NEWMARK CAPITAL CORPORATION LTD AND OTHERS v. COFFEE PARTNERS LTD AND ANOTHER

HCA 1271/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1271 OF 2006

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J U D G M E N T

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Background

1.  By a Stock Purchase Agreement dated 8^th December 2004 executed in Hong Kong, the 1^st and 2^nd Plaintiffs agreed to purchase 35,000 Series B Preferred shares in the capital of the 1^st Defendant (“CPL”) at US$14 per share. 

2.  By another Stock Purchase Agreement dated 18^th January 2005 executed in Hong Kong, the 3^rd Plaintiff agreed to purchase 5,000 Series B Preferred shares in the capital of CPL at US$14 per share.

3.  These two Stock Purchase Agreements will be referred to in this judgment as “the SPAs”. 

4.  CPL is a BVI company.  The 2nd Defendant is and was at the material time the sole director and founding member of CPL. 

5.  The Plaintiffs have all paid the consideration due under the SPAs. 

6.  By Writ dated 13^th June 2006, the Plaintiffs commenced this action against the Defendants.  Three causes of action are asserted:

(1)     Misrepresentation:-  It is alleged that by a number of pre-contractual representations made by the 2^nd Defendant (on behalf of CPL) to Mr. Ng Poh Meng Allan (“Mr. Ng”) on behalf of the Plaintiffs (Mr. Ng was the chairman of the 1^st Plaintiff), the Plaintiffs were induced to enter into the SPAs.  The representations were untrue and the Plaintiffs seek various remedies on the basis of misrepresentation including rescission and damages. 

(2)     Repudiatory breach:-  As an alternative cause of action it is alleged that upon receipt of the consideration paid by the Plaintiffs, CPL had failed to issue any Series B Preferred shares to the Plaintiffs and thereby committed repudiatory breach of the SPAs.  One of the particulars of non-issuance is that the resolutions purporting to issue the new shares were passed before the amendment to the Memorandum of Association (creating the new shares) was registered with the Companies Registry.  Under this head, the Plaintiffs claim a declaration that the SPAs had been terminated as a result of CPL’s repudiatory breach.  The Plaintiffs also sought damages.

(3)     Breach of settlement agreement:-  As another alternative cause of action the Plaintiffs allege that a settlement agreement (“the Settlement Agreement”) was concluded with CPL by exchange of correspondence in October 2005, and that in breach of the Settlement Agreement CPL failed to procure a nominee to purchase the Plaintiffs’ shares at US$15.12 per share.  The Plaintiffs claim damages under this cause of action.

7.  The Defendants have, by summons dated 29^th September 2006, applied to stay all further proceedings in this action in favour of arbitration on the basis of an arbitration agreement contained in the Articles of Association of CPL.

8.  By a summons dated 9^th October 2006 the Plaintiffs applied to strike out certain parts of the 1^st affidavit of the 2^nd Defendant (sworn in support of the Defendants’ summons for stay).  Both this summons and the Defendants’ summons for stay came before me for hearing at the same time.  At the hearing I struck out part of the 2^nd Defendant’s 1^st affidavit and indicated that I would give my reasons at the same time as rendering my decision on the Defendants’ stay summons.  I shall give those reasons in the last part of this Judgment, after I had dealt with the merits of the Defendants’ stay summons. 

The approach and the issues

9.  Under section 6(1) of the Arbitration Ordinance (Cap. 341), Article 8 of the UNCITRAL Model Law (“the Model Law”) applies to a matter that is the subject of a domestic arbitration agreement in the same way as it applies to a matter that is the subject of an international arbitration agreement.  Article 8 of the Model Law, in effect, provides for a mandatory stay of proceedings in favour of arbitration where the action is the subject of an arbitration agreement, unless the court finds that the agreement is null and void, inoperative or incapable of being performed.  In this case the existence of an arbitration agreement is in dispute; the parties are also in dispute as to whether the subject of the action fell within the ambit of the arbitration agreement (assuming that an arbitration agreement did exist). 

10.  On an application to stay proceedings in favour of arbitration and where the existence of a valid arbitration agreement is in issue, the test to be applied is whether the applicant for stay (in this case the Defendants) can show on a prima facie basis that there was a valid arbitration agreement: see PCCW Global Ltd. v Interactive Communications Services Ltd. CACV No.18 of 2006 (16^th November 2006) at paragraph 49-50 per Tang VP.  At paragraphs 60-61 Tang VP re-iterated the importance of the court not usurping the function of the arbitrators and that unless the point is clear, the matter should be stayed for arbitration. 

11.  Tang VP cited, in support of the “prima facie case” test, the judgment of Litton VP (as he then was) in Private Company `Triple V’ Inc. v Star (Universal) Co. Ltd. & another [1995] 3 HKC 129 at 132 B-C and the judgment of Burrell J in Pacific Crown Engineering Ltd. v Hyundai Engineering and Construction Co. Ltd. [2003] 3 HKC 659 at paragraph 12.  In the former case Litton VP cautioned against going into the matter more deeply than to take a prima facie view.  In the latter case (i.e. Pacific Crown), Burrell J said “The proper test is therefore is there a prima facie or plainly arguable case that the parties were bound by an arbitration clause.  The onus being on the defendant to demonstrate that there is”.

12.  In this application I propose to adopt the approach set out above.

13.  In this case the relevant arbitration agreement is said to be contained in Article 21.1. of CPL’s Articles of Association, which provides as follows:-

“Whenever any difference arises between the Company on the one hand and any of the members or their executors, administrators or assigns on the other hand, touching the true intent and construction or the incidence or consequences of these Articles or of the Act, touching anything done or executed, omitted or suffered in the pursuance of the Act or touching any breach or alleged breach or otherwise relating to the premises or to these Articles, or to any Act or Ordinance affecting the Company or to any of the affairs of the Company such difference shall, unless the parties agree to refer the same to a single arbitrators, be referred to two arbitrators one to be chosen by each of the parties to the difference and the arbitrators shall before entering on the reference appoint an umpire.”

14.  Even if Article 21.1 is binding on the Plaintiffs vis-à-vis CPL, there still remains the issue of whether it covers the claims made by the Plaintiffs against the Defendants in this action.  However, logically speaking, the first question to be decided is whether Article 21.1 is binding on the Plaintiffs.  I therefore deal with this issue first.

15.  The Defendants contend that CPL’s Articles of Association (including Article 21.1) were binding on the Plaintiffs as a matter of contract by two routes (one of them involving two sub-routes):

(1)     First it is said that as a matter of construction of the SPAs, the SPAs expressly incorporated the provisions of CPL’s Articles of Association as part of the contract between the Plaintiffs and CPL.  

(2)     Then it is said that the Articles of CPL are binding on the Plaintiffs because the Plaintiffs had become “members” of CPL.  There are two sub-arguments here.

(a)      The Plaintiffs are truly “members” of CPL under BVI law (being the law under which CPL was incorporated) and that under BVI law, CPL’s Articles of Association had the effect of a statutory contract between (among others) CPL and its members.

(b)     Even if the Plaintiffs had not become “members” of CPL under BVI law, the Plaintiffs are bound by Article 21.1 by reason of estoppel.

16.  I shall deal with these contentions in turn. 

Route one: Incorporation of CPL’s Articles of Association via clause 6.4 of the SPAs

17.  As to incorporation by the SPAs, I do not think that a prima facie case has been made out.  On the contrary, the position is quite clear that CPL’s Articles of Association had not been incorporated via the SPAs. 

18.  The clause in the SPAs relied on by the Defendants provided as follows (both SPAs contained the same clause and both clauses bore the same clause number 6.4):-

“6.4   Entire Agreement; Amendment

This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof.  Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that holders of a majority of the outstanding Shares (whether or not converted may waive or amend, on behalf of all Investors and other holders of Shares, any provisions hereof benefiting the Investors so long as the effect thereof will be that all such Investors and other holders of Shares will be treated equally.”

19.  The Defendants’ case is that on the 2^nd Defendant’s instructions, Mr. Anthony Correa (the then Chief Financial Officer of CPL) delivered copies of the Memorandum and Articles of Association of CPL to Mr. Ng when Mr. Correa delivered the SPAs (see the 2^nd Defendant’s 2^nd affidavit at paragraph 9).  The Memorandum and Articles of CPL were therefore part of “the other documents delivered pursuant hereto” within the meaning of clause 6.4 of the SPAs and hence formed part of the agreement between the parties by operation of that clause.

20.  The Plaintiffs countered this by an affidavit of Mr. Correa himself.  By his affidavit made on 24^th November 2006 (in respect of which I granted leave to the Plaintiffs to file and serve without objection from the Defendants), Mr. Correa said that in or about May 2005 Mr. Ng asked him (i.e. Mr. Correa) to provide him with a copy of the Memorandum and Articles of Association of CPL, that Mr. Correa gave Mr. Ng a copy of the Memorandum and Articles in his possession and that he had no recollection of providing the Memorandum and Articles to Mr. Ng prior to May 1995.  Mr. Correa went on to say that he had no recollection of any discussion with the 2^nd Defendant about providing these documents to Mr. Ng prior to May 2005. 

21.  There is a conflict of testimony in this regard.  I am prepared to proceed, for present purposes, on the basis that there is a prima facie case that Mr. Correa had indeed delivered copies of the Memorandum and Articles of Association of CPL to Mr. Ng when he delivered the SPAs.  The 2^nd Defendant’s affidavit in fact did not spell out precisely when the SPAs were delivered (there were two SPAs, each signed on a different date).  I am prepared to proceed, for present purposes, that there is a prima facie case that the Memorandum and Articles had been delivered at some time between December 2004 and January 2005 (this being the timeframe within which the two SPAs were signed).

22.  The difficulty with the Defendants’ argument is that even assuming that the Articles of CPL were delivered within the above timeframe, there is nothing to suggest that they had been delivered “pursuant to” the SPAs (“pursuant hereto” in clause 6.4 must mean “pursuant to the SPAs”).

23.  The common sense (and common parlance) meaning of the phrase “pursuant to” is “in accordance with” or “as required by”.  Within the SPAs, there were numerous provisions requiring different documents to be provided at different points of time.  There is, however, nothing in the SPAs which required that copies of the Articles of Association should be delivered by CPL to the Plaintiffs.  The fact that a set of the Articles of Association happened as a matter of fact to have been delivered at the time of delivering the SPAs is neither here nor there.  It does not render the Articles a set of documents delivered “pursuant to” the SPAs.

24.  Mr. Bartlett submitted that the Articles of CPL were a matter of public record in the BVI.  That may or may not be so, but even if that were correct, that does not, as a matter of law, have the effect of incorporating the Articles (especially Article 21.1) under clause 6.4 of the SPAs.

25.  It follows that I reject the Defendants’ submissions based on incorporation of CPL’s Articles via clause 6.4 of the SPAs.  That disposes of the first route.  The argument is short and simple and I have no difficulty in summarily dismissing it, mindful of the fact that only a prima facie case is needed.  The Defendants had failed to meet that hurdle.

Route two:  The Articles had the effect of a statutory contract between CPL and the Plaintiffs

26.  I now turn to the second route.  The basic point of this route is that the Plaintiffs were members of CPL under BVI law and under BVI law, the Articles of CPL had the effect of a statutory contract between CPL and its members.  As I said above, there were two sub-routes here.  One is that the Plaintiffs were truly “members” of CPL under BVI law; this hinges on BVI law as to the meaning of “members”, the other is that the Plaintiffs are in any event estoppel from disputing the application of Article 21.1.  This hinges on BVI law on estoppel.

27.  I shall deal with these two sub-routes separately.

Route two sub-route one: The Plaintiffs were “members” of CPL under BVI law and were therefore bound by its Articles

28.  The effect of the Articles of Association of a BVI company is similar to that of a company incorporated under Hong Kong law.  Section 13(3) of the International Business Companies Act of the BVI provides as follows:-

“The articles, when registered, bind the company and its members from time to time to the same extent as if each member had subscribed his name and affixed his seal thereto and as if there were contained in the articles, on the part of himself, his heirs, executors and administrators, a covenant to observe the provisions of the articles, subject to this Act.”

29.  The question, then, is whether the Plaintiffs were “members” of CPL.  If they were, then they would be bound by the statutory contract constituted under section 13(3).

30.  Under section 2(1) of the BVI International Business Companies Act, “member” means a person who holds shares in a company.  In this case there is no dispute that no share certificate has been issued to the Plaintiffs.  But it is common ground between the parties’ BVI law experts (Mr. Fay for the Plaintiffs; Mr. Forte for the Defendants – I add here that no challenge has been made to the expertise of the experts by both sides) that under BVI law, failure to issue a share certificate is not determinative of the question of whether any shares of a company had been issued by a company to a person.  Therefore one can be a member of a company (i.e. one who “holds shares” in a company) without a share certificate having been issued to him. 

31.  Unlike the position under Hong Kong law (where membership in a company depends on the entry of a person’s name on the company’s register of members (section 28(2) of the Companies Ordinance (cap.32)), under BVI law the share register of a company is only prima facie evidence of any matters directed or authorized by the International Business Companies Act to be contained therein (section 28(5) of the International Business Companies Act).  Therefore the non-appearance of a person’s name on the share register of a company is not conclusive of the question of membership either. 

32.  What, then, would be the approach under BVI law in deciding whether a person is a member of a company (i) in the absence of a share certificate and (ii) in the absence of that person’s name in the share register?  Mr. Forte (for the Defendants) expresses the opinion that under BVI law the question is one of evidence and proof as to whether shares had been issued to that person.  Mr. Fay did not really disagree with this approach, but he takes a fundamental objection as to the validity of any purported act of allotment of Series B Preferred shares on the facts of this case.  As I understand him (and put shortly), there could be no valid act of issuance of shares (whatever the purported act of issuance may be) if there were no shares in existence that could be “issued” in the first place.

33.  To understand the significance of this point, it is necessary to set out the following points and sequence of events:-

(1)     CPL was incorporated on 28^th April 1997.  Upon incorporation, its Memorandum of Association provided that its authorized share capital would be US$5,000,000 consisting of one class and series of shares divided into 5,000,000 shares of US$1 par value with one vote for each share (clauses 6.2 and 6.3). There were no Series A or Series B Preferred shares to start with.

(2)     Section 16(1) of the BVI International Business Companies Act provides that a company incorporated under that Act could amend its Memorandum of Association by a resolution of members or, if permitted by its Memorandum or Articles or by the Act, by a resolution of directors.  Such permission was to be found in clause 9 of CPL’s Memorandum of Association, which provided that CPL could amend its Memorandum or Articles of Association by a resolution of members or resolution of directors. 

(3)     By a sole director’s resolution dated 30^th May 1997, CPL purported to amend clauses 6.2 to 6.4 of its Memorandum of Association by increasing the authorized share capital to US$10,000,000 and by creating 5,000,000 preference shares of US$1 each with one vote for each share.  This resolution was registered with the BVI Registrar of Companies on 7^th September 1998. 

(4)     By a sole director’s resolution dated 28^th December 1999, CPL purported to amend clauses 6.2 to 6.4 its Memorandum of Association.  Under this purported amendment, its authorized share capital was still US$10,000,000, but 2,500,000 Series A Preference shares (of US$1 each share and one vote each share) and 2,500,000 Series B Preference shares (of US$1 each and one vote each share) were created in place of the 5,000,000 preferences shares.

(5)     By another sole director’s resolution dated 8^th August 2004, CPL purported to amend clauses 6.2 to 6.4 of its Memorandum of Association to provide that there would be 100,000 Series A Preference shares of US$1 each, 900,000 Series B Preference shares of US$1 each and 4,000,000 Series C Preference shares of US$ each.

(6)     By a sole director’s resolution dated 27^th November 2004 (note: this date is before the date of the 1^st and 2^nd Plaintiffs’ SPA), CPL resolved as follows:-

“I, the undersigned [this being a reference to the 2^nd Defendant, the sole director of CPL], being the Sole Director of the Company. hereby consent to the adoption of the following resolution with effect from the 27^th day of November 2004:- 

1.   Issuance of shares

It was resolved, noted, and recorded that the Company, upon receipt of funds, issue Series B Preferred Stock to the following shareholder:

[there then followed details of the 1^st and 2^nd Plaintiffs and the shares to be purchased by them and the purchase price]”

(7)     By another sole director’s resolution dated 18^th January 2005 (note: this is the same date as the 3^rd Plaintiff’s SPA), CPL resolved as follows:- 

“I, the undersigned [this being a reference to the 2^nd Defendant, the sole director of CPL], being the Sole Director of the Company. hereby consent to the adoption of the following resolution with effect from the 18^th day of January 2005:- 

2.   Issuance of shares

It was resolved, noted, and recorded that the Company, upon receipt of funds, issue Series B Preferred Stock to the following shareholder:

[there then followed details of the 3^rd Plaintiff and the shares to be purchased by her and the purchase price]”

(8)     On 20^th July 2005, CPL’s sole director’s resolutions dated 28^th December 1999 and 8^th August 2004 (both of which, as seen above, purported to amend CPL’s Memorandum of Association and provided for the existence, and number, of Series B Preferred shares) were filed with the BVI Registrar of Companies. 

34.  Mr. Fay, the Plaintiffs’ BVI law expert, had given evidence that under BVI law (section 16(ii) of the International Business Companies Act), a company that amended its Memorandum or Articles of Association must submit to the registrar of Companies an extract of the resolution effecting the amendment (certified as a true copy) and that (under section 16(iii) of the International Business Companies Act) an amendment to a company’s Memorandum of Association was only effective from the time when the amendment was registered by the Registrar.  These provisions were not challenged by the Defendants.

35.  The point taken by Mr. Fay is this: CPL’s resolutions (dated 28^th December 1999 and 8^th August 2004) providing for the existence and number of Series B Preferred shares were not registered until 20^th July 2005.  Thus the authorized share capital of CPL did not comprise any series B Preference shares until 20^th July 2005.  That being so, CPL could not have allotted or issued any Series B Preferred shares prior to 20^th July 2005 because such shares did not exist, and could not have existed, prior to 20^th July 2005.  (There is actually another point here.  The 28^th December 1999 and 8^th August 2004 resolutions were actually inconsistent in that they purported to create a different number of series of Preference Shares.  Yet they were registered under one certificate.  Mr Fay thought this was unusual but thought it likely that the later resolution in time would prevail, i.e. the 8^th August 2004 one.  I am content to proceed on this basis).  It was also Mr. Fay’s view that any purported allotment or issuance of such shares by CPL prior to this date would be void and any money paid for such shares would be recoverable as money paid on a consideration that has wholly failed. 

36.  Mr. Fay acknowledged that he could not cite any BVI authority for his proposition but in my view the argument presented by Mr. Fay sounded entirely compelling and logical to me based on the source material which he cited.  One could not allot or issue shares to a person unless those shares are in existence and form part of the authorized share capital at the time of the purported allotment and issuance.  In this case the only conceivable acts of allotment/issuance are the sole director’s resolution dated 27^th November 2004 and 18^th January 2005 and they both pre-dated the registration of the amendment resolutions.

37.  The relevant evidence of Mr. Fay is contained in paragraphs 14 to 22 and 25 to 30 of his affidavit sworn on 13^th November 2006.  Mr. Forte (the Defendants’ BVI law expert) swore his 3^rd affidavit on 21^st November 2006 to respond to Mr. Fay’s affidavit.  Paragraphs 6 to 33 purported to address Mr Fay’s point.

38.  First Mr. Forte made the point that the arbitration clause (Article 21 of the Articles) had been in existence in CPL’s Articles of Association as from the incorporation of CPL.  I do not think this is disputed.  But I do not think that this meets Mr. Fay’s point. 

39.  Then it is said that under the SPAs there was an obligation to procure another filing to “account for” the new Series B shares.  Clauses 1.1(a) and 2.4 are referred to.  Insofar as it is intended to suggest that the two clauses cited by Mr. Forte provided for an obligation to procure an additional filing to amend the Memorandum in order to create the new Series B shares, I do not think that is correct.  Clause 1.1(a) of the SPAs talked about a filing in the BVI of the amended Articles (not the Memorandum) to give effect to the issuance and sale (not creation) of the shares.  Clause 2.4 did not provide for any obligation to make any filing to create the new shares either. 

40.  But even if, assuming for the sake of argument, that those two clauses did have the effect of providing for an obligation by CPL (or the Defendants) to procure a filing of the amendments to the Memorandum creating the new Series B Preferred shares, that still does not answer the question “What if the purported act of issuance of Series B Preferred shares took place before the registration of the resolutions (amending the Memorandum to provide for the existence of Series B Preferred shares in the first place)?”  These two clauses, therefore, do not assist.

41.  Then Mr. Forte criticized Mr. Fay’s argument as being based on the premise that the SPA was an allotment in itself (see paragraph 13 of Mr. Forte’s 3^rd affidavit).  Mr. Forte then pointed out that the SPA was not, and has not been held put to be, an allotment.  But that is a mischaracterization of Mr. Fay’s argument (as I understand it).  Mr. Fay’s reasoning did not treat any of the SPAs as an allotment.  The purported acts of issuance/allotment which were addressed by Mr Fay (see paragraph 33(a)(ii) of his affidavit) were CPL’s sole director’s resolutions dated 27^th November 2004 and 18^th January 2005.

42.  Mr. Forte then made the point that under BVI law, there is no objection in principle to a company entering into an agreement to issue shares.  That may be so, but this is a separate question from whether shares could actually be issued (as opposed to “agreed to be issued”) at a time when they had not yet been created.  The Plaintiffs are not contending that any agreement to create and issue new shares (at a time when the shares did not exist) would be void.

43.  Mr. Forte then went into details of the parties’ dealings and correspondence with a view to showing that they had all along conducted themselves on the basis that the Plaintiffs were shareholders.  Arguments of this nature may be relevant in the context of estoppel (see below) but in the context of a point of law, namely whether it was possible for shares to be validly issued under a purported act of allotment prior to the creation of those shares, I fail to see how the parties’ acts or dealings could be relevant. 

44.  Mr. Forte then expressed his view that even if the Plaintiffs could not be considered shareholders or members unless the resolutions were registered, still the Plaintiffs became shareholders of CPL no later than 20^th July 2005 (date of registration of the resolutions amending the Memorandum) (see paragraph 24 of his 3^rd affidavit).  In my view, this is the only place in Mr. Forte’s 3^rd affidavit where he attempted to meet the real point put by Mr. Fay.

45.  But problem with this part of Mr. Forte’s evidence is that whilst he stated his conclusion (i.e. that “the Plaintiffs became shareholders no later than July 20, 2005”), he did not set out the source materials, basis or process of reasoning leading to this conclusion.  I appreciate that very often there may be no particular source materials on the point (such as a decided case, or a statute, or a textbook), but at least I would expect a statement of the line of reasoning (say, from first principles) from the expert.  In the absence of such a statement of his process of reasoning it is impossible for me to assess the inherent soundness of Mr. Forte’s views.

46.  I had tried to approach the matter by considering whether there were some analogous common law or English/Hong Kong law principles which may at least raise a prima facie case against Mr Fay’s reasoning.  I could not find any.  Mr Bartlett had, in submissions, argued that CPL’s resolutions dated 27^th November 2004 and 18^th January 2005 did not purport to issue shares forthwith; they were resolutions to issue shares (i) upon receipt of funds and (ii) also implicitly upon acquiring capacity to do so, i.e. upon the shares being validly created, and that upon these conditions being fulfilled the shares were to be regarded as being issued there and then, without further ado.  As will be seen below (see paragraph 53) I have no problem with the prima facie soundness of (i).  But I am not satisfied that there is a prima facie case on (ii).  I have not been shown any authority or principle that, in the context of acts which a company had no capacity to start with, it is open to a company to so resolve.  It may well be open to CPL, upon acquiring capacity to issue these shares (i.e. after their valid creation), to make a fresh resolution to issue shares to the Plaintiffs; but it is not Mr Bartlett’s submission that CPL needed to make a fresh resolution to issue shares upon acquiring capacity (in fact there simply was no such fresh resolution in existence).  Mr Bartlett’s submission is that no further resolution was required.

47.  I do not think that a court, even for the purpose of assessing whether there was a prima facie case, is obliged to take an expert’s statement of his conclusions at face value.  The task of a foreign law expert is to provide assistance on matters of foreign law.  In my view, even for the purpose of demonstrating a prima facie case, a foreign law expert is obliged to set out not only his conclusion, but also the source materials, legal principles, and process of reasoning leading to that conclusion.  If the process of reasoning of one expert is, on its face, sound and supported by the materials cited, then it would be capable of raising a prima facie case.  The resolution of whether this expert’s view should be preferred over that of another expert can then legitimately be said to be a conflict that should be left to the arbitrator.

48.  In this case, however, what I have is, on the one hand, the views of Mr. Fay (that the shares were incapable of being allotted at the time of purported allotment because they did not exist) supported by a prima facie sound process of reasoning and, on the other hand, the conclusion of Mr. Forte unaccompanied by any statement of his process of reasoning.  In this state of the expert evidence I cannot be satisfied that the Defendants have satisfied the burden (and it is accepted by Mr Bartlett that the burden is on the Defendants) of showing a prima facie case that the Article of CPL (specifically, Article 21.1) bound the Plaintiffs on the basis that the Plaintiffs were members under BVI law. 

49.  I do not think that in adopting this approach I am going further than taking a prima facie view or that I am usurping the role of the arbitrator (or a BVI law expert).  My view is that there is no proper expert evidence to even begin to raise a prima facie case in the first place for the matter to go to an arbitrator.  Under ordinary conflict of laws principles governing a Hong Kong court’s approach to foreign law evidence, a court is not bound to accept the evidence of a foreign law expert “if he never applied his mind to the real point of law”, or “if the matters stated by the expert did not support his conclusion according to any stated or implied process of reasoning” (Dicey and Morris and Collins:  The Conflict of Laws (14^th ed)§9-016). 

50.  This does not only apply at the stage of trial.  This applies also to an interlocutory stage of proceedings where a party is obliged, by proper and admissible evidence, to show a prima facie case.  In the context of an appeal against an order granting summary judgment (where the threshold was whether a triable issue has been raised), it was said that:-

“In studying the validity of any opinion based on foreign law, the Court does not simply accept any stated conclusion as being correct, even where there may be no legal opinion contradicting it.  The Court is entitled to (and indeed must) look at the basis of the legal reasoning as well as the terms of the State Council Notice in determining what weight, if any, should be attached to the Opinion.”

(see Full Wisdom Holdings Ltd. & others v Traffic Stream Infrastructure Co. Ltd. & others [2004] 2 HKLRD 1016 at 1025, paragraph 23 per Le Pichon JA, cited in Johnston: Conflict of Laws in Hong Kong at § 2.041)

In terms of approach to expert evidence, I could see no difference between a case where the threshold was “triable issue” and a case where the threshold was “prima facie case”. 

51.  For the same reason I reject Mr. Forte’s suggestion (at paragraph 85 of his 1^st affidavit) that it was likely that the BVI courts would interpret the term “member” as including someone with a beneficial interest.  No process of reasoning had been set out.  In any event, if the shares were not in existence as of the time of purported time of allotment, there was nothing to which any “beneficial interest” can attach. 

52.  It has been contended before me that if I were to decide this question summarily, it would (or might) have the effect of determining one of the three causes of action pleaded by the Plaintiffs.  That may or may not be the case, and the parties are at liberty to debate at trial whether my ruling on this point had the effect of precluding the Defendants from defending the second cause of action pleaded by the Plaintiffs. I express no view on this.  But my task now is to form a view based on the evidence as it is presented before me for the purpose of this application, and if the evidence presented before me does not meet the requisite threshold, the potential effect of my ruling at trial (and I stress that the impact of my ruling is a matter for the trial judge) is neither here nor there.

53.  As a matter of completeness (and in case the matter were to go further), I should deal with another point taken by the Plaintiffs.  It is contended by Mr. Scott SC that on the wording of both the 27^th November 2004 and 18^th January 2005 resolutions of CPL, they did not actually allot or issue shares, but simply recited that CPL would issue the Series B Preferred shares upon payment being made.  The resolutions contemplated that something further was required of CPL to actually allot and issue the shares once payment had been made, and CPL did not do anything to allot or issue shares once the funds had been paid.  On the other hand the Defendants argued that by the resolutions, CPL resolved to issue shares upon receipt of funds, not that CPL would then further resolve to issue.  My view is that, for present purposes, the Defendants had made out a prima facie case on their interpretation of the resolutions.  That, however, is academic in view of my earlier ruling on CPL’s ability to issue/allot shares at a time when the shares did not exist.

Route two sub-route two: Estoppel

54.  The argument on “members”, however, has a second limb.  It is said that the Plaintiffs are estopped under BVI law from disputing the application of Article 21.1.  Two forms of estoppel are relied on by Mr. Forte: promissory estoppel and estoppel by convention.  Mr. Forte had cited numerous common law authorities to elucidate the scope of these two doctrines under BVI law.  All (save one) of these authorities are familiar English authorities on the subject.  The one exception is the case of Gigi Osco-Bingemann v The Island Company Ltd.(High Court of Justice & Court of Appeal, Anguilla, 2005).  The principles laid down in that case are in line with the English authorities cited by Mr. Forte. 

55.  The effect of the authorities cited by Mr. Forte can be briefly summarized as follows:-

(1)     Promissory estoppel:-  This would apply if, in the course of a legal relationship giving rise to rights and duties between the parties, a promise or representation is made by one party that he will not enforce against the other his strict rights arising out of that relationship coupled with an intention that the latter would rely on that representation.  In such a case, the “representor” (or “promisor”) will be estopped from going back on his promise if the “representee/promisee” had acted in reliance on the representation/promise and that it would be inequitable for the first party to go back on his promise. 

(2)     Estoppel by convention:-  The ingredients of this doctrine are as follows:-

(a)     The parties to a transaction should act on an assumed state of facts or of law as a basis of their relationship.

(b)     The assumption is either one which both parties shared or one which is made by one party and acquiesced in by the other.

(c)    The agreed assumption need not be expressed and may be inferred from conduct, and even silence.

(d)     It must be unconscionable for one party to be permitted to deny that which knowingly or unknowingly he has allowed or encouraged another to assume to his detriment. 

56.  Whilst the contents of BVI law on estoppel is a matter for expert evidence (as it turned out, the content of that law is not different from English and Hong Kong law), arguments as to how the facts of a particular case are to be interpreted are not a matter for the experts.  Therefore whilst Mr. Forte’s 1^st and 3^rd affidavits went on to put forward extensive arguments as to why, applying the principles of estoppel to the facts, the Plaintiffs were estopped from contending that they were not bound by Article 21.1, I had treated those parts of Mr. Forte’s evidence as really being in the nature of submissions rather than in the nature of “true” expert evidence of foreign law (in fact there are numerous examples of the experts straying into submissions and from time to time Mr Forte actually said “I submit” in his expert affidavit see e.g. paragraphs 58 and 62 of his 1^st affidavit). 

57.  In support of the Defendants’ plea of estoppel, Mr. Bartlett and Mr. Forte relied on aspects of the parties’ conduct and correspondence which indicated that at all material times prior to the commencement of this action, the Plaintiffs had engaged in correspondence with the Plaintiffs on the basis that they were shareholders of CPL, and that likewise CPL had engaged in correspondence with the Plaintiffs on the basis that the Plaintiffs were shareholders of CPL. 

58.  In his oral submissions Mr. Bartlett took me to a number of letters that passed between the parties.  I do not propose to set them out in detail.  Suffice it to say that they showed that from time to time the Plaintiffs had written to CPL:

(1)     referring to themselves as ”substantial shareholder” of CPL and their “diminishing shareholder value” (e-mail dated 20^th April 2005) and “substantial shareholders” of CPL (e-mail dated 30^th May 2005 from Mr. Ng’s PA);

(2)     asking for corporate information on the basis that they were the “second largest shareholders” in CPL (e-mail dated 3^rd June 2005); and

(3)     alleging breaches of the Articles of Association of CPL and asserting the Plaintiffs’ status as shareholders (letter from the 1^st Plaintiff dated 28^th June 2005).

59.  The documents also show that CPL had written to the Plaintiffs:

(1)     indicating that CPL would be taking legal advice to determine the Plaintiffs’ rights as shareholders in CPL to obtain certain information (e-mail from CPL/the 2^nd Defendant dated 31^st May 2005);

(2)     indicating CPL’s position of “non-denial” as to the Plaintiffs’ ownership of Series B Preferred shares in CPL (letter from CPL to Mr. Ng dated 29^th July 2005); and

(3)     indicating that the Defendants would provide some corporate information about CPL to the Plaintiffs (on the basis of the Plaintiffs’ assertion that they were shareholders (see 2^nd Defendant’s e-mail dated 19^th June 2005)).

60.  The high point of Mr. Bartlett’s submissions is the fact that the Plaintiffs had entered into settlement correspondence with CPL and had, on their own case as pleaded as the third cause of action in this action (though disputed by the Defendants), concluded the Settlement Agreement with CPL whereby CPL would buy-back the Plaintiffs’ shares in CPL.

61.  Mr. Ng had tried to explain the correspondence and conduct of the Plaintiffs by suggesting that all those took place at a time before the Plaintiffs had received BVI legal advice that the purported allotment of shares to the Plaintiffs was void.  But even assuming that to be true, that only means that at the time of the correspondence the Plaintiffs were labouring under a mistake or misapprehension as to their legal status.  That does not by itself defeat the estoppel argument.  Indeed most, if not all, estoppel arguments are founded upon a mistake as to the true legal/factual position by one party or another.  On the basis of the evidence, therefore, I am prepared to proceed on the basis that there is a prima facie case that the Plaintiffs had represented to the Defendants that they regarded themselves as shareholders in CPL, and that the parties had at the material time conducted themselves (subject to any discussion below as to how they had so acted) on the basis of a mistaken assumption that the Plaintiffs were shareholders of CPL.

62.  But that is only part of the story for any case based on estoppel.  Something more is needed.  For promissory estoppel, there has to be detrimental reliance by the representee, rendering it unjust for the representor to go back on his representation.  For estoppel by convention, the conduct of the parties had to be such that it would be unconscionable to permit one party to renege on the shared assumption on which the parties had acted.  In terms of verbal formulation of the doctrines, therefore, both doctrines required an element of injustice, unfairness or unconscionability in allowing one party to renege.  The difference between the two is that for promissory estoppel, there is an express requirement of detrimental reliance.  But in my view that is only a matter of words.  Even for estoppel by convention (where conventional textbook/case law formulations do not always contain such a requirement), the requirement of unconscionability has already “built in” within it the notion that a party should not just have acted on the basis of the shared assumption, but acted on it to change his position for the worse. 

63.  This is because if a party had not changed his position for the worse (or relied on the shared assumption detrimentally), it can hardly be seen how it would be unfair, unjust or unconscionable to allow the other party to insist on the strict legal position.  Whether it is unjust or unconscionable to allow a party to renege from a shared assumption involves making (even for the purpose of determining whether a prima facie case has been made out) a value judgment.  Such a value judgment must be based on examining and comparing (among other things) (i) the nature of the acts of reliance (or conduct which the parties engaged in pursuant to the shared assumption) and (ii) and the way in which a party is seeking (and the consequences of allowing him) to renege.  There are ways and ways in which parties can act on the basis of a shared assumption; and there are ways and ways in which a party can seek to renege.  Unconscionability (or injustice) does not automatically flow from (i) any form of acting on a shared assumption and (ii) one party reneging from the assumption.  Otherwise the law will simply be formulated as forbidding a party from reneging after parties had acted on a shared assumption and no more.  That however has never been stated to be the law.

64.  In this case, the acts relied on by the Defendants as giving rise to the estoppel consists mostly in the writing of letters and sending of e-mails by the Defendants to the Plaintiff on the basis that the Plaintiffs were shareholders.  There was also some reference to CPL taking legal advice on the Plaintiffs’ entitlement as shareholder to certain information.  And there was a reference in the correspondence to the provision of certain corporate data and information to the Plaintiffs.  In my view such acts and conduct was not sufficient to raise a prima facie case that it would be unconscionable to allow the Plaintiffs to renege from the shared assumption that the Plaintiffs were shareholders in the context of the applicability of Article 21.1.

65.  First, in this case the effect of holding the Defendants to the strict legal position is that the matter would be resolved by litigation, not arbitration.  In terms of “justness” there is, as Mr. Scott SC for the Plaintiffs put it, no predisposition either way.  It is not as if, by holding the Defendants to the strict legal position, the Defendants will be barred from making a claim, or from defending a claim, or from running a substantive point that they would otherwise be able to run.  In other words I cannot see any substantive “injustice” in requiring the Defendants to litigate in Hong Kong. 

66.  By way of contrast, in Amalgamated Property Co. v TexasBank [1982] 1 QB 84 (an oft-cited case on estoppel by convention, and in fact a case cited by Mr. Forte), the effect of holding the defendant bank to the strict legal position would be that it could not recover on the guarantee given by the plaintiff company because that guarantee, on its proper construction, did not cover a loan given by Portsoken (the bank’s subsidiary) (Lord Denning MR in fact also held that the guarantee, on its proper construction, did cover the loan in question but in his discussion on estoppel by convention he was proceeding on the alternative basis that on its construction the guarantee did not cover the said loan: see 119F of the judgment).  The injustice there is plain and easy to see.  The difference is between “claim” and “no claim”.  But that is not the case here. 

67.  It may be said that whilst there is no predisposition either way (in terms of substantive fairness or justice) between litigation and arbitration, it is still unfair or unjust to require a party to litigate when he has been induced by the other side to act on the basis that a dispute would be resolved by arbitration instead of litigation.

68.  The problem with this argument on the facts of this case is that there is no evidence to show that the Defendants had been so induced, and had so acted.  This brings one back to my discussion at paragraph 63 above as to the need to analyze (i) the specific act of reliance by the Defendants and (ii) the specific point which the Plaintiffs are seeking to “renege” from.  It is not enough to just establish, in a general way, that the Defendants had acted on the basis that the Plaintiffs were members.  We are here talking about a dispute resolution mechanism.  The strict entitlement that the Plaintiffs are insisting upon is that Article 21.1 does not apply and hence they are free to litigate here.  Viewed in this light, the acts of reliance (or shared assumption between the parties) had to be referable to the specific issue of choice between two forms of dispute resolution mechanisms.  I can at least begin to see an estoppel argument if, for example, the Plaintiffs had led the Defendants to believe that the Plaintiffs were content to arbitrate because Article 21.1 applied to them, and the Defendants then incurred time and costs in preparing for arbitration instead of litigation.  But, as I said at the beginning of this paragraph, there is no evidence of such acts.  There is, for want of a better way of describing it, a “mismatch” between the Defendants acts of reliance (such as writing letters and e-mails to the Plaintiffs on the basis that they were members, taking BVI law advice on a point unrelated to dispute resolution mechanism, providing some corporate information to the Plaintiffs) and the specific point which the Plaintiffs now insist on (namely that Article 21.1 does not apply and that they were not bound to arbitrate).

69.  In oral submissions, Mr. Bartlett submitted that the Defendants suffered detriment by not sorting out the filing of the resolutions at an earlier stage because they were under the impression that the Plaintiffs were treating themselves as shareholders.  This came from Mr. Bartlett as an advocate but there is no evidence from the Defendants that this was what caused the delay in filing at the material time.  At paragraph 11 of the 2^nd Defendant’s 2^nd affidavit he described the reason why CPL had not submitted a number of documents for filing.  There he did not say that the delay in filing was induced by the impression that the plaintiffs were already regarding themselves as members.

70.  I now deal specifically with what I have called the “high point” of Mr. Bartlett’s submissions namely that the Plaintiffs were suing, in one of their three causes of action, on the Settlement Agreement which provided for the re-purchase of their shares by CPL.  The flaw in this argument lies in the fact that this was only the way the Plaintiffs saw and perceived the matter.  One thing that the Defendants had not said (and could not have said, in view of their opposition to the Plaintiffs’ claim based on the Settlement Agreement) is that they relied on the Plaintiffs’ status as “members” and concluded a binding settlement agreement with them or perhaps even paid them on that basis.  It is therefore not clear where the detrimental reliance, or the injustice, could lie. 

71.  When I pressed Mr. Bartlett on this point during the course of oral argument, he submitted that the Defendants entered into settlement negotiations on a re-purchase of shares and thereby exposed themselves to a claim by the Plaintiffs on a settlement agreement (pleaded on the footing that the Plaintiffs were shareholders). 

72.  I am not convinced, even on a prima facie basis, that engaging in settlement negotiations per se (which on the Defendants’ own view and perception did not result in a binding agreement) could be any kind of detrimental reliance.  On the Defendants’ case, necessarily, the Plaintiffs are acting wrongly in interpreting the effect of the correspondence as having given rise to a binding agreement.  I do not think that the writing of letters which (on the Defendants’ case) provided an opportunity or a “platform” for the Plaintiffs to make a wrongful claim against them can be regarded as any form of detriment.  That was far too tenuous.

73.  The upshot of the above discussion is that the Defendants had failed to make out a prima facie case of estoppel by convention to enable them to rely on the arbitration clause in CPL’s Articles of Association.

74.  The Defendants having failed in all the suggested routes of demonstrating the prima facie existence of an arbitration agreement, their summons for stay must be dismissed with costs. 

Whether claims covered by Article 21.1 of the Articles

75.  Assuming that I am wrong in my conclusions above (and in case this matter goes further) I think I should express my views on the scope of Article 21.1.  This is because even if the Articles were binding on the Plaintiffs (whether by incorporation through the SPAs, or because the Plaintiffs were “members” by reason of BVI law, or by reason of the doctrine of estoppel), the Defendants still had to raise a prima facie case that the disputes in question fell within the scope of the arbitration clause.  In my view they fail at this hurdle also.

76.  The clause applies to disputes between CPL and its members.  But that does not mean that any kind of dispute between CPL and a member can be sent to arbitration. It has been said that arbitration clauses should be given a broad construction.  Mr. Bartlett has also submitted that the clause in question is a wide one.  I acknowledge and bear in mind all these points.  But the scope of the arbitration clause still has to be ascertained by reference to applicable principles of law and construction.

77.  I deal with the claims in turn.

78.  The first cause of action is a claim in misrepresentation.  It does not concern any of the matters mentioned in the arbitration clause.  In particular I do not think that the claim is one “touching” or “relating” “to the affairs of CPL” (in paragraph 32 of Mr. Bartlett’s skeleton arguments he stressed the words “touching” and “affairs of the Company” but I do not think that, properly read, the word “touching” applies to the phrase “affairs of the Company”; the phrase “affairs of the Company” is preceded by the word “to” and the more natural word to apply to the entire phrase “to the affairs of the Company” must be “relating” and not “touching; be that as it may I shall deal with the word “touching” as well).  In no way can the issue of whether certain representations were made by the Defendants to the Plaintiffs prior to their even signing the SPAs (and becoming members) be regarded as “affairs of [CPL]”. 

79.  It may be said that the alleged acts of making misrepresentations formed part of the “affairs” of the Company.  Further, some of the alleged misrepresentations related to the way the company would be run and managed, and that in demonstrating the “falsity” of the representations one had to look at the way in which the “affairs” of CPL were conducted and hence the claim falls within this part of the clause.  But I do not think that the phrase “touching… relating to the affairs of [CPL]” meant these sorts of dispute.  I accept Mr. Scott SC’s submission that the phrase “affairs of the Company” in clause 21.1.is intended to cover a complaint about the administration of CPL such as allegations of unfair prejudicial conduct, fraud on minority and similar claims.  Otherwise, the clause will cover any or all disputes with CPL, because all disputes with CPL must necessarily arise out of things done (or not done) by CPL and disputes about any such acts or omissions by CPL would be a dispute on the “affairs” of CPL.  Article 21.1 is not and cannot be as broad as that.  If it is as broad as that, then much of Article 21.1 would be otiose.  It would only need to say “all or any disputes with CPL whatsoever”.  That, however, is not what Article 21.1 says.

80.  The Defendants’ construction also runs into another difficulty, which is that the statutory contract constituted by section 13(3) could only apply to disputes between CPL and a member in his capacity as a member. 

81.  Support for this proposition can be found in Russell on Arbitration (22^nd edition)§2-062.  London Sack & Bag Co. Ltd. v Dixon & Lugton Ltd.[1943] 2 All ER 763 and Beattie v Beattie[1938] Ch 708 were cited in footnote 26. 

(1)     In London Sack, Scott LJ said (at 765F-H):-

“It may well be, even as between ordinary members of a company who are also in the nominal ways shareholders, that section 20 [note: this is the English equivalent of section 13(3) of the International Business Companies Act] adjusts their legal relations inter se in the same way as a contract in a single document would if signed by all; and yet the statutory result may not be to constitute a contract between them about rights of action created entirely outside the company relationship, such as trading transactions between members.  I notice that Halsbury, Laws of England, Hailsham edition, Vol.5, p.142, para 256, says this:

While the articles regulate the rights of the members, inter se, they do not it would seem constitute a contract between the members, inter se, but only a contract between the contract and its members and, therefore, the rights and liabilities of members as members under the articles can only be enforced by or against the members through the company.” [emphasis added]

(2)     In Beattie, the claim was one brought by a member on behalf of herself and all other members of the company (except one Mr. Beattie) against the company and Mr. Beattie (who was a director and a member of the company) seeking various relief in relation to inspection of books of the company and other affairs of the company.  Mr. Beattie applied to stay the action in favour of arbitration on the basis of an arbitration clause contained in the articles of the company (which was a widely worded clause and which contained the word “member”).  The Court of Appeal considered the question by reference to two separate issues.  First, they considered whether the word “members” in the article should be construed as being subject to the qualification “members in their capacity as members”.  The first instance judge held that it was subject to this qualification.  Sir Wilfred Greene MR preferred not to express any view on this (see 719; agreed to by Scott LJ at 723 and Clauson LJ at 724).  Then they considered the legal effect of section 20 of the Companies Act 1929 (which, as I said above, is the equivalent of section 13(3) of the International Business Companies Act).  At 720 Sir Wilfred Greene MR said:-

“The question as to the precise effect of s.20 has been the subject of considerable controversy in the past, and it may very well be that there will be considerable controversy about it in the future.  But it appears to me that this much, at any rate, is good law: that the contractual force given to the articles of association by the section is limited to such provisions of the articles as apply to the relationship of the members in their capacity as members.”  (my emphasis)

I take that to be, not a ruling on the construction of the article itself (because on this point, the Court of Appeal expressed no view), but a ruling on the nature, extent and legal effect of the “statutory contract” constituted by section 20 of the Companies Act 1929.

(3)     On the facts of Beattie itself, the claim brought against Mr. Beattie was brought against him in the capacity of a director in the sense that the acts complained against Mr. Beattie were committed by him in the capacity as a director.  The Court of Appeal observed that “the real matter which is being here being litigated is a dispute between the company and [Mr. Beattie] in his capacity as a director”.  Mr. Beattie’s application to stay was therefore dismissed.  It is correct that the stay application in that case was brought by a member (who was not sued as a member) against (in effect) the company, but there is no reason in principle why it should not apply in reverse, i.e. to a stay application brought by a company against a member (who was not suing as a member).

82.  Applying the above to the present case, it is plain (and there is no prima facie case to the contrary) that the Plaintiffs were not suing as members.  They are suing as persons who were allegedly induced to enter into a contract by misrepresentation.  It may well be that the consequence of the contract, if brought to fruition, was that they would become members.  It may even be that, as a matter of timing, by the time the action was brought they had already become members (assuming that I am wrong on the membership issue above).  But the “membership status” is not part of, or an ingredient of, the Plaintiffs’ cause of action.  The fact that by the time of the action the Plaintiffs might have already become members is a matter of sheer fortuity. 

83.  Mr. Bartlett had urged me not to take this approach.  He relied on a statement in Mr. Fay’s affidavit at paragraph 55(a) where Mr. Fay said this:-

“I accept that the first claim against CPL [viz. the misrepresentation claim] could fall within the terms of the arbitration agreement if (i) the Plaintiffs were members, and (ii) the articles of association, and in particular clause 21.1, were incorporated into the SPA.  However, for the rasons that I have set out above it is my opinion that (i) the Plaintiffs are not, and were never, members of CPL; (ii) the articles of association of CPL, and in particular regulation 21.1, were not incorporated into the SPA.”

84.  Mr. Bartlett contended that in view of this statement it is not open to the Plaintiffs to contend that the misrepresentation claim did not fall within the scope of Article 21.1.

85.  I had reflected on this point.  In dealing with it, I think I should start with first principles.  I cannot put the matter better than set out Dicey and Morris and Collins: The Conflict of Laws, supra, §9-019:-

“The function of expert witness in relation to the interpretation of foreign statutes must be contrasted with his function in relation to the construction of foreign documents [My note: by that I understand the editors to be referring to mean contracts and instruments governed for a foreign proper law].  In the former case, the expert tells the court what the statute means, explaining his opinion, if necessary, by reference to foreign rules of construction [My note: by that I understand the editors to be referring to foreign rules of statutory construction such as those to be found and discussed, in the English context, in works such as Bennion on Statutory Interpretation or Craies on Statute Law].  In the latter case, the expert merely proves the foreign rules of construction [My note: by this, I understand the editors to be referring to foreign rules of interpretation of contracts, such as those to be found and discussed, in the English context, in works such as Lewison: Interpretation of Contracts], and the court itself, in the light of these rules, determines the meaning of the documents.” 

86.  In the present case, whether one is talking about interpreting the provision of the Articles (which would be an exercise of contractual interpretation) or interpreting section 13(3) of the International Business Companies Act (which would be an exercise of statutory interpretation), the expert should set out the applicable rules of construction and then (in the case of statutory interpretation) explain his process of reasoning (see my discussion in paragraphs 47 to 50 above) which led him to the conclusion that the statute bore a particular meaning or had a particular effect.  To blandly assert the conclusion that a contract or a statute bore a particular meaning (or would be construed by the foreign court as bearing a particular meaning) does not really assist. 

87.  But what Mr. Fay did in the paragraph in question (paragraph 55(a) of his affidavit) was not to set out any applicable BVI principles of construction (whether of contracts, or of statute).  Nor did he set out any process of reasoning.  In fact he did not really state his views on the meaning of Article 21.1 or section 13(3).  What he did was simply to set out the “ultimate conclusion” namely that the misrepresentation claim could fall within Article 21.1 (if incorporated).  It is not, properly called, expert evidence on foreign law.  There was no mention of any law.

88.  In fact the entirety of paragraph 55 is really in the nature of submissions rather than expert evidence.  I appreciate that it is sometimes difficult for legal experts to strictly segregate in their minds (i) opinions on foreign law and (ii) their views or (in effect) submissions on how that law is to be applied to the particular factual configuration of a case  (in fact both experts had allowed submissions to find their way into their affidavits: I had commented on this in the context of Mr Forte’s evidence on estoppel in paragraph 56 above).  But the distinction is important.  The former is properly the province of expert evidence; the latter is really in the nature of submissions which could just as well have been made by counsel in their skeleton arguments. 

89.  When I asked Mr. Scott SC how he would respond to Mr. Bartlett’s reliance on paragraph 55 of Mr. Fay’s affidavit, he was frank enough to tell me that he disagreed with Mr. Fay, that the relevant paragraph of Mr. Fay’s affidavit did not set out any opinion of BVI law, that paragraph 55 was only Mr. Fay’s analysis of whether the claim fell within the arbitration clause (which may or may not be right), and that Mr. Fay’s view on this point was not something which bound the court. 

90.  In my view Mr. Scott SC is entitled to take this stance.  If, as a matter of proper analysis, a party’s expert evidence does not fulfil the relevant rules governing how expert evidence on a particular topic is to be presented, that party (and the court) is not bound by such evidence.  It is in fact an item of “non-evidence”, and it is as if no proper or admissible evidence has been given on that topic.  The apparent “disowning” by Mr. Scott SC of paragraph 55(a) of Mr. Fay’s affidavit is nothing more than a potential source of forensic comment by the Defendants (and perhaps forensic embarrassment for the Plaintiffs). 

91.  But Mr. Bartlett protested that, given Mr. Fay’s paragraph 55(a), the Defendants would suffer a feeling of injustice if the Plaintiffs were permitted now to take the “in the capacity of members” point by reference to the English authorities. 

92.  I have considered this point with care.  If, for example, by reason of a particular stance taken by a party, another party has been induced into not putting in evidence on a particular point and thereby suffered prejudice, the court would be slow to allow the former party to depart from that stance.  Even if the court were prepared so to allow, it would view with sympathy (if not readily accede to) any requests for time by the other party to adduce evidence in response. 

93.  But in this case, it is important again to bear in mind first principles and the burden of persuasion.  The burden in a stay application is on the applicant to make out a prima facie case.  That burden applies to showing that the dispute in question is covered by the clause in question.  The construction of the clause in question (and the legal effect of incorporation of the clause) could well involve questions of law, even foreign law.  Where the applicable law is foreign law, and where the party bearing the burden does not adduce evidence of foreign law, the Hong Kong courts will apply the well known presumption that foreign law is the same as Hong Kong law (Dicey and Morris and Collins: The Conflict of Laws, supra, §9-001 Rule 8(2)).  The application of the presumption has been viewed with skepticism by some, in cases where the foreign system is not a common law system (see e.g. discussion in Fentiman: Foreign Law in English Courts – Pleading, Proof and Choice of Lawpages 147 and 185).  But that is academic on the facts of this case because, first of all, BVI shared the same common law heritage as Hong Kong.  In any event, it can be said that by resorting to these English authorities, one is not so much replying on the presumption of similarity but relying on evidence of how BVI courts would ascertain the law.  As Mr Forte pointed out in paragraph 13 of his 1^st affidavit:-

“However, there is often no first instance or Court of Appeal precedent in a particular area of commercial law.  This is so because of the size of the jurisdiction, and volume of relevant case law being generated in comparison to say, England and Wales.  If there has been no British Virgin Islands judicial decision in a given area, the Court can and will look for guidance to other decisions in other Commonwealth countries, and beyond if useful.  The most important decisions in this respect are generally those from the Courts of England and Wale (especially those from the Court of Appeal and the House of Lords).  These decisions carry the greatest weight, and are frequently looked to as, in effect, precedents.”

94.  This brings me to the question of burden and any “prejudice” caused to the Plaintiffs by Mr. Scott SC’s departure from paragraph 55(a) of Mr. Fay’s affidavit. 

95.  As I said, the burden is on the Defendants.  The Defendants filed the first round of affidavits in support, and that included Mr. Forte’s 1^st affidavit.  The Defendants’ burden included showing that Article 21.1 covered the disputes in question.  One would expect that if there had been any BVI statute, case law or doctrine specifically on the “member qua member” point (different from the English authorities), the Defendants would have adduced evidence on the issue.  This is not something which required prompting by the other side.  There is no mention in Mr. Forte’s 1^st affidavit of any such BVI authority covering the sort of grounds dealt with by the authorities I discussed in paragraph 81 above.  In relation to the potential “coverage” of Article 21.1, Mr. Forte in fact spent paragraphs 41 to 47 of his 1^st affidavit analyzing the claims put by the Plaintiffs in the action, and why they would fall within the clause “on many different independent fronts”.  In the same way as I had described Mr. Fay’s paragraph 55, these paragraphs do not contain any expert evidence on “law” at all.  They are in the nature of submissions.  But it shows that the Defendants were fully aware that they bore the burden to show the “coverage” of the clause, without having to wait to see the other side’s stance.

96.  It cannot be (nor has it been) suggested that the Defendants were led by Mr. Fay’s paragraph 55(a) into not adducing any such evidence or not referring to any such BVI authority in Mr Forte’s 1^st affidavit, for the simple reason that as a matter of timing, Mr. Forte’s 1^st affidavit pre-dated Mr. Fay’s 1^st affidavit.

97.  I therefore cannot detect any prejudice that would be caused by allowing Mr. Scott SC to argue the “in the capacity as members” point despite paragraph 55(a) of Mr. Fay’s 1^st affidavit. 

98.  I further note that Mr. Scott SC’s skeleton arguments raised this point at paragraph 30.  It was dated 24^th November 2006 (Friday).  The hearing before me took place on 28^th November 2006 (Tuesday).  There was no application to adduce any evidence in the form of a supplemental expert report, exhibiting any BVI authority to counter the point; nor has counsel by way of submissions drawn my attention to any English, Hong Kong or Commonwealth authority (being the sources which, according to Mr. Forte, the BVI courts will look to in the absence of any BVI case law on the point); nor has counsel even handed up any BVI authority countering the authorities cited in paragraph 81 above.

99.  I now deal with the claim based on repudiatory breach.  This is based on the failure to issue shares to the Plaintiffs.  The very basis of the claim is that the Plaintiffs have not had shares issued to them and that there had not become members.  Therefore it cannot be said that Article 21.1. (which talks of “members”) has any application to such a claim which is premised on an absence of membership status.  I am not satisfied (on a prima facie case basis) that a claim based on non-issuance of shares falls within Article 21.1 as a matter of construction. 

100.  Lastly I deal with the claim based on the Settlement Agreement.  It is true that the claim is made on the basis that the Plaintiffs were shareholders of CPL (and hence had shares to be re-purchased by CPL), but I am not satisfied (on the basis of a prima facie case) that the claim had anything to do with the “affairs of CPL”. 

Conclusion on the stay summons

101.  It follows from the above that I would dismiss the Defendants’ summons dated  29^th September 2006 in relation to CPL. 

102.  Before me, it was accepted that the arbitration clause did not on its face cover the dispute between the Plaintiffs and the 2^nd Defendant.  The 2^nd Defendant relies on section 16(3) of the High Court Ordinance in seeking a stay.  It was acknowledged, however, that the 2^nd Defendant’s application could only get off the ground if I were minded to grant a stay in relation to the Plaintiffs’ claim against CPL. 

103.  Given my conclusions on CPL’s stay application, it must also follow that the 2^nd Defendant’s application for stay should be dismissed. 

104.  As to costs, I make an order nisi that they (including any costs reserved) be to the Plaintiffs to be taxed if not agreed.

Striking out of affidavit

105.  As foreshadowed at the beginning of this Judgment I now give brief reasons for my decision in relation to the striking out of parts of the 2^nd Defendant’s 1^st affidavit. 

106.  Two parts of the 2^nd Defendant’s 1^st affidavit are in issue.  The first one is exhibit “RJB-4”, being a memorandum dated 12^th April 2006 prepared by CPL’s attorneys namely Latham and Watkins (“the Memorandum”).  The ground relied on is that the Memorandum was subject to “without prejudice” privilege.  The second one is the phrase “and destroy us.  He made personal threats and my family” in paragraph 25 of the affidavit.  The grounds relied on were that the passage was scandalous and vexatious, irrelevant, unparticularized and unsubstantiated. 

107.  At the hearing, I struck out the Memorandum but refused to strike out the passage in paragraph 25.

108.  As to the Memorandum, it was expressly marked “For Settlement Purposes, Without Prejudice Except as to Costs, Strictly Confidential, draft” in a prominent box at the top of the first page.  It consisted of an attempt by CPL’s attorneys to respond, and set out defences, to claims made by Mr. Ng and the Plaintiffs against CPL.  It set out CPL’s own claims against the Plaintiffs, and then it set out certain settlement proposals and invited a response from the Plaintiffs.

109.  It is trite that the express use of the label “without prejudice” is not conclusive.  But having examined the contents of the Memorandum I am satisfied that it contained genuine “without prejudice” matters by way of settlement proposals.  Therefore unless that privilege has somehow been waived or lost, it is inadmissible and must be struck out.

110.  The background to the 2^nd Defendant’s introduction of the Memorandum as an exhibit to his 1^st affidavit is that when Mr. Ng made his affirmation on 20^th June 2006 for the purpose of seeking Order 11 leave for serving the Writ out of the jurisdiction, he alluded (under a section headed “Full and Frank Disclosure”) to the existence of the Memorandum.  The purpose of this was to draw the Court’s attention to the fact that there had been pre-action correspondence between the parties and that the Defendants had set out their position (on the merits of the claim) in the Memorandum.  Mr. Ng did not exhibit the Memorandum.  What he did was to provide a summary of the Defendants’ position (vis-à-vis the Plaintiffs’ assertions) as contained in the Memorandum.  He did so in an attempt to discharge his duty of full and frank disclosure. 

111.  The Memorandum was, apparently, the “opening shot” in terms of settlement negotiations.  It consisted of proposals put forward by the Defendants.  Mr. Bartlett does not, however, seek to argue (quite rightly so in my view) that the party who first puts forward “without prejudice” proposals had a right to unilaterally waive “without prejudice” privilege.  Nor do I think that Mr. Bartlett was seeking to justify exhibiting the Memorandum on the basis that Mr. Ng had unilaterally waived privilege by referring to its existence and by seeking to summarize its effect in his Order 11 affirmation.  In any event I do not think that Mr. Ng’s reference to the Memorandum, when read in context, amounted to the expression of an intention or offer to waive privilege (such that the Plaintiffs could, in effect, “accept” the Plaintiffs’ offer to waive privilege and then freely exhibit the Memorandum). 

112.  Mr. Bartlett put his case on the basis that in the Order 11 affirmation the Memorandum was “put into the arena” by Mr. Ng’s reference to it.  But I have not been referred to any half-way-house doctrine of “putting into the arena short of a waiver”.  Either there was waiver or there was not.  If there was no waiver then that was the end of the matter.

113.  Then it was said that parts of the Memorandum (and the exhibits to the Memorandum) contained matters which showed the Plaintiffs’ conduct where they treated themselves as shareholders, and also showed a past incident about Mr. Ng which showed that Mr. Ng was “not quite what he professed to be”.  But even if the Memorandum contained matters which are regarded as relevant to the merits of this application, I do not think it is open to me to somehow trawl through the Memorandum and to “blue pencil” the “without prejudice” parts and to retain those which went to the merits of the application.  The result is not harsh to the Defendants. If they had wanted to put those materials before the court, they could have put those in an open letter or put them in the form of an affidavit for the purpose of this hearing.  Indeed, for those exhibits of the Memorandum that are said to show the Plaintiffs’ conduct in treating themselves as shareholders, those letters were exhibited elsewhere in the affidavits already. 

114.  I therefore see no ground for allowing the exhibiting of the Memorandum.  I will strike it out.

115.  I now turn to the phrase “and destroy us.  He made personal threats against me and my family”. 

116.  The Plaintiffs dispute this assertion.  But the fact that a party denies an assertion is not a ground for striking it out. 

117.  It is said that the passage was unparticularized.  There is no mechanism for formally seeking Further and Better Particulars of an affidavit (an affidavit not being a pleading, it does not fall within Order 18 rule 12).  The absence of details or particulars is something that the Court is entitled to take into account, in appropriate circumstances, as relevant to the weight to be attached to it.  But that is not a ground for striking it out either. 

118.  It is said that the passage is scandalous and vexatious.  Assertions in an affidavit making unpleasant allegations are often scandalous in the sense of being damaging to someone’s reputation.  But such allegations will not be struck out if they are relevant to an issue (Hong Kong Civil Procedure (2007)18/19/7).  In this case, whilst the narrow issue is whether there was a prima facie case that there was a valid arbitration agreement covering the dispute in question and that it is strictly speaking unnecessary to go into the underlying rights and wrongs (or the motive for raising a particular dispute), the relevant passage nonetheless formed part of the 2^nd Defendant’s version of the background events leading to the breakdown of the parties’ relationship.  Its relevance is, at best, marginal and peripheral but it is not so extravagant as to call for a strike-out.  In the exercise of my discretion I refuse to accede to the application in relation to paragraph 25.

119.  As to costs, the Plaintiffs had not been wholly successful.  I am aware that I have a wide discretion as to costs including but not limited to disallowing part of the Plaintiffs’ costs.  The bulk of the time in arguing the strike-out summons has been taken up on arguing the Memorandum.  The Defendants just narrowly escaped a strike out for paragraph 25 of the 1^st Defendant’s 1^st affidavit.  In the exercise of my discretion I order that the Plaintiffs are to have the costs of this summons on a nisi basis.