HYUNDAI ENGINEERING & CONSTRUCTION CO.,LTD v.UBAF (HONG KONG) LTD

HCA 175/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 175 OF 2012

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DECISION

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1.  This is an application by the third party to these proceedings, Bank of China Limited (“BOC”), for an order that all further proceedings against BOC be stayed on the ground of forum non conveniens in favour of the Luoyang Intermediate People’s Court in the province of Henan in Mainland.

Background

2.  The background of this case has been summarised in my judgment dated 24 October 2012.  In short, the plaintiff is an engineering and construction company based in South Korea whilst the defendant carries on business as a bank in Hong Kong.

3.  On 2 November 2010, the plaintiff entered into a contract (“the Contract”) to purchase steel tubular piles from Hyojong Industrial Co Ltd (“Hyojong”) for a construction project in Kuwait.  On 24 November 2010, Hyojong entered into a subcontract (“the Sub-Contract”) with Luoyang Aviation Construction Co Ltd (“Qatar Luoyang”) for the supply of the piles. Subsequently in December 2010, Qatar Luoyang assigned its rights and obligations under the Sub-Contract to Luoyang Aviation Engineering Construction Co Ltd (“Mainland Luoyang”) which is a Mainland company.

4.  Under the terms of the Contract, the plaintiff had to provide 10% of the total price (ie US$5,980,833.40) to Hyojong as an advance payment against the provision of, inter alia, an advance payment guarantee.

5.  On 31 December 2010, at the request of the Henan branch of BOC (“BOC Henan”), the defendant issued an advance payment bank guarantee (“the APG”) and a performance bank guarantee (“the Performance Guarantee”) in favour of the plaintiff pursuant to the terms of the Contract. In consideration of the defendant issuing the APG and the Performance Guarantee, BOC Henen issued 2 back-to-back guarantees in favour of the defendant (“the Back-to-Back Guarantees”).  The said 4 guarantees are governed by the Uniform Rules for Demand Guarantees, ICC Publication No 758 (“the Uniform Rules”).

6.  The APG contains an express and irrevocable undertaking on the part of the defendant to pay an amount not exceeding US$5,980,833.40 upon the receipt by the defendant of a first demand in writing.

7.  As Hyojong had failed to deliver the piles to the plaintiff in accordance with the terms of the Contract, the plaintiff issued a few demands to the defendant in December 2011 for the payment of the sum of US$5,552,787.75 under the APG.  There is no dispute that at least one of the demands was made in accordance with the terms of the APG.  However, the defendant refused to make payment on the ground that there was evidence of fraud in relation to the underlying contract.

8.  The allegation of fraud was made in the Mainland proceedings commenced by Mainland Luoyang and CAMA (Luoyang) Doors Windows and Curtainwall Co Ltd (“CAMA”), the latter of which is the parent company of Mainland Luoyang and Qatar Luoyang.  In the Mainland proceedings, CAMA and Mainland Luoyang obtained a civil ruling against the plaintiff and BOC Henan to freeze their assets to the amount of RMB ¥85,000,000.  Injunctions had been granted by the Luoyang court against BOC Henan on 5 December 2011, 31 May 2012, 3 September 2012 and 3 December 2012 restraining BOC Henan from making payment under the Back-to-Back Guarantees.  On 29 December 2011, CAMA and Mainland Luoyang commenced proceedings by issuing a civil complaint setting out the particulars of their allegations including the allegation of fraud against the plaintiff in the underlying contract.  On 1 March 2013, the Luoyang court granted another injunction against BOC Henan restraining it from making payment under the Back-to-Back Guarantees.

9.  Earlier on 14 February 2012, the plaintiff made an application to challenge the jurisdiction of the Luoyang court.  However, the application has yet been heard and there is very little progress in the Mainland proceedings.

10.  On 2 February 2012, the plaintiff brought proceedings in this court against the defendant based on the failure on the part of the latter to honour its payment obligation under the APG.  On 9 March 2012, the plaintiff applied for summary judgment against the defendant.

11.  On 14 March 2012, the defendant issued a summons to stay the proceedings on the ground of forum non conveniens.

12.  On 11 October 2012, the defendant issued a Third Party Notice against BOC claiming damages in the event that the defendant is held liable to the plaintiff, or alternatively, an indemnity of any damages or sums ordered to be paid by the defendant to the plaintiff.

13.  On 24 October 2012, I granted summary judgment in favour of the plaintiff and dismissed the defendant’s stay application.  I am given to understand that the defendant has lodged an appeal against these decisions.

14.  On 31 October 2012, the defendant took out an application for an order for directions in the third party proceedings.

15.  On 6 November 2012, BOC took out the present application for stay of third party proceedings (“the Third Party’s Summons”) based on the ground of forum non conveniens in favour of the courts of Henan and that the summons for directions in the third party proceedings be adjourned pending the final disposal of BOC’s stay of proceedings application.

The exclusive jurisdiction clause and the governing law clause

16.  It is common ground that the APG, the Performance Guarantee and the 2 Back-to-Back Guarantees are governed by the Uniform Rules.

17.  Article 34 of the Uniform Rules is about the governing law relating to guarantee and counter-guarantee:

“(a) Unless otherwise provided in the guarantee, its governing law shall be that of the location of the guarantor’s branch or office that issued the guarantee.

(b) Unless otherwise provided in the counter-guarantee, its governing law shall be that of the location of the counter-guarantor’s branch or office that issued the counter-guarantee.”

18.  Article 35 contains the exclusive jurisdiction clause:

“(a) Unless otherwise provided in the guarantee, any dispute between the guarantor and the beneficiary relating to the guarantee shall be settled exclusively by the competent court of the country of the location of the guarantor’s branch or office that issued the guarantee.

(b) Unless otherwise provided in the counter-guarantee, any dispute between the counter-guarantor and the guarantor relating to the counter-guarantee shall be settled exclusively by the competent court of the country of the location of the counter-guarantor’s branch or office that issued the counter-guarantee.”

19.  By virtue of these articles, it is clear that: the governing law of the APG and the Performance Guarantee shall be Hong Kong law and any disputes relating to these guarantees shall be settled exclusively in the Hong Kong courts; whilst the governing law of the 2 Back-to-Back Guarantees shall be Mainland law and any disputes relating to these counter-guarantees shall be settled exclusively in the Mainland courts.

The legal principles on forum non conveniens and exclusive jurisdiction clause

20.  The principles on forum non conveniens are well settled.  Where a plaintiff institutes proceedings in Hong Kong as of right, the defendant can challenge the jurisdiction of the Hong Kong court to hear the claim by relying on the existence of a foreign jurisdiction clause or on the principle of forum non conveniens, and the burden is on the defendant as the applying party to demonstrate that a stay should be granted.  However, where a defendant is not a resident in Hong Kong and the plaintiff institutes proceedings in Hong Kong not as of right, the burden is on the plaintiff, in persuading the court to grant an order to serve outside jurisdiction, to show that Hong Kong is clearly the appropriate forum (see: Noble Power Investment Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631).  As BOC is a company in Hong Kong, there is no dispute that the third party proceedings have been issued by the defendant as of right.

21.  Identification of the natural forum is governed by the well-established principles enunciated in Spiliada Martime Corporation v Cansulex Ltd [1987] AC 460 and The Adhiguna Meranti [1987] HKLR 904 (see also: Dynasty Line Ltd v Sukamto Sia [2009] 4 HKLRD 454, per Cheung JA at §§58 & 59).

22.  In determining whether to grant a stay of proceedings on the ground of forum non conveniens, the presence of an exclusive jurisdiction clause is an important factor to be considered.  Where such a clause exists, a party who seeks a stay brought in breach of that agreement to refer disputes to a named forum, will have to show strong cause (see Noble Power Investment Ltd v Nissei Stomach Tokyo Co Ltd, supra, per Ma CJHC, as he then was, at §37 and Donohue v Armco Inc & Ors [2002] 1 All ER 749 at §§24-25).

23.  The rationale for such approach is that the court will endeavour to make contracting parties abide by their contracts (see Euromark v Smash Enterprises PTY Ltd [2013] EWHC 1627 (QB), per Coulson J at §13). As I see it, this is particularly the case if the dispute involves international commercial entities like the present one.  In the commercial world, the parties have, to a great extent, tried to allocate the risks of litigations by their choice of the exclusive forum and the governing law.  To reflect the need for predictability, consistency and stability in the resolution of international commercial disputes, the courts should be cautious in interfering with any such arrangements agreed by the parties.

24.  However, the court retains the power to disallow a party to rely on the strict enforcement of an exclusive jurisdiction clause if there is strong reason.  As stated in Dicey, Morris & Collins: The Conflict of Laws, 15 ed, at §12-152:

“The general principle is that a court, whilst it will give great weight to a jurisdiction clause, will not allow the parties to a contract to insist on the strict enforcement of their contractual agreement at the cost of damage being done to the orderly and efficient resolution of complex disputes or of the resolution of the controversy by a ‘single tribunal which is best fitted to make a reliable, comprehensive judgment on all matters in issue, especially where this would risk exposing non-parties to serious prejudice.”

25.  Mr Man, counsel for the defendant, does not dispute the aforesaid legal principles.  By reason of the exclusive jurisdiction clauses in the Back-to-Back Guarantees, Mr Man accepts that the defendant has the burden of establishing a strong cause against the stay application.

Merits of the stay application

26.  With a view to establish such a strong cause, Mr Man relies on the following arguments.

27.  Firstly, Mr Man points out that a stay of the third party proceedings would result in fragmentation of proceedings.  Further, the defendant is caught in the middle of the dispute between the plaintiff and BOC Henan and the other Mainland parties.  If a stay is to be granted, there is a real risk that the defendant would be subject to conflicting judgments in Hong Kong on the APG and in the Mainland on the Back-to-Back Guarantees.  It may result in grave injustice to the defendant.

28.  Secondly, there may not be a fair trial if the dispute under the Back-to-Back Guarantees is to be resolved in the Mainland court.  In particular, Mr Man submits that the stay application is not motivated by a genuine desire for trial in the Mainland court but merely to delay payment.

29.  According to the law in the Mainland, the court can only freeze money for not more than 6 months in total, and yet the injunction granted against BOC Henan on 1 March 2013 restraining it from making payment under the Back-to-Back Guarantees has no expiry date.  Despite that such injunction is prima facie unlawful, BOC Henan took no action to challenge the injunction in the Mainland court.  Under such circumstances, the defendant may not be able to get a fair resolution of the dispute in the Mainland.

30.  Further, Mr Man also relies on the following dicta I made in my earlier decision on summary judgment against the defendant:

“I therefore agree with the observation of Mr Pao that the whole exercise in the Mainland proceedings is a dubious attempt to protect the self interest of the two Luoyangs which would arise from BOC Henan discharging its obligations under the Back-to-Back Guarantees. It may just be a desperate effort to protect ‘stated-owned assets’, which is exactly the phrase used in the Civil Complaint, resulting from the lack of commercial prudence on the part of the two Luoyangs in protecting their own interest.” (at §31)

“On the other hand, since the plaintiff has very little control over the proceedings in the Mainland Court, the duration of the stay in the Hong Kong proceedings would be entirely uncertain. If a stay were to be granted, there is no assurance that the Mainland proceedings would be prosecuted with due expedition or at all. Instead, since the plaintiffs in the Mainland proceedings have already obtained an order to stop payments on the Back-to-Back Guarantees, there is no incentive to prosecute the claim in a speedy manner. As the Hong Kong court has no control over the conduct of the case by the plaintiffs in the Mainland proceedings, it may result in grave injustice to the plaintiff here if the court were to stay the Hong Kong proceedings.” (at §39)

31.  By reason of the aforesaid, Mr Man submits that the stay application is not motivated by a genuine desire for trial in the Mainland court but merely to delay payment.

32.  Despite the able submission of Mr Man, I do not find that there are sufficient strong reasons for the court to exercise the discretion against the stay.  The defendant and BOC Henan had expressly agreed for the Back-to-Back Guarantees to be governed by the Uniform Rules.  According to the evidence of Mr Zhao Xiao Xing of BOC Henan, the defendant had raised preference for adopting Hong Kong law or English law in respect of the Back-to-Back Guarantees, nevertheless the parties finally agreed to adopt the Uniform Rules.  This express negotiation, which is not disputed by the defendant, indicates that the parties had made a deliberate decision for the Back-to-Back Guarantees to be governed by the Uniform Rules.  In such circumstances, the parties should abide by their agreement unless there are very strong reasons to the contrary.

33.  In fact, the parties should have anticipated that there would be parallel proceedings in different jurisdictions relating to the APG and the Back-to-Back Guarantees.  Articles 34 and 35 of the Uniform Rules have expressly provided for separate governing laws and exclusive jurisdiction clauses for guarantees and counter-guarantees, and so the Uniform Rules are clearly contemplated and intended for different sets of governing laws and jurisdictions to apply between guarantees and counter-guarantees.

34.  Such approach is also consistent with Article 5 of the Uniform Rules concerning the independence of guarantees and counter-guarantees.  Article 5(b) reads as follows:

“A counter-guarantee is by its nature independent of the guarantee, the underlying relationship, the application and any other counter-guarantee to which it relates, and the counter-guarantor is in no way concerned with or bound by such relationship. A reference in the counter-guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the counter-guarantee. The undertaking of a counter-guarantor to pay under the counter-guarantee is not subject to claims or defences arising from any relationship other than a relationship between the counter-guarantor and the guarantor or other counter-guarantor to whom the counter-guarantee is issued.”

35.  One of the reasons advanced for the stay is to prevent fragmentation of proceedings.  But to avoid fragmentation, the defendant and BOC have to bring in all the relevant parties in front of the Hong Kong court so that it can determine the legal effects of the APG and the Back-to-Back Guarantees and whether there was fraud in respect of the underlying contract.  However, is that possible to bring in all the parties?  Although the Hong Kong court is empowered to join foreign parties to the local proceedings on the ground of necessity, one can foresee that parties such as CAMA and the two Luoyangs would put up serious oppositions for the Hong Kong court to assume jurisdiction in respect of the claim of fraud under the underlying contract.  As I see it, these jurisdictional challenges would complicate rather than simplify the resolution of the disputes in the present case.

36.  In my judgment, Mr Man has exaggerated the inconvenience possibly resulting from fragmentation of proceedings.  The plaintiff’s claim under the APG has already been concluded in Hong Kong.  Although there is a pending appeal against my decision on the summary judgment, it is still a valid judgment at this stage.  Furthermore, the basis of my decision on the summary judgment is that the law in Hong Kong should treat performance bond like some kind of promissory note.  So long as the conditions for the demand of payment are satisfied, the court should give effect to the payment obligation under the performance bond.  The law in this area may be different in the Mainland, and so there is no inconvenience if this issue is to be resolved in the Mainland court.

37.  Although the decision on the summary judgment was also made on the basis that there is insufficient evidence to prove fraud in respect of the underlying contract, the defendant has had adequate opportunity to gather evidence to substantiate the allegation of fraud before the summary judgment application.  Yet the defendant was not able to adduce some creditable evidence to support the allegation.  Hence, I do not accept that separate litigation of the liabilities under the APG and the Back-to-Back Guarantees is a strong reason to deny the stay application.

38.  Mr Man also submits that the defendant would suffer serious prejudice if the courts in the Mainland and in Hong Kong were to reach different conclusions on the liabilities under the APG and the Back-to-Back Guarantees.  However, this inconvenience was something which should have been within the contemplation of the defendant when it issued the APG in favour of the plaintiff.  The laws and the procedural rules governing the claims on these kinds of performance bonds may be different in Hong Kong and in the Mainland, and so it is not surprising that the courts in the two jurisdictions may treat these bonds differently.

39.  Further, one should not take the injunction in the Mainland proceedings and assume that the Mainland court would simply dismiss the defendant’s intended claim against BOC on the Back-to-Back Guarantees.  Without the benefit of a written decision, there is no indication that the Mainland court had been asked to consider the legal effect and the nature of the Back-to-Back Guarantees and the provisions in the Uniform Rules in issuing the injunction against BOC Henan, and so the Mainland court might have issued the injunction against BOC Henan without the benefit of full arguments by the interested parties.  In the case that the defendant is issuing proceedings in the Mainland court to claim for payment under the Back-to-Back Guarantees, the court would have the opportunity to consider the submissions of the defendant and the result may be very different.

40.  Mr Man has kept on reminding the court that the defendant may suffer serious prejudice if the courts in the two jurisdictions were to hand down conflicting judgments, and as a result the defendant is caught in the middle of the dispute between the plaintiff and BOC Henan and the other Mainland parties.  In the worst possible scenario, that may be the case. However, the same inconvenience may be suffered by BOC if the Hong Kong court insists to try the claim on the Back-to-Back Guarantees in Hong Kong.  In the event that the Hong Kong court is to hold that BOC is liable under the Back-to-Back Guarantees, BOC would be bound to pay the defendant in Hong Kong, and yet BOC may not be able to pursue any remedy against CAMA and the 2 Luoyangs in the Mainland because of the Mainland proceedings.  This may not be fair to BOC as well, and it also explains why BOC pursues the stay application in the Hong Kong proceedings.  As there may be a lot of possible complications in the development of the case, it is very difficult for the Hong Kong court to judge what is fair in the circumstances.  In my judgment, the best and the safe course for the Hong Kong court to take is not to disturb the parties’ allocation of risk as reflected in their choice of governing law and exclusive forum in the resolution of their dispute.

41.  In a further attempt to oppose the stay application, Mr Man points out that BOC has not even provided the court with an outline of its defence.  However, the Hong Kong court cannot just proceed to hear the claim in defiance of the exclusive jurisdiction clause simply because the claimant has a strong claim.  As observed by Coulson J in Euromark v Smash Enterprises PTY Ltd, supra, at §35:

“However, I ask rhetorically, where does that generally favourable impression on the merits get the claimant on this application? Even if one concludes that the claimant is very likely to win on liability at trial, the issue still remains as to where that trial should take place. There is no basis in law for concluding that a strong case should be heard in England, whilst a more arguable case should be heard in Australia. That would be absurd. Ultimately, for the reasons I have given, it seems to me that the strength of the claimant’s claim on liability is either not a relevant consideration for the purpose of this application or, if it is, it remains a matter of very little significance.”

Hence, I see no merit in such argument.

42.  In the course of the submissions, there is a dispute between the parties as to whether foreseeable questions of convenience are relevant in determining the question of stay in the case of an exclusive jurisdiction clause.  In this regard, Mr Dawes refers me to Euromark v Smash Enterprises PTY Ltd, supra, in which Coulson J said the following:

“ 14. Where there is an exclusive jurisdiction clause, particularly if it selects the ‘home’ court of one of the contracting parties, foreseeable questions of convenience are irrelevant (see Beazley (on behalf of Lloyd’s Marine Towage Insurance) v Horizon Offshore Contractors Inc [2004] EWHC 2555 (Comm). This principle was summarised by Gloster J, as she then was, in Antec International Limited v Biosafety USA Inc [2006] EWHC 47 (comm.) where she said:

‘Such overwhelming or very strong reasons do not include factors of convenience that were foreseeable at the time that the contract was entered into (save in exceptional circumstances involving the interests of justice); and it is not appropriate to embark upon a standard Spiliada balancing exercise. The defendant has to point to some factor which it could not have foreseen at the time the contract was concluded. Even if there is an unforeseeable factor or a party can point to some other reason which, in the interests of justice, points to another forum, this does not automatically lead to the conclusion that the court should exercise its discretion to release a party from its contractual bargain …’

15. In essence, the party seeking to invoke the jurisdiction of the English court in the face of an exclusive jurisdiction clause, which provides for disputes to be determined in a foreign court, must point to a factor which could not have been foreseen when the contract was made.  Moreover, what matters is whether it ought to have been foreseen, not whether it actually was (see by way of example the judgment of Moore-Bick J, as he then was, in Mercury Communications Ltd v Communications Telesystems International [1992] All ER (Comm) 33).”

43.  I agree with the dicta of Coulson J.  If the parties could have foreseen that there would be some inconvenience resulting from the application of the exclusive jurisdiction clause (as it was in the present case), then such inconvenience is generally irrelevant in determining the question of stay.  In fact, such approach is consistent with the principle that contracting parties should abide by the terms of their agreement.  It also reflects the need for predictability, consistency and stability in the resolution of international commercial disputes.

44.  However, this is not an inflexible rule.  As pointed out by Coulson J, exceptional circumstances involving the interests of justice may persuade the court to exercise the discretion in not applying the exclusive jurisdiction clause.  Nevertheless, foreseeable questions of convenience remain weighty considerations.  As I have pointed out in the earlier part of this decision, I am of the view that the inconvenience suffered by the defendant is not substantial to the extent that the court should interfere with the choice of governing law and forum agreed by the parties.  I therefore allow BOC’s application and stay the third party proceedings on the ground of forum non conveniens in favour of the Luoyang Intermediate People’s Court in Henan of the Mainland.

46.  Both parties agree that costs should follow the event and so I award the costs of the Third Party’s Summons to BOC.