廈門新景地集團有限公司 formerly known as 廈門市鑫新景地房地產有限公司 v. ETON PROPERTIES LTD AND OTHERS

CACV 451/2021

[2022] HKCA 602

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 451 OF 2021

(ON APPEAL FROM HCCL NO 13 OF 2011)

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J U D G M E N T

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Hon Kwan VP:

1.  I agree with the judgment of Yuen JA.

Hon Yuen JA:

2.  This is the appeal of the 1^st and 2^nd defendants (“the defendants”)[1] from a Decision dated 3 August 2021 (“the Decision”)  of Mimmie Chan J (“the judge”)  in which it was ordered that a number of passages[2] in the defendants’ Statement in Response dated 15 January 2021 be struck out with costs.

Background

3.  The history of the litigation between the plaintiff and the defendants is lengthy, and has been set out in the judgment of the Court of Final Appeal (“CFA”)  in FACV Nos. 3 and 5 of 2019[3].

4.  However, to understand the arguments in the present appeal, it is only necessary to highlight the following events set out in the CFA Judgment and other relevant events.

4.7.2003	The plaintiff and the defendants entered into an Agreement in respect of a project to develop a piece of land in the PRC (“the Agreement”)  [§§6-9].
16.11.2005	The defendants divested themselves of a Hong Kong subsidiary[4] whose PRC subsidiary[5] held the land.  The plaintiff was not aware of this divestment [§§14-15].
27.10.2006	After the defendants renounced the Agreement, the plaintiff obtained a CIETAC arbitration award (“the Award” or “the 1st Award”)  ordering (among other things)  that the defendants shall continue to perform the Agreement [§§16-21].
31.10.2007	The plaintiff entered judgment in HCCT 54/2007 to enforce the Award under the Arbitration Ordinance (“the statutory judgment”)  [§23].
27.5.2008	Upon learning of the divestment, the plaintiff commenced HCA 961/2008 (later re-designated HCCL 13/2011)  in a common law action to enforce the Award (“the Action”)  [§25].
22.4.2009	The arbitral tribunal dismissed the defendants’ application for a determination that the Agreement could no longer be performed and that the parties should be discharged therefrom (“the 2nd Award”)  [§29].
27.7.2009	The arbitral tribunal refused to entertain the defendants’ application (made in June 2009)  for a further ruling on (among other things)  what relief (including damages or other appropriate reliefs)  the plaintiff should have, holding that the Award (the 1st Award)  was final and comprehensive (“the tribunal’s Ruling”)  [§142].
21.12.2011	In the Action, Reyes J gave leave to the plaintiff to re-amend the statement of claim (“Re-Amd SOC”)   and gave directions for expert evidence on quantum [§40].
11.1.2012	The defendants filed their Re-Amended Defence[6].
3.2.2012	The Court of Appeal[7] allowed the defendants’ appeal from Reyes J’s order to the extent of ordering a split trial with the issue of quantum raised by §35(5)  of the Re-Amd SOC to be dealt with, in so far as necessary, after the outcome of the trial [§41].
14.6.2012	DHCJ Stone dismissed all the claims in the Action [§§43-53].
15.4.2016	The Court of Appeal[8] gave Judgment allowing the plaintiff’s appeal from DHCJ Stone’s dismissal of the common law action to enforce the Award, and gave directions for the plaintiff to elect between the statutory judgment and entering judgment in the Action for damages (“the CA Judgment”)  [§64-70].
20.10.2017	Upon the plaintiff’s election, the Court of Appeal set aside the statutory judgment, and entered judgment in the Action for damages against the defendants for their breach of the implied promise to honour the Award [§75].
3.6.2019	The CFA Leave Committee[9] refused leave to the defendants to appeal the following Question[10]: “whether the applicable law on enforcement by the common law action on a foreign arbitral award is the lex causa, the lex fori, or the curial law governing the arbitration, in view of the fact that the cause of action in a common law action for damages for failure to perform an award is based on contract and the law governing whether there was such a contract should be the putative proper law of the contract” on the ground that it was not reasonably arguable, holding that[11]: “in a common law action for enforcement of a foreign arbitral award, one is not suing on the underlying agreement (which is governed by the choice of law clause), but on the breach of the implied promise to honour the arbitral award, which is a cause of action based on Hong Kong law. By definition, the lex fori applies”.
9.10.2020	The CFA dismissed the defendants’ appeal from the CA Judgment (“the CFA Judgment”).
6.11.2020	In the Action, Anthony Chan J ordered[12] (among other things): (1)  the plaintiff to file a statement of the nature of its case, including particulars of loss and damages and the applicable law for assessment of damages; (2)  the defendants to file a statement in response to the plaintiff’s statement; (3)  the plaintiff to have leave to file a statement in reply to the defendants’ statement.
11.12.2020	The plaintiff filed its Statement of Case in respect of loss [13] (“Statement of Case”).
15.1.2021	The defendants filed their Statement in Response[14].
16.2.2021	The plaintiff filed its Statement of Reply [15].

Applications to strike out

5.1.  On 3 February 2021, the defendants issued a summons (referred to in the Decision as “the 1^st Summons”)  for an order that the plaintiff do (among other things)  supply particulars of, and amend, the Statement of Case, failing which it be struck out.

5.2.  On 24 February 2021, the plaintiff issued a summons (referred to in the Decision as “the 2^nd Summons”)  to strike out specific paragraphs in the Statement in Response.

The judge’s Decision

6.  In the Decision, the judge dismissed the defendants’ summons with costs.  There is no appeal from that order.

7.1.  As for the plaintiff’s summons, the judge ordered the passages identified in footnote 2 of this Judgment be struck out, and that the defendants pay the plaintiff’s costs.

7.2.  The struck out passages pleaded “the PRC Law Argument” and “the New Arbitration Argument”.

8.1.  The PRC Law Argument refers to passages in the Statement of Response which pleaded, in summary, that:

-  questions relating to the plaintiff’s loss, including in respect of heads of loss, causation and remoteness, are governed by PRC law [§19], and

-  under PRC law, failure to perform an arbitral award does not give rise to any right to damages [§§20 - 21].

The consequences of applying PRC Law were pleaded in §§26-29, so they stand or fall together.

8.2.  The defendants argued that in respect of the judgment for damages for breach of the implied promise to honour the Award, the CA and CFA Judgments dealt with liability only, that the issue of assessment of damages had yet to be determined, and so it was open to them to argue that PRC law applied and consequently, the plaintiff was not entitled to any damages at all. 

8.3.  This argument was rejected by the judge.  After referring to certain passages in the CA and CFA Judgments, the judge emphasized that a common law action on an arbitral award is an independent cause of action, distinct from the underlying contract, and since the action is for enforcement, it is concerned with the law of remedies, which is governed by the lex fori of the enforcing court. 

8.4.  The judge held at §36:

“In my view, it is clear from the CFA Judgment and the CA Judgment that the action now in Hong Kong, for breach of the Implied Promise and for enforcement of the Award, deals with the law of remedies and is therefore governed by the lex fori and regulated by the enforcing court. I agree with Counsel for the Plaintiff that as held by the CFA and the CA, Hong Kong law, being the lex fori, governs the entire enforcement procedure and the entire common law action for breach of the Implied Promise” (Underlining added).

8.5.  Dealing with the defendants’ argument that in a breach of contract claim at common law, causation, remoteness and heads of damage are governed by the law of the contract, and only quantification is governed by the lex fori, the judge further held at §38:

“... in the present case, given that the CA and CFA have held that the action on the Award is on the basis of enforcement of the Implied Promise, implied under common law, I do not agree that the law of the relevant contract can be said to be PRC law. The promise, or the quasi-contract, to honour the Award is implied under the common law, by the court of enforcement. The law of the relevant contract or promise is hence Hong Kong law. Accordingly, Hong Kong law being the lex fori as well as the law of the relevant contract applies to all the relevant questions of causation, remoteness, heads of damage, and the measure or quantification of damages”. (Underlining added).

8.6.  Accordingly, the judge held that the passages containing the PRC Law Argument should be struck out, either by reason of issue estoppel, or for failing to disclose any reasonable defence [§36], or as a collateral attack on the CA Judgment and the CFA Judgment and an abuse of process [§38][16].

9.1.  The New Arbitration Argument refers to passages in the Statement in Response which pleaded, in summary, that:

-  the plaintiff should submit the underlying dispute to the arbitral tribunal to obtain an award which can be performed and enforced [§22, 3^rd sentence], or seek a ruling or direction as to how (if at all)  the parties can continue to perform the Agreement, or accede to the defendants’ request to submit to arbitration in order to advance whatever claim it would be entitled to under PRC law and the terms of the Agreement [§24];

-  in not doing the above, the plaintiff has caused its own loss, or it has failed to mitigate its loss [§§30(3)   and 32(2)]. 

9.2.  The judge noted that as reflected in the judgments of the CA and the CFA, the defendants had in June 2009 requested the arbitral tribunal to issue further directions on how the Award should be performed, and what relief (including damages or other appropriate relief)  could be granted, but the tribunal had rejected that request in its Ruling of 27 July 2009.  As shown in the 2^nd Award, the tribunal was aware that the matter had reached the enforcement phase in Hong Kong [CFA §139] and in answer to the defendants’ request for directions on relief, it had given their request “short shrift” [CFA §32]. 

9.3.  In the CFA, the defendants had already argued that if the plaintiff wanted damages, it had to return to the arbitral tribunal and persuade it to make such an award, and only then could the enforcing court enter a judgment for damages by way of enforcement [CFA §127].  The premise of this argument was rejected by the CFA as “untenable” [CFA §128].

9.4.  The judge held at §48:

“When it has been clearly pointed out by the tribunal, and unequivocally accepted by the Hong Kong courts, that it is not possible for the Plaintiff to seek further orders or any form of relief from the tribunal, it is disingenuous for the Defendants to plead in the Response that the Plaintiff has failed to mitigate its loss by failing or refusing to submit the differences between the parties to CIETAC arbitration in accordance with the terms of the underlying Agreement, or to obtain from the tribunal an award which can be enforced”.

9.5.  Accordingly, the judge held that the passages containing the New Arbitration Argument should be struck out as failing to disclose any reasonable defence or as an abuse of process of the Court.

Appeal

10.  It is not suggested in the Notice of Appeal that the judge had been plainly wrong in the exercise of discretion to strike out the passages pleading the PRC Law Argument and the New Arbitration Argument. 

11.  1.  Rather, in respect of the PRC Law Argument, the defendants argued that the judge had “misinterpreted” (and thus, failed to properly consider)  the Judgments of the CA and the CFA which were limited in scope as they only dealt with the “liability stage” and not the “quantum stage”, as a result of the hiving off of §35(5)  by the Court of Appeal hearing the appeal from Reyes J’s directions[17]. 

11.2.  The defendants also argued that in giving directions for the parties’ statements to include the applicable law for assessment of damages, Anthony Chan J recognized that the “quantum stage” issue had not yet been determined.  

12.  In respect of the New Arbitration Argument, the defendants argued that the issue whether the plaintiff had mitigated its loss was never before the arbitral tribunal, and that the judge had also misinterpreted (and thus, failed to properly consider)  the scope of the tribunal’s Ruling, and the Judgments of the CA and the CFA on this aspect.

Discussion

The PRC Law Argument

13.  First, it would be noted that the defendants’ case now (that under PRC Law, the plaintiff is entitled to no damages at all for the defendants’ failure to perform the Award [§§20(1)   and 21 Statement in Response])  was never pleaded in their Re-Amended Defence[18], where they pleaded only a different measure of damages under PRC Law to that advanced by the plaintiff [§§83D and 83E]:

“83D. If and insofar as the Plaintiff’s claim for ... damages is on the basis of an alleged implied promise to perform the Award, it is denied that the Plaintiff has suffered any loss or damage. In particular, it is denied that the value of the Award could be measured by the difference between the existing value of the entire shareholding in the 4^th Defendant and the sum of RMB120,000,000 [ie the plea in §35(5)  of the Re-Amd SOC]. The 1^st and 2^nd Defendants will rely on the fact that the Plaintiff has not taken any step to enforce the [statutory] judgment ... Further or alternatively, the applicable or proper law governing any such claim should be PRC law.

83E(5). Under the laws of the PRC (without admission of any liability thereunder), the damages ... should be the Plaintiff’s foreseeable profit to be derived from the Plaintiff’s development (through the 5^th Defendant)  of the Land, less the price the Plaintiff has to pay under the Agreement, had the Agreement been fully performed according to all its terms ie had the Plaintiff obtained the Land pursuant to the Agreement within 6 months of the making of the Agreement (Article 5 clause 2).

(6). Had the Plaintiff been delivered the Land according to the time frame of the Agreement, the Plaintiff’s development would have been commenced in January 2004 and the apartments on the Land would have been sold in April 2005, about 14 months before they were sold by the 5^th Defendant.

(7). The property prices in Xiamen were lower by 61% in April 2005, than in June 2006 when the units on the Land were actually sold by the 5^th Defendant.

(8). The design for the development was different from the Plaintiff’s design so that the units of the development were sold for higher prices: (a)  it was of 32 stories instead of the Plaintiff’s design of 23; (b)  duplex units were added; (c)  more parking spaces; (d)  one more basement floor.

(9). 4 years’ extension for the land use right was procured and as a consequence the units of the development were sold for higher prices than the case had the plaintiff been delivered the Land and had the Plaintiff proceed[ed] with the development.

(10). Had the Plaintiff proceeded with the development, the interest costs would have been higher than the actual interest costs incurred by the 5^th Defendant as the 5^th Defendant had obtained interest free intra-group loans and shareholders loan in the total sum of RMB73,441,820 to fund the development.

(11). Had the Plaintiff proceeded with the development, substantially more costs in managing the development, marketing and sales would have been incurred.

(12). The 1^st and 2^nd defendants reserve the right to furnish further or better particulars on the aforesaid as soon as they are available.

(13). In the premises, under PRC law (without admission of liability thereunder), the profit that would have been made by the Plaintiff had it been given the Land to develop according to the Agreement would have been substantially lower than what the Plaintiff claims under para.35, to be assessed”. (Underlining added).

14.1.  It was on the basis of these pleadings (which clearly called for expert valuation evidence)  that the defendants argued in the Court of Appeal in February 2012 that Reyes J’s grant of leave to re-amend the SOC and directions for expert evidence on quantum was a “perverse case management decision”.  What they argued then was that “the timetable imposed by the judge on the parties for ... the filing of relevant expert valuation evidence was almost impossible to comply with” [CA Reasons for Judgment[19], §26].  This led to the Court of Appeal’s order to hive off §35(5)  instead of “squeezing the case into the existing trial dates” [§35].

14.2.  Had the defendants advanced at that time their present case that under PRC law the plaintiff would not be entitled to any damages in any event even if the defendants were found liable for breach of the implied promise to honour the Award, the court might well have ordered that issue to be resolved as a preliminary issue before the parties embarked on time-consuming and expensive litigation in the action on the Award, as arguments on what the defendants have called “the liability stage” would be purely academic if (on the defendants’ case that PRC Law applies)  the plaintiff would get zero damages in an empty judgment at the “quantum stage”. 

14.3.  There was no explanation for this failure by the defendants to comply with the Civil Justice Reform which requires parties to advance all their arguments at the earliest stage, and to lay their cards face up, so that the issues may be disposed of fairly and in a cost-effective manner.

15.  Be that as it may, I return to the defendants’ argument that the hiving off of §35(5)  Re-Amd SOC meant that the CA and the CFA were only concerned with the “liability stage” and not the “quantum stage”, and so the judge was in error in applying the principle of issue estoppel.  It was no doubt in the face of this argument that Anthony Chan J directed the parties to state their case on the applicable law for assessment of damages.

16.  In my view, the question whether issue estoppel arises from the CA Judgment or the CFA Judgment is immaterial because:

(1)  the CFA had decided in refusing leave on Question (2)  on 3 June 2019 that Hong Kong law applies[20]; and

(2)  the judge was correct in finding that in any event, PRC law would not apply to the “quantum stage” for the reasons set out in §38 of the Decision, ie that the proper law of the implied promise (or quasi-contract or implied contract)  would be Hong Kong law. 

17.  As for (1), the CFA’s decision speaks for itself and is binding on this court.

18.  1.  As for (2), first, as the CFA affirmed in its Judgment, the Action on the Award is an independent cause of action, separate and distinct from the underlying agreement.  Although the relevant law of the underlying agreement is PRC law, the implied promise is a creature of the common law.  Clearly, the promise came into being by implication of law by the law of Hong Kong.

18.2.  Secondly, regarding discharge of the obligation imposed by that promise, the CFA has said that it is for the Hong Kong court to fashion an apt remedy chosen from the full range of remedies available to it[21].

18.3.  Accordingly, if one were to apply the usual conflicts principles to find the proper law of a contract (in a situation where a choice of law was not expressed and could not be inferred), the proper law of the promise here would be Hong Kong as the system of law with which the promise has the closest and most real connection[22], being the system of law by reference to which the contract was made, which imposed the obligation to be performed, and which decided on the appropriate remedy. 

18.4.  Thus, I agree with respect with the judge that Hong Kong law is not only the lex fori but would also be the proper law of the promise, and accordingly Hong Kong law would in any event be the lex causae for the assessment of damages, including heads of damage, causation and remoteness.

19.  The defendants’ appeal on the PRC Law Argument should therefore be dismissed.

The New Arbitration Argument   

20.  The defendants argue that the plaintiff has failed to mitigate its loss by not submitting to the arbitral tribunal, where it may obtain relief in damages, and that it is open to the plaintiff to do so because “where, as here, P claims that D1-D2 have acted in breach of their implied promise to honour the Award, this is necessarily a separate dispute[23] between the parties that is outside the mandate of the Tribunal”[24].  

21.  These arguments can be disposed of shortly. 

22.  1.  First, the defendants’ case is that under PRC law, failure to perform an arbitral award does not give rise to any right to damages [§§20 - 21 Statement in Response].  If that is so, it is difficult to see how it would be an act in mitigation of loss for the plaintiff to go to a tribunal which would not give it anything. 

22.2.  In any event, the CFA has already held that what the parties have agreed to refer to arbitration are “disputes arising from the performance of the Agreement” (Article 13), and that an action to enforce the implied promise to honour the Award is not such a dispute[25]. That is the end of the matter.

23.  Further, the defendants’ argument ignores the historical fact that they themselves had in June 2009 requested the arbitral tribunal to issue further directions on how the Award should be performed, and what relief (including damages)  could be granted, and in the CFA’s words, they were given “short shrift” in the tribunal’s Ruling.  As noted in the CA Judgment, the Ruling was not predicated on the fact that the application had been made by the defendants and not by the plaintiff[26].  There was no appeal from this finding and there is nothing to suggest that the answer from the tribunal would be different if the application had come from the plaintiff.  The judge described this argument as “disingenuous” and I respectfully agree.

Order

24.  For the reasons set out above, the defendants’ appeal should be dismissed.  The parties have agreed that costs should follow the event with certificate for three counsel.

Hon Chow JA:

25.  I agree with the judgment of Yuen JA.