CITIBANK N.A. v. HUNTER SOCKS & APPAREL INTERNATIONAL LTD AND OTHERS

HCMP 2063/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2063 of 2016

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DECISION

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The factual background

1.  Citibank N.A. (“the Bank”) has brought a mortgage action (“the mortgage proceedings”) against the 1^st defendant (“Hunter”) in respect of advances made pursuant to 4 sets of facility letters made between February 2013 and July 2015.  The advances were secured by a legal charge registered over the 2^nd defendant’s (“Ease Keen”) real property in Kwai Chung.

2.  The advances were also secured by guarantees given by the 2^nd, 4^th, 5^th and 6^th defendants in February 2013 and December 2013.  The 3^rd defendant, on its own gave a guarantee in July 2015.  The collective effect of the four guarantees is to guarantee, unconditionally, all liabilities due and/or payable by Hunter to the Bank.

3.  Between September 2012 and May 2015, the Bank and Hunter entered into a series of foreign exchange derivative agreements (“FX derivatives”).  The derivative products are linked to the foreign exchange rate of the US dollar, and the Chinese Yuan.  The FX derivative trading was governed by an ISDA Master Agreement (“the ISDA Agreement”).  An ISDA Agreement is the standard document that is commonly used to govern over-the-counter derivative transactions.  The agreement, which is published by the International Swaps and Derivatives Association (“ISDA”) outlines the standard terms to be applied to a derivatives transaction between two parties.  The ISDA Agreement provided that any dispute between the parties arising out of the ISDA Agreement was to be litigated in London.

4.  The defendants say that Hunter was induced to enter into the FX derivatives by the Bank’s negligent misrepresentation.  On 26 October 2016, Hunter and a related company commenced proceedings, (“the London FX derivative action”), in the Queen’s Bench division in which they seek damages and recession of the ISDA Agreement and a series of FX derivative agreements made between the Bank and Hunter between April 2012 and May 2015.  Restitution of all sums paid by Hunter, all wrongly withheld by the Bank is also sought. The claim alleges that Hunter was induced to enter the agreements by the Bank’s negligent misrepresentation, and that Hunter suffered losses as a consequence of the Bank’s breach of contract/negligence arising in respect of advice and information provided by the Bank.

The application

5.  Now all the defendants seek pursuant to Order 12, rule 8 of the Rules of the High Court, a stay of these proceedings, asserting that the sums claimed under the Originating Summons are inextricably linked with the losses Hunter suffered under the FX derivative trading. Consequently, the defendants say, the mortgage action should not proceed until the London FX derivative action has been concluded.

6.  On 12 August 2016, when the Bank commenced the mortgage action the defendants were jointly and severally indebted to the Bank and a total sum of $16,424,977.68.  On 16 August 2016, a deposit in the sum of $7,383,921.14, held by Hunter with the Bank, was uplifted and applied to partially settle the outstanding indebtedness.  Consequently, the Bank says that at 2 September 2016, the indebtedness of Hunter, (including interest to date), is a total of $6,854,803.84.  It is the case for the Bank that that sum does not include any indebtedness that might arise under the ISDA Agreement. The Bank says it is entitled to press on the mortgage proceedings to a conclusion without having to wait for the determination of the London FX derivative action.

7.  Hence, the need arises for the defendants to obtain a stay of the mortgage proceedings while the London FX derivative action is resolved.  In order to determine this issue it is necessary to examine the documentation.

The facility letters, mortgage and guarantee documentation

8.  Each of the facility letters contains a “Governing Law” section containing a non-exclusive jurisdiction clause in favour of the Hong Kong courts in the following terms:

“ This Facility Letter shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region and the parties hereby agree to submit to the non-exclusive jurisdiction of the courts of the Hong Kong Special Administrative Region.”

9.  Clause 23 of the legal charge contains a similar non-exclusive jurisdiction clause in the following terms:

“ This Deed and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of Hong Kong and the Mortgagor and the Borrower hereby irrevocably submits to the non-exclusive jurisdiction of the courts of Hong Kong.”

10.  Clause 29 of each of the guarantees contains a similar clause in the following terms:

“ The Guarantor agrees for the benefit of (the Bank), but without prejudice to the right of (the Bank), to take proceedings in relation to this Guarantee before any other court of competent jurisdiction that the courts of Hong Kong have jurisdiction to hear and determine any suit, action or proceeding that may arise out of or in connection with this Guarantee. The Guarantor irrevocably submits to the jurisdiction of those courts.”

11.  Next, the Legal Charge contains a “no set-off” clause in favour of the Bank in these terms:

“ All sums payable under this Deed shall be paid in full without set-off or counterclaim or any restriction or condition and free and clear of any tax or other deductions or withholdings of any nature….”

12.  A similar clause is contained in each of the Guarantees:

“ The Guarantor will not be excused, and the rights conferred on (the Bank) by this Guarantee will not be in any way discharged, diminished or affected by the existence of any defence, set-off, counterclaim, matter or thing…”

13.  Further, it is the case for the Bank that the relationship between the Bank and Hunter (at least) is governed by a General Customer Agreement, clause 15 of which provides:

“ All sums payable to the Bank by me/us shall be paid to the Bank… In the currency in which the Facilities have been made available without defence, set-off, cross-claims, counterclaim or any other restriction or condition and free and clear of and without deduction….”

The FX derivative transactions

14.  The ISDA Agreement contains an exclusive jurisdiction clause 13(b)(i) in favour of the English court in the following terms, (effectively, after amendment):

“ Jurisdiction. With respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement (‘Proceedings’), each party irrevocably

(i) submits:-

(1) if this Agreement is expressed to be governed by English law, to (A) the exclusive jurisdiction of the English courts if the Proceedings do not involve a Convention Court and (B) the exclusive jurisdiction of the English courts if the Proceedings do involve a Convention Court.

……”

15.  If that were not sufficient, the schedule, in Part 4(h) provides:

“ Governing Law. This Agreement and any other non-contractual obligations arising out of or in connection with it will be governed by and construed in accordance with English law.”

16.  So it is clear that, despite the fact that the FX derivative trading, the subject of the dispute under the ISDA Agreement, took place in Hong Kong, that all of the documents relating to the dispute are in Hong Kong, and that all of the witnesses relevant to the dispute are in Hong Kong, the documentation requires that the dispute be litigated in London.  It is not surprising in those circumstances that the defendants commenced their action for damages in relation to the FX derivative trading in London.

The FX derivative action in Hong Kong

17.  In the course of argument on the first day of the hearing I suggested to Mr Hui that it would be sensible for the Bank to agree to have the FX derivative dispute litigated in Hong Kong.  He took instructions, and the Bank agreed to that course.  The requirement to litigate in London arose solely through a contractual agreement.  There was nothing to stop the parties subsequently agreeing to litigate in Hong Kong.

The conflict between the parties

18.  Mr Hui says that the amount the Bank seeks to recover does not include any sum arising from the FX derivative trading. Consequently, he says there should be no restriction on the Bank proceeding with the mortgagee proceedings, leaving the FX derivative dispute to be separately litigated.  He says that the “no set-off” provisions in the documentation entitled him to take that position.

19.  Mr Wou, on the other hand says that the amount for which the bank might proceed on its mortgagee proceedings does not involve a set‑off, but a calculation, or as he put it, a crystallisation, of the real amount due.  This, he said, could only be determined as a matter of fact.  A central feature in Mr Wou’s submission was the fact that the Bank had carried out the general business of its client, Hunter and the FX derivative trading through one single account.  Mr Wou put the issue in these terms:

“ Whether the alleged indebtedness underlying the Originating Summons has arisen out of,- (1) FX losses; (2) the termination costs of the FX derivative products; and (3) wrongful withholding of deposits pursuant to operation of the so-called ‘Top Up’ provisions in the Bank’s facility letters and of the FX derivative products?”

20.  Because of the manner in which the Bank has conducted Hunter’s transactions I find that there is an arguable issue as to the manner in which the amount due under the mortgage proceedings might be calculated.  In simple terms, does the calculation involve, as Mr Wou styled it, a crystallisation involving an examination of the FX derivative transactions, which necessarily gives rise to the damages action, or, as Mr Hui put it, a simple matter of calculation from various entries in the bank statements, of the amount due under the mortgage, ignoring the FX derivative transactions and any consequences thereof.  This, Mr Hui put it, would give proper effect to the “no set-off” provisions.

The procedure

21.  If Mr Wou is right, then he will be entitled to a stay of the mortgage proceedings while the amount due is crystallised.  If Mr Hui is right, there should be no stay, and the mortgagee proceedings should continue leaving the defendants to litigate the FX derivative proceedings in Hong Kong at such pace as they may be advised. 

22.  I was concerned that although the defendants had issued their London proceedings in September 2016, those proceedings had not gone beyond the issue of a Claim Form in London containing an appropriate endorsement.  At my suggestion, the present proceedings were adjourned to 25 May 2017, to see if there could be agreement on appropriate directions.  I indicated that it was essential that such directions should include the issue of appropriate proceedings in Hong Kong by Hunter against the bank.

23.  The parties returned on 25 May 2017, but had not been able to reach agreement.  I have considered both sets of proposals.  It is necessary that Hunter promptly commence FX derivative proceedings in Hong Kong, and that steps be taken to resolve the “crystallisation or no set-off” argument upon which the mortgage proceedings will turn.  Further evidence is required for this.

24.  I accordingly make the following directions:

(1) The defendants shall, on or before Friday, 16 June 2017,

(i) file and serve a Writ of Summons, together with a Statement of Claim against the plaintiff; and

(ii) file and serve an affirmation in opposition to (a) the plaintiff’s Originating Summons dated 12 August 2016 (“the Originating Summons”) and (b) the plaintiff’s Summons dated 10 May 2017 (“the Injunction Summons”);

(2) The plaintiff shall, on or before Friday, 30 June 2017, file and serve an affirmation in reply in respect of the Originating Summons and the Injunction Summons and in opposition to the Stay Summons (if so advised);

(3) The defendants do want to before Friday, 14 July 2017, file and serve any affirmations in reply (if so advised);

(4) No further affirmation may be filed without leave of the court and any application for leave to file further affirmations in respect of the Originating Summons and/or the Injunction Summons and/or the Stay Summons must be made not less than 14 days before the substantive hearing (to be fixed in accordance with (5) below) and the supported by an affirmation with reason;

(5) The Stay Summons, the Originating Summons and the Injunction Summons be adjourned for substantive argument for a Judge in chambers on a date to be fixed in consultation with Counsel’s diaries, with two days reserved; and

(6) Costs of this application and the hearings on 18 May 2017 and 25 May 2017 be in the cause.