FORTUNE PHARMACAL CO., LTD v. FALCON INSURANCE COMPANY (HONG KONG) LTD AND ANOTHER

CAMP 526/2021

[2023] HKCA 66

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 526 OF 2021

(ON AN INTENDED APPEAL FROM HCCT NO 6 OF 2021)

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J U D G M E N T

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Kwan VP (giving the Judgment of the Court):

1.  This is the plaintiff’s renewed application for leave to appeal against the decision of Mimmie Chan J on 21 September 2021 (“Decision”)[1]. By the Decision, it was ordered that all further proceedings in the action against the 2^nd defendant be stayed pursuant to section 20 of the Arbitration Ordinance, Cap 609 and all further proceedings in the action against the 1^st defendant be stayed pending the resolution of the arbitration between the plaintiff and the 2^nd defendant. The stay of proceedings against the 1^st defendant was granted under the case management powers of the court.

2.  The plaintiff sought leave to appeal only in respect of the case management stay against the 1^st defendant. Leave was refused by the judge on 4 November 2021 (“Leave Decision”)[2].

3.  The plaintiff issued a summons on 18 November 2021 to seek leave to appeal from the Court of Appeal. The grounds of appeal in the draft notice of appeal are the same as those placed before the judge.

4.  Having considered the papers and the submissions, we think it is appropriate to exercise our power under Order 59 rule 2A(5)(a) to determine this application without an oral hearing.

Background

5.  The relevant background matters may be stated as follows.

6.  The plaintiff as the employer engaged the 2^nd defendant as the contractor to carry out construction works in Yuen Long under the main contract (“Contract”) which was formally executed by way of the Articles of Agreement dated 21 April 2016. The Contract contained a provision[3] by which the contractor was to obtain a guarantee from an insurance company or bank for the due performance of the Contract under the terms of a surety bond and an arbitration clause[4].

7.  The 1^st defendant is the insurance company that issued a surety bond dated 3 February 2016 in favour of the 2^nd defendant in the amount of $58,880,000. The conditions under which payment under the surety bond is to be made appear in clause 2, which reads as follows:

“The Contractor shall duly perform and observe all the terms, provisions, conditions, obligations, stipulations and specification of the Contract according to the true purport intent and meaning thereof and to the reasonable satisfaction of the Architect appointed by the Employer in respect of the Works or if on default by the Contractor the Surety shall satisfy and discharge the damages sustained by the Employer thereby as certified by the said Architect, up to the amount of the above written Bond then his obligation shall be null and void but otherwise his obligation shall be and remain in full force and effect.” (Emphasis supplied.)

8.  The surety bond was not a single bond which is payable on demand but a double or conditional bond consisting of two parts: first, the obligation, and secondly, the condition. To claim under the surety bond, the plaintiff has first to prove breach by the 2^nd defendant and secondly damages[5]. In this instance, payment under the bond is in part dependent upon certification by the architect, which is subject to opening up in the arbitration.

9.  By clause 6 of the bond, the 1^st defendant agrees to submit to the non-exclusive jurisdiction of the Hong Kong courts. The 1^st defendant is not a party to the arbitration agreement set out in the Contract between the plaintiff and the 2^nd defendant.

10.  On 14 January 2021, the plaintiff issued the writ in this action claiming $54,369,814.10 alternatively damages against the 1^st and 2^nd defendants for breach of the bond and damages against the 2^nd defendant for breach of the Contract and/or negligence in carrying out the works.

11.  On 1 March 2021, the 2^nd defendant issued a summons for stay of all further proceedings in this action pending the publication of an award in the arbitration already commenced by the 2^nd defendant by its notice of arbitration dated 5 January 2021 pursuant to the arbitration agreement in the Contract.

12.  The day before the hearing of that summons, the 2^nd defendant provided to the court an undertaking document signed on behalf of the 1^st defendant headed “To whom it may concern” with the caption of the present proceedings and it reads as follows:

“We, [the 1^st defendant], hereby agree to be bound by the result of the arbitration, if any, between [the 2^nd defendant] and [the plaintiff] regarding the captioned matter.”

13.  As between the plaintiff and the 1^st defendant, and since there is no arbitration clause in the bond, the 2^nd defendant sought a case management stay on the basis it would be just to stay the plaintiff’s claims against the 1^st defendant in the event of a stay of this action against the 2^nd defendant.

14.  The 2^nd defendant’s summons was heard before Mimmie Chan J on 11 June 2021. On 21 September 2021, the judge handed down the Decision in the terms as aforesaid.

15.  After the plaintiff renewed its application for leave to appeal by the present summons, the solicitors for the 1^st defendant wrote to the court on 10 December 2021 stating that the 1^st defendant maintains a neutral stance in the plaintiff’s renewed application and would not file a statement in opposition.

Grounds of appeal

16.  The grounds of appeal in the draft notice of appeal may be summarised as follows:

(1)  The judge erred in law in taking into account the purported undertaking for the 1^st defendant to be bound by the result of the arbitration in arriving at her conclusion that a stay of the plaintiff’s claims against the 1^st defendant under the bond on case management grounds is appropriate. This is because the undertaking purports to bind the 1^st defendant but not the plaintiff, so it does not have the effect of avoiding the risk of inconsistent findings on common facts and issues that may be determined in the arbitration and in this action.

(2)  The judge failed to take into account the fact that the plaintiff’s claims against the 1^st defendant were commenced in this jurisdiction as of right under a non-exclusive jurisdiction clause in the bond and there is no good reason for the plaintiff’s exercise of its right to be delayed as a result of another agreement to which it is not a party.

(3)  The judge failed to take into account the fact that the present proceedings could proceed in tandem with the arbitration and the stay granted would by itself cause delay to the present proceedings.

(4)  The judge failed to consider if there were rare and compelling circumstances to justify a case management stay in respect of the plaintiff’s claims against the 1^st defendant.

Legal principles

17.  Under section 14AA(4) of the High Court Ordinance, Cap 4, leave shall not be granted unless the intended appeal has a reasonable prospect of success, or there is some other reason in the interests of justice why the appeal should be heard.

18.  To meet the threshold of reasonable prospect of success, it must be shown that the prospect of succeeding is more than fanciful, without having to be probable (SMSE v. KL [2009] 4 HKLRD 125 at §17). In other words, the applicant is required to show more than just an arguable case, although he does not have to demonstrate that the appeal will probably succeed (Wynn Resorts (Macau) SA v Mong Henry [2009] 5 HKC 515 at §19).

19.  Case management decisions are only subject to appeal in rare circumstances. An applicant who seeks to appeal in this situation faces a very high hurdle. He has to show that the trial judge had gone clearly wrong and made orders which clearly involved an injustice or an inability for the trial court to carry out its task or had erred in principle or that the order was irrational having regard to the issues to be resolved (Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at §31).

Analysis

20.  The main thrust of Mr Maurellet SC’s argument for the plaintiff[6] is directed towards these parts of §36 of the Decision and §5 of the Leave Decision which we have italicised below for easy reference:

“36. The Plaintiff must establish the 2^nd Defendant’s breach of the Contract, and that is to be determined in the Arbitration already commenced by the 2^nd Defendant in January 2021. The 1^st Defendant is of course not a party to the Arbitration, but the important and distinguishing feature in this case is that the 1^st Defendant has given an undertaking in writing that it will be bound by the outcome of the Arbitration between the Plaintiff and the 2^nd Defendant. With this, the risk of inconsistent findings on common facts and issues as to the 2^nd Defendant’s breach of the Contract, and the rights and liabilities of the Plaintiff and the 2^nd Defendant thereunder, can be avoided. The Arbitration has already been commenced and it is unlikely that the present litigation between the Plaintiff and the 1^st Defendant (initiated by the Plaintiff on 14 January 2021) can be concluded before the conclusion of the Arbitration, for the resolution of the Plaintiff’s claim in these proceedings to be delayed by the Arbitration. With these in mind, I consider that it would serve the ends of justice between the parties and the administration of justice by the Court, to grant the stay of the Plaintiff’s action against the 1^st Defendant, pending the resolution of the Arbitration between the Plaintiff and the 2^nd Defendant.”

“5. The Plaintiff seeks to argue that the Plaintiff itself is not bound by the 1^st Defendant’s undertaking to abide by the outcome of the Arbitration between the Plaintiff and the 2^nd Defendant. However, the Plaintiff as a party to the arbitration agreement is itself bound by the outcome of the Arbitration, as to whether there is breach by the 2^nd Defendant of the Contract, which is the issue for determination in the Arbitration. The 1^st Defendant’s liability to the Plaintiff under the Bond only arises if the Plaintiff suffers any damage due to the 2^nd Defendant’s breach of its obligations under the Contract. This issue, of whether the 2^nd Defendant is in breach of the Contract, will be determined in the Arbitration, together with the issue of whether there are other sums due from the Plaintiff to the 2^nd Defendant under the Contract, which may exceed any damages for which the 2^nd Defendant may be liable. There is no way in which the Plaintiff can claim that it is not bound by the findings in the Arbitration on these issues. By the stay of the Plaintiff’s claims against the 1^st Defendant in these proceedings pending the determination in the Arbitration of whether there is any breach of the Contract by the 2^nd Defendant and hence any amount payable by the 1^st Defendant to the Plaintiff under the Bond, inconsistent findings on these identical issues between the Plaintiff and the 2^nd Defendant can be avoided.”

21.  Mr Maurellet submitted the judge is wrong in law in holding that as a result of the 1^st defendant’s undertaking, the plaintiff would also be bound as against the 1^st defendant in the court proceedings (the 2^nd defendant has ceased to take part in this action as all further proceedings against it have been stayed) in respect of any findings in the arbitration between the plaintiff and the 2^nd defendant. Any findings in the arbitration would only bind the plaintiff and the 2^nd defendant as parties to the arbitration in respect of res judicata and/or issue estoppel. As for the undertaking given by the 1^st defendant, this does not extend res judicata or issue estoppel to bind the plaintiff and the 1^st defendant inter se. At best, it only takes effect as a promise of the 1^st defendant to the court to refrain from advancing a different position from the determination in the arbitration. In the court proceedings which relate to the plaintiff’s claim against the 1^st defendant under the bond, the plaintiff is entitled to argue the issues whether the 2^nd defendant was in breach of the Contract and whether the plaintiff has thereby sustained damages, irrespective of the adjudication on these issues in the arbitration. Hence, inconsistent findings in the arbitration (between the plaintiff and the 2^nd defendant) and the court proceedings (between the plaintiff and the 1^st defendant) cannot be avoided.

22.  We do not agree with his contentions.

23.  For cause of action estoppel and issue estoppel, Mr Maurellet is correct in that the estoppel operates in favour of, and against, parties and privies, not strangers. Cause of action estoppel or issue estoppel cannot be invoked in the absence of mutuality as in this instance, where the parties in the arbitration and the parties in the court proceedings are not the same.

24.  However, cause of action estoppel and issue estoppel are not the only legal principles embodied in the “portmanteau term” of res judicata. As analysed by Lord Sumption JSC in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2014] AC 160 at §17, this term covers a number of different legal principles with different juridical origins, one of which is the general procedural rule against abusive proceedings. Mutuality is not required. The abuse of process may take the form of a collateral attack on a previous decision thereby bringing the administration of justice into disrepute so that the abusive proceedings should be struck out (Hunter v Chief Constable of the West Midlands Police [1982] AC 529 at 542C; Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72 at §83(4); Ho Kin Man v Commissioner of Police [2014] 3 HKLRD 478 at §§10, 17, 26, 35).

25.  By clause 2 of the bond, the 1^st defendant’s liability only arises if the plaintiff suffered damage due to the 2^nd defendant’s breach of the Contract. These issues will be determined in the arbitration, which is the parties’ agreed dispute resolution procedure. Whether any amount is payable under the bond is wholly dependent on these issues to be decided by arbitration, which is the subject of a compulsory stay.

26.  It is accepted by the plaintiff that it is bound by the findings in the arbitration on these issues which determined the rights between the plaintiff and the 2^nd defendant. The amount payable (if any) by the 2^nd defendant is the only matter relevant to the 1^st defendant’s obligations as the surety under the bond. The underlying issues between the plaintiff and the 1^st defendant in the court proceedings are the same as the underlying issues between the plaintiff and the 2^nd defendant in the arbitration.

27.  In the event those issues are found in the plaintiff’s favour in the arbitration, the court will rule in favour of the plaintiff on the 1^st defendant’s liability under the bond in the court proceedings, as the 1^st defendant has agreed to be bound by the result of the arbitration by its undertaking.

28.  If it should transpire that those issues are found against the plaintiff in the arbitration, should the plaintiff be allowed to have a second bite of the cherry in the court proceedings against the 1^st defendant? We do not think there are any valid reasons for allowing the plaintiff to do so. This is not a situation where a party who seeks to re-litigate an issue has not had his day in court. To the contrary, the very same issues would have been fully litigated by the plaintiff and the 2^nd defendant in the arbitration. They are the parties involved in the incidents giving rise to the dispute and would be well placed to raise or defend any point relevant to the resolution of the dispute in the arbitration, unlike the 1^st defendant who is the surety and would have to rely on input from the 2^nd defendant to defend the same issues in the court proceedings, now that the 2^nd defendant has dropped out of the action owing to the stay for arbitration. If the plaintiff is permitted to run a case in the court proceedings contrary to the findings in the arbitration, this is in effect a collateral attack on the findings in the arbitration and amounts to an abuse of process bringing the administration of justice into disrepute. Such abusive litigation is liable to be struck out.

29.  For the above reasons, we reject the main contention of Mr Maurellet. The judge is correct in holding that there is no way in which the plaintiff can claim it is not bound by the findings in the arbitration on those two underlying issues and that inconsistent findings on those identical issues can be avoided by the stay of the plaintiff’s claim in the court proceedings pending the determination in the arbitration.

30.  The other points raised on behalf of the plaintiff may be dealt with shortly.

31.  Mr Maurellet submitted that the undertaking of the 1^st defendant, which is headed “To whom it may concern”, is not addressed to the court, and there was no indication that the signatory (whose identity is not known) was properly authorised. We do not agree with this. As pointed out by the judge, the 1^st defendant’s solicitors were present in court when the undertaking document was furnished to the court, so there is little room for argument that the undertaking was invalid or unauthorised[7].

32.  Mr Maurellet contended that 1^st defendant agrees “to be bound by the result of the arbitration”, this is just the award and there is no clear reference to the factual findings in the arbitration binding on the 1^st defendant. We do not consider it reasonably arguable that the undertaking is deficient. In agreeing to be bound by the result of the arbitration, the purport of the undertaking is sufficiently clear.

33.  As for the contentions that the 1^st defendant did not undertake to refrain from raising defences not put forward by the 2^nd defendant in the arbitration and there was no undertaking of the 1^st defendant to pay interest and costs of the arbitration, all these are of little or no substance. The stay is in relation to the plaintiff’s claims against the 1^st defendant under the bond, and this entails the resolution of the two underlying issues required to be established to give rise to the 1^st defendant’s liability, which will be determined in the arbitration. The 1^st defendant has agreed to be bound by the result of the arbitration. It is unnecessary for the 1^st defendant to further undertake it would refrain from raising defences not put forward by the 2^nd defendant in the arbitration. As for interest and costs of the arbitration, we agree with Mr Clayton SC that the 1^st defendant is not required to pay such amounts under the bond, as clause 2 provides it is only to “satisfy and discharge the damages sustained by the Employer thereby as certified by the said Architect”.

34.  Nor do we think it would be appropriate to allow the arbitration and the court proceedings to proceed in tandem, as argued by Mr Maurellet. The judge had apparently considered this and rejected it for the reasons given in §6 of the Leave Decision, with which we agree. And in the event that the issues giving rise to liability of the 1^st defendant were found against the plaintiff in the arbitration, the duplicated costs incurred in the court proceedings (if they were ongoing) would be completely wasted.

35.  We are not persuaded that the high threshold for appellate intervention in a case management decision is met in this instance. It has not been shown there is more than just an arguable case that the judge has gone clearly wrong in granting a case management stay, or that she has erred in law or in principle, or has failed to take into account any relevant consideration.

36.  We do not think there is some other reason in the interests of justice why the intended appeal should be heard. The judge granted a case management stay in the particular circumstances of this case. As rightly submitted by Mr Clayton, no appellate guidance is desirable or would be in the interests of justice because the inherent flexibility of a case management stay already allows for each case to be considered on its own facts and circumstances and a stay be directed as appropriate.

Orders

37.  For all the above reasons, we refuse to give leave to appeal and dismiss the plaintiff’s summons. We make a further order under Order 59 rule 2A(8) that no party may under rule 2A(7) request the application be reconsidered at an oral hearing inter partes, as this application is entirely without merits.

38.  Costs of the application should follow the event. We order the plaintiff to pay the 2^nd defendant’s costs of this application. Having considered the 2^nd defendant’s revised statement of costs for summary assessment, we allow costs to the 2^nd defendant in the sum of $201,905. We wish to point out that costs for gathering information and drafting of statement of costs for summary assessment are generally not granted, see Practice Direction 14.3 §13.

39.  The costs order and summary assessment are orders nisi. They will be made absolute if there is no application for variation within 14 days of the handing down of this judgment.