CENTURY YACHTS LTD. v. XIAMEN CELESTIAL YACHT LTD.

IN THE COURT OF APPEAL

1993, No. 11
(Civil)

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J U D G M E N T

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Litton, J.A.:

1. On 3 November 1992 Jones J gave leave ex parte to the plaintiff under Order 11 r.1 of the Rules of the Supreme Court to issue a writ of summons and to serve the same on the defendant out of the jurisdiction. The defendant then took out a summons under Order 12 r.8 to have the ex parte order of Jones J set aside. This summons, as eventually amended, relied upon the following grounds:

"(a) The plaintiff's claim does not fall within any of the sub-heads of Order 11 rule 1(1) and the Court had no jurisdiction to give leave to serve the writ out of the jurisdiction; and

(b) the Plaintiff has failed to comply with the provisions of Order 11 rule 4(1)(b) of the Rules of the Supreme Court and the court in its discretion should set aside the .....Order dated 4 November 1992..... ".

2. This was heard by Barnett J. on 14 January 1993 and, by a judgment given on the same day, he allowed the defendant's application and discharged Jones J's ex parte order granting leave. The plaintiff, being dissatisfied with Barnett J's decision, now appeals to this court and asks for Jones J's order of 3 November 1992 to be restored.

The plaintiff's cause of action

3. The concurrent writ, issued on 5 November 1992, pursuant to Jones J's ex parte order, contains the following endorsement of claim:

" INDORSEMENT ON WRIT

The Plaintiff claims against the Defendant for

I. the sums of

1. US$187,836.96 being the loss suffered by the Plaintiff for the Defendant's wrongful breach of:-

(a) an agency agreement made in December 1990 between the Plaintiff (as an agent) and the Defendant (as a principal);

(b) further or alternatively, agreements made during the following periods:-

i) October 1991;

ii) October 1991;

iii) March 1992;

iv) July 1992;

v) August 1992;

vi) September 1992;

vii) September 1992;

between the Plaintiff and the Defendant whereby the Defendant was to sell and/or supply to the Plaintiff yachts for the Plaintiff's resale.

2. Further or alternatively, HK$5.5 million (i.e. US$709,677.42) being the money lent to the Defendant by the Plaintiff during the period from December 1990 to October 1992."

The application for leave

4. The application for leave was supported by an affidavit of Mr. Park, the plaintiff's managing director. This was a lengthy document, containing 43 paragraphs, formulated primarily for the purpose of supporting an ex parte application for a Mareva injunction. Paragraph 43 of this affidavit states:

"43. Pursuant to RSC Order 11 rule 1(1)(a), (b), (d), the leave of this Honourable Court is required before the proposed writ of summons can be served upon the Intended Defendant as they are resident out of this jurisdiction. I therefore respectfully ask this Court to grant such leave".

5. The reliance upon sub-paragraphs (a) and (b) has not been pursued. This leaves sub-paragraph (d) as the foundation for seeking ex parte leave from Jones J. Order 11 r.1(1)(d) reads:

(1) Provided that the writ does not contain any claim mentioned in Order 75, rule 2(1) and is not a writ to which paragraph (2) of this rule applies, service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ -

(d) the claim is brought to enforce .... or to recover damages or obtain other relief in respect of the breach of a contract, being (in either case) a contract which:

(i) was made within the jurisdiction, or

(ii) was made by or through an agent trading or residing within the jurisdiction on behalf of a principal trading or residing out of the jurisdiction, or

(iii) is by its terms, or by implication, governed by Hong Kong law, or

(iv) contains a term to the effect that the High Court shall have jurisdiction to hear and determine any action in respect of the contract;"

6. Mr. Park's affidavit does not make clear which of the four sub-paragraphs under paragraph (d) the plaintiff relied upon when leave was sought from Jones, J, nor was the affidavit formulated in such a way as to marshal information bearing upon these sub-paragraphs. Scant attention was paid to the provisions of Order 11 r.4(1) - which spells out what the supporting affidavit must contain in an application for the grant of leave under r.1(1) - with unfortunate results for the plaintiff.

Hearing before Barnett J

7. At the hearing before Barnett J, leave was granted to the plaintiff to rely upon sub-paragraph (e) of r.1(1), in addition to paragraph (d). Order 11 r.1(1)(e) reads:

"(1) .....service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ -

(e) the claim is brought in respect of a breach committed within the jurisdiction of a contract made within or out of the jurisdiction, and irrespective of the fact, if such be the case, that the breach was preceded or accompanied by a breach committed out of the jurisdiction that rendered impossible the performance of so much of the contract as ought to have been performed within the jurisdiction...."

8. Before Barnett J, the arguments, as apparent from his judgment, boiled down to the following:

"First, has the plaintiff shown, on the material before the court, that it has a good arguable case that any of the contracts sued upon was made within the jurisdiction: Paragraph (d)(i)?

Second, has the plaintiff shown a good arguable case, that any of the contracts, by implication, is governed by Hong Kong Law: Paragraph (d)(iii)?

Third, has the plaintiff shown that it has a good arguable case that in respect of any alleged breach of contract, the breach was committed within the jurisdiction: Paragraph (e)?"

9. The judge concluded as follows. First, as regards paragraph (d)(i), that is whether the contracts were made in Hong Kong, he thought that Mr. Park's affidavit was too lacking in particulars in relation to the individual contracts for the plaintiff to be able to rely upon that paragraph.

10. Second, as to paragraph (d)(iii), whether the contracts by implication were governed by Hong Kong Law, the judge concluded that "the real substance of each of these contracts was the construction of a boat rather than the delivery of that boat in Hong Kong"; and as the "place of performance" was in Xiamen China, the law of China rather than that of Hong Kong was "appropriate to the individual contract".

11. Third, as regards paragraph (e), the place where breach of contract was committed, the way the judge viewed the matter was as follows: Mr. Park, in his affidavit complained of the "unilateral severance of business relationship" by a letter dated 16 October 1992 from the defendant at Xiamen as the operative breach; this was, on the plaintiff's case, an anticipatory breach of the various contracts which the plaintiff chose to accept, treating it as a wrongful repudiation; accordingly, the breach took place in Xiamen.

12. As regards the plaintiff's failure to comply with r.4(1)(b) - the requirement that the affidavit in support must state the deponent's belief that the plaintiff has a good cause of action - the judge treated this as academic because any deficiency in that regard had been corrected by a later affidavit by Mr. Park made in support of an application for summary judgment under Order 14; in any case, this was, as the judge found, a mere irregularity which could be cured by the court exercising its discretion under Order 2 r.1.

The appeal

13. What we have before us is a "composite" notice of appeal, and also a respondent's notice. The plaintiff, as the appellant, seeks a reinstatement of the leave given by Jones J to issue the writ and to serve it out of the jurisdiction. There are, broadly speaking, two matters for consideration:

(1) Jurisdiction: That is, whether any of the conditions of Order 11 r.1 has been made out, to the appropriate standard of proof.

(2) Discretion: That is, whether it has been made sufficiently apparent to the court that the case is a proper one for service out of the jurisdiction under Order 11: see Ord 11 r.4(2).

14. Before Barnett J, the plaintiff failed at the first hurdle. The judge was not satisfied that any of the conditions of Order 11 r.1 applied in the circumstances of this case. Accordingly, the judge did not go on to consider the question of discretion.

15. There is, before us, also the preliminary point raised in the respondent's notice: namely, that the judge's decision setting aside the leave given by Jones J should be supported on the basis that the plaintiff failed to comply with r.4(1)(b), in that Mr. Park's affidavit never stated in terms that he believed that the plaintiff had a good cause of action. It would help to clear the deck by dealing with this point first.

Rule 4(1)(b)

16. What is required, to comply with the rule, is not some ritual incantation of the wording of rule 4(1)(b): see Man Won Co. Ltd. v. Tay Vi Bing CA 32/90 (27 Sept. 91, unreported) at p.20. In Mr. Park's affidavit, he sets out the history of the relationship between the parties and their course of dealings from about December 1990 until the business relationship was severed in October 1992. The main thrust of his affidavit is to the effect that the parties had entered into contracts which the defendant breached, causing loss and damage to the plaintiff. Mr. Park also deposed to the arrangements whereby loans were advanced to the defendant; although the affidavit does not refer to the specific sum of US$709,677.42 mentioned in the writ as money lent, it is plain from the tenor of the affidavit that this was what Mr. Park meant. In my judgment, the affidavit has sufficiently stated Mr. Park's belief, to comply with the requirements of r.4(1)(b), and there was in fact no need for the judge to refer to Mr. Park's subsequent affidavit filed for the purposes of the Order 14 proceedings. In that regard, however, I am also of the view that the judge was right. In that later affidavit, Mr. Park said in paragraph 2:

"I confirm that the facts pleaded in the Amended Statement of Claim are true".

17. This seems to me to be a sufficient statement of Mr. Park's belief that the plaintiff has a good cause of action. Mr. Bunting, for the defendant, criticised this affidavit because where the expression "a good cause of action against the defendant" is used, it is with reference only to the alleged repudiation of the agency agreement; no specific reference is made to the seven individual contracts for the supply of yachts. The point is correct as far as it goes, but is irrelevant since the deponent has verified all the facts pleaded in the amended Statement of Claim, which pleaded the seven individual contracts and the amounts lent by the plaintiff to the defendant.

18. In my judgment, the defendant (respondent) fails on this point.

Agency agreement

19. There is no doubt that the parties, between themselves, had set up a framework within which business was carried on from about December 1990 until October 1992. What is not so clear is whether this amounted to a contract enforceable by an award of damages in a court of law. In the writ, the plaintiff alleges that it has lost US$187,836.96 as a result of the defendant's breach of the agency agreement. But, looking at the Statement of Claim, this cannot possibly be so because that figure is, in fact, made up of the loss of profit flowing from the failure to supply the seven individual yachts ordered from the defendant between October 1991 and September 1992. Moreover, the agency agreement covered only 49-foot yachts. The seven sales contracts did not all relate to yachts of this size. Only four of them did. The judge found the agency agreement far too vague. I agree with him. Take, for instance, the question of the "options". As can be seen from the voluminous documents which have been exhibited, the customers invariably required optional features to be incorporated into their yachts. How was the plaintiff to be charged for these optional features? The agency agreement, as pleaded in the Statement of Claim, merely states :

"(j) in the event the Plaintiff's customers placed orders for options, the Plaintiff would be entitled to profit for the same".

In other words, the parties were content to leave this matter to be worked out in the future, on a case by case basis. As can be seen from the particulars of loss pleaded in the Statement of Claim, this is how in fact matters transpired. For instance, in relation to a 49-foot yacht ordered by Mr. Wylie, the plaintiff made a profit of $9,907.50 on the "options" : the plaintiff charged Mr. Wylie $25,305 for them, and paid a "dealer price" to the defendant of $15,397.50. There was no machinery in the agency agreement from which such a profit to the plaintiff could have been worked out.

20. There is, of course, only written material before the court at this stage, and the court should not be thought to be judging the case finally upon affidavits. However, what the plaintiff must show, in an application for leave under Order 11 r.1, is that it has a good arguable case against the defendant. In my judgment, this has not been shown in relation to the claim for damages for breach of the agency agreement.

21. I am reinforced in this view when I consider the terms of the notice of appeal. The grounds of appeal focus entirely upon the seven sale contracts and make no specific reference to the agency agreement. It is not separately averred that the judge was wrong when he concluded that the agency agreement did not come within sub-paragraph (d) of r.1(1).

The sales contract

22. Before the judge, it was not suggested on behalf of the defendant that the parties had not entered into sales contracts for the supply of yachts to the plaintiff as averred. What was suggested, and accepted by Barnett J, was that Mr. Park's affidavit was far too vague and lacking in particulars in relation to those contracts to enable the plaintiff to bring its case within r.1(1)(d)(i), that is, that the contracts were made in Hong Kong.

23. Before us, counsel for the defendant takes a threshold point, namely, that the arrangement regarding the seven yachts had not matured into legally enforceable contracts; there is accordingly nothing to consider under paragraph (d)(i). This, of course, is not an issue we can finally resolve on the papers before us. The judge was, perhaps, not referred to the large volume of supporting material, to which we were referred, indicating the agreement of the parties concerning these yachts. There was, for instance, a delivery schedule prepared by the defendant in relation to some of the yachts; disbursements were made by the plaintiff, debited to the defendant's account, in relation to the purchase of material to be incorporated into the yachts. The weight of the evidence is in my judgment certainly sufficient to show a good arguable case for damages for breach of contract in relation to five out of the seven sales contracts sued upon. In relation to the last two - 32-foot yachts ordered by Mr. Ho and Mr. Mak - the material is not so strong because these orders were only placed in September 1992, about one month before business relationship between the parties was terminated. However, for the purposes of the grant of leave under Order 11 r.1, it would not be practicable to draw fine distinctions between the individual contracts: I bear in mind the proposition that all that is permissible at this stage is for the court to reach a provisional conclusion: the stage for trial and for final decision has not been reached: see Staughton L.J. in Attock Cement v. Romanian Bank [1989]1 WLR 1147 at 1155F.

Rule 1(1)(d)(i): whether contracts made in Hong Kong

24. Part of the plaintiff's problem in this case springs from the fact that Mr. Park's affidavit was made, as counsel informed us, primarily for the purpose of supporting the application for the Mareva injunction. Compliance with the requirements of Order 11 r.4 was treated, quite wrongly, as a subsidiary issue. The affidavit therefore did not focus upon the facts bearing upon the place where the contracts was made. There was, nevertheless, in my judgment, enough material in the affidavit for the plaintiff to surmount the threshold under paragraph d(i). First, in paragraph 4(c) of Mr. Park's affidavit, he made this general statement:

"Whenever the Intended Plaintiff received an order from a customer, I would notify the Intended Defendant either in writing or by telephoning them in Xiamen. Sometimes, the Intended Plaintiff and the Intended Defendant would sign an agreement in Hong Kong to confirm the same".

Second, Mr. Park also deposed to the manner in which the individual orders for yachts was placed. In relation to Mr. Humphries' yacht, the agreement between the plaintiff and the defendant was signed in Hong Kong: exhibit "SJCP-16", and in relation to the others the orders were first placed by the plaintiff phoning from Hong Kong, an oral agreement was then made on the telephone and later confirmed by letter sent from Hong Kong.

25. The principle of law is that in the case of instantaneous communication, unless the intention of the parties is displaced by other circumstances, the contract is made at the place where the offeror receives notification of acceptance : Entores v. Miles Far East Corporation [1955]2 QB 327.

26. In my judgment, the evidence before the judge was sufficient to establish a strong arguable case that the sales contracts were made in Hong Kong. The point is now reinforced by the further affidavit of Mr. Park, adduced pursuance to leave given by order of this court dated 1 April 1993.

Rule 1(1)(d)(iii): contract governed by Hong Kong law

27. Where the relationship between the parties is informal, in the way they were in this case, one would not expect to find the parties stating expressly what the governing law should be. The task of the court is then to infer their intention from all the relevant circumstances.

28. Looking, first of all, at the larger picture. The contemplation of the parties was that the plaintiff should, in the first place, secure orders for yachts from wealthy customers either in Hong Kong or overseas; when deposits were received from these customers, 75% thereof would be credited to the defendant's account in Hong Kong; the plaintiff was to render financial assistance to the defendant by undertaking to purchase material and accessories for the yachts; such material was unavailable in China and these purchases would be made in Hong Kong and sent to the defendant in Xiamen; these transactions would all be reflected in the accounts which kept in Hong Kong.

29. Second, all communications between the parties were in English. Mr. Park, the managing director of the plaintiff is English and Mr. Fuhriman, the managing director of the defendant, is American.

30. Third, as regards the plaintiff and its own customers, the governing law of those contracts is Hong Kong law. If, for example, there was some defect in the manufacture of the yachts, those customers would obviously have proceeded against the plaintiff in the Hong Kong courts. It would naturally have been in the contemplation of the parties that, in that event, the plaintiff would in turn bring in the defendant as a third party. In these circumstances, it would have been very odd if the plaintiff intended, as between itself and the defendant, that the governing law of the sales contracts should be that of the PRC.

31. In considering the question whether the parties intended by implication that the sales contracts should be governed by Hong Kong law, the test is what ordinary reasonable businessmen would have been likely to have agreed if their minds had been directed to the question. In my judgment, there can be no doubt what Mr. Park and Mr. Fuhriman would have said, before the dispute arose in this case. They would have said that Hong Kong law governed their contracts. It would have been highly improbable that they would have selected PRC law, having regard to the commercial realities of the matter.

32. The factor which influenced the judge to conclude that the parties by implication intended the law of China to apply is this: the "real substance" of each of the sales contract was the construction of a boat rather than the delivery of that boat in Hong Kong. This, in my judgment, is to take far too limited a view of the matter. Even in relation to the construction of the boats, there were many essential acts performed in Hong Kong, such as the ordering of spars and sails, and of course the provision of finance. Moreover, as the plaintiff was, in each case, obliged to deliver the boat to its own customer in Hong Kong, it would have been very odd if the plaintiff did not require the defendant in turn to have the boat delivered in Hong Kong: either by making arrangements to have the boat sailed to Hong Kong, or putting it on a freighter bound for Hong Kong. In this regard, I am not greatly influenced by the fact that, in some of the contracts, there were provisions for the customers to "accept" the yacht at Xiamen. It seems to me that there is a distinction between acceptance by the customer and the obligation to deliver. It would be a surprising thing if a foreigner in China was, in these circumstances, content to take delivery of his yacht at Xiamen, and assume the burden of port clearance and other matters, relieving the plaintiff of the obligation to deliver the yacht to him at the place where he resides.

33. In my judgment, the evidence before the judge pointed overwhelmingly to the conclusion that the governing law of the sales contracts was Hong Kong law and the judge had erred in this regard.

Rule 1(1)(e): whether the breach was committed within Hong Kong

34. Having reached the conclusion as stated above, it is unnecessary to deal with the Plaintiff's separate reliance upon paragraph (1)(e). For the sake of completeness I will deal briefly with the point.

35. The judge concluded that, on the evidence complained in Mr. Park's affidavit, the breaches of contract alleged by the plaintiff occurred in Xiamen. He reached this conclusion by reference to the defendants' letter sent by fax from Xiamen severing all business relationship. This, according to the plaintiff, was the repudiatory breach, accepted by the plaintiff, which gave rise to the claim for damages.

36. The plaintiff says that the breach relied upon is the failure to deliver the yachts. As to this, it is difficult to see how this can be right in relation to the last four yachts since, in the statement of claim, the time for delivery as pleaded was respectively December 1992, January 1993, February 1993 and March 1993. At the time when leave was sought to issue the writ, such time had not yet expired.

37. If the plaintiff's case had depended upon paragraph 1(e), I would have upheld the judge in his finding that, on the evidence before him, the plaintiff had not established a strong arguable case within that paragraph.

Loans amounting to HK$5.5m

38. Very little argument was put by either side concerning the plaintiff's claim for the loans. Some mention was made in the course of argument of proceedings having been instituted in Xiamen for these loans. There is, however, no evidence before the court to this effect. On the evidence before the court, the loans were made in Hong Kong, debited to the defendant's account kept in Hong Kong. On the face of it, these were obligations falling within rule 1(1)(d)(i) and (iii). This was, however, not a matter dealt with by the judge, and since counsel who appeared before us were not counsel in the lower court no explanation has been offered for this omission. I therefore say no more about this except to observe that, on the material placed before Jones J, he was right to give leave to the plaintiff to seek recovery of these loans in proceedings in Hong Kong.

Conclusion

39. Having reached the views as I have done, particularly in relation to the governing law of the contracts and of the loans, the exercise of discretion must clearly be in the plaintiff's favour.

40. In my judgment, for the reasons given above, this appeal should be allowed and the order of Jones J of 3 November 1992 should be restored, subject to this proviso: no leave should have been granted to pursue the claim for damages for breach of the agency agreement. The writ should accordingly be amended and re-served. This must, in consequence, lead to amendments to the statement of claim.

41. I would also make an order nisi that the defendant (respondent) should pay the costs of the appeal.

Bokhary, J.A.:

42. I agree, for the reasons given by my Lord, that this appeal must be allowed, to the extent which he proposes, with an order nisi as he proposes.

Sears, J.:

43. I also agree that this appeal must be allowed with the orders proposed.