EXCELSIOR CAPITAL ASIA (HK) LTD AND ANOTHER v. ZHANG HENGSHUN (partner in and trading as King & Wood Mallesons (a firm) AND ANOTHER

HCCL 14/2016

[2018] HKCFI 181

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 14 OF 2016

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D E C I S I O N

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1.  This is an application made by the defendants under Order 12 rule 8 RHC to set aside the order dated 13 February 2017 (“Order”), whereby the Plaintiffs were granted leave to serve their Amended Writ of Summons on the defendants out of the jurisdiction, on the ground that Hong Kong is not the natural or appropriate forum for the trial of this action.

2.  On 28 June 2016, the Plaintiffs issued their Writ against King & Wood Mallesons (a firm) (formerly known as King & Wood PRC Lawyers) (“Firm”). The claim was for damages in respect of the Firm’s alleged breach of contract and negligence.

3.  On 7 February 2017, the Writ was amended, by deleting the name of the Firm, and naming as defendants, instead of the Firm, Zhang Hengshun and Zhao Xiaohong (“Partners”) as “partners in and trading as (the Firm)”.  On 13 February 2017, the Plaintiffs obtained ex parte leave under the Order to issue the Concurrent Amended Writ for service on the Partners on the Mainland.

4.  According to the Statement of Claim filed on 23 May 2017, the Plaintiffs allege that the Partners were in breach of their contractual duties and were negligent, in their performance of their services to the Plaintiffs under a letter of engagement signed in Hong Kong on 19 March 2010 (“Letter of Engagement”), whereby the Partners agreed to carry out legal due diligence and to advise the Plaintiffs on PRC law, in connection with the Plaintiffs’ investment in a PRC company, Ganzhou Dingsheng Water Technological Co Ltd (“DS”), and contracts made and rights held by DS on the Mainland. 

5.  The 1^st Plaintiff had agreed to invest in DS on the representation that DS operated a successful water bottling business on the Mainland.  The investment was to be made through the 2^nd Plaintiff, an offshore vehicle incorporated for the purpose, by the 2^nd Plaintiff’s subscription (“Transaction”) of convertible notes to the value of US $10 million and share warrants to the value of US $5 million issued by Accelstar Enterprises Limited (“AE”), the holding company of DS.

6.  In March 2010, the 1^st Plaintiff engaged King & Wood Mallesons Shanghai by the Letter of Engagement to carry out legal due diligence on DS, to prepare a legal due diligence report on DS, to advise on any legal issues on PRC law and to issue a legal opinion.  A due diligence report (“Report”) was issued by the Firm in May 2010, and a legal opinion (“Opinion”) was also issued to the Plaintiffs on 30 June 2010, in which advice was rendered on DS’s right to source spring water in the Fengshan District of Ganzhou City (“Right”); and the validity of the water drawing permit granted to DS (“Permit”).  In reliance on such advice and on the Opinion, the Plaintiffs proceeded with and completed the Transaction.

7.  The Plaintiffs’ claim is that the Report and the Opinion were, in fact, materially incorrect, in that under the relevant PRC law, the alleged Right did not exist, and/or the Permit was invalid or did not confer the rights on DS as purported.

8.  By way of relief for alleged negligence and breach of duties, the Plaintiffs seek to recover from the Partners, under the Amended Writ, loss and damage which the Plaintiffs had sustained as a result of their investments in DS, and expenses incurred, in the total sum of US$10,184,248.89.

Applicable legal Principles

9.  On an application by a defendant to set aside leave granted under Order 12 rule 8, the Court is called upon to consider whether the plaintiff can show a good arguable case that the case falls within one or more of the categories set out in Order 11 rule 1.  The requirement of showing a good arguable case is the threshold which a plaintiff must cross, to demonstrate that the Court has jurisdiction under Order 11.  The plaintiff is not required to show a good arguable case on the merits.  It suffices for the plaintiff to show that there are serious issues to be tried.

10.  Where the plaintiff can establish that the case falls within one of the categories in Order 11 rule 1, the Court is required to exercise a discretion and decide whether it is a “proper” case for service out.  In the exercise of such discretion, the Court may consider questions of forum non conveniens.

11.  As restated by the Court of Final Appeal in SPH v SA (2014) 17 HKCFAR 364, in determining stay of proceedings by reason of forum non conveniens, the single question to be decided by the Court is whether there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action ie in which the action may be tried more suitably for the interests of all the parties and the ends of justice.  To answer the question, the applicant for the stay has to establish that first, Hong Kong is not the natural or appropriate forum, “appropriate” in this context meaning the forum which has the most real and substantial connection with the action, and second, there is another available forum which is clearly or distinctly more appropriate than Hong Kong.

Issues for trial

12.  In Rambas Marketing Co LLC v Chow Kai Fai David [2001] 3 HKC 250, the Court emphasized that the appropriateness of a forum is to be decided from the point of view of the trial of the action, on which the Court should focus. The issues in dispute should be identified, so that the Court can consider and determine the forum which is clearly or distinctly more appropriate for the determination of the issues at trial.

13.  In gist, what the Plaintiffs claim against the Defendants in this action is that they were in breach of their contractual duties owed to the Plaintiffs, and were negligent, in failing to conduct proper legal due diligence on DS and its business activities on the Mainland, and to advise on the relevant PRC laws relating to the Right and the Permit. 

14.  In defence, the Partners have raised various issues.

15.  They allege that both the contractual and tort claims asserted by the Plaintiffs are governed by PRC law.  Under PRC law, the Plaintiffs have no personal claim against the Partners, as the Firm bears responsibility for any negligence of the Partners, and it is the Firm rather than its partners which should be sued.

16.  The Partners further allege that the Plaintiffs’ claims against them are time-barred, as the Opinion was issued on 30 June 2010.  The Writ was issued on 28 June 2016, but it only named the Firm as the sole Defendant.  The amendment made on 7 February 2017, whereby the Partners were replaced as defendants, was only made after the limitation period had expired, and should not have been allowed.

17.  Third, under PRC law, the Plaintiffs cannot concurrently sue in contract and in tort, and there is no valid contractual claim against the Partners.

18.  Fourth, the Partners allege that the Report had referred to the risks in the Right, that the Plaintiffs knew of the potential defects in the Right but had insisted on a “clean” or unqualified Report to be issued.  Reference and reliance are made in this regard to an alleged telephone conversation between representatives of the 1^st Plaintiff and the Firm on 13 April 2010, and to an email from the 1^st Plaintiff to the 1^st Defendant on 14 April 2010.

19.  Fifth, the Partners claim that the economic loss allegedly suffered by the 2^nd Plaintiff is not attributable to any negligence on the part of the Partners, and is not recoverable.

20.  Finally, the Partners deny that they were negligent and that the Opinion was inaccurate as a matter of PRC law, as the Plaintiffs allege.  Their expert on PRC law disagree with the Plaintiffs’ expert evidence as to the relevant legislation which should govern the Right and the Permit.

21.  I am satisfied that the Partners have raised sufficiently clear issues in relation to their defence, for the Court to ascertain the matters for investigation and determination at trial, and to identify the more appropriate forum for that exercise. 

Case for service out under Order 11

22.  It suffices to say that, on the evidence, I am satisfied that the Plaintiffs have established a good arguable case that their claims come within Order 11 rule 1 (d) (i) (that the contract contained in the Letter of Engagement was made in Hong Kong), and rule 1 (f) (that their damage for the tort of negligence was sustained in Hong Kong).  I am also satisfied that there is a serious issue to be tried on the merits of the Plaintiffs’ claim against the Partners, as to whether they were in breach of their contractual duties, or were negligent.  Whether or not the amendment of the Writ can be set aside or disallowed under the Limitation Ordinance are not for disposal on this summons before the Court.

23.  The Partners argued that there was material non-disclosure in the Plaintiffs’ ex parte application for leave under Order 11.  In the application, the Plaintiffs already disclosed that the Mainland court may also have jurisdiction over the case.  I do not agree that the Plaintiffs are bound to make disclosure of further details of the relevance of PRC law in support of the argument that the Mainland court may be the more appropriate forum, and that under PRC law, the 1^st Plaintiff can only sue in tort, as the Partners now argue, and on which there is conflicting expert law evidence.  The Plaintiffs had identified the facts which establish the good arguable case of the Letter of Engagement having been made in Hong Kong, and of their loss having been sustained in Hong Kong, as well as other facts relied upon to show the connection with Hong Kong, in support of their case that Hong Kong was the proper forum.  I am prepared to accept that there was no withholding of material fact, to justify the Order being set aside.

The appropriate forum

24.  It is clear that the gravaman of the Plaintiff’s complaint against the Partners is that they had given erroneous advice on PRC law, as to the validity and effectiveness of the Permit and the Right, including the term of the Permit and the duration of the Right, the relevant authority by which the appropriate permit or licence should have been issued, and the binding effect of the Permit. There is dispute between the experts appointed by the Plaintiffs and by the Partners as to the relevant legislation which should apply to the Permit and the Right, and by whom the Permit should be issued: whether the relevant legislation should be the Mineral Resources Law (中華人民共和國礦產資源法) (as the Plaintiffs’ expert alleges), or Water Law (中華人民共和國水法) (as the Partners’ expert alleges), and this turns on (according to the Partners’ expert) whether the water supplied under the Permit was spring water, or mineral water.

25.  There is also dispute between the experts as to whether under PRC law, only the Firm is liable in negligence, or whether the individual partners of the Firm can also be sued.

26.  The Plaintiffs accept that the 1^st Plaintiff’s contractual claim is governed by PRC law.  They maintain, however, that their tort claim is governed by Hong Kong, relying on Diamond v Bank of London and Montreal [1979] QB 333, 345G-346G, that the Partners’ tort of negligence was committed in Hong Kong, where the erroneous Report and Opinion were received and relied upon by the Plaintiffs.

27.  Leading Counsel for the Partners emphasized that when the Plaintiffs applied for leave for service out of Hong Kong, their application was made under Order 11 rule 1 (f) on the basis that their claims were founded on a tort and the damage was sustained in Hong Kong (paragraphs 34, 36 and 38 of the affidavit in support of the ex parte application).  Leading Counsel also argued that although the general proposition stated in Diamond v Bank of London and Montréal is not disputed, the place where the tort is committed is fact sensitive, and there are many factors in the present case which connect the alleged tort to the Mainland.  Under the Letter of Engagement, the Firm was appointed as the 1^st Plaintiff’s “PRC legal counsel”, to advise the 1^st Plaintiff “in relation to all issues to be considered in the context of PRC laws”.  A substantial part if not the entirety of the work was to be (and had been) performed by the Firm (including the Partners) on the Mainland.  The due diligence work instructed by the Plaintiffs under the Letter of Engagement was carried out on the Mainland. 

28.  Importantly, the allegations of negligence made in the Statement of Claim are that the Defendants had failed to conduct the proper and legal due diligence on the relevant PRC laws relating to the Right granted, including the duration of the Right, the payments made for the Permit, any limitation on the volume of water to be drawn, the process of renewal of the Right to source spring water in the Fengshan District, the authority of the Water Bureau of Zhanggong to approve or confirm the Right, and whether other departments and authorities of the government of the province, autonomous region or municipality directly under the Central Government where the water intake is located, should have approved the Right.  On the evidence of the experts, there is also an issue as to whether mineral resources are involved, thus invoking arguably different legislation, different government authorities and different policies concerning the grant of permits.  All these are closely linked to acts and matters on the Mainland.

29.  Even if the Plaintiffs are correct in their contention that the tort was committed in Hong Kong and Hong Kong law should apply, it is inevitable that the Court deciding the issue of negligence at trial must take into account PRC law, in deciding the ultimate question of whether the statements made in the Partners’ Report and the Opinion were correct, as a matter of PRC law, so far as they relate to the validity and effect of DS’ Right and the Permit.

30.  Irrespective of where the tort of negligence took place, in deciding the liability of the Partners at trial, and whether they can be said to have fallen short of the standard to be expected from lawyers with expertise on PRC law, the Court must also take into account the standard of care and skill which can reasonably be expected from other lawyers in Shanghai, when they undertake the services to be performed under the Letter of Engagement, and in issuing the Report and the Opinion on PRC law.

31.  If the Court should decide that the tort is governed by PRC law, there will be the further question as to whether the Partners can personally be made liable under the relevant PRC law. 

32.  Other than the availability of the witnesses who will be in the position to give evidence on the communications between the Plaintiffs and the Partners on the issue of the Plaintiffs’ alleged knowledge of the defects in the Right, the parties have not identified other factors which are relevant to the consideration of the appropriate forum for the trial.  There are no issues raised concerning the Transaction or the listing of DS in Hong Kong which require determination at trial.  No question of juridical advantage has been raised.

33.  Having regard to all the matters identified in paragraphs 25 to 32 above, I have come to the inevitable conclusion that Hong Kong is not the appropriate forum for the trial of this action, and that the judges in the Mainland courts, with their in-depth understanding and knowledge of the relevant PRC laws, the policy considerations and the practices of the Mainland authorities, would be more familiar with and be better able to decide the issues in dispute in this case.  The Partners have identified the Shanghai No 1 Intermediate People’s Court, the Shanghai Xuhui District People’s Court or the Jiangxi High People’s Court as the relevant Mainland court which is the more appropriate forum, depending on the nature and size of the Plaintiffs’ claim against the Partners.

34.  I accordingly grant the orders sought in the Partners’ summons, to set aside the Order and to stay these proceedings, on the basis that Hong Kong is not the appropriate forum for the trial of claims made in this action.  An order nisi will be made that the costs of the Partners’ application are to be paid by the Plaintiffs, with Certificate for 2 Counsel.