WERNER BOSSARD v. URS HESS

HCA 2721/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2721 OF 2016

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J U D G M E N T

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1.  This is an application by the defendant (“Mr Hess”) by summons dated 5 December 2016 to stay an action, namely, HCA 2721/2016, (“the Hong Kong action”) commenced by the plaintiff Werner Bossard (“Mr Bossard”) in Hong Kong against him on 19 October 2016 in favour of pre-existing Swiss proceedings (“the Swiss action”) on the grounds set out in Order 12, rule 8(2A)(c) (“the parallel proceedings ground”) and/or rule 8(2A)(a) (“the forum non conveniens ground”) of the Rules of the High Court.

Background facts

2.  Both parties are Swiss nationals whose mother tongue is Swiss German although both know sufficient English for business purposes.

3.  In 2001, Mr Hess started a business in Switzerland using the trademarks “Café Gourmet” and “Swiss Gourmet”.  The business which involved the sale and distribution of high-end specialist items including nuts, dried fruits and roasted coffee beans was incorporated in Switzerland under the name Swiss Gourmet AG (“SG Swiss”).  From 2001 until the present, SG Swiss is located in Switzerland.

4.  Prior to the commencement of his partnership with Mr Bossard in 2012, Mr Hess was the sole owner of the business and the sole owner of SG Swiss.  By then, the business had already expanded beyond Switzerland: Swiss Gourmet South Africa (“SG S Africa”) was established in 2007 and Swiss Gourmet Hong Kong (“SG HK”) in 2008.  Mr Hess was the sole owner of the issued share capital of those companies.

5.  Mr Hess and Mr Bossard became acquainted in 1991 when they both worked for a common employer in Colombia and overlapped for a few months.  During the second half of 2011 when Mr Bossard was about to leave or retire from Kraft Foods (his then employer), Mr Hess and Mr Bossard started exploring the possibility of forming a partnership.

6.  The parties reached an agreement for a partnership with Mr Hess being the 80% majority partner and Mr Bossard the 20% minority partner.  The partnership was effective from 1 January 2012 although the partnership agreement was only signed on 10 February 2012.  It was a home-made document drafted by Mr Hess in English and executed by the parties in Switzerland.

7.  In 2013, SG Swiss set up another affiliate known as Swiss Gourmet Australia (“SG Australia”).  As is the case of the other affiliates, Mr Hess is its sole owner.

8.  In addition to the partnership agreement, a year later, on 20 February 2013, the parties entered into a bonus agreement.

9.  By early 2015 there was a loss of trust between the partners who agreed that the partnership should be dissolved.  In the result, Mr Bossard exited from the partnership as of 31 December 2015. 

10.  Before setting out the chronology, the partnership agreement and bonus agreement will be outlined in brief.

The partnership agreement

11.  The salient provisions may be summarised as follows:

(a)  the partnership commenced on 1 January 2012: clauses 2(c) and 6(a);

(b)  clause 1 set out the ‘definition and allocation of equity’;

(c)  either party could terminate the partnership by tendering one year’s notice to exit the partnership — “Payout based on market valuation of Equity”: clause 3(d);

(d)  the basic and standing equity required Mr Hess to pay in US$4 million and Mr Bossard US$1 million although both partners must double their equity to a total of US$10 million “during the main crop(s)”: clause 2(a) and (c);

(e)  equity would be defined once per year on December 31 and profits would be retained in the company: clause 3(e) and (f);

(f)  the parties would share the profit and loss by reference to their equity participation in the ratio of 4:1 between Mr Hess and Mr Bossard: clause 2(e);

(g)  Mr Hess would be responsible for sales to North America and for purchasing from South and North America and Mr Bossard for sales to Europe and purchasing from Africa and Europe: clause 7 which further provided as follows:

“ HK-office: Operational: lead by both partners, depending on the sourcing of products

Administrative: [Mr Hess]

Toll-cracking operations: lead by both partners, depending on the sourcing of products

Administrative: [Mr Hess]”

The bonus agreement

12.  It provided as follows:

(a)  starting from 2013, each partner would be credited with a bonus of 10% of the net profits after tax;

(b)  an agreed formula was set out for the bonus calculation;

(c)  the bonus would not be paid but retained within the ‘company’;

(d)  the basis of the bonus calculation would be the EPL which should be completed within two months of the business year.

13.  The partners had no difficulty agreeing the EPL for each of the years 2012, 2013 and 2014 notwithstanding the ‘current’ disagreement as to what the acronym “EPL” stands for.  According to Mr Hess it means “estimated profit and loss” and according to Mr Bossard it means “equity–profit–loss”.

14.  Sometime during the fourth quarter of 2015, Mr Hess paid Mr Bossard a sum of US$3,226,601 as his entitlement upon dissolution.  It was apparently calculated on the basis that the partnership business made no profits in 2015 which state of affairs Mr Bossard disputed.

15.  It is apparent that the determination of 2015 EPL, in other words, whether or not the business made any profits in that year is one of the central issues in the partnership dispute that requires resolution.

Chronology of events after dissolution

16.  

(i) In January 2016 Mr Hess’ Swiss lawyer (Mr Schild) advised Mr Bossard in writing that the partnership incurred a substantial loss in 2015 and that there would be no bonus.

(ii) Mr Bossard’s then Swiss lawyer (Mr Borter) refused to accept that the partnership was unprofitable in 2015 and sought substantiation. At the same time he asserted by letter on 26 February 2016 that there should have been profits of US$2.3 million as at November 2015[1].  Thereafter he broke off communication.

(iii) It seems that on 26 February 2016, Mr Hess proposed that there should be a meeting to be attended by Mr Hess, Mr Bossard and Mr Bossard’s brother Dr Andreas Bossard (a lawyer) to resolve the dispute.  While such a meeting was apparently scheduled, it never took place.  However, it is unclear which party was at fault.

(iv) In any event, by mid-March 2016 Mr Hess was informed that Mr Bossard had obtained legal advice to the effect that court claims have to be filed in Hong Kong. 

(v) On 18 March 2016 Mr Bossard’s new Swiss lawyer (Dr Nageli) intimated to Mr Hess’ Hong Kong solicitors (William KW Leung & Co (“WL”)) that Mr Bossard was planning to institute legal actions in Hong Kong although the identity of the Hong Kong law firm that would be handling the claim was not disclosed.

(vi) On 20 April 2016, in response to the threatened Hong Kong proceedings, WL intimated that Mr Hess had given instructions to WL to make claims in Hong Kong against Mr Bossard including claims concerning alleged breaches of the partnership agreement.  WL then requested information regarding Dr Nageli’s “local Hong Kong partnering law firm”.

(vii) On 12 July 2016 WL (after referring to its 20 April letter and Mr Bossard’s threatened Hong Kong proceedings) advised Dr Nageli that his firm had instructions to apply to dismiss any Hong Kong proceedings on the basis that Switzerland, and not Hong Kong, is the appropriate forum for resolving the dispute.

(viii) On 31 August 2016 Mr Schild sent the financial statements of SG HK to Dr Nageli.

(ix) This was followed by a letter dated 26 September 2016 from Mr Schild to Dr Nageli setting out the results of the SG Group and its affiliates.  Mr Schild also offered inspection of the audited accounts and financial statements of the SG Group at the offices of the partnership’s Swiss accountants in Switzerland on 6 October 2016.

(x) On 5 October 2016 Dr Nageli requested that all correspondence relating to the partnership should be addressed Mr Bossard’s Hong Kong solicitors whom she proceeded to identify and also requested that the 2015 EPL be made available.

(xi) The inspection offer was not taken up.

(xii) On 12 October 2016 Mr Schild (on behalf of Mr Hess) initiated the Swiss action by filing the Application for Conciliation (“Conciliation Application”) with the Conciliation Authority which was mandatory under Swiss procedural law, that being the only way of initiating an action.  Under Swiss law a conciliation application has the effect of “pendency” for the purposes of limitation.  Mr Hess sought an order that Mr Bossard be ordered to pay Mr Hess US$124,567 with interest of 5% from 11 October 2016 as a result of the partnership dissolution.

(xiii) Under Swiss law, only in the event of conciliation failing would the Conciliation Authority issue a formal notice of permit to the applicant to enable him to file a claim.  Without that formal notice, no further steps could be taken.

(xiv) Procedurally, it was for the Conciliation Authority rather than the applicant to issue a notice to the parties scheduling a hearing.  There is no evidence that the party making the application has to give notice of his Conciliation Application to the respondent.

(xv) On 10 November 2016 the Conciliation Authority issued a notice of hearing to the parties, scheduling it for 28 November 2016.

(xvi) Pursuant to Mr Bossard’s request, the scheduled hearing was postponed to 26 January 2017.

(xvii) Meanwhile, on 19 October 2016, a week or so after the commencement of the Swiss action, the writ was issued in the Hong Kong action, seemingly, without there being any letter before action.

(xviii) On 30 November 2016, in response to Dr Nageli’s request, Mr Schild provided the 2015 EPL.  However, its correctness is disputed by Mr Bossard.

(xix) The conciliation meeting conducted on 26 January 2017 failed and under Swiss law, the applicant (Mr Hess) had three months from that date to file his claim.

(xx) The Swiss statement of claim dated 25 April 2017 was filed in Switzerland.  It was said to be a lengthy document to which all relevant documents relied on had to be appended and that involved some 125 schedules.

17.  Pausing there, looked at from a chronological point of view, it is clear that when the Hong Kong action was commenced the Swiss action was already on foot, albeit Mr Bossard had no notice of it at the time. 

18.  It is relevant to note that in addition to the Swiss action, on 30 September 2016 Mr Hess had commenced an action in Germany against one Michaela Kogel (“Ms Kogel”) (a former employee) and Mr Bossard for alleged “unfaithful management” and on 18 November 2016 SG Swiss brought an action in Germany against Swiss Deli Trade (a company owned by Mr Bossard) for “illegal competition”.

19.  Mr Hess maintains that his “unfaithful management” and “illegal competition” claims could be decided at the same time in the Swiss action which, in any event, will continue regardless of the Hong Kong action.

The applicable legal principles

20.  There is no dispute over the legal principles that are applicable.  In the absence of a choice of governing law, the issue is to determine the system of law with which the contract has its closest and most real connection.  In other words, it is necessary to identify the ‘centre of gravity’ of the partnership business.

21.  In this regard, considerations such as, inter alia, the nature of the partnership business, its operations and how the business was conducted in practice are obviously relevant. 

Centre of gravity of the business: Switzerland or Hong Kong?

22.  I turn to the evidence.

(1)  The business of the partnership

23.  The partnership business is an international business: it involves the import/export of specialist food items (nuts, dried fruit and coffee beans) sourced from different parts of the world and resold to purchasers in other countries.  Some of the items may require processing, depending on the buyers’ requirements.

24.  It was a business originally founded and carried on by Mr Hess through his wholly-owned company Swiss Gourmet AG more than a decade prior to the formation of the partnership.  Switzerland was undoubtedly the centre of his operations notwithstanding the fact that various overseas offices and affiliates came into existence, forming what is known as the SG Group.

25.  The SG Group is headquartered in, and has always operated from, Switzerland.  Because it was an international business, Mr Hess had to travel extensively.

26.  Upon the formation of the partnership with Mr Bossard, as appears from the partnership agreement, each partner was responsible for a different geographical area. Expansion into China and to other countries were also part of the agenda and for which either party could lead ‘depending on the sourcing of products’.  SG HK provided administration and back-office facilities for which Mr Hess was responsible in addition to developing the China business.

27.  As earlier noted, SG HK was established in 2008. Thereafter, Mr Hess paid short visits to Hong Kong on a regular basis.  His evidence is that prior to the formation of the partnership he stayed in hotels apart from a period of five months in 2009 when he resided in a furnished apartment in Hong Kong with his family.

28.  After the formation of the partnership, he continued to reside in Switzerland for tax purposes until 1 August 2013.  Nevertheless, Mr Hess still owns a house in Switzerland. He holds a permanent Hong Kong identity card and resides in both Hong Kong and Switzerland while throughout the duration of the partnership up to the present, Mr Bossard remained resident in Switzerland. 

29.  The partnership also maintained a business presence without necessarily incorporating an affiliate in a number of countries, where, for example, it took up minority interests in existing businesses operating in the relevant countries.

(2)  Banking and credit facilities of the business

30.  The partnership maintained bank accounts in various overseas jurisdictions some of which were in the sole name of Mr Hess.  That is apparent from the partnership agreement: see clause 1(b) of the partnership agreement which reads:

“ Allocation: [Swiss AG] and any affiliated companies, including any off-shore accounts or private accounts linked to the activity.”

31.  That is borne out by the agreed EPLs. In the 2014 EPL for Europe and Africa, one finds various bank accounts listed such as UBS and a forex account and for Asia/Americas, accounts at HSBC, CCB Shanghai, HSBC–offshore, OCBC–offshore, amongst others.

32.  While SG HK operated two HSBC accounts in Hong Kong, HSBC did not provide credit facilities for the partnership’s trading operations.  Credit facilities (as distinct from banking/‌deposit facilities) were provided only by UBS in Switzerland and no other bank. 

33.  Ms Xu (counsel for Mr Bossard) pointed to the secured bank loan shown in SG HK’s financial statements for 2014 as evidence of credit facilities obtained in Hong Kong.  In fact, that loan was a secured bank loan for SG HK’s acquisition of its office premises for which a director ie Mr Hess had provided a personal guarantee.  It is not the case of HSBC extending credit facilities to SG HK for its business/trading operations generally.

(3)  How the partnership operated in practice

34.  In support of his contention that Hong Kong was the centre of the partnership’s business activities, Mr Bossard exhibited various contracts including contract no. MAC-3477 showing the purchase by SG HK of a shipment of 14,003 kgs of macadamia nuts at US$9.39/kilo net from Kenya in July 2014.

35.  As per the terms of the partnership agreement, Mr Bossard was responsible for Africa.  In fact, that contract was negotiated and made by him in Switzerland directly with Kenya and intended for shipment to Germany.

36.  Ostensibly, SG HK was the buyer but in reality, Mr Hess demonstrated that it was a re-invoicing exercise.  Mr Hess’ explanation is supported by a contract bearing the same number (MAC-3477) between SG HK and Swiss AG at a significantly higher price to Swiss AG (at US$15/kilo net for shipment to Germany), thus yielding a significant profit for the partnership.  The shipment went directly from Kenya to Hamburg, Germany without ever coming through Hong Kong.

37.  Part of the shipment was transported from Hamburg to the partnership’s German factory for roasting, processing and repacking and then delivered to one of its Swiss purchasers (Lindt & Sprüngli).  It is to be noted that SG Swiss acquired machinery from Turkey in 2012 for the roasting and drying of nuts.  There is no suggestion that any roasting or drying of nuts took place in Hong Kong and is consistent with processing activities in Europe.

38.  At §22 of his affidavit, Mr Hess summed up the partnership’s business activities in Europe and Hong Kong.  It reads:

“ The corporate operations of the Business include the following activities in Europe:

(1) In Germany:

SG Swiss is the importer and seller of nuts. SG Swiss is the owner of some machines located in Germany which perform main transformation of nuts (including roasting, dicing, packing).

SG Group has kept large fiscal stocks in Germany and Switzerland throughout the years.

(2) In Switzerland:

SG Swiss perform roasting and selling coffee beans in Switzerland (until 2013), selling and distributing nuts, performing all operative, administrative and financial tasks for European business, and others.

(3) In the rest of Europe:

SG Swiss is the importer, seller and distributor of nuts, partially manufactured in the factory in Germany.

(4) In Hong Kong:

In sharp contrast with the above (sic), the operation in Hong Kong is purely a distribution/logistics/invoicing activity and there is no machinery involved. There is no transformation of goods in Hong Kong and basically no stocks have ever been kept in Hong Kong.”

39.  There is nothing in the bundles that contradict their summary.

(4)  Inventories

40.  The partnership and bonus agreements as well as the EPLs for 2012, 2013 and 2014 were signed by the parties in Switzerland where Mr Bossard is resident.  However, while the EPLs (whose significance is considered below) show significant stocks in Europe for the years 2012 and 2014, no stocks are shown for Asia/America at all.

41.  Mr Bossard relied on the 2014 financial statements of SG HK to show that the partnership had substantial assets in Hong Kong.  They showed inventories in excess of HK$18 million.  However, in the audited books at the end of 2013 the inventory stood at under HK$3 million which is reflected in SG HK’s stocklist for 31 December 2013.  On closer examination of the 2013 stocklist, it is apparent that the ‘stock’ shown is variously described as “in transit to China”, “afloat, “open” or “shipped to Germany”.  The only part in “HK” was 1701 kgs valued at under HK$27,000.

42.  In fact, inventories shown in the financial statements of SG HK relate to stocks in transit rather than physical stocks in Hong Kong.

(5)  EPLs

43.  As earlier noted, the 2015 EPL and its correctness is at the heart of the dispute.  The importance of the EPL is that the numbers shown therein establish the equity of the business and hence a partner’s entitlement upon dissolution.

44.  Mr Bossard does not accept the 2015 EPL provided by Mr Hess.  Yet, he is not able to articulate in what respects it is wrong or inaccurate.  How certain provisions of the EPL are to be construed and applied is quite another matter.

45.  Although it was contended that the Hong Kong employees may be necessary witnesses, Ms Xu could not really explain why.  There was a feint suggestion that evidence may be necessary concerning SG HK’s contracts but there are no allegations of impropriety.  Moreover, the accounts of SG HK are audited accounts.  It is not apparent why any of the Hong Kong employees would need to be a witness.

46.  It has to be borne in mind that more than one invitation had been extended to Mr Bossard and his team to inspect and discuss the financial statements and accounting records of SG Swiss and its affiliates, they being the constituent elements of the EPL.  In so far as the affiliates were incorporated, there would be audited accounts.  However, the evidence shows that those invitations were never ever taken up.

(6)  Miscellaneous considerations

47.  It was said that SG HK has more employees and that it was the main office.  SG Swiss also has employees. Relative numbers cannot be determinative where the need for HK employees to be called as witnesses has not been shown.

48.  While the partnership and bonus agreements are in English, the business has international dimensions.  It cannot be gainsaid that the parties themselves who are Swiss nationals would naturally be more at ease with Swiss German than English, albeit for business reasons they possess a degree of proficiency in English since it is the lingua franca of the business world.

49.  I also note that the contractual documents were executed in Switzerland where Mr Bossard is resident.  While he made the occasional visit to Hong Kong, it would not appear that he was a regular attendee of SG HK’s board meetings.  According to Mr Hess, significant business decisions of the partnership always took place in Switzerland.  That is not challenged.

Conclusion

50.  It is tolerably clear from the above that SG HK is but one segment (albeit an important one) of what, overall, is an international business operating in many countries.  Regardless of the Hong Kong action, the Swiss action (which was already on foot when the writ in the Hong Kong action was issued) will continue in accordance with Swiss law.  

51.  Since the central question arising in the Hong Kong action (namely, Mr Bossard’s entitlement upon dissolution of the partnership) is one that also arises for determination in the Swiss action (which the court is given to understand may well encompass other claims currently launched in Germany), a good case has been made out for staying the Hong Kong action.  There is no good reason for having parallel proceedings.

52.  It had been suggested that Mr Bossard would be at a disadvantage if the matter were to be litigated in the Swiss action.  There was some vague suggestion that procedurally he might not be entitled to discovery that is available in Hong Kong.  However, it has not been shown that discovery is not available in Switzerland.  I am by no means satisfied that Mr Bossard would suffer any procedural disadvantage by having the dispute decided by the Swiss court.

53.  Physically, he would not be inconvenienced as he lives in Switzerland.  In so far as it was suggested that Swiss court fees are significant compared to Hong Kong court fees, any such disadvantage would pale into insignificance given the notoriously high litigation costs involved in any Hong Kong litigation. 

54.  For all those reasons, I am satisfied that Switzerland is the proper and appropriate forum for the resolving the partnership dispute.