MELVIN WAXMAN AND ANOTHER v. LI FEI YU AND ANOTHER

CACV 157 / 2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 157 OF 2014

(ON APPEAL FROM HCA NO. 1972 OF 2012)

____________________

___________________

J U D G M E N T

___________________

Hon Yuen JA:

1.  This is an appeal from a Decision of To, J given on 19 July 2013 (“the Decision”) in which he dismissed an application by the 2^nd defendant, a Hong Kong company, to stay an action commenced in Hong Kong on the ground of forum non conveniens. The 2^nd defendant contended that the proceedings should be stayed in favour of the Xiamen court in the PRC.

Background

2.  It is common ground that the following four persons had been in a business relationship for some time:

- the 1^st plaintiff Melvin Waxman (“MW”), a US citizen;

- the 2^nd plaintiff Larry Waxman (“LW”), MW’s son, also a US citizen;

- the 1^st defendant Li Fei Yu, also known as Frank Li (“FL”), a PRC citizen and sole controller of the 2^nd defendant Solut (Hong Kong) Co Ltd (“Solut”); and 

- Yu Yuebin, also known as Ben Yu (“BY”), FL’s brother-in-law, also a PRC citizen.

3.  1.             Prior to the events which are the subject-matter of this case, these four individuals had been involved in a number of companies in what has been called “the WDI group”, including:

- WDI International (HK) Ltd, a company incorporated in Hong Kong (“WDI HK”);

- WDI International Inc., a company incorporated in the US (“WDI US”);

- Voreto (Xiamen) Plumbing Technology Co Ltd (“Voreto”);

- WDI (Xiamen) Precision Mould & Plastics Co Ltd (“WDI Precision”);

- Xiamen Da Chun Industries Inc (“Da Chun”); and

- Xiamen WDI Plumbing Industrial Co Ltd (“WDI Plumbing”).

3.2. The latter four companies were incorporated in the PRC.

The Shareholders’ Agreement

4.  It is the plaintiffs’ case that on 5 August 2002, there was an oral agreement (“the Shareholders’ Agreement”) made between MW (also on behalf of LW), FL and BY.

4.1.             First, it was agreed that the proportions of their capital investments in the companies in the WDI group would be adjusted.  This adjustment would take place after FL (through Solut) added investment capital in the sum of US$1.5m.  Upon such adjustment on 31 December 2002, the four shareholders’ respective holdings would be as follows:

MW and LW	40%
BY	18%
FL (also through his control of Solut)	42%

4.2. Second, it was agreed that WDI Plumbing would set up a new PRC company WDI Technology Ltd (“WDI Technology”) by way of a joint venture with Solut.  Solut was the corporate vehicle through which FL would add investment capital in the said sum of US$1.5m to the WDI group leading to the adjustment.  In other words, it was understood that Solut’s investment in the joint venture was related to the adjustment.

4.3. Third, it was agreed that the assets and business of WDI Plumbing and that of the new JV company WDI Technology would be combined and included in the adjusted shareholding structure starting 1 January 2003.  The “legal company documents” was just for obtaining favourable land prices and preferential tax policies if any.  

4.4. Fourth, the four individuals agreed to provide loans for the purchase of land for the joint venture, such loans to follow the current proportion of shareholdings. 

5.  It is the plaintiffs’ case that the Shareholders’ Agreement was evidenced by:

- a document dated 5 August 2002 and signed the following day by MW, FL and BY (“the Minutes”);

- other documents made between 2004 and 2007, in particular a “letter of net equity of shareholders confirmation” signed by the four individuals and issued by WDI Group, naming its wholly-owned subsidiaries and which set out the percentage of shareholding referred to above. It is notable that WDI Technology (the joint venture vehicle of WDI Plumbing and Solut) was included in the list of companies with “consolidated 100% shares” owned by the WDI group.

6.  It is common ground that in the meantime, by a contract dated 22 August 2002 between WDI Plumbing as the PRC party and Solut as the foreign party, WDI Technology was established as a Sino-Foreign joint venture.

Proceedings

7.  The plaintiffs claim however that FL and Solut have failed or refused to implement the adjustment of holdings in certain companies in the WDI group.  FL has failed or refused to transfer shares held by him in Da Chun, and Solut has failed or refused to transfer shares held by it in WDI Technology. 

8.  In October 2012, the writ in HCA1972/2012 was issued by MW and LW against FL and Solut.  It was not served on FL but it is common ground that it was properly served on Solut, a Hong Kong company. 

9.  On 7 December 2012 Solut issued the summons to stay the action on the ground of forum non conveniens.  The matter was heard before To, J.

The judge’s Decision

10.  On 19 July 2013 the learned judge handed down a 37-page Decision.  After narrating the parties’ respective cases, he set out the applicable legal principles and considered the following 3 stages in accordance with the approach set out by Hunter JA in The Adhiguna Meranti [1987] HKLR 904:

Stage I

11.  1. Has the applicant (Solut) shown that Hong Kong is not the natural or appropriate forum for the trial, and also that there is another available forum (Xiamen) which is clearly or distinctly more appropriate than Hong Kong?

11.2. Under this Stage, the judge examined each of the following factors:

(a) The Shareholders’ Agreement and the Joint Venture Agreement (para. 23);

(b) The parties’ connection with Hong Kong or the PRC (paras. 24-25);

(c) The subject matter of the action (para. 26);

(d) The language and terminology used in the Shareholders’ Agreement (paras. 27-30);

(e) Complexity of the legal issues in dispute (paras. 31-33);

(f) Exclusive jurisdiction of the PRC court over the Joint Venture Agreement (paras. 34-38);

(g) The place of performance of the Shareholders’ Agreement (para. 39);

(h) Remedies sought (paras. 40-44);

(i) The governing law of the Shareholders’ Agreement (paras. 45-49).

Stage II

12.  If the answer to Stage I is “yes”, can the plaintiffs prove that a trial in Xiamen will deprive them of any legitimate personal or juridical advantage?

Stage III

13.  If the answer to Stage II is “yes”, can Solut show that on balance, the Xiamen court is more suitable for the interests of all the parties and the ends of justice?

14.  1. For reasons set out methodically in the Decision (paras. 50-56), the judge held that the answer to Stage I was “no”.  Accordingly, Stages II and III were not engaged. 

14.2. However, the judge expressed his opinion that, had the answer to Stage I been “yes”, the answer to Stage II would have been “yes” for reasons set out in paras. 58-60.

14.3. Moreover he took the view that the disadvantages suffered by the plaintiffs in Stage II would have been so fatal that the answer to Stage III would have been obviously “no” (para. 60).

14.4. Accordingly, the judge dismissed the application for stay.   

Appeal

15.  The grounds of appeal can be summarized as follows.

15.1. In relation to Stage I,

(1) the dispute on Article 266 of the PRC Civil Procedure Law was a “weighty factor” in favour of the Xiamen court as the more appropriate forum;

(2) the enforceability of a judgment was also a “weighty factor” in favour of the Xiamen court as the more appropriate forum;

(3) the present dispute should have been characterized as one of property (the shares in the PRC companies), rather than of contract.  For property disputes, the lex situs is the governing law, and the lex situs of the shares is the place of incorporation (ie the PRC);

(4) in any event, the governing law of the Shareholders’ Agreement is PRC law;

(5) in any event, the judge was wrong to make a conclusive finding as to the proper law;

(6) there were other factors in favour of the PRC court.

15.2. In relation to Stage II,

(7) the disadvantage that would be suffered by the plaintiffs in not being able to invoke the concept of beneficial ownership in the Xiamen court was caused not by the choice of forum, but by the choice of governing law; and in any event, the plaintiffs might have other remedies under PRC law.

Discussion

16.  Before considering the specific grounds, the following principles should be noted.

17. 1. First, a decision whether or not to stay an action on the ground of forum non conveniens is a matter for the exercise of a judge’s discretion, and as with all cases involving discretion, an appellate court should be slow to interfere even if the appellate judges themselves might have arrived at a different decision had they dealt with the proceedings at first instance.  As Lord Templeman put it in Spiliada Maritime Corp v Cansulex Ltd [1987] 1 AC 460, “an appeal should be rare and the appellate court should be slow to interfere” (p.465).    

17.2. In Lubbe and others v Cape PLC [2000] 1 WLR 1545, a case where two different divisions of the English court of appeal had arrived at different conclusions as to whether or not to order a stay of English proceedings on the ground that South Africa was the more appropriate forum, Lord Bingham observed, in the context of an application for stay of proceedings on the ground of forum non conveniens, (at p.1556):

“This is a field in which differing conclusions can be reached by different tribunals without either being susceptible to legal challenge. The jurisdiction to stay is liable to be perverted if parties litigate the issue at different levels of the judicial hierarchy in the hope of persuading a higher court to strike a different balance in the factors pointing for and against a foreign forum”.

18.  Second, the plaintiffs have sued Solut as of right in the Hong Kong court.  This is a matter to which the court must pay proper regard.  The judge emphasized this at paras. 17, 22, 33 and 56 of the Decision.

19.  Third, the court should consider the issues set out in the pleadings.  In the present case, the primary dispute is whether the Shareholders’ Agreement was made. This is essentially a factual dispute. 

20.  Fourth, as Solut is a Hong Kong company, it would be susceptible to methods of execution provided by the rules of the Hong Kong court should an order be made against it. 

21.1. Before proceeding to the points advanced before this court, I shall deal with one point first.  Solut has submitted that the judge should have characterized the dispute as being one of property, rather than of contract.  If it had been characterized as a property dispute, so the argument goes, the lex situs would apply and since the dispute was over shares in a PRC Company, the PRC law would apply.

21.2. I do not think it would be right for this court to deal with this submission when it had never been Solut’s case before the judge that the dispute was one of property and not contract.  Indeed it was not even in the grounds of appeal until the Notice of Appeal was amended 16 months after the Decision was handed down, so it is clearly an after-thought which was never part of Solut’s case below.

22.1. Coming then to the other grounds, Solut’s leading counsel Miss Eu SC placed much emphasis on Article 266 of the Civil Procedure Law which provides:

“Actions instituted for disputes arising from the performance of contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures or Chinese-foreign cooperative exploration and exploitation of natural resources in the People’s Republic of China shall be under the jurisdiction of the people’s courts of the People’s Republic of China”.

22.2. Miss Eu submitted that the present case was a dispute “arising from the performance of” a contract for a Chinese-foreign equity joint venture viz. WDI Technology. I agree with the judge (para. 36) that there is no evidence of any dispute between the contracting parties in the joint venture (viz WDI Plumbing and Solut) arising from either party’s performance of the contract.  It is not as if, for instance, Solut has failed or refused to provide the funds it has promised to invest in WDI Technology, in breach of clause 9 of the Joint Venture Agreement.

22.3. Rather, the dispute is between individual shareholders who have, or lay claim to, shares in the companies one level up the corporate structure from the joint venture company. 

22.4. Miss Eu submitted that the Shareholders’ Agreement and the Joint Venture Agreement are part and parcel of the parties’ overall agreement for their joint venture in WDI Technology, and that an inference should readily be drawn that both agreements were intended to be governed by the same law, ie PRC law.

22.5. With respect, it would appear that in the alleged Shareholders Agreement, the four individuals agreed to an overall adjustment of holdings, which was to include and subsume the joint venture to be established between the companies held by one or all of them.  That appears from the second and third points recorded in paras. 4.2 and 4.3 above.  The “legal company documents”, (presumably meaning the agreement setting up the joint venture) was explicitly just for obtaining favourable land prices and preferential tax treatment. 

22.6. Further, it is important to note that the alleged agreement for the overall adjustment of holdings covered not only the joint venture company (WDI Technology) but also other companies, some of which were in the PRC and some of which were not, and it would be at least arguable that the parties could not have intended PRC law to apply to the agreed transfer of shares in companies incorporated in the US and Hong Kong.

22.7. Accordingly I am not persuaded that Article 266 is so clearly engaged. 

23.  In light of the above, it is not necessary to discuss the support which the judge drew from the Supreme People’s Court’s Judicial Interpretation cited by the plaintiffs’ expert in PRC law (para. 37). 

24.  Further, in respect of Miss Eu’s submission that at least the Xiamen court is the more appropriate forum to decide a dispute regarding Article 266, this is only one of the factors in favour of the Xiamen court.  The weight given to one factor amongst many is a matter for the judge.

25. 1. This is also the case in respect of Solut’s argument based on the enforceability of a Hong Kong judgment in the PRC.  The weight of this factor is again a matter for the judge, not an appellate court.   

25.2. In this connection it should be noted that the present situation is not that the plaintiffs have started proceedings in the PRC and Solut has applied, in the PRC court, to stay those proceedings in favour of Hong Kong.  In such a situation, the plaintiffs might seek to argue, at Stage II of a similar exercise, that staying in favour of Hong Kong may deprive them of a legitimate advantage in ease of enforcement.  But that is not the case here.  The plaintiffs have chosen to sue a Hong Kong company in Hong Kong.  The plaintiffs’ right to do so cannot be gainsaid.  Insofar as Solut is seeking to suggest that if an order is made against it, it will not comply with it and a Hong Kong court cannot compel it to transfer shares in a PRC company, it must be noted that as a Hong Kong company, Solut would be liable to such enforcement measures as the plaintiffs may seek to deploy against it if it refuses to comply with a judgment against it, including but not limited to winding up for failing to pay a judgment debt after damages are assessed.

25.3. In any event, the judge was well aware of Solut’s argument on enforceability, and the weight he gave that factor is a matter for him. 

26. 1. The same point applies to Solut’s submission that the judge placed too much weight on the parties’ inferred intention that the Shareholders’ Agreement should be governed by a law under which it would effective, rather than a law with which (on Solut’s contention) the matter had the closest connection. 

26.2. First, as was set out by Lord Collins in First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569, the first stage of the court’s enquiry must be what was the intention of the parties.  Absent an express intention, often the tests of inferred intention and close connection merge into each other (para. 53). 

26.3. Then the question is whether PRC law is the law with which the agreement has the closest connection.  In my view, it must be remembered that the Shareholders Agreement covered companies in the PRC, the US and Hong Kong.  Therefore when one is considering the inferred intention of the parties or the jurisdiction with which the Shareholders Agreement has the closest connection, one should not confuse that with the place of performance of part of that agreement (the PRC).  First Laser was quite different.  The agreement in that case only covered PRC-incorporated companies.

27. 1. Finally there is Solut’s argument that the judge was wrong to make an irresistable inference that Hong Kong law was the governing law and to make the inference conclusive. 

27.2. I do not see anything in the Decision which indicates that the judge had arrived at such a conclusion.  In fact in his decision on costs, the judge expressly referred to the provisional nature of the matter (para. 25). 

Order

28.  In conclusion, I am not persuaded that the judge was so plainly wrong in his finding on Stage I that his Decision must be disturbed on appeal.  Accordingly it is not necessary to proceed to Stage II.  I would dismiss the appeal with costs, with certificate for two counsel.

Hon Barma JA:    

29.  I agree.