楊佩玲 v. SUPER BEST INVESTMENT LTD

CAMP 375/2023, [2024] HKCA 520

On Appeal From [2023] HKCFI 2494

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 375 OF 2023

(ON AN INTENDED APPEAL FROM HCA NO 1465 OF 2022)

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BETWEEN

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J U D G M E N T

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Hon G Lam JA (giving the Judgment of the Court):

Introduction

1.  This is an application by the plaintiff for leave to appeal. The plaintiff issued proceedings for recovery of a loan and had the writ served on the defendant in late 2022. The defendant failed to give notice of intention to defend within time, and default judgment was entered against it on 28 December 2022. Two days later, it took out a summons (1) for leave to file an acknowledgment of service; (2) for an order to set aside the default judgment; (3) for a stay of the proceedings in favour of arbitration, based on a written agreement that disputes should be referred to the Guangzhou Arbitration Commission for resolution by arbitration; and (4) as an alternative to (3), for a stay of the proceedings on the ground of forum non conveniens.

2.  In his Decision[1] dated 29 September 2023 on the defendant’s application, K Yeung J held that the defendant had shown a prima facie case (and, indeed, good prospects of success) that there was an arbitration agreement between the parties, that there were disputes on the defendant’s liability to repay the loan to the plaintiff, that the default judgment should therefore be set aside and the disputes referred to arbitration, and that the action should therefore be stayed. He also held that if necessary, the action should be stayed on the forum non conveniens ground in favour of the People’s Court of Yuexiu District of Guangzhou.

3.  By his Decision dated 11 December 2023, the judge refused to grant leave to appeal.[2] The plaintiff has now asked this court for leave to appeal.

Background

4.  According to the plaintiff’s statement of claim indorsed on the writ, the plaintiff advanced a loan of RMB 10 million to the defendant in 2013 for a term of two years with interest at 25% per annum. The defendant failed to repay in 2015, whereupon the parties entered into a loan agreement (“2015 loan agreement”) treating the outstanding RMB 15 million as the new principal, which was to be lent again for two years with interest at 25% per annum. There was in addition a provision for penalty of 0.05% of the principal sum per day in case of failure to make repayment on time. As the defendant still failed to repay in 2017 or thereafter, the plaintiff brought the action for RMB 57,662,500 (including the principal of RMB 15 million, interest for 7 years and 5 months in the total sum of RMB 27,812,500, and daily penalty for 1,980 days amounting in aggregate to RMB 14,850,000).

5.  The defendant’s case is set out in the affirmation evidence of Au Siu Fung (“Au”), a director of the defendant. He said that Mr Chen Jianxiong (“Chen”) (through a corporate vehicle called “Union Group”) and the defendant are co-shareholders (in the proportion of 65.5% and 34.5%) in a company called “Heyday” which is itself a shareholder in a Guangzhou joint venture company (“Guangzhou JV”). The defendant was obliged to inject capital into the Guangzhou JV but lacked the funds to do so. As a result, it was agreed that Chen would lend the money to the defendant in 2013. All the negotiations were conducted with Chen but in the end the lender stated on the loan agreement in 2013 was the plaintiff. The defendant’s directors had never met the plaintiff and simply understood her to be the girlfriend of Chen. They considered her to be the nominee or agent of Chen in respect of the loan.

6.  The 2015 loan agreement for rolling over the loan and interest from 2015 onwards was signed in 2016. In addition, an agreement was signed at the same time (the “2016 agreement”) to the effect that when the Guangzhou JV managed to obtain a bank loan of no less than RMB 80 million, it would be used in part for repaying the RMB 15 million loan to the plaintiff. Au said that shortly afterwards, Chen gave the defendant a Supplemental Agreement to sign, which stated that the 2015 loan agreement will be governed by the laws of the PRC and that disputes between the parties should be resolved by negotiation, failing which by arbitration through the Guangzhou Arbitration Commission. The defendant and Union Group (by Chen) signed on the Supplemental Agreement, among other parties.

7.  Au says that the Guangzhou JV did manage to obtain the requisite bank loan in 2017 and that therefore pursuant to the agreement signed in 2016, the plaintiff’s loan should have been repaid from such financing.

8.  The plaintiff denies that she is a girlfriend of Chen and denies that she acted as Chen’s agent or nominee in respect of the loan. She says that the loan was her own commercial transaction and relies on the 2015 loan agreement. She says she is not aware whether a bank loan had been obtained by the Guangzhou JV as alleged by the defendant. She says that shortly after signing the 2015 loan agreement, Chen told her that the defendant asked her to sign the Supplemental Agreement but she refused to do so. She contends that the arbitration clause in the Supplemental Agreement is therefore not binding on her.

The intended grounds of appeal

9.  The special feature of this case is that there was a regular default judgment and the defendant applied both for an order to set aside the default judgment and an order staying the action for arbitration. K Yeung J considered that the question of stay was decisive of whether the default judgment should be set aside. He held that the usual test for deciding whether to grant a stay of proceedings in favour of arbitration, namely, whether there is a prima facie case that the parties are bound by an arbitration agreement, applied equally in this situation. He found that there was such a prima facie case and therefore set aside the default judgment and stayed the action.

10.  For the present application, the plaintiff has raised five intended grounds of appeal.

Ground 1

11.  Ground 1 contends that the defendant ought to be required to demonstrate a real prospect of success on the merits for the purpose of setting aside the default judgment, before it can invoke the arbitration clause for the purpose of obtaining a stay of proceedings. It is said that the judge was wrong to “give precedence to the UNCITRAL regime over the judicial regime”.

12.  The question of the proper approach of the court in a situation like the present case has been considered before by Ma J (as he then was) in Dah Chong Hong (Engineering) Ltd v Boldwin Construction Co Ltd (HCA 1291/2002, 11 October 2002), a decision that was regrettably not cited to K Yeung J who was told by counsel there was no authority on the point. In that case a regular default judgment was entered against the defendant. The defendant issued a summons to have it set aside and for an order that the action be stayed for arbitration.

13.  In his judgment Ma J set out the arguments in favour of the proposition that the requirement to demonstrate a defence that has a real prospect of success, which he termed the “Defence Requirement”, is inapplicable when the court will or is likely to grant a stay of the action. Those arguments were as follows (§20):

“ (1) The rationale behind the Defence Requirement is that the court looks at the position it and the parties would be put in should the relevant default judgment be set aside. The court then has to determine whether or not in these circumstances, there is any real point in setting aside the judgment. …

(2) In most actions, the position that the court and the parties find themselves in should the default judgment be set aside, is that the disputes or differences between the parties will have to be resolved at trial in court. Hence the need for the court itself to determine whether or not there exists a defence that has a real prospect of success or carries some degree of conviction (for it will be the forum for the trial). If this requirement (the Defence Requirement) is satisfied, it can then readily be seen that there is a real point in setting aside the default judgment. Conversely, if the Defence Requirement is not satisfied, then there would be little or no point in setting aside the default judgment in question.

…

(4) … It is quite different when an arbitration agreement is involved. Here, the position or scenario is that should the default judgment be set aside, the court will, as in the present case, often be faced with an application by the defendant for the action to be stayed so that the disputes or differences can be referred to arbitration.

(5) The role of the court when faced with a stay application … is clear. It must refer the disputes or differences to arbitration unless one or more of the following is demonstrated:

(a) There is no arbitration agreement at all.

(b) The arbitration agreement is null and void, inoperative or incapable of being performed.

(c) There is in fact no dispute or difference to be referred to arbitration.

(d) The relevant dispute or difference is not one that is covered at all by the arbitration provisions in the arbitration agreement.

…

(7) In this context, “disputes” or “differences” exist unless there has been a clear and unequivocal admission of both liability and quantum. …

(8) The above points highlight what I believe to be a fundamental difference in approach when the court is dealing with an application to set aside a default judgment in circumstances where there exists an arbitration agreement between the parties and it is the intention of one of them to apply to stay the court proceedings should the relevant default judgment be set aside. Essentially, there are three major differences in this context :

(a) The position that the court and the parties find themselves in should the default judgment be set aside is not the trial of the action by the court, but the application by one of the parties for a stay. It must therefore be to that application that the court’s immediate attention is directed.

(b) The court’s role in the stay application is limited in that the court can only look at those aspects set out in sub-paragraph (5) above.

(c) In particular, in considering the merits of the dispute between the parties, the court effectively does not do so and its role is restricted to finding out whether there is a clear and unequivocal admission of liability and quantum. The only proper forum for the resolution of the disputes or differences between the parties is the chosen one (viz. the arbitral tribunal).”

14.  Ma J went on to express his view that these arguments were compelling and set out the proper approach of the court as follows (at §21):

“ (1) The court must of course reach a view on the stay application. Usually of course, as in the present case, such an application will be made at the same time as the application to set aside default judgment. Where the court will or is likely to grant the stay, the court does not consider the merits of the defence at all. In other words, the Defence Requirement need not be satisfied.

(2) Where, however the court takes the view that the stay application will or is likely to fail, the Defence Requirement will then have to be satisfied by the defendant since the court will then be projecting itself to the trial of the action by it should the default judgment be set aside.

(3) The matters referred to in sub-paragraphs (1) and (2) above do not of course signal the end of the court’s enquiry in considering the application to set aside. The court will also have to consider those other factors I have referred to in paragraph 18 above [i.e. factors such as the reasons for letting the default judgment occur, any delay in applying to set aside, and the intervention of third party interests].”

15.  Following Dah Chong Hong, in Truearns Co Ltd v Wealthy Fountain Holdings Inc [2019] HKCFI 1840 (at §12) where there was again an application to set aside a default judgment coupled with an application for stay of the action for arbitration, it was common ground that “the stay application should be determined first. If the court is of the view that the stay application would succeed or is likely to succeed, the court would not consider the merits of the defence at all”.

16.  In their supplemental written submissions, counsel for the plaintiff have not offered any argument against the reasoning in Dah Chong Hong. They submit instead that the court should not grant a stay in the present case because there was no arbitration agreement between the parties, and that the merits should therefore be inquired into in deciding whether the default judgment ought to be set aside. This argument belongs to Grounds 3 and 4 below and does not support Ground 1. Counsel also submit that Ma J did not rule out that the Defence Requirement must first be satisfied, referring to §26 of Dah Chong Hong. But if one reads §26 together with §25, it is clear that Ma J was addressing the merits of the substantive defence on a contingent basis if the primary approach he adopted was in error. It is surprising that the plaintiff’s counsel feel able to draw support for Ground 1 from that paragraph.

17.  We are aware that there is a dispute in the present case whether an arbitration agreement exists between the plaintiff and the defendant, and that whilst the court below has referred the parties to arbitration on the basis of a prima facie case, it is conceivable that the arbitral tribunal may decide that no arbitration agreement exists and that therefore it has no jurisdiction. We do not however think that this difference is sufficient to displace the approach in Dah Chong Hong. After all, the judge’s finding also means that prima facie the proper forum for the adjudication of the substantive dispute is arbitration.

18.  Nothing has been said against the reasoning in Dah Chong Hong. In the present case K Yeung J arrived independently and, in our view, correctly at the same approach. Ground 1 has no merit.

Ground 2

19.  Ground 2 contends that the judge omitted to consider that simply by seeking to show reasonable prospects of success on the merits for the purpose of setting aside the default judgment, the defendant would not be regarded as having taken a step in the proceedings and submitted to the court’s jurisdiction. Reliance is placed on Patel v Patel [2000] QB 551.

20.  In our view this point is immaterial. The judge did not come to his conclusion on the ground that to require the defendant to show reasonable prospect of success on the merits would be to require it to submit to the court’s jurisdiction thereby waiving the right to arbitrate. Nor was this a material consideration for the reasoning in Dah Chong Hong which we find compelling as stated above.

Ground 3

21.  Ground 3 contends that the judge failed to take into account that in Haller AG v Vestey International Group Ltd [2023] 1 HKLRD 39 at §§67 & 83-84, this court declined to express an opinion as to whether, instead of proceeding on the basis that once there is a prima facie case of a binding arbitration agreement the court must grant a stay of the action, the court should adopt a more flexible approach and choose among four possible options:

“ (1) (where it is possible to do so) to decide the issue on the available evidence presently before the court that the arbitration agreement was made and grant the stay; (2) to give directions for the trial by the court of the issue; (3) to stay the proceedings on the basis that the arbitrator will decide the issue and (4) (where it is possible to do so) to decide the issue on the available evidence that the arbitration agreement was not made and dismiss the application for the stay.”

22.  This ground goes towards whether the judge should have ordered a stay of proceedings under section 20 of the Arbitration Ordinance. As pointed out by the judge when refusing leave to appeal, a decision of the Court of First Instance to refer the parties to arbitration under Art. 8 of UNCITRAL Model Law, which mandatorily results in an order staying the action (section 20(5)), is by virtue of section 20(8) not subject to appeal: see e.g. Wing Bo Building Construction Co Ltd v Discreet Ltd [2016] 2 HKLRD 779 and HCMP 775/2016, 5 May 2016. This ground has therefore no prospect of success.

Ground 4

23.  Ground 4 contends that the judge was wrong to hold that the defendant had established a prima facie case that an arbitration agreement exists between the parties. It seems to us that this contention goes towards the order referring the dispute to arbitration and staying the proceedings in the action, and is as such misconceived for there can be no appeal against that order as explained above.

24.  In any event, we are not satisfied it is reasonably arguable that the judge’s conclusion, based on his evaluation of the evidence provided in the parties’ affirmations, is erroneous. The judge concluded that the defendant had demonstrated on a prima facie basis that either the plaintiff was Chen’s agent and nominee or Chen was the plaintiff’s agent in the relevant dealings with the defendant.

25.  In coming to his views on this question, the judge attached weight to a number of features of the case. In the 2013 loan agreement, the plaintiff’s particulars were inserted by hand whereas the rest of the documents was typewritten. Chen was closely involved in the transaction. He issued a receipt for the proceeds of the 2013 loan in the sum of RMB 10 million, which stated that the sum was for injection into the Guangzhou JV. Chen signed the 2016 agreement. The plaintiff denies that she is Chen’s girlfriend but gives no explanation otherwise as to their relationship and why she was prepared to grant the loans merely upon Chen’s requests without any due diligence investigation. The plaintiff, her mother and Chen were together the shareholders of a company which provided a guarantee for a facilities letter which resulted in the bank loan obtained by the Guangzhou JV. According to the plaintiff, she did not pursue the defendant for default interest on the 2013 loan merely because Chen so requested, without knowing the defendant’s ability to repay or the worth of the securities provided.

26.  In the present application, the plaintiff submits that the defendant failed to explain why Chen could not procure the plaintiff to sign the Supplemental Agreement and why the defendant did not bother to follow up on whether the loan had been repaid to the plaintiff out of the proceeds of the bank loan. The plaintiff also says that the defendant did not raise its contentions, including in particular the arbitration clause, when it received the plaintiff’s demand letter in August 2022. It is further argued that the fact that Chen introduced the plaintiff as a lender and assisted in the communications between the plaintiff and the defendant does not necessarily mean that he acted as agent for either party.

27.  In our view, the judge’s conclusion that there was prima facie basis for saying that an arbitration agreement existed between the parties cannot be faulted. Chen was clearly central to the transactions and the relationships between the parties. He was not merely an introducer. He signed the 2016 agreement as well as the Supplemental Agreement on behalf of Union Group. The points raised by the plaintiff are arguments that will no doubt be relied upon for the proposition that there was no arbitration agreement binding on the plaintiff, but they are in our view not sufficient to impugn the judge’s assessment that there was a prima facie case, which is not a very high hurdle.

Ground 5

28.  Ground 5 contends that the judge was wrong to find that the People’s Court of Yuexiu District of Guangzhou is clearly and distinctly a more appropriate forum than the Hong Kong court for the trial of the action.

29.  It is unnecessary to consider this ground since there is no reasonably arguable appeal against the judge’s order staying the action in favour of arbitration.

Conclusion

30.  For the above reasons, we take the view that there are no reasonable prospects of success in the proposed grounds of appeal. Leave to appeal is accordingly refused. We make an order under Order 59 rule 2A(8) that the plaintiff may not ask for her application to be reconsidered at an oral inter partes hearing.

31.  There will be an order nisi that the plaintiff do pay the defendant the costs of and occasioned by her application for leave to appeal by summons dated 20 December 2023, to be summarily assessed on paper. The defendant is to submit a statement of costs for that purpose within 7 days, and the plaintiff may lodge a statement of objections within 7 days thereafter.