CHINA ALLIANCE CONTRACTING and ENTERPRISE CO. LTD. v. FAM ENGINEERING LTD.

1995, No.A3647

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an appeal from a Master's decision whereby he dismissed an application for a stay of proceedings. In these proceedings the plaintiff seeks payment of monies allegedly due under an agreement for the execution of works by it at an hotel in Dandong, northern China. The stay is sought on the ground that Hong Kong is not the appropriate forum for trial, and that a court in Dandong is clearly a more appropriate forum.

Dramatis personae

2. The defendant is a company incorporated in Hong Kong and carries on business in Hong Kong and in the People's Republic of China ("PRC") as engineering contractors.

3. The plaintiff is a joint venture company incorporated under the laws of the PRC. Half of its share capital is owned by a Hong Kong company, the other half by Mainland bodies, which include a company called China Guangdong Province Arts & Crafts Import & Export Co. ("Guangdong Province Arts"). The plaintiff carries on the business of an engineering, construction and decoration contractor in the PRC. It does not conduct business in Hong Kong.

4. The current dispute concerns work carried out by the plaintiff at an hotel in Dandong, called the Dandong International Hotel. That hotel is owned by a company incorporated in the PRC, namely, the Dandong International Hotel Limited ("the hotel company"). The defendant owns 50% of the shares of the hotel company.

The agreements

5. By an agreement dated 28th January 1992, the defendant was engaged by the hotel company to carry out engineering, construction and decoration works at the hotel. There was a further agreement dated 10th January 1993 between these two companies for the execution of further works.

6. The defendant sub-contracted its work, or part of its work, to the plaintiff. That was effected by a written contract ("the main agreement") dated 4th December 1992, by which the plaintiff agreed to carry out installation and decoration works at the hotel. The works were to be carried out within a period of 240 days of the date of the first payment made under the contract. The agreement provided for staged payments to the plaintiff. The agreement, which is in the Chinese language, was executed in the PRC. The price agreed for the works was Renminbi (RMB)19.865 million, but to be paid to the plaintiff in Hong Kong dollars (HK$).

7. On the same day, 4th December 1992, Guangdong Province Arts provided to the hotel company a written guarantee that :

"... if the [plaintiff] shall incur any economic responsibility in the works, and its assets is not sufficient to set off its liability, our company shall guarantee the insufficient part."

8. There was then a supplemental agreement between the plaintiff and the defendant, dated 15th December 1992. It is a short agreement which includes provision for an alteration in the exchange rate, and for the plaintiff's responsibility in the event of delay; and provides that payments to the plaintiff are to be dependent upon receipt by the defendant of payments from the Hotel Company.

9. It is common ground that in 1993 the plaintiff started its work at the hotel but that later in the year it stopped. The stoppage is said to have occurred from September to December 1993, and there is said to be a dispute about the cause of that interruption. However, an agreement dated 15th January 1995 was signed by the plaintiff, the defendant and the hotel company. There are before me two translations of it. According to the translation by the court translator, it provides that the hotel company is to pay, through the defendant, to the plaintiff a

"renovation price in Hong Kong currency at the value of RMB$5 million ... in late January ...,"

and that the plaintiff

"... is liable to on the basis of the original contract with [the defendant] to complete all the unfinished renovation works in April. The outstanding balance shall be paid ... by monthly instalments of not less than RMB$500,000 in Hong Kong currency as soon as the hotel is in full business in the middle of May."

The claim

10. The hotel opened for business in May 1994. In June 1994 the hotel manager issued a document which certified that the plaintiff's work at the hotel was "basically completed".

11. These proceedings were instituted by writ dated 19th April 1995. The plaintiff asserts that it has been paid some, but not all, of the sums due under the agreements of December 1992. HK$14.772 million has been paid. The balance allegedly due is HK$7.746 million. Demands have been made for this balance, but the defendant refuses to pay.

The defences

12. The defendant says that it has a number of answers to the plaintiff's claim :

(1) that the supplemental agreement stipulates that it is only bound to pay the plaintiff as and when it in turn receives payment from the hotel company, and that since the defendant has not received payment to the tune now claimed, it is not yet obliged to pay the plaintiff;

(2) that part of the sums claimed, about $1 million, has been paid to a Mr Leung Dor Keung who is said to have been the plaintiff's project supervisor and to whom in December 1993 it was allegedly agreed by the plaintiff that payments due to it were to be made; and

(3) that the plaintiff delayed completion of the works, and that the work it did complete was defective. It is said that in consequence the hotel company has suffered a loss in the sum of over RMB20 million, comprising RMB9 million in respect of the defective work, and over RMB11 million for loss of profit due to delay, and that it intends to institute proceedings in Dandong against the plaintiff and the defendant for those damages. Accordingly, the argument goes, the defendant is entitled to set off or counterclaim as against the plaintiff's claim this liability which it has to the hotel company.

Forum non conveniens : the defendant's case

13. Mr Mumford argues that all connecting factors point away from Hong Kong and towards Dandong. This is especially so in relation to the defects defence. He invites my attention to the following factors :

(1) Witnesses

The defects and delay defences will require, it is said, evidence of witnesses who are resident in the PRC. Mr Mumford tells me that these are witnesses such as foremen, surveyors, site engineers and workmen from Liaoning province as well, perhaps, of others employed at the hotel after completion of the works. The expense of bringing them to Hong Kong will be great. There is only one potential witness who is not in Mainland China, and that is Mr Liu Yuk-Tong, the defendant's managing director who resides in Hong Kong. What is more, there is no machinery by which witnesses in the PRC can be compelled to attend the hearings in Hong Kong. Although expert evidence put before me establishes that witnesses in the PRC could not be compelled to attend court in Dandong (or elsewhere), the courts in the PRC exercise investigatory powers and they collect evidence, and individuals from whom evidence is sought may not refuse to cooperate.

(2) Documents

It is said that there are a large number of documents including design plans, working plans, and defects lists, and that it would be a costly and unnecessary burden to have to bring these to Hong Kong and to have them translated.

(3) Multiplicity of proceedings

The defendant says that the hotel company intends to institute proceedings in the People's Middle Court of Dandong City against both the plaintiff and the defendant. That company has not, however, yet done so. There is no evidence before me to explain that, but Mr Mumford says that it is because the institution of proceedings in the PRC carries with it the obligation to lodge a substantial monetary deposit, that it had hoped to negotiate a resolution of the dispute, and that the defendant has been waiting to see whether this Hong Kong action will be stayed.

(4) Proper law

It is argued that it is obvious that the proper law of the contract is Chinese law, and that that is clear from the preamble to the main agreement, the language of the agreement, and the fact that the subject matter of the action is the decoration of an hotel in the PRC. Should questions of Chinese law arise, they would best be resolved by a PRC court.

(5) Other factors

Mr Mumford points to the facts that the negotiations for the agreement took place in China and the works were carried out in China, as additional connecting factors. Should a view of the locus in quo be required, that would be a simple task for the court in Dandong.

14. The affirmations filed by the defendant's managing director make the further point that the plaintiff's assets are in the PRC, and significant assets of the defendant are in the PRC, so that enforcement proceedings would be facilitated by an action in the PRC; the more so since there is no provision for enforcement in the PRC of judgments obtained in Hong Kong.

15. Accordingly, the argument is that the court in Dandong is not only an appropriate forum for the resolution of this dispute, but that the interests of the parties and the ends of justice clearly dictate that that is where the trial should take place. The appropriate court is identified by the defendant as the Intermediate People's Court of Dandong City of Liaoning Province.

The plaintiff's stance

16. Mr Tang invites me to view this application with scepticism. It is evident, he argues, from the documents before the court, that the application is a tactical ploy, that the defects and delay allegations are highly suspect, so much so that the plaintiff would be likely to obtain summary judgment or that the defendant would be granted only conditional leave to defend; and, that if that is a fair analysis, it is hardly the mettle of successful applications for a stay of proceedings.

17. He goes on to contend that it cannot be said that Hong Kong is not a suitable forum. All issues specified by the defendant as issues, save possibly for the defects issue, are as readily triable in Hong Kong as they are in Dandong. It is, he adds, inaccurate to talk of a multiplicity of proceedings, for no proceedings have been instituted elsewhere in relation to the issues which are suggested by the defendant to be in dispute. It is, he further argues, not suggested by the defendant that the plaintiff is not entitled to payment on the footing that the plaintiff has not performed the contract. What is alleged is a set-off and counterclaim, and before a court will require a plaintiff to abandon proceedings in a jurisdiction in which it has, as of right, instituted those proceedings the defendant has a particular onus to discharge - an onus to show that the subject matter of the set-off and counterclaim is a real or true issue, and to show sound cause why no claim has yet been brought.

18. All that aside, the plaintiff says that it is in any event not established that the Dandong Court is clearly the more appropriate forum. The contracts between plaintiff and defendant have a substantial connection with Hong Kong in that payment was to be made in Hong Kong in Hong Kong dollars; the defendant is a Hong Kong company; and the plaintiff is half owned by a Hong Kong company. It is common ground that there is no power in the PRC to compel the attendance of witnesses; and if indeed the defects defence is a genuine issue, experts engaged by both parties, whether from the PRC or Hong Kong, will have to travel to Dandong (should that prove necessary) whether the action progresses here or in Dandong. The agreements were negotiated in Guangzhou, and that is where the defendant's management personnel are - closer in other words, to Hong Kong than to Dandong.

19. Finally Mr Tang contends that there is a personal and juridical advantage to the plaintiff in proceedings in Hong Kong. The personal advantage is that Guangzhou is the plaintiff's home base, and that is where the plaintiff's witnesses are. He asserts that the juridical advantage is that enforcement of a judgment in Hong Kong is more advantageous than in Dandong in that, since the defendant is a Hong Kong registered company, enforcement will lie against its local and overseas assets, and liquidation proceedings, should they prove necessary, will lie here.

20. As for the defendant's emphasis on the fact that the plaintiff has its assets in the PRC, the plaintiff is prepared to offer a payment into court, or a bank guarantee, as security for the defendant's costs.

The law

21. The relevant law is encapsulated in Spiliada Maritime Corporation v. Consulex Ltd. [1987] AC 460 :

"The basic principle is that a stay will only be granted on the ground of forum non conveniens where the court is satisfied that there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of the action, i.e. in which the case may be tried more suitably for the interests of the parties and the ends of justice." (per Lord Goff, at page 476C)

The burden is on the defendant to show that the alternative forum is clearly or distinctly more appropriate than the Hong Kong forum. If that is shown, the burden then shifts to the plaintiff :

"... to show that there are special circumstances by reason of which justice requires that the trial should nevertheless take place in this [territory]." (per Lord Goff in Spiliada, page 476E)

Or put in a slightly different way, the court will ordinarily grant a stay if the other forum is clearly more appropriate,

"... unless there are circumstances by reason of which justice requires that a stay should nevertheless not be granted. In this inquiry, the court will consider all the circumstances of the case including circumstances which go beyond those taken into account when considering connecting factors with other jurisdictions." (per Lord Goff at p 478D)

In deciding which forum is the natural forum, the court is to look to the forum with which the action has the most real and substantial connection, and this brings into play the connecting factors upon which Mr Mumford so heavily relies in this case. Finally, whilst

"the legal burden of proof rests on the defendant to persuade the court to exercise its discretion to ground a stay, ... the evidential burden will rest on a party who seeks to establish the existence of matters which will assist him in persuading the court to exercise its discretion in his favour."

(See Dicey and Morris 'The Conflict of Laws' 12th Edition, Vol I, page 403; and Spiliada page 476 D-E).

Analysis

22. It is evident that there is much which connects this case - by which I mean the case which embraces the suggested set-off or counterclaim, as well as the plaintiff's claim - with the PRC. Yet factors connecting the case with Hong Kong are by no means as sparse as Mr Mumford contends, and certainly not as tenuous or remote as may be gathered from a reading of the defendant's first affirmation in support of this application for stay :

1) Whilst it is true that the plaintiff is a company incorporated in the PRC and carries on business there, it is a joint venture company, half owned by a company incorporated in Hong Kong. Its base is in Guangzhou, considerably closer to Hong Kong than to Dandong.

2) Many, if not all, of the progress and other payments were, by agreement, effected in Hong Kong and in Hong Kong dollars.

3) The plaintiff asserts, and there is no reason to doubt the assertion, that all its original documents which relate to the issue in this action are in Hong Kong. Most have been sent to the plaintiff's solicitors for translation. Whether these documents include documents which would also be relevant to the suggested defects claim, I do not know.

4) The defendant is a company incorporated in Hong Kong. There is evidence that its main assets are in the PRC. It is not suggested that it has no assets in Hong Kong.

5) I have been informed, and it is not contended that the information is inaccurate, that the plaintiff's management personnel are in Guangzhou, and that all relevant agreements were negotiated there. The agreement by which, so the defendant contends, payments were to be made by the defendant to the plaintiff's project supervisor, Mr Leung Dor Keung, is said by the defendant to have been concluded at a meeting in Guangzhou attended by personnel representing the defendant, and the plaintiff, and by Mr Leung. It seems evident that Guangzhou is where key witnesses - though not all - are based. If so, Hong Kong is considerably more accessible than is Dandong for those based in Guangzhou.

23. In so far as it is suggested that the main agreement by its preamble makes express provision for the proper law of the agreement to be the Economic Contract Law of the PRC, that does not appear to me to be the effect of that preamble. Be that as it may, and assuming that the proper law of the contract is the law of the PRC, the defendant demonstrates nothing beyond that. In other words, no aspect of PRC law is identified as requiring particular application, and therefore understanding, in the context of this case; and no suggestion is made that such PRC law as may be applicable is particularly complex or outwith the ready ability of the Hong Kong courts to assimilate and, if necessary, apply. In the circumstances, the proper law, which I shall assume to be that of the PRC, is a relevant connecting factor, but far from decisive.

24. Furthermore, it seems to me that there is nothing in either the first or second limbs of the defence, namely, the "pay when paid" defence, and the alleged payments to Leung Dor Keung, which require a trial in Dandong rather than Hong Kong. Mr Mumford does not suggest otherwise in relation to the first of those two issues, but as to the second says that Mr Leung Dor Keung cannot be made to come to Hong Kong. For that matter, he cannot be made to go to Dandong, a far more distant venue, and no evidence is placed before me that he is or would be a reluctant witness, or reluctant to come to Hong Kong.

25. The remaining issue, namely, the defects and delay set-off and counterclaim, is the one upon which the defendant's application truly hinges. It is to this issue that the defendant avers when it speaks of voluminous documents, such as quotations, designs, defects lists, certificates and the like. So, too, it is this issue to which the multiplicity of proceedings argument is directed, and in respect of which, says Mr Mumford, many of the relevant witnesses are in northern China. Certainly, the expense and inconvenience of bringing witnesses to Hong Kong is a relevant factor for my consideration.

26. That issue, the defects and delay issue, is the only issue which in my judgment could well tilt the balance of connecting factors in favour of Dandong, rendering it the natural and more appropriate forum, and that is so because it is said that that issue requires the evidence of foremen, site engineers and workmen from Liaoning province, and because it is further suggested that there are many plans and lists which will require translation. The fact that other witnesses are also in the PRC does not add further weight in favour of Dandong if all those other witnesses are as close to Hong Kong (and as far from Dandong) as Guangzhou. There is however no evidence at all before me as to how many Liaoning province witnesses there are who are likely to be called, who they are, and to what factual issue each will speak.

27. But that aside, the burden upon a defendant who seeks to persuade a court to order a stay is, in my judgment, less likely to be discharged if the fabric of the issue which it imports into the case and which it contends renders the alternative forum clearly the more appropriate forum, is suspect. The balance of connecting factors is bound to be affected if a material factor in one of the scales is of dubious weight. The matter might be approached from a different angle, namely, that even assuming the connecting factors pertinent to trial of the issue raised by a defendant were to point to trial in an alternative forum, amongst all the circumstances which a court will then take into account in deciding whether "... justice requires that a stay should nevertheless not be granted," are circumstances which demonstrate or suggest that the defence thus imported is tenuous or of suspect validity. That is the conclusion which the plaintiff invites me to draw in this case. If there is real merit in the contention, then the court should be slow before forcing the plaintiff from a jurisdiction in which it has, as of right, commenced proceedings.

28. My attention had been drawn to documents exhibited in this application as supporting the bona fides of the delay and defects claim. It is common ground that the hotel was not opened for business until May 1994, and a certificate, said by the plaintiff to be a certificate of completion of the works, is dated 28th June 1994. Yet, says the defendant, the main agreement provided for the works to be completed within 240 days from the date of first payment, and on any view, works were completed later than that. What the defendant did not refer to in the first affirmation filed in support of this application were two documents of significance :

(1) the agreement of 15th January 1994; that is an agreement concluded immediately after the delay of which the defendant complains; and

(2) a letter dated 21st April 1994 from the plaintiff to the defendant, by which the plaintiff presses the defendant for payment and asserts that : "Because your client's cash deficiency is comparatively big. Therefore the project has been delayed for 9 months longer than scheduled," where "your client" is no doubt a reference to the hotel company. There is no suggestion of a riposte contending that the delay was caused for reasons other than that asserted by the plaintiff.

29. The documents are significant because on their face and in the absence of accompanying complaint or denial by the hotel company or by the defendant, they tend to undermine the defence now put forward. But the matter hardly ends there.

30. By letter dated 30th June 1994, the plaintiff wrote to the hotel company. It is in the main a letter which asserts that the project is complete, and that monies are outstanding and unpaid, referring also to the hotel company's internal problems. Defects are mentioned as being in the course of rectification. There is however no letter in response from the hotel company which asserts that the project is not complete, or that payments have been withheld because of delay or defects. There is not a hint of a suggestion that delay in opening the hotel has caused the company loss, or that such delay as has occurred lies at the door of the plaintiff. The letter of 30th June follows two days after the issue of a certificate or "exposition" by the manager of the hotel certifying that

"[the] decoration work of Tantone International Hotel undertaken by China Alliance Contractory & Enterprise Company Limited after over 1 year of work is now basically completed, and part of the work has been put to use since May 1994, the rest of the work has been basically inspected and accepted recently.

[The defendant] and [the plaintiff] have checked and examined the completed works against contracted works, a comparatively detailed audit of the quantities of the decoration works has been made. Regarding the problems existing in the account, both parties have reached agreements what should be added to and what should be reduced from the project. Please refer to the works account for details."

The plaintiff contends that the amount agreed in that works account is the amount claimed by the plaintiff in this action.

31. By letter or fax dated 27th July 1994 the plaintiff complained to the defendant directly that several letters relating to the outstanding account have gone unanswered, and repeated its demand for payment of the outstanding sum, (which is the sum now claimed). There is a response the same day from the defendant to the plaintiff in which there is, yet again, no hint of a suggested set-off or counterclaim arising from delay or defects. The problems with payment is, so the reply asserts, all to do with financial problems suffered by the hotel company.

32. The conduct of the hotel company and of the defendant at the material time is to be examined in the context of assertions now made that the plaintiff's defaults, far from being insignificant, caused loss to the tune of RMB$20 million.

33. It is true that there are before me two defects lists directed at suggested defects in the plaintiff's work, one is undated and its source and addressee are not stated; the other is from the hotel company to the defendant dated 18th January 1995, months after the plaintiff's solicitors had issued letters before action. The first letter before action is dated 22nd September 1994, and in the course of the response dated 11th October, defects are asserted as one of several defences.

34. As a further example of conduct inconsistent with a bona fide complaint there is a letter of a vintage more recent than those by which in April, June and July 1994 the plaintiff was calling for payment, drawing no response, or none which complained of defects or delay as pertinent to those demands. It is a letter dated 6th May 1995 written by the Chairman of the hotel company to Mr Liu Yun, the plaintiff's general manager. This is what it says :

" During the 1st anniversary of running Tantone International Hotel on a trial basis, and preparing for a formal inaugural ceremony in August this year, please accept my sincere gratefulness and respect on behalf of the director(s) and the staff of the hotel for the laborious work and efforts of your employees in having renovated the hotel!

Due to several tricky difficulties, there has been and is an outstanding amount of renovation costs due and owing to FAM Engineering Limited by Tantone Hotel, this also adds to the pressure of your company. As for this, I, as a proprietor and director, feel very sorry and responsible. However, I am glad to inform you, sir, that at a directors' meeting, a decision was made that the hotel will try its very best in gradually paying off the outstanding renovation costs owed to FAM Engineering Limited from May onwards. If you, sir, think it necessary, you and I can contact and negotiate in respect of this problem.

At the time of the inaugural ceremony, it would be (my) honour to invite you, sir and the other person(s) in charge of the renovation works to attend the ceremony, written notification will be sent in due course.

Wish you have a good business."

This is conduct hardly consistent with that of the Chairman of a hotel company whose losses or damages at the hand of the addressee is in the order of RMB20 million.

35. The explanation which has been placed before me in the form of a letter dated 3rd June 1996 from the hotel company to the defendant is that the letter was a polite ploy to induce Mr Liu to come to Dandong to discuss remedial work, and yet the same letter asserts that the Chairman of the hotel was not then "familiar with the defective work."

36. Whilst it is not for me to try the issues on the affirmations, the evidence before me gives cause for a material degree of scepticism about the defects and delay claim, which scepticism sits uncomfortably with the notion of staying the proceedings and thereby forcing the plaintiff to commence its action afresh in Dandong so that there might, at less cost to the defendant, there be tried the issue which it seeks to raise in these proceedings. That scepticism is reinforced by the fact that two years after the opening of the hotel, no proceedings have been instituted by the hotel company against the defendant, or against the plaintiff, whether in the PRC or elsewhere, whether in respect of delay in completion of the hotel project, or defects in the contracted works, or otherwise in relation to that project. None has even been threatened in any correspondence which I have seen. I am merely told in the third affirmation filed by the defendant in this application (affirmed on 14th May 1996) that the defendant's managing director has been

"informed by the Hotel ... that the Hotel will not let this claim go by and will institute proceedings in the People's Middle Court of Dandong City ... against the Plaintiff and the defendant in this action."

In the face of suggested damages in the region of RMB20 million, the failure of the hotel company hitherto to launch proceedings, or take any steps towards proceedings, is a factor of some considerable note. There is no evidence filed which suggests that negotiations have been taking place; no evidence about the reasons for the lack of action thus far; and in so far as it is suggested that the hotel company has been waiting for the outcome of this application, I note that this action was only launched in April 1995, almost a full year after the hotel opened, and yet no proceedings were launched or threatened in that year either by the hotel company or by the defendant. It can certainly not be said with much force that one of the factors to which I must give weight is that a refusal to stay the Hong Kong action will mean a multiplicity of proceedings.

Conclusion

37. The defendant has filed to satisfy me that Dandong is clearly and distinctly the more appropriate forum. Accordingly this appeal is dismissed. There will be an order nisi that the defendant shall pay the costs of this appeal.