CHINA MEDICAL TECHNOLOGIES INC (In Liquidation) v. PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP (a firm) AND ANOTHER

HCA 577/2015 & HCA 3272/2016

[2020] HKCFI 567

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 577 OF 2015

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HCA 3272/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3272 OF 2016

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(Heard together)

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D E C I S I O N

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1.  The defendants seek leave to appeal against my decision dated 25 October 2019 (“Decision”).[1] I shall refer to the draft Notice of Appeal as “NoA” below.[2]

2.  The first thing to note is that the defendants do not seek to appeal against the conclusion that the plaintiffs were entitled to serve the writs on PW LLP in Hong Kong pursuant to Order 81 on the basis that PW LLP was carrying on business in Hong Kong (section D of the Decision).  Accordingly, both actions were begun and served on the defendants as of right, and the relevant framework for the defendants’ challenge of jurisdiction is their application for stay of the actions on forum non conveniens grounds.

3.  It is well established that the determination of the appropriateness of competing fora involves an evaluative or balancing exercise akin to the exercise of a discretion, which is “pre‑eminently a matter for the trial judge”.  “An appeal should be rare and the appellate court should be slow to interfere”.[3]  The judge’s decision may only be interfered with on appeal where he has misdirected himself on the principles that govern the discretion, or he has taken into account irrelevant matters or failed to take into account relevant matters, or where his decision is plainly wrong.[4]  “This is a field in which differing conclusions can be reached by different tribunals without either being susceptible to legal challenge.  The jurisdiction to stay is liable to be perverted if parties litigate the issue at different levels of the judicial hierarchy in the hope of persuading a higher court to strike a different balance in the factors pointing for and against a foreign forum”.[5]

4.  The defendants wish to argue that the “substance test” (as explained in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391) should not have been applied at all: NoA §3(e).  As to this:

(1)  This is a new contention not advanced below.

(2)  While the ultimate issue in Metall concerned, inter alia, Ord 11 r 1(1)(f), the substance test was endorsed and explained there in the context of the argument that the relevant acts were not actionable as torts in England because of the double actionability rule (see defendants’ argument at 438H‑439C, plaintiffs’ argument at 440E‑G, court’s ruling at 446A‑E).  The case has been correctly taken as relevant to the governing law of a tort: see The Conflict of Laws in Hong Kong (3^rd ed), §5.086.  There is no reasonable prospect of arguing that this case has been misunderstood and wrongly applied in the numerous cases citing it thereafter.

(3)  The approach in Metall was not new, but based on the case law preceding it, and was not a rigid inflexible approach: see the passage in the 11^th edition of Dicey & Morris cited in Metall at p 444B, which regarded the substance test as “sufficiently flexible” and “without undue rigidity” to enable the court to locate the tort in one place for choice of law purposes.

(4)  The fact that the approach has been superseded in the UK by the Private International Law (Miscellaneous Provisions) Act 1995 does not affect the common law: see §7(3) below.

(5)  As mentioned in the Decision §127, the substance test has been applied in Hong Kong in Shanghai Reeferco Container Co Ltd v Waggonbau Elze GmbH & Co Besitz KG [2005] 2 HKLRD 711, §41 (Deputy Judge Poon, as he then was) and Hong Kong Exchanges and Clearing Ltd v Shi Huaifang [2019] HKCFI 1212, §67 (Mimmie Chan J).

5.  The defendants rely on the double actionability rule and the Red Sea exception[6]: NoA §3(b)‑(d).  As to this:

(1)  This begs the question whether the double actionability rule applies in the first place — a question that is answered in Hong Kong law by applying the substance test to see whether the tort has in substance been committed in a foreign jurisdiction or in Hong Kong.

(2)  For convenience, a summary of the double actionability rule and the Red Sea exception may be taken from the judgment of Deputy Judge Poon (as he then was) in Shanghai Reeferco Container Co Ltd at §47:

“ To recap, the double actionability rule states, as a general rule, that an act done in Country A is a tort and actionable as such in Country B, only if it is both (a) actionable as a tort according the law of Country B (lex fori), or in other words is an act which, if done in Country B, would be a tort; and (b) actionable according to the law of Country A where it was done (lex loci delicti). In the Red Sea case, the central issue arising on the appeal was whether the defendant could rely on Saudi Arabian law (lex loci delicti), to establish direct liability in tort when Hong Kong law (lex fori) does not recognise such liability. In summary, the Privy Council addressed the question in this way. The first requirement of the double actionability rule, that is, the act must be actionable as tort according to the lex fori, is not a test of jurisdiction. It is a rule of choice of law to decide which law should be chosen to determine the relevant issue or issues. That is not an invariable rule. English law (so does Hong Kong law for that purpose) recognises that a particular issue between the parties to litigation may be governed by the law of the country which, with respect to that issue, has the most significant relationship with the occurrence and with the parties. In an appropriate case, a plaintiff could rely exclusively on the lex loci delicti even if under the lex fori his claim would not be actionable. This is the exception to the double actionability rule.”

(3)  The double actionability rule is not applicable where the tort has in substance been committed within the jurisdiction.  This was accepted by the defendants whose skeleton for the hearing stated (at §147) that double actionability was only relevant on the footing the tort was in substance committed in New York.

(4)  The Red Sea exception does not assist the defendants here because it relaxes the double actionability rule so as to allow the application of the lex loci delicti alone.  On the footing that the tort was committed in Hong Kong, the lex loci delicti in the present case is Hong Kong law.  See Shanghai Reeferco Container Co Ltd at §48. 

(5)  Even if one focusses on the acts done in the US alone to find the lex loci delicti, it would likely be the law of Washington DC, not New York law (Decision §§187, 188, 189(10); see also §§155, 157, 159).  There is no evidence that the defendants would not have any liability for negligent conduct or advice under that law: cf NoA §3(d).

6.  The defendants also argue that the court should have followed a suggestion in Rickshaw Investments Ltd and another v Nicolai Baron von Uexkull [2007] 1 SLR(R) 377 at §§59‑66 that even for a local tort (ie one held to have been in substance committed in Hong Kong), an exception akin to the Red Sea exception may be applied, such that Hong Kong law will be displaced by some other law as the law applicable to the tort: NoA §3(f)‑(g), (i)‑(k).  As to this:

(1)  This approach would, quite plainly, be a departure from the law as understood in Hong Kong. 

(2)  The point was, however, not advanced before me. Rickshaw Investments Ltd was a case cited to this court by the plaintiffs for the proposition accepted in section E of the Decision (§119).  The commentary on it, Briggs, A Map or a Maze: Jurisdiction and Choice of Law in the Court of Appeal (2007) 11 SYBIL 123, was not cited.

(3)  Whether or not Hong Kong should adopt such an approach is not a point that I should begin to analyse in the present context of leave to appeal.  It is for the Court of Appeal to consider whether they wish to entertain such a new point for the first time: see eg Lehmanbrown Ltd v Union Trade Holdings Inc & Ors (HCMP 977/2015, 17 June 2015), §10.

(4)  On the facts of Rickshaw, the Singapore Court of Appeal concluded there was no basis for making such an exception.

(5)  According to Rickshaw, the suggestion is in any event limited to the exceptional circumstance where the fact that the tort has been committed in Singapore is “purely fortuitous”: see §§63‑64.  An example given in Briggs (at p 126) is a drunken brawl in the transit lounge at Changi Airport between Qantas passengers who are just about to complete their journey back to Australia.  As can be seen from the Decision (esp sections F & G), the fact that in the present case the tort took place in Hong Kong is a far cry from such “wholly fortuitous happenstance”.  There would be, therefore, as it seems to me, no scope for the application of the exception in any event.  Any discussion of whether it should in principle be espoused as part of Hong Kong law would be academic.

(6)  Further, in Rickshaw, although the allegedly tortious acts were committed by the defendant in the course of performing his contractual obligations which were governed by German law, this was not seen as an exceptional circumstance at all that should lead to German law being applied to the tort: see the passages cited in Decision §119.

(7)  It may be noted that Briggs confirms that if that drunken brawl had taken place in Heathrow, the English common law (on conflict of laws) would have applied English law.

7.  As to the case law under the (UK) Private International Law (Miscellaneous Provisions) Act 1995:

(1)  Contrary to NoA §3(h), there is no inconsistency in the Decision §§129‑131 if one pays attention to the contents of these paragraphs and of the separate provisions of ss 11 and 12 of the 1995 Act.

(2)  Sections 11 and 12 of the 1995 Act do not reflect the application of the Red Sea exception which is an exception to the double actionability rule. 

(3)  Section 10 of the 1995 Act abolishes the common rules for cases falling within the Act.  The common law (the substance test and double actionability rule) as explained in Metall and other cases remains relevant for cases in the UK to which the 1995 Act (and subsequent EU regulations) do not apply: see Base Metal, §17; Ennstone Building Products Ltd v Stanger Ltd [2002] 1 WLR 3059, §15; Sophocleous v Secretary of State for Foreign and Commonwealth Affairs [2019] 2 WLR 956, §§1‑2 & 11 (the common law there is still that “if the cause of action arose in England, then the law of England and Wales applies and no other law”).  Still less has the common law in Hong Kong been changed by analogy with the 1995 Act.

8.  The defendants argue that this court erred in finding that the governing law of the retainer as a contract was not relevant to the determination of the law applicable to the tort: NoA §2. 

(1)  My reasoning on the applicable law to the tort is based upon well‑established and orthodox principles shown in a long line of authorities cited: see sections E, F1 and F2 of the Decision.  No case has been cited by the defendants in NoA §2 or in their skeleton to contrary effect.

(2)  Contrary to NoA §2(f), the authorities cited in the Decision are not limited to employment cases.  For example, Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 (Decision §118) was relevantly about a director’s duty of care in relation to investment transactions undertaken on behalf of the company; Ennstone (Decision §§117, 139) was about the duty of care in tort of a specialist consultancy firm engaged by contract to investigate and advise on the staining of stone.  Both are English Court of Appeal’s decisions that also concern the tortious duty of care arising from a pre‑existing relationship with a contractual origin.  In any event, the principles that pervade the cases do not depend on the particular type of contract in question.  NoA §2(a)‑(e) do not show any reason why the established principles do not apply in this case.

(3)  As made clear in Decision §123, there is no suggestion that one should ignore the facts and circumstances including the contractual engagement of the defendants, but it does not follow that the tortious cause of action is parasitic on the contract as a legal construct.  The reason why the defendants allegedly owed a tortious duty of care, as pleaded, is their appointment and their conduct as CMT’s advisers, and their knowledge and the reasonable foreseeability that the plaintiffs would rely on their advice in Hong Kong and would suffer damage if the defendants were negligent (see statement of claim §§95), not because there was a contractual duty of care.  In the case of PW HK, despite the absence of a contract, there is no challenge (for present purposes) that a duty of care was owed to the plaintiffs.

(4)  The fact that the contract itself may define the scope of the duty is recognised (see Decision §124).  As was said in Ennstone at §47, it is necessary to see what the defendants were engaged to do for the plaintiffs, since the duty of care in tort must relate to that activity.  But it does not follow that the law applicable to the tort follows the law governing the contract.  Neither Reid v Rush & Tompkins Group plc [1990] 1 WLR 212 nor Greenway v Johnson Matthey plc [2016] 1 WLR 4487 cited by the defendants in their submissions concerns conflict of laws principles at all.  As pointed out in Decision §124, there is no suggestion that there is anything special in New York law relevant to the interpretation of the retainer.  As to the doctrine of in pari delicto, see §13 below.

(5)  NoA §2(g) raises the “legitimate expectation” of the parties.  The passages in Red Sea and Breavington v Godleman (1988) 169 CLR 41 referred to are general in nature and add nothing to the argument that has already been dealt with in the Decision.  The same “expectation” could be raised in support for a rule that outlaws the concurrence of claims in contract and tort, but this is not the law in Hong Kong; see section E of the Decision.  The same argument was raised by the managing agents in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, who contended that to allow the Names to pray in aid the more favourable time for accrual of a cause of action in tort would deprive the managing agents of their “contractual expectations” (see p 177G).  This was rejected by the House of Lords, which held that concurrent duties in contract and tort existed (“the law of tort is the general law, out of which the parties can, if they wish, contract”: p 193B).

(6)  If the parties do indeed have any relevant “expectation”, it is open to them to contract to exclude, limit or regulate concurrent liability in tort.  Such limitation would be recognised even in a suit for tort pursuant to the principle set out in Coupland v Arabian Gulf Oil Co [1983] 1 WLR 1136 (Decision §109).  Contrary to NoA §2(m), the Decision does not encroach on freedom of contract.  As the plaintiffs point out, the defendants have deliberately chosen not to include any such clause, or even a choice of law clause, in the retainer.  There is no choice of law clause here that purports to extend to a tort claim, and it is unnecessary to deal with the effect of such hypothetical clause (cf NoA §2(o)).

(7)  The fact that different causes of action may be governed by different systems of law is not “anomalous” as alleged in NoA §2(n), but a potential result of permitting concurrence of causes of action.  In all the cases cited the applicable law to tort and contract are separately analysed and found.  In Matthews v Kuwait Bechtel Corporation [1959] 2 QB 57, Coupland, Base Metal, and Rickshaw, it was all concluded that the governing law of the different causes of action were different.  There is no presumption that a single law governs the legal relationship between businessmen in a contract whatever the complaints may be and wherever their disputes are adjudicated.  In fact, even under the same system of law, the liability flowing from the same acts may be different under different causes of action, for example because of different rules of remoteness of damage (Decision §113).

(8)  The passages in the cases of Tremendous Success Holdings Ltd v Sinosoft Technology Group Ltd (unrep, HCA 2345/2013, 11 July 2016) and Murakami v Wiryadi (2010) 268 ALR 377 cited by the defendants in their skeleton at §22 concern claims of breaches of equitable obligations, which is quite a different subject where the rules are not yet settled or clear (see eg Rickshaw, §§75‑81; Murakami, §§146, 149).  In fact, in Tremendous Success, so far as the tort claim for conspiracy is concerned, the court referred to the substance test and double actionability rule (§§135‑138).  The passage relied upon in Lord Browne‑Wilkinson’s speech in Henderson v Merrett at p 206 has been dealt with in the Decision §§111‑112; see also §124.  In Rickshaw, despite the contract was expressly governed by German law (§4) and the claims in equity were also found to be governed by German law (§85), the applicable law to the claims in tort was held to be Singapore law (§73).

9.  I do not think there is reasonable prospect of success to contend, as alleged in NoA §4, that this court erroneously reduced the flexibility of the substance test by following certain precedents.

(1)  On the contrary, I reminded myself that the substance test is to be applied “broadly, looking back over the series of events constituting the tort” (§140) and “not to be applied mechanistically but with common sense and due regard for comity” (§175) and, I believe, proceeded accordingly.  The common law is after all a system of law constituted by precedents and there can be no complaint that the court has regard to precedents in coming to a decision.

(2)  In the Decision §128, I pointed out the importance of knowing the legal context of the authorities.  I have explained why some of the cases referred to are of relevance (Decision §§135‑140) and why some other cases are not (Decision §§141‑142; see also §228 and footnote 79).  NoA §§4(c)‑(d) & (f) provide nothing to show any error.  The case of Distillers Co (Biochemicals) Ltd v Laura Ann Thompson [1971] AC 458 cited in NoA §4(a) is itself a case on the NSW equivalent of Ord 11 r 1(1)(f): see Decision, footnote 37 in §127.

(3)  NoA §4(f)(1) suggests there is a difference between cases where a duty arises at the same time as the breach and cases where the duty arises before the breach.  This is not a point raised before but, in any event, FFSB Ltd (formerly known as Fortis Fund Services (Bahamas) Ltd) v Seward & Kissel LLP [2007] 5 LRC 224 (Decision §137) and Ennstone (Decision §139) show the application of the substance test in situations where the duty arose prior to any breach.

(4)  Langlands v SG Hambros Trust Co (Jersey) Ltd [2007] EWHC 627 (Ch), referred to in NoA §4(d)(1) but not cited before, is a decision under s 11(2)(c) of the 1995 Act, not under the common law substance test.  In any event, as can be seen from section F of the Decision, this court did not omit consideration of the circumstances in which the duty initially arose.

(5)  There is no question of general importance whether English case law decided under the 1995 Act or the Lugano Convention is of assistance.  Such case law has no direct application in Hong Kong and whether assistance can be derived from them depends on the context and reasoning of the particular case, as appears from the Decision §§128, 129‑132, 138, 142, 228.  Specifically, there is no need to enter into the question whether such case law (such as Microsoft Mobile OY v Sony European Ltd [2017] EWHC 374 (Ch)) is relevant to the consideration of the “act” limb in Ord 11 r 1(1)(f): see Decision §228 and footnote 79.

(6)  Ultimately, the application of the substance test also involves an evaluative exercise taking into account a variety of matters, weighing and balancing them.  I apprehend the conclusion is not something the Court of Appeal will lightly or readily interfere with.

10.  As to NoA §5:

(1)  The chapeau in NoA §5 distorts the reasoning in the Decision by omitting any mention of the various other matters taken into account, including the fact that a very substantial part of the alleged breaches of duty occurred in Hong Kong, viz the failure to take investigative steps which ought to have been taken in Hong Kong (Decision §§153, 154, 172, 193).  There is no proposed ground of appeal challenging this.

(2)  Noticeably absent in the NoA also is any challenge against the reasoning that damage is the gist of the cause of action (Decision §140) and that the damage in respect of the tort substantially occurred in Hong Kong (Decision §§6, 8, 164‑171, 173 & 195).

(3)  NoA §5(e) mischaracterises the reasoning in the Decision: see §§162‑163, which is based on the facts and evidence relating to CMT and the Audit Committee, not an abstraction.  The defendants instead appear to advocate a mechanical and abstract exercise by asking where CMT was incorporated or listed or had its manufacturing facilities in order to decide where reliance occurred (NoA §5(c) & (d)).

(4)  The defendants’ view of the pleaded reliance as being confined to the two resolutions of the Audit Committee (NoA §5(i)) is untenable. It is pleaded in the statement of claim (§132) that in reliance on the defendants’ statements and advice, the Audit Committee took no steps, inter alia, to stop the payments to the Supreme Well group on 3 July and 4 December 2009, freeze or recover payments made prior to 3 July, continue the Investigation, or report to the auditors KPMG HK and PwC (Decision §162).  On the evidence I have seen, these actions would be likely to have been taken or initiated by Mr Bruce in Hong Kong if correct advice had been given (Decision §§163, 168‑169, 173).  This is not challenged in the NoA.  Hence “Mr Bruce’s reliance on the advice probably took place in Hong Kong” (Decision §172), which is neither a conjecture nor outside the plaintiffs’ case: cf NoA §5(h).

(5)  NoA §5(l) does not show any basis for an appeal with reasonable prospects because it in effect cavils at the weight given to particular matters — an area the appellate court does not usually enter.

11.  As to NoA §6, I have explained in sections E and F of the Decision why no finding on governing law of the contract was made in the Decision; see also paragraph 8 above on NoA §2.  Further, NoA §2(h) is incorrect in saying no law other New York law was contended for; it was the plaintiffs’ position at the hearing that the substance of what was to be done under the contract pointed to Hong Kong and the Mainland, and that New York connections were marginal.  There is the further point, no longer challenged by the defendants, that PW LLP was carrying on business in Hong Kong (section D of the Decision) and part of the reason for the defendants obtaining the engagement was because of their Hong Kong office (Decision §189(7)).  The defendants continue to conflate the US and New York: Decision §§188, 189(10); NoA §§3(a)(1) & (2), 5(l), 6(b), 6(f).

12.  As to NoA §9:

(1)  The discussion of juridical advantage in the Decision was premised on the footing that Hong Kong law is the applicable law to the tort: Decision §208.  NoA §9(b) mischaracterises the reasoning.

(2)  As to NoA §9(c) & (d), the disadvantage arose from the application of a New York law defence notwithstanding that the applicable law of the tort is Hong Kong law: Decision §209‑211.  It is not correct to suggest this was contrary to Spiliada Maritime Corporation v Cansulex Limited [1987] 1 AC 460, 482D.  There Lord Goff was referring to the “mere fact” that the plaintiff has an advantage in proceedings in England (p 482B).  At pp 483H‑484A his Lordship recognised a defence in a foreign forum could deprive a plaintiff of a legitimate juridical advantage, such as on limitation issues.  The reasoning in the Decision is supported by the English and Hong Kong authorities there cited: see §§210‑211, which have not been said to be wrong.

13.  NoA §§2(l) and 10 seem to suggest that the in pari delicto defence is intrinsic to or an implied term of the contract.

(1)  This is not a contention advanced before me; see eg the last 3 sentences of Decision §124.

(2)  The defendants’ own expert evidence is that the in pari delicto doctrine is not a feature of the retainer or even contract law, but a common law doctrine of New York based on public policy, applicable to many kinds of claims (Decision §§125, 209).  The defendants’ skeleton for the hearing also described it as a “public policy doctrine” (§116.5) serving “public policy purposes” of New York (§101).

14.  NoA §11 alleges there are material errors of fact in the Decision.  I do not think they are material or — except for the description of Mr Loftus and Ms Ioffredo as partners — errors at all.

(1)  Mr Loftus and Ms Ioffredo, whilst in fact not partners, were core members of the Investigation team and both were based in Washington DC: Decision §§186, 188.

(2)  It was correct that “much” of the time billed in the US was for review of documents: Decision §188.  I did not overlook that there was time billed by senior personnel as well: see eg Decision §152.

(3)  It was correct that of the three core members, it was Mr Loftus who liaised with the SEC: Decision §189(10).  The defendants’ own evidence was that Mr Kramer was not a core member and Mr Ricciardi could not appear before the SEC.

(4)  Mr Bruce was in fact the first person to whom the defendants relayed their opinions, on 1 July 2009.  The plaintiffs’ pleaded case was that negligent advice was given on each of 1, 2 and 18 July 2009: see statement of claim §§7, 11, 14‑15, 113, 118, 119. The advice on 1 and 2 July 2009 was integral to the plaintiffs’ case on loss and damage and particularly critical to the loss of US$51.75m paid out to Supreme Well on 3 July 2009 (Decision §164(1)); see statement of claim §§132.1, 173‑177.

15.  For all these reasons, I do not think there are reasonable prospects of success in the proposed appeal.

16.  Nor do I consider there is any special reason why leave to appeal should be given.  This court applied well established legal principles to determine the place of the tort and the law applicable to the tort.  There is no relevant conflict of authorities.  The conclusions on the substance test and on the Spiliada principles are based on an evaluative exercise taking account of the detailed facts of this particular case.  In essence, the defendants wish to contend that the governing law of the retainer is New York law and then contend for judicial legislation on the governing law of tort in a form that mandates it to follow the governing law of the contract even where there is no choice of law clause whatsoever. 

17.  The justice of the matter as referred to in Decision §§212-214 is fortified by the fact that the defendants now accept that PW LLP was carrying on business in Hong Kong.

18.  Accordingly, the application for leave to appeal is dismissed.  There will be an order nisi that the defendants are to pay the plaintiffs’ costs, to be taxed if not agreed.