FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

CACV 126/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 126 OF 2008

(ON APPEAL FROM HCA NO. 4414 OF 2001)

____________

BETWEEN

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_____________________________

JUDGMENT
on
(1)  Plaintiff's application to add
ground no.5 to Respondent's Notice
and
(2)  Defendants' application for
leave to file Rejoinder

______________________________

Hon Yuen JA (giving the judgment of the court):

Subject matter of this judgment

1.  On 21-25 June 2010, this court heard an appeal by the Defendants from the judgment of Deputy Judge To (now To, J).  The appeal was part heard and adjourned to 30-31 August 2010.  This judgment is concerned with two applications:

1.1 the Plaintiff’s application to amend its Respondent’s Notice by adding ground no. 5 (for convenience I shall refer to this as “the Fault Compensation Application”);

1.2 consequent to leave given by this court on 25 June 2010 for the Plaintiff to amend its Respondent’s Notice by adding ground no. 7 (“the Estoppel by Convention Application 1"), the Defendants’ application for leave to file a rejoinder as per a draft handed up to the court (“the Estoppel by Convention Application no. 2").

Relevant background

2.  The background - both factual and procedural - to the present applications is complex and it is necessary to recount it briefly. 

2.1 The Plaintiff is a Macau company controlled by Ngan In Leng     (“Ngan”).

2.2 The 1^st Defendant is a Hong Kong company which was a “window company” of the Fujian Provincial People’s Government. 

2.3 The 1^st Defendant owned a PRC company, Fujian Casix Laser Inc (“FCL”).  The 1^st Defendant through its subsidiaries Casix Ltd (“Casix”) a Hong Kong company, and Fujian Kexin Technology Development Company (“Kexin”) a PRC cpmpany, owned Fuzhou Casix Optronics Inc. (“FCO”).

2.4 Before 1996, the 1^st Defendant and Fujian Research Institute of Material Structures of the Academy of Science (“FRIMS”) jointly owned FCL but they fell out, with the 1^st Defendant buying out FRIMS’ shares but with FRIMS asserting that it retained intellectual property rights over certain technology relevant to FCL’s manufacturing operations.  There were ongoing disputes between the 1^st Defendant and FRIMS.

2.5 In December 1996, the Plaintiff and the 1^st Defendant entered into 3 agreements, the  agreement known as the First Laser Agreement (“the Agreement”) superceding 2 previous agreements (the Hang Wo Agreement and the COM Agreement),  for the sale by the 1^st Defendant to the Plaintiff of 51% of the shares in FCL and FCO.

2.6 By reason of their corporate status, the transfer of shares in FCL and FCO required approval (by which I include valuation, etc) of various PRC government authorities (“the authorities”).

2.7 In February 1997 FCO applied to the authorities for the transfer of all its shares to Casix Optronic Manufacturing Ltd (“COM”) pursuant to an agreement (“the FCO Agreement”) between Casix and Kexin and COM which bears a date prior to the Agreement; COM was a Macau company owned as by 51% of Hang Wo (a company owned by Ngan), and 49% by Jenwing (the ownership of which was the subject matter of dispute).

2.8 On 3 March 1997, the authorities approved the transfer of all FCO shares to COM.

2.9 There was no application for the transfer of any FCL shares, all of which remained in the name of the 1^st Defendant.

2.10       By 13 March 1998, the Plaintiff had paid (or was deemed to have paid) the entire purchase price under the Agreement.

2.11 The Plaintiff had also provided funds for a successful project of FCL (“the Project”).

2.12 In February 2000, the 1^st Defendant sold all the shares in FCL to a third party JDS Uniphase China Holdings Company (“JDS”) for US$60m.  The 2^nd Defendant received the proceeds of sale.

Litigation

3.  The sale of the FCL shares to JDS gave rise to two pieces of litigation.

3.1 The Plaintiff sued the Defendants in Hong Kong.  In the Statement of Claim, the Plaintiff pleaded the Agreement (para. 10); it also pleaded a “Trust” (para. 16) of 51% of the shares in FCL on the ground that it had paid the entire purchase price.  It also pleaded, on the alternative basis that the agreement was not valid, restitution of the purchase price and the funds paid for the Project as money had and received, and tracing for such restitution (para. 38).  There were also claims based on mistake (para. 39).

3.2 The 1^st Defendant sued the Plaintiff, Hang Wo and COM in the Fujian People’s Court for an order that the agreements were of no effect.

4.  The Plaintiff sought an anti-suit injunction against the 1^st Defendant.  The Defendants sought a stay of proceedings against the Plaintiff.  Neither was successful, so the parallel proceedings carried on in both Hong Kong and the PRC.

PRC proceedings

5.  The PRC proceedings concluded first. 

5.1 In April 2002 the Fujian Higher People’s Court held that none of the 3 agreements was valid for want of approval.  (It also dealt with the dispute over the authenticity of a memorandum.  That dispute is not material to this judgment).              

5.2 The Plaintiff (together with Hang Wo and COM) appealed to the Supreme People’s Court (“SPCt”), who on 3 December 2004 made an order that the COM Agreement and the First Laser Agreement were of no effect, and that the part of the Hang Wo Agreement concerning the transfer of shares in FCL and FCO was of no effect.  The SPCt did not deal with the consequences of its judgment. 

5.3 In the SPCt, the Plaintiff accepted that PRC law applied to the agreements.

Hong Kong proceedings

6.  In the Hong Kong proceedings, the Defendants ran a number of defences, both factual and legal (no distinction was made between the two defendants).  Amongst the legal defences were the following.

6.1 The Defendants pleaded that PRC law applied to the agreements, and that was the subject matter of issue estoppel by virtue of the SPCt’s judgment (para. 14A Re-Amended Defence and Counterclaim ).

6.2 The Defendants also pleaded that the agreements were invalid and of no effect for want of approval under PRC law, and that was also the subject matter of issue estoppel by virtue of the SPCt’s judgment (para. 14A).

6.3 The Defendants pleaded that in any event, the agreements were not binding on it for want of approval from the authorities (paras. 19-20).

6.4 The Defendants also pleaded that by reason of the approval of the transfer of all the shares of FCO to COM in March 1997, the First Laser Agreement has been “precluded” (排除) under PRC law from being submitted for approval (para. 21B).

6.5         The Defendants also pleaded that, even if the Agreement was binding, PRC law did not recognize beneficial ownership or constructive trust of shares, and that was contrary to the public policy of the PRC (para. 22(2)).

7.  The Plaintiff’s Re-amended Reply included the following. 

7.1 The Plaintiff pleaded that the proper law of the Agreement was Hong Kong law (para. 23)

7.2 The Plaintiff also pleaded that in any event, Hong Kong law was applicable to the “Trust” (para. 24)

7.3 The Plaintiff pleaded that the SPCt’s judgment only held that under PRC law, the agreements were of no effect to transfer the legal title to the shares; and in any event the SPCt’s judgment was not binding on other matters such as what were the consequences of the agreements being of no effect (para. 14).

7.4         The Plaintiff also pleaded that even if PRC law applied, the 1^st Defendant was obliged to procure approval.  The 1^st Defendant was “at fault” in failing to do so, and as such liable under PRC statutes to compensate the Plaintiff , including restitutionary remedies (para. 25A).  The Plaintiff pleaded certain articles in the PRC statutes which provide that when an agreement is of no effect, any property obtained by one party should be “returned” (返還) to the other party, and that if any party is at “fault” (有過錯) for the agreement being of no effect, then it must “compensate” (賠償) for the loss suffered by the other party so caused.                   

7.5 The Plaintiff also pleaded that there was no “preclusion” as the FCO Agreement was made only to facilitate transfer of the FCO shares under the Agreement (para.10).

7.6 The Plaintiff also pleaded that in any event, the Defendant was estopped by convention from denying the validity of the Agreement as both parties had acted as if the Plaintiff owned 51% of the FCL shares (paras. 17-19).

Notable matters concerning the pleadings

8.  The Reply gave rise to two fresh issues - (1) the concept of “fault” and “compensation” under PRC law and (2) estoppel by convention.  The following matters are notable. 

Relevant to the Fault Compensation Application

8.1 First, the Plaintiff had not pleaded an entitlement, founded on PRC statutes, to compensation for loss arising from fault (para. 7.4 above) as a cause of action, nor did it make a claim to such compensation, in the Statement of Claim.  All that the Plaintiff had pleaded in the Statement of Claim, on the basis that there was no agreement, were claims for restitution of the purchase price and funds for the Project as money had and received, and tracing for such restitution (see para. 3.1 above, referring to para. 38 of the Statement of Claim).

8.2 As a matter of procedural law,

“a plaintiff must not put forward in his reply a new cause of action which is not raised either in the writ or statement of claim. (If the plaintiff, after seeing the defence, finds it necessary to rely on a cause of action which has not been raised in the writ or statement of claim, normally the proper way is to amend the writ and the statement of claim).”

(Hong Kong Civil Procedure 2010 vol. 1 p.359 para. 18/3/2).

8.3 It was not until Day 5 of the Appeal that the Plaintiff’s leading counsel orally sought leave to amend the Statement of Claim.  This was followed on 28 June 2010 by the Plaintiff’s summons for leave to amend the Statement of Claim to plead in para. 39A

“further or as a fallback alternative, the Plaintiff refers to and relies upon paragraphs 25 and 25A of the Re-Amended Reply and Defence to Counterclaim”

and to add a claim in the relief for

“monetary award, or compensation”.

8.4 However it is important to note that the Defendants’ counsel at trial were alert to the fact that the Plaintiff was making an “alternative claim” for loss arising from “breach of ... statutory duties ... to obtain approval and registration” and made submissions on that alternative claim (see Defendants’ Closing Submissions pp.65 paras. 15.1-15.2).

Relevant to the Estoppel by Convention Application 2

8.5 Secondly, after the Plaintiff’s reply pleaded estoppel by convention, the Defendants did not seek leave to file a rejoinder to plead that that concept was not known to PRC law. 

8.6 Generally,

“leave to serve a rejoinder will not be granted unless it is really required, so as to raise matters which must be specifically pleaded”.

(Hong Kong Civil Procedure 2010 vol. 1 p.360 para. 18/4/1). 

Order 18 rule 8(1) sets out the principles governing matters which must be specifically pleaded. 

8.7 Applying those principles, I take the view that foreign law is a matter which should be specifically pleaded.  Accordingly the Defendants should have sought leave to plead in a rejoinder that estoppel by convention was not known to PRC law. 

8.8 However that was not done.  I shall deal later with the circumstances in which the Defendants’ application for leave to file a rejoinder (the Estoppel by Convention Application 2) was made on Day 5 of the Appeal.

Expert evidence

9.  It may be convenient at this stage to refer briefly to the expert evidence insofar as they are relevant to the two present applications.  The Plaintiff’s expert on PRC law was Prof. S Z Wang and the Defendants’ expert was Mr Bai Tao.  All their opinions were given after the SPCt’s judgment.

Relevant to the Fault Compensation Application

9.1     In Prof. Wang’s opinion dated 8 April 2005 (“Wang I”), he included his opinions on PRC law on what I have called “Fault Compensation”, including the issue of the agreement being of no effect (paras. 1-5), the issue of fault (paras. 6-9), the issue whether the Plaintiff was also at fault (paras. 10-11), the legal basis of compensation subsequent to the agreement being of no effect (paras. 12-16), the issue of return of property (paras. 17-23) and the issue of compensation for loss (paras. 24-33).

9.2     In Mr Bai’s supplemental opinion dated 11 October 2005 (“Bai II”), he dealt with Prof. Wang’s opinions above.  Mr Bai’s opinion was that the entity responsible for applying for approval was FCL (para. 5), that the 1^st Defendant was not at fault (para. 6), that the “return” of property did not extend to restitution for unjust enrichment (不當得利) (para. 7), and that compensation for fault was restricted to loss for reliance interest (信賴利益) which comprised only (1) expenses for making the agreement (訂約費用), (2) expenses for carrying it out (履行費用), and (3) reasonable indirect losses (合理的間接損失), which did not include loss of profit (para. 8).  

9.3     In Prof. Wang’s supplemental opinion dated 12 January 2006 (“Wang II”), he discussed and disputed Mr Bai’s opinions at para. 5 that the 1^st Defendant was not responsible for applying for approval (paras. 27-29), at para. 6 that the 1^st Defendant was not at fault (paras. 30-32), at para. 7 that the “return” of property did not extend to restitution (paras. 33-40) and at para. 8 that  compensation for fault was so restricted (paras. 41-53).

9.4     In turn, in Mr Bai’s 2^nd supplemental opinion dated 3 May 2006 (“Bai III”), he challenged Prof. Wang’s opinions above.

9.5     Both experts were cross-examined at the trial on their opinions regarding fault and compensation.

Relevant to the Estoppel by Convention Application 2  

9.6     In Wang II, Prof. Wang had referred to a “common understanding” (共識) between the parties that he said was shown in minutes of a meeting at Zhuhai on 5 October 2000 (para. 20). 

9.7     In Bai III, Mr Bai referred to this point and specifically asserted that the PRC did not have the concept of Estoppel as known to Hong Kong law (para.8.1). 

9.8     There was no further expert evidence from the Plaintiff challenging that assertion.  Nor was there cross-examination of Mr Bai on this assertion at the trial.

Trial and judgment

10.  At the trial, there were many more issues before the judge, both factual and legal, than have been set out above.  The judgment ran to 82 pages.  In a nutshell, the judge found that Hong Kong law applied to the Agreement, that there was an implied term in the Agreement that the 1^st Defendant should procure approval, that the 1^st Defendant had breached the Agreement by not transferring 51% of the FCL shares to the Plaintiff, and that on the contractual claim the Plaintiff was entitled to US$30.5m being 51% of the value of the FCL shares, as evidenced by the sale price to JDS.  The judge also found, on the proprietary claim, that since the Plaintiff had paid the entire purchase price under the Agreement, the 1^st Defendant held 51% of the FCL shares as trustee for the Plaintiff.  The judge then invited the Plaintiff to elect between the contractual and proprietary remedies.  As shown by the sealed order, the Plaintiff elected the proprietary remedy.

Judge’s approach to issue of fault and compensation under PRC statutes

11.  Coming back to the dispute between the experts on fault and compensation under the PRC statutes, it would appear that the judge, having held that Hong Kong law applied to the Agreement, did not consider it necessary to deal with PRC law except to the limited extent discussed below. 

12.  The Defendants had put forward a defence on the basis that a finding in favour of the Plaintiff under Hong Kong law would offend public policy and comity with the PRC.  In connection with this defence only, the judge found the following.

12.1       As far as the two different systems of law were concerned:

-  fault was “to some degree” synonymous with breach, the difference being “only one of degree” under two different systems of law,

-  compensation and damages were just a matter of terminology under two different systems of law, and

-  the assessment of compensation under PRC law or Hong Kong law was also “a matter of quantum” under the two different systems (para. 115).

12.2       As far as the party at fault was concerned, the judge:

-  rejected Prof. Wang’s opinion that the 1^st Defendant was under a PRC statutory obligation to procure approval, and

-  having found under Hong Kong law that there was an implied term in the Agreement that the 1^st Defendant had to procure approval, considered that “it is open to me to presume the same is true under PRC law as FCL was under a statutory obligation to procure the approval and the 1^st Defendant was the only shareholder and solely had control and management of FCL.  Thus, under PRC law, the 1^st Defendant was at fault in not procuring the approval and is liable to pay compensation” (para. 116, emphasis added).

12.3        It is clear from the context in which those passages appeared that the judge was dealing with the fault and compensation issue only insofar as it was necessary to deal with the public policy and comity defence.  Apart from rejecting Prof. Wang’s opinion that the 1^st Defendant was under a statutory obligation to procure approval, the judge did not determine the disputes on the many provisions in PRC law raised by the experts.  It is clear from that, and his reference to inexactitudes of degree and quantum, that he was not determining substantively the issues of fault and compensation under the PRC statutes and any remedies flowing from them.  The judgment was based solely on Hong Kong law.

Appeal

13.  The Defendants appealed.  The Plaintiff filed a Respondent’s Notice.  As I have said, the hearing of the appeal commenced on 21 June 2010. 

14.  In the course of the appeal, the Plaintiff sought leave to amend its Respondent’s Notice by the addition of three grounds, viz. no. (5) to (7).  The Defendants did not object to ground no. (6).

Fault Compensation Application

15.  Ground no.(5) (the present Fault Compensation Application) reads as follows:

“If and insofar as the learned trial judge did not so hold, which is not admitted, it is averred that the learned judge ought to have accepted the Plaintiff’s submissions in paragraphs 150 to 219 of its Closing Submissions, that the 1^st Defendant was at fault in making approval of the transfer of the FCL shares to the Plaintiff impossible by selling to JDS and obtaining or procuring transfer approval, and held that even if Mainland PRC Law applies, by reason of the ‘restitution’ and/or ‘compensation’ available for ‘fault’ even under Mainland PRC Law, under the statutory provisions pleaded in paragraph 25A of the Re-Amended Reply & Defence to Counterclaim, the Plaintiff is still entitled to remedies in constructive trust, equitable compensation, tracing or substitution, 51% of the proceeds of sale to JDS, breach of contract, damages, restitution or unjust enrichment, whether with or without reliance upon estoppel by convention”.

16.  The Defendants object to the application on the ground that fault compensation was never claimed in the writ or Statement of Claim.  However as I have noted (para. 8.4), the Defendants’ counsel at the trial understood that the Plaintiff was making an alternative claim for the statutory entitlement under PRC law and made closing submissions on that claim.  In those circumstances, the Defendants are not caught by surprise.

17.  Further the experts for both parties have already expressed their views on the issue in their respective opinions and a transcript of their oral evidence is available.  It would not be necessary (or desirable) to have further evidence on the issue. 

Order on the Fault Compensation Application

18.  Accordingly we take the view that leave should be given to the Plaintiff to amend its Respondent’s Notice to add ground no. (5).  We will hear counsel on any consequential orders.  

Estoppel by Convention Application no. 1

19.  The Plaintiff relied on estoppel by convention at trial (see Plaintiff’s Closing Section F and paras. 268-275).  The Defendants had put forward a number of defences to this issue (Defendants’ Closing paras. 8.1-11.4). 

20.  In  the course of the Appeal, the Plaintiff’s leading counsel sought to uphold the trial judge’s judgment on the basis that (1) the judge had rejected the Defendants’ defences on Estoppel by Convention even though he had not expressly found there was such estoppel and (2) the Defendants have not appealed against that. 

21.  In our judgment given on 25 June 2010, we held that this was an incorrect reading of the judgment, and that  even though the closing submissions at trial showed that both parties had thoroughly addressed the judge on this issue, the judge had not made any determination on the issue of estoppel by convention (presumably because he had found that the Plaintiff had valid contractual and proprietary claims).  In the circumstances, we gave leave to the Plaintiff to add ground no.(7) to its Respondent’s Notice which (as amended by the court) now reads:

“The learned judge ought to have found and held in favour of the Plaintiff that the Defendants are estopped from denying the validity and effect of the First Laser Agreement and/or the Plaintiff’s interest to and beneficial ownership of 51% of the shares of and in FCL”.

Estoppel by Convention Application no.2

22.  The Plaintiff’s success on the Estoppel by Convention Application no.1 gave rise to the Defendants’ application for leave to file a rejoinder as follows:

“In response to the plea of estoppel in paragraph 17 of the re-re-amended Reply and Defence to Counterclaim [see para. 7.6 above], insofar as the said plea is premised upon PRC law as being the proper law of the First Laser Agreement it is averred that:-

(1) any issue of estoppel by convention is likewise governed by the proper law, namely PRC law,

(2) Without prejudice to any argument as to the burden of pleading and proving PRC law (and whether the Plaintiff has properly pleaded a case of estoppel by convention under PRC law), the concept of estoppel by convention does not exist under PRC law”.

23.  The Plaintiff has objected to this application as it says that it is too late for a rejoinder to be filed after trial and it would need to file evidence of PRC law’s approach to estoppel.  However I have referred earlier (paras. 9.6 - 9.8) to the opinion of the Defendants’ expert on PRC law that there was no concept of estoppel in that system of law (Bai III para. 8.1).  Since the system of law governing the relationship between the parties was of fundamental importance in this case, the Plaintiff who was asserting its rights by way of estoppel by convention must have been alive to the significance of Mr Bai’s point (even in the absence of a rejoinder).  It was open to the Plaintiff to present a contradictory opinion from its own expert on PRC law, whether in a supplementary opinion or in Prof Wang’s oral evidence.  It was also open to the Plaintiff to cross-examine Mr Bai on this point.  As it did not do so at trial, we do not see why it should be entitled to seek to adduce evidence of PRC law now, and on that basis to oppose the Defendants’ application, especially when the Plaintiff has not suggested that its expert would challenge Mr Bai’s expert opinion on this matter.

Order on the Estoppel by Convention Application no. 2

24.  In the premises, we would give leave to the Plaintiff to file a rejoinder as per the draft handed up to the court on 25 June 2010.  We will hear the parties on any consequential orders.