并非基于[被告人]存在违约行为故应该承担违约责任这一法律关系，而是基于[被告人]擅自将[原告人]所有的技术申请了专利故侵害[被告人]的权益这一法律关系，因此，... 本案中提起的诉讼请求及理由，已超出 … 仲裁事项范围，本案纠纷属于人民法院受理民事诉讼的范围。”[3]

24.  In my view, Ye’s opinion is consistent with the clear wording of the Clause and supported by the highest authority in the Mainland.

25.  Pan gave a contrary opinion, adopting a wide construction of the Clause, ie, it is capable of covering the tortious disputes between the parties. With respect, I agree with Mr Lam, who appeared for Li, that on a close reading of Pan’s opinion his reasoning is not really supported by the authorities he cited.

26.  I need only refer to the 6 cases cited by Pan. Four of the cases were concerned with a much wider arbitration clause, eg, “凡因执行本合约所发生的或与本合约有关的一切争议, …”[4] (《最高人民法院公报》1998 年第3期). Further, in that case the SPC found that the disputes in question arose out of the two contracts signed by the parties.

27.  In respect of 上海市松江区人民法院民事裁定书 (2021) 沪0117民初9842号, where the arbitration clause was similar to the Clause, it concerned the misappropriation of funds of the plaintiff company by the defendant employee whilst he was working as its manager. The Court was of the view that the employee’s conduct was both a breach of contract and tortious, ie, there was an overlap between the causes of action. It is understandable that in the circumstances of that case the Court concluded that the tortious claim made by the plaintiff was covered by the arbitration clause such that he could not opt out of it by making a claim only in tort. This case, however, is distinguishable from the present.

28.  湖南省邵阳市中级人民法院民事裁定书 (2022) 湘05民终1388号 was a case involving an arbitration clause that was materially identical to the Clause. However, I agree with Mr Lam that the part of the decision relied upon by Pan was apparently the reasoning of the first instance court, which was not adopted by the appellant court. Ms Sit submitted that the first instance decision was not overturned by the appellant court. Be that as it may, the first instance decision was making the same point of overlap of causes of action and did not take the matter further.

29.  The appellate court disposed of the appeal based on the following reasoning :

“[上诉人]向一审法院提交的起诉状所达事实和理由中，既包含有[被上诉人]未按合同约定交付足够面积出租物的违约行为，又包含有[被上诉人]的其他侵权行为，但是未提出[被上诉人]的侵权行为具体侵害了其何种民事权益，需承担责任的具体法律依据 … 因其在诉状中未明确[被上诉人]侵害其何种民事权益及区分所主张的赔偿系违约责任还是侵权责任，一审法院因此认定其起诉应受仲裁条款约束，裁定驳回其起诉，无不当。”[5]

30.  Apart from the lack of adequate underpinning for his opinion, I am unable to see how, in the face of a clear authority from SPC, Pan’s view can be supported.

31.  In the premises, I must resolve Question (4) against Chen, and this application cannot succeed.

Question (2)

32.  An arbitration agreement is inoperative if a party has waived his right to arbitrate. There would be such a waiver if :

(1)  a party has a right under a contract or by operation of law;

(2)  he knows of the existence of the right or the facts giving rise to such right; and

(3)  he has by conduct, clearly and unequivocally abandoned his right, or indicated that he is not exercising his right.

See Polytec Overseas Ltd v Grand Dragon International Holdings Co Ltd

[2017] 3 HKLRD 258, [52]

33.  In my view, the court should take a holistic view in examining the conduct of Chen generally in this action, and to evaluate the particular action or non-action relied upon by Li to contend that Chen had abandoned the right to arbitration in light of his conduct.

34.  First and foremost, it is quite clear from the original Statement of Claim (“SOC”) that Li is alleging a case of fraud against Chen. She alleged that by virtue of his fraud, her shares in the Company were transferred to Eight for no consideration. It should be borne in mind that it was Li’s case from day 1 that in reliance upon Chen’s representations she had signed various documents given to her by Kingston. Amongst such documents was a Sale Note dated 15 June 2018 with Li’s purported signature and Eight was the stated purchaser, as well as a document stating that Li had received HK$43 million as purchase price.

35.  Despite his knowledge of and involvement in the Agreement, Chen had chosen to defend this action on the basis that he had nothing to do with the disposal of Li’s shares. Such defence was inconsistent with the Agreement. Two points can be made. First, Chen had chosen not to rely upon the Agreement and contend that the disposal was a genuine sale. Second, as Mr Lam had submitted, this is an opportunistic application.

36.  Contrary to Chen’s contention, I am unable to see that Li had changed her case. The Agreement was added by way of amendment to the particulars of fraud[6] after Li had obtained a copy of it and, like the Sale Note[7], she is relying upon it as an instrument used to cheat her out of the shares.

37.  Ms Sit submitted that the introduction of the Agreement necessitated a determination thereon and generated a separate and discreet issue concerning the Agreement, which is subject to arbitration. Accordingly Chen seeks a stay of the whole action, since the original claims cannot proceed in the absence of a determination on the contractual issue. Ms Sit relied on Keswani v Keswani [2022] 4 HKC 555, [35], for the proposition that a person of full age and capacity is normally bound by his signature; the validity of the document is not impugned merely because he signed without knowing its contents.

38.  It is not entirely clear to this court why Li will have to establish a case of non est factum as a separate and discreet issue in this case, given her case of fraud and that the Agreement was an instrument of fraud. Rather, if Chen wanted to advance a case that the disposal of Li’s shares was a genuine sale, he will have to rely upon the Agreement under which he was Li’s guarantor (see Chen’s 1^st affirmation, para 12.7).

39.  As pointed out above, Chen had made a choice not to rely upon the Agreement.

40.  Further, Mr Lam relied on 2 particular conduct of Chen as waiver of arbitration. First, Chen did not in any way indicate that he would be applying for a stay in light of the proposed amendment to the SOC after having received Li’s Summons to amend the SOC with the Amended SOC enclosed on 25 April 2022. Instead, he took no objection to the amendment at the hearing on 12 May 2022.

41.  In Ahad v Uddin [2005] EWCA Civ 883, [19], Lord Phillips MR explained that where an amendment of a pleading will introduce issues which the defendant says he is entitled to have resolved by arbitration, the defendant should object to the amendment on this ground at the time the amendment application is made :

“Permission to amend in such circumstances is required and, so it seems to me, the appropriate course is for the defendant, if he contends that the amendment sought will introduce new issues which he is entitled to have resolved by arbitration, to object on this ground to permission being given to amend. …”

42.  I accept Ms Sit’s submission that Chen should be given proper opportunity to consider his right. On the other hand, the action had been on foot since August 2021, Chen well knew about the Agreement and he had been legally represented throughout the proceedings.

43.  Second, Chen took out a security for costs application against Li on 11 February 2022. This court was referred to La Donna Pty Ltd v Wolford AG (2005) 194 FLR 26, [25]-[27] where the Supreme Court of Victoria held that the defendant had waived its right to arbitrate by applying for security for costs :

“25. The application for security for costs falls into an entirely different category, however. That application was based on the explicit premise that the litigation would proceed to trial in the absence of a settlement, and that the matters the subject of the proceedings would be determined by the Court.

26. [The defendant] sought an advantage, or at least sought to impose upon [the plaintiff] a burden, which was based upon the proposition that the litigation would proceed in this Court, that [the defendant] would take steps, and that [the defendant] would incur costs in taking those steps, in that litigation in this Court. This step was an unequivocal abandonment of the alternative course, being an application for a stay and a consequent arbitration.

27. To allow [the defendant] to rely on the arbitration provision now would be to permit it to approbate and reprobate. In my view, it has waived the provisions and thereby rendered them inoperative.”

44.  This court was shown some without prejudice correspondence of the parties dated from 23 March to 10 May 2022 by which the security sought was reduced from over HK$3 million to HK$1 million to cover Chen’s costs up to the exchange of witness statement(s). That compromise, proposed by Li, was accepted by Chen and the money was subsequently paid.

45.  As pointed out by Ms Sit, the application to amend the SOC was made in the course of the negotiation. However, it was expressly referred to in the letter of Li’s solicitors dated 3 May 2022, para 8.

46.  Whilst it is true that there was only a 2-week window between the amendment application and the agreement to Li’s proposal of HK$1 million by way of a letter from Chen’s solicitors dated 10 May 2022, the same points made in para 42 apply.

47.  Further, the agreement on costs up to exchange of witness statement(s) was plainly inconsistent with this application by which Chen seeks a stay pending arbitration. On his case, there would be no need for any witness statement if Li is found by the arbitral tribunal to be bound by the Agreement.

48.  For these reasons, I hold that Question (2) should also be resolved against Chen. In other words, he had waived his right to arbitration.

Disposition

49.  In the premises, this application is dismissed. I see no reason why costs should not follow the event. However, out of abundance of caution, I make an order nisi that the costs of and occasioned by this application be paid by Chen.

50.  Last but not least, I am grateful to counsel for their assistance.