XINJIANG XINGMEI OIL-PIPELINE CO LTD v. CHINA PETROLEUM & CHEMICAL CORPORATION

HCCL 6/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.6 OF 2004

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REASONS FOR JUDGMENT

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The application

1. By summons dated 3 May 2004, as amended on 10 November 2004, the defendant in these proceedings, China Petroleum & Chemical Corporation, sought a stay of these proceedings on the basis that Hong Kong was an inappropriate forum and that the Beijing High Court was a clearly and distinctly more appropriate forum in which the case may be tried more suitably for the interests of the parties and the ends of justice.

2. At the conclusion of argument this court granted the stay in terms of paragraph 1 of the amended application, with reasons to be given later.

3. A further order was made, in terms of paragraph 3 of the summons, that the costs of and occasioned by this action, including the costs of this application to stay these proceedings, be paid by the plaintiff to the defendant, such costs to be taxed if not agreed.  The defendant’s request that the application be certified as fit for two counsel was denied.

4. I now give reasons for the judgment thus rendered at the hearing on 2 February 2005.

The background

5. This case has generated a significant amount of paper.  In essence, however, it is relatively straightforward.

6. The plaintiff herein, which I shall call ‘Xingmei’, is a company incorporated in the PRC.  In fact, Xingmei is a Sino-Foreign Joint Venture, established under PRC law, between China National Star Petroleum Company Limited, a PRC company, and GeoMaxima Energy Company Limited, a BVI company, to construct and maintain a 70 kilometre oil pipeline from the Ta He Oilfield to Lun Tai County in Xinjiang Province.

7. The defendant company, more generally known as ‘Sinopec’, is also incorporated in the PRC.  It has its registered office in Beijing, and its headquarters and management functions are based in Beijing.

8. Sinopec is registered in Hong Kong under Part XI of the Companies Ordinance, Cap.32, and its shares are listed in Hong Kong.  Its presence in this territory is that of a representative office, with two local staff whose responsibility, inter alia, is to liaise with the Hong Kong Stock Exchange.  It has an indirect subsidiary, Sinopec (Hong Kong) Limited, to which the Hong Kong Government awarded a land grant for the operation of petrol stations.

9. The writ in these proceedings was filed by Xingmei on 6 February 2004, and a Statement of Claim followed on 30 March 2004.  On 13 October 2004 this court gave directions for the hearing of this application, pending the determination of which no Defence has been filed.

10. Essentially this is a contractual dispute relating to the construction and application of the terms of a Transportation Agreement, dated 25 November 1999, which was entered into between Xingmei and China National Star; the plaintiff’s pleaded case is that, consequent upon a restructuring, Sinopec assumed the liabilities of China National Star under this Transportation Agreement.

11. The substance of the dispute is thus : Xinmei claims that it was granted an exclusive right under the Transportation Agreement in respect of the storage and transportation of the crude oil produced by Sinopec at the Ta He oilfield through the joint venture pipeline to Lun Tai County, Xinjiang, but that contrary to and in breach of its obligations under the Transportation Agreement, Sinopec has arranged for the storage and transport of the crude from the oilfield via its own new pipeline, alternatively that Sinopec has intimated an intention not to effect the storage and transportation of such crude oil so as to enable Xingmei’s pipeline to operate at full capacity.  Accordingly, damages are claimed for breach of the Transportation Agreement.

12. A number of defences are raised.

13. Sinopec disputes Xingmei’s authority to sue.  It is further said that the Transportation Agreement is governed by PRC law, that it does not confer upon Xingmei an exclusive right in relation to the storage and transfer of the oil from the oilfield, that it does not preclude Sinopec (as opposed to third parties) from so transporting the oil using its own pipeline, that the pipeline in question was inadequate to transport crude oil of the density that was being produced at the Ta He Oilfield without adverse safety consequences and damage to the pipeline, and that in any event this dispute has its origin in another dispute, an ‘equity transfer dispute’ ongoing between Sinopec and Xingmei’s majority shareholder under an Equity Transfer Agreement under which over RMB88 million is owed by such shareholder to Sinopec.

14. The foregoing summation is intended to give but a flavour of this litigation, which, I am bound to say, at first blush struck me as a corporate fight indisputably and inextricably connected with China, as indeed in this application the defendant so contends.

Applicable principle

15. Applications for a stay of proceedings on the basis of forum non conveniens principles constitute a repetitive (and time-consuming) element within the work of the Commercial Court in Hong Kong.

16. Accordingly the governing principles are tolerably well known.  Indeed, they are not in dispute.  In fnc applications the burden is on the defendant applicant to demonstrate that there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of the action in that the case may be tried more suitably for the ends of justice and the interests of the parties: see the speech of Lord Goff in Spiliada Maritime Corporation v. Cansulex, [1987] AC 460, at 476B-D.  See also commentary in the Hong Kong White Book 2004, at M/N 11/1/10.

17. In so far as an examination of ‘connecting factors’ within the particular factual matrix points to another identified forum as the natural forum for the trial of the action, the burden then passes to the plaintiff to demonstrate some personal or juridical disadvantage which would accrue upon grant of a stay by reason of which justice requires that the trial of the action nevertheless should take place in Hong Kong : see, for example, Dicey & Morris, The Conflict of Laws, Vol 1 (30^th ed., 2000), at para.12-021.

Connecting factors

18. I accept the proposition that the court will not examine the so-called ‘connecting factors’ in the abstract, but will determine whether such factors will lead to the conclusion that another forum is more appropriate for the trial of the action : see Rambas Marketing Co. LLC v. Chow Kam Fai, David, [2001] 3 HKC 250, at 255C-F, per Recorder Ma (as he then was), subsequently affirmed on appeal in CACV 1055 of 2001.

19. In this instance Sinopec submits that the Beijing High Court is clearly and distinctly the more appropriate forum and “the natural and obvious centre of gravity” in this dispute.  Xingmei contends otherwise.

20. It strikes me that in this case the scales are heavily weighted in favour of the defendant.  In fact, apart from Sinopec’s registration under Part XI, and its listed status on the local market, Hong Kong has no connection whatever with that which is very obviously a PRC-based dispute.

21. This is litigation about a contractual agreement entered into in China and governed by PRC law, the subject matter of which is the construction by the defendant of an oil pipeline in Xinjiang, wherein the alleged breach of agreement, in terms of the relevant management decision, took place in Beijing at the head office of the defendant, wherein all the relevant witnesses, save perhaps one, are in the PRC, and all the relevant documentation is in the PRC and exclusively is in the Chinese language, and wherein the related shareholder dispute — allegedly the origin of the current litigation — also is taking place in the PRC.

22. Accordingly, looked at largely and liberally, it is difficult to make a cogent prima facie case for trial in Hong Kong, valiantly though Mr Chow SC strove to do so.

23. In this context, Mr Chow submitted that in reality this was no more than a dispute over the construction of the Transportation Agreement, that the Hong Kong court was in as good a position so to construe the Agreement when armed with expert assistance as to Chinese law — there was, he said, no suggestion in this case that there was any special principle or applicable rule of construction which would render the Hong Kong court any the less suitable to construe this contract.

24. Enticing though the argument was, I do not consider that this case can be confined simply to argument as to the construction of contractual provision, and even if this was the case, I hesitate fully to embrace the proposition that the Hong Kong court is in as good a position as the PRC courts in terms of the application of PRC law.  Plainly no court applying another system of law can perform this function as surely as the ‘home’ court.

25. Mr Chow’s second main point boiled down to the bald proposition that, if indeed there was an alternative appropriate forum, the defendant had not discharged the necessary burden of demonstrating that the court stipulated by the defendant in this application, namely the Beijing High People’s Court, was the natural and appropriate forum as compared with the Xinjiang High People’s Court, which was the more obvious choice.  Thus, he maintained, this application should be considered as having failed at the first hurdle, and the plaintiff, which had served these proceedings on the defendant as of right, should not be deprived of such right to have this matter decided by the Hong Kong court.

26. I reject this argument also.  In the particular circumstances I see no reason why the Beijing High People’s Court should not be considered as the natural and appropriate forum for the trial of this case.  In this connection I am minded to agree with Mr Jat’s submission that whilst the physical events which constitue the subject of this case had taken place in Xinjiang, which of course is where the pipelines in question are situate, the management decision to do what has been done — and of which complaint now is vociferously made in terms of contractual breach — had been taken in the Beijing boardroom of his client, and that as a consequence there was no reason to send this dispute to the northwest frontier when the issue could conveniently and cogently be debated in the Chinese capital.

27. Accordingly I am unsympathetic to Mr Chow’s ingenious approach on the facts of a case wherein it is undisputed that under PRC laws both the Beijing High People’s Court and the Xinjiang High People’s Court possess jurisdiction.  Nor do I consider that he is right in arguing that, when compared with the Xinjiang forum, the Beijing court and the Hong Kong court stand on a similar footing.

28. It is likely to be rare indeed that argument along such lines — namely, that a specific court in a specific country is not the forum conveniens as compared with another court in that same country — will be successful; in this connection the learned editors of Dicey, op cit., at p.396, fn 81, note that “if there are two such fora, both more appropriate than England, a stay may be granted: there is no requirement that one be more appropriate than the other”.

29. For the avoidance of doubt, on the factual matrix in this case in my view both fora in China are clearly more appropriate than Hong Kong, and had the application stipulated a stay of proceedings in favour of the Xinjiang High People’s Court it is likely that such equally would have been successful.

30. It follows from the foregoing that in my judgment the defendant has discharged its burden of demonstrating the existence of an alternative forum conveniens.  It seems to me that every factor, be it the availability of the foreign forum and the overwhelming nexus of the PRC with this dispute — whether such nexus be considered in terms of proper law of the agreement, locus of the alleged contractual breach and consequential damage, availability of witnesses and documentary materiel, and the absence of travel restrictions — points to trial at the designated court in China.

31. I consider these factors in light of the apparent lack of any factual connection between this dispute and Hong Kong, save, of course, from the fact that jurisdiction is founded here against Sinopec as of right; significant though this latter aspect be, (and often is in applications of this type) in this instance it is manifestly insufficient to prevent the scales from tilting heavily in favour of trial at the specified Chinese court.

32. I turn now to that element of the fnc equation which is the exclusive province of the party resisting the stay application.

Juridical disadvantage

33. In terms of the discharge of the burden upon it the plaintiff prays in aid several aspects which, it says, conclusively weigh in the balance against a stay of proceedings in favour of the Beijing High People’s Court.  I deal with them briefly in the order in which they were advanced.

(i)  Lack of a right of appeal/lack of transparency and natural justice within the adjudication process in the Supreme People’s Court

34. It is said in evidence filed on behalf of the plaintiff by one George Quiangguo Fu, the managing partner of a PRC law firm and formerly a judge of the Shanghai High People’s Court, that in light of the huge amount in dispute, the importance and status of the defendant, the fact that the dispute relates to crude oil transportation, a key sector of the PRC economy, and the fact that this dispute has a ‘foreign element’, in the sense that Sinopec is listed on the major stock exchanges of the world, that it it likely that the Supreme People’s Court will take over first instance jurisdiction in this matter, even though this case be transferred to the Beijing High People’s Court.

35. Consequent upon this suggested scenario, two things are said to follow : first, that should this eventuality occur the plaintiff would lose a right of appeal, and second, that under the PRC system the case may not in fact be decided by the trial bench but behind closed doors by an ‘Adjudication and Supervision Committee’, contrary to the rules of natural justice.

36. With respect, this strikes me an ambitious argument in the circumstances of this case.  The obvious starting point is that it is predicated on a situation which presently does not exist, and one which the evidence demonstrates almost certainly will not occur.

37. In this connection the expert witness who has given an affirmation on behalf of Sinopec, Li Fan, a former Senior Judge of the Supreme People’s Court, has confirmed that the SPC has never conducted a first instance hearing of any civil claim since the establishment of that court in 1949, and that no authority has been cited by the plaintiff’s expert in which Article 21 of the Civil Procedure Law (which is the article in question) has ever been invoked by the SPC; in fact, the evidence is that Article 21 envisages exceptional circumstances which would have a major impact on the whole country, such as an issue affecting Chinese sovereignty.  Indeed, Mr Jat went so far in argument as to state that he had been instructed that the only occasion since its establishment in which the SPC had exercised first instance jurisdiction was in the celebrated trial of the ‘Gang of Four’ in the early 1970’s.

38. Moreover, the plaintiff’s argument in this regard appears to be predicated on the assumption that it would lose before the SPC; in this purely theoretical situation, such lack of a right of appeal would, of course, equally be applicable to Sinopec.  In addition, as Li Fan points out, Article 10 of the PRC Civil Procedure Law provides that parties to a civil dispute are entitled to a right of appeal, and that a significant reason why the SPC has never invoked its right of first instance jurisdiction is precisely because of the fundamental principle of a two-hearing system.

39. It follows, therefore, that the criticism put forward as to the adjudication process does not arise on the facts of this case.  Accordingly there is no necessity further to consider this issue, save to note that in any event Li Fan firmly disputes the allegation made as to the position of the Adjudication Committee; he observes, inter alia, that the sole right to hear a case remains with the collegiate trial bench, and that the Committee “has no authority to participate in the hearing of a case directly or to determine the results of a case”.

40. In my judgment, there is nothing in these points which should weigh heavy within the discretionary ‘mix’.

(ii)  Judicial preference accorded to state-owned enterprises

41. On behalf of Xingmei it is asserted by George Quiangguo Fu that there is a ‘culture’ within the PRC judiciary which fosters the protection of state property, and that the courts favour state-owned enterprises of which, it is said, Sinopec is a prime example.  It is also said that Sinopec will call upon its “official connections” to seek to influence the decision of the PRC court.

42. This latter allegation is disputed by Li Fan, on behalf of the defendant, who states that after twenty years as an SPC judge he has not once been approached by government officials seeking to influence the outcome of any case he was handling, nor has he heard from any of his judicial colleagues that they had been so approached, although he does acknowledge that isolated instances of such conduct are possible; in such instances, however, he notes that there are “sufficient safeguards” in place, citing Article 126 of the Chinese constitution providing for the independent hearing of claims by the People’s Court, and further that in 2001 the General Office of the State Council issued a special document requiring all administrative organs to refrain from interfering with the independent hearing and determination of a claim by the court.

43. As to that which may be described as a ‘culture of preference’ for state enterprises, said to be based on deep-rooted systemic and political considerations, Li Fan states that it is wrong for Mr Fu to say that state-owned enterprises are unfairly favoured by PRC judges, and observes that no specific example is proffered of any such alleged bias.  Li Fan states that it is “not uncommon” for judgments of People’s Courts to be rendered against state-owned enterprises in civil and commercial claims, and in his evidence he cites no fewer than eleven examples of significant cases in which either the Supreme People’s Court or the Beijing courts ruled against such state-owned enterprises.  It is further pointed out that under Articles 11 and 13 of the PRC Constitution the rights and interests of private parties are enshrined as a constitutional norm, and that Article 3 of Chapter 1 of the General Principles of Civil Code provide that all parties to a civil claim have equal status.

44. Mr Li also states that this is not a case involving a ‘foreign element’ (as the plaintiff initially had asserted), and he has further drawn attention to extracts from the 2003 and 2004 SPC work reports, which point to improvements in recent years in the administration of justice, including the quality and experience of judges, the enforcement of judgments, and the fairness of the adjudication process, although at the same time it is fair to record that it is candidly recognized by Xiao Yang, the Chief Justice of the Supreme People’s Court, within the 2004 report, that it is an ongoing process to rectify various perceived inadequacies within the PRC legal system, it being stated that “further measures” will be intensively and progressively instituted in order to solve the problems identified and described by the Chief Justice in terms of the overrall quality of justice administered in the Chinese courts.

45. At the end of the day all that a court fairly can do is to act on the quality of the evidence placed before it in any particular case.  In this instance, having considered evidence in the round, and in the absence of compelling evidence underpinning the general and perjorative conclusions presently asserted on behalf of the plaintiff, I decline to hold that Xingmei will suffer any juridical disadvantage by having its case heard before the Beijing High People’s Court, in terms either of preferential treatment of Sinopec or in terms of outside influence being brought to bear on the judges hearing the dispute.

46. In short, in my judgment the case as put up by the plaintiff in this regard has not been made out.

(iii)  Difficulty of enforcement of judgments against state-owned enterprises

47. The fourth particular area prayed in aid under this head is that which is said to be the difficulty of enforcing judgments against enterprises such as Sinopec.

48. I do not consider that there is anything in this point to tip the balance in favour of the plaintiff and against the grant of a stay.

49. Mr Li Fan states in his evidence that a judgment obtained against Sinopec before a Mainland court is likely to be more readily enforceable in China than a judgment obtained before a Hong Kong court.  There is no evidence that a PRC judgment cannot be enforced in Hong Kong in the normal manner, nor has the plaintiff provided any examples wherein a state-owned enterprise in general or Sinopec in particular successfully has resisted enforcement by the Beijing High People’s Court, and save for speculative assertion there is no evidence that Sinopec is able to influence enforcement officials.  The 2003 SPC work report indicates that the courts are engaging in substantial efforts to improve efficiency of the enforcement process.  I note, further, that Sinopec is a large company in world terms, with assets in China and worldwide, and that there is evidence from Li Fan regarding the enforcement process if the company is found liable in this dispute by the Beijing High People’s Court: his conclusion, which of course differs from that of Mr Fu, is that in the event of liability on the part of the defendant there will be no problem in terms of enforcement.

50. At the interlocutory stage the court can do no more than assess the relative state of the evidence, and form a conclusion.  And once again, in my view the plaintiff did not succeed in making its case under this subhead.

51. Accordingly, in my judgment the plaintiff failed to discharge the burden upon it of demonstrating that it will suffer a personal or juridical disadvantage if this action is stayed in favour of the Beijing High People’s Court.

52. Absent the specific categories of disadvantage invoked for this purpose, that which perhaps also is notable is what was not said in this context; there was, for example, no suggestion that prejudice would be suffered consequent upon procedural or substantive legal differences between the two systems, or that there would be any difficulty with limitation periods, delay in proceedings in the PRC, or in terms of recoverability of costs.

Generally

53. For the reasons herein adumbrated, therefore, in the exercise of its discretion this court concluded that it was appropriate to make the orders specified at the conclusion of the hearing of this application.

54. This struck me as a paradigm case for the grant of a stay of proceedings.  Mr Chow said all that could reasonably be said on behalf of his client, but at the end of the day I had little difficulty in concluding that Mr Jat was correct in his opening observation that in terms of such an application this must be one of the clearest instances to have been placed before the Commercial Court.