SHANGHAI METGOAL INDUSTRIAL CO. LTD. (formerly known as SHANGHAI PUCAKON INDUSTRIAL CO. LTD.) AND OTHERS v. LUK SUET YIM AND ANOTHER

HCA 2680/2016

[2018] HKCFI 558

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2680 OF 2016

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D E C I S I O N

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1.  This summons dated 9 May 2017 was taken out by Luk Suet Yim (“D1”) and Tianlong Holding Company Limited (“D2”) (collectively “the defendants”) for a declaration that the court has no jurisdiction, or would exercise jurisdiction, over the defendants in this claim; and for an order that the proceedings in this action be stayed. At the conclusion of the hearing judgment was reserved which I now give.

2.  It was issued following a worldwide Mareva injunction order granted by the court on 30 December 2016 upon the plaintiffs’ ex parte application restraining the defendants from removing from Hong Kong any of their assets within Hong Kong up to the value of RMB 324,750,000 or its HK dollar equivalent.

A.    BACKGROUND

3.  In 1994 D1 (a Hong Kong permanent resident and ordinarily resident in Hong Kong until at least mid-2009) married Zhang Dacheng (aka Cheung Hoi Ming (“Zhang”)).  The marriage was dissolved in 2015.

4.  In about 2002, a company incorporated in Shanghai in November 1999 formerly engaged garment business changed its name to Chanitex (Shanghai) Pure Water Equipment Ltd (“Chanitex Shanghai”) when it started manufacturing water purification equipment under the brand name of “Chanitex”. Each of Zhang and D1 claims to have been responsible for starting the water purification business under the new name.  D1 claims to be its sole beneficial owner.

5.  D1 is the sole owner of D2 a BVI company which was incorporated on 18 February 2009 as part of the corporate structure to facilitate the AOS transaction described below. 

6.  The 1^st to 8^th plaintiffs (“the 8 plaintiffs”) and the 9^th plaintiff (“P9”) (collectively “the plaintiffs”) are companies incorporated in Shanghaiafter Chanitex Shanghai had commenced its manufacturing business.  The 8 plaintiffs served as Chanitex Shanghai’s downstream sales and service providers and P9 was its supplier of parts and accessories.

7.  The beneficial ownership of the plaintiffs is controversial: Zhang claims that to have introduced the water purification business to his relatives and friends who agreed to invest in it.  They made capital injections into the plaintiffs.  While none of the beneficial owners of the plaintiffs has filed any evidence in these proceedings, the initial investors of the plaintiffs are named in company records filed and registered with the relevant Shanghai authority.  D1 for her part claims to have injected the initial investment personally or through Chanitex Shanghai for setting up the plaintiffs but has not adduced supporting evidence.   

8.  In these proceedings the plaintiffs’ evidence consists of, inter alia, Zhang’s affirmation dated 18 October 2017 and three affirmations of Zhang Xiaoheng (“ZXH”) who is Zhang’s daughter from an earlier marriage.  She is the legal representative of P2 and said to be the beneficial owner of P8.

9.  By 2007, Chanitex Shanghai had become a substantial manufacturer of water purification equipment.  At about that time, A. O. Smith Corporation (“AOS”), a leading US company engaged in the business of manufacturing water heaters and related systems began to expand in China and to acquire domestic businesses through its indirect subsidiary A. O. Smith Holdings (Barbados) SRL (“AOS Barbados”).  In mid-2008, D1 commenced negotiations with AOS.

B.    THE AOS TRANSACTION

(1)    Preliminary steps

10.  In contemplation of a potential transaction with AOS, various events occurred.  In chronological order they are the following: 

(i)  D1 caused Earl Smiths (HK) Ltd (“Earl Smiths”)[1] to be incorporated on or about 18 December 2008 with herself as the sole shareholder.

(ii)  Approximately three weeks later, on 5 January 2009, Chanitex Shanghai and the 8 plaintiffs entered into a “Memorandum of Transfer of Enterprises as a Package” dated 5 January 2009 (“the memorandum”)[2] recording that each company participating in the memorandum formed part of a “family enterprise” which AOS was willing to acquire for a reasonable price and that the companies named in the memorandum “unanimously agreed to sell” [3].  For the purposes of the memorandum, Chanitex Shanghai was party A and the 8 plaintiffs party B and the parties agreed that the value of the entire business would be apportioned between party A and party B with “55% of the beneficial right of the transfer” going to party A and the remaining “45% transfer rights and interests” going to party B and specifying the sharing ratio inter se among the companies constituting party B.

(iii)  On 17 February 2009 Earl Smiths set up a wholly foreign owned enterprise A. O. Smith (Shanghai) Water Treatment Products Co Ltd (“AOS Shanghai/WOFE”) in Shanghai.

(iv)  On the following day (18 February 2009) D2 was incorporated in the BVI with the view to its ultimately holding the entire share capital of Earl Smiths.

(v)  On 16 September 2009 (the day prior to the signing of the SPA considered in §§11 – 13 below), while in detention by the authorities in Shanghai, D1 executed a power of attorney appointing Zhang to be her attorney in fact and entrusting Zhang to “cope with the acquisition” between AOS and its affiliates and the companies D1 controlled authorising Zhang to execute all necessary contracts and to take such other action to accomplish the same.  Payments under the contemplated transaction were to be transferred into specifically identified accounts. 

(vi)  By mid-September 2009, D2 had become the indirect owner of AOS Shanghai/WOFE through its wholly-owned subsidiary Earl Smiths[4].

11.  In summary, the AOS transaction was structured such that D2 would hold 100% of Earl Smiths which in turn would own AOS Shanghai/WOFE into which the respective assets and businesses of Chanitex Shanghai and those of the 8 plaintiffs would be injected. 

(2)   The Share Purchase Agreement dated 17 September 2009 (“SPA”)

12.  On 17 September 2009 D2 as vendor entered into the SPA with AOS Barbados for the sale and purchase of 80% of the issued share capital of Earl Smiths.  The purchase price for the 80% was RMB 524 million with the entire shareholding of Earl Smiths having an agreed value of RMB 655 million.

13.  Completion was conditional on various conditions precedent being fulfilled.  Those conditions contemplated, inter alia, a restructuring of assets[5] that required the transfer of all the assets and businesses of Chanitex Shanghai and of the 8 plaintiffs to and vesting in AOS Shanghai/ WOFE prior to completion.

14.  §21 of the SPA provided for the laws of Hong Kong to be the governing law and for all disputes to be submitted to the ICC for determination.

(3)   Completion of the AOS transaction

15.  Material to the plaintiffs’ claims in the present proceedings are three agreements dated 18 September 2009 (the day after the signing of the SPA) but which the defendants allege are forgeries.

(a)  Agreement for Authorization to Transfer Business dated 18 September 2009 (“the authorization agreement”)

16.  This was signed the day after the SPA .  The 8 plaintiffs were the “joint donors” granting certain powers to the D1, D2, Zhang and Chanitex Shanghai[6] (collectively “the joint attorneys”).  At the same time, Chanitex Shanghai and the defendants appointed Zhang to be their representative for the purposes of the authorization agreement.

17.  §§2, 4, and 8 authorised the joint attorneys (and thus their representative Zhang) to proceed with the AOS transaction (stipulating that the value of the remaining 20% of shares in the company should have a value corresponding to the 80% being sold), to collect the proceeds on behalf of the 8 plaintiffs and to distribute to each its share of the 45% in accordance with the sharing ratio contained in the memorandum. 

18.  §15 then provided that:

“ … if there is dispute, the joint donors of power and the joint attorneys unanimously choose the court at the place of signing (Shanghai City Minhang District Jidi Road No. 1418) to deal with.”

(b)   Agreement for Authorization to Transfer Business dated 18 September 2009 (“the P9 attorney agreement”)

19.  P9 was not party to the memorandum.  The P9 attorney agreement was made between P9 as donor of power and Chanitex Shanghai[7], D1, D2 and Zhang (collectively “the joint attorneys”).  As in the authorization agreement, the joint attorneys appointed Zhang to be their representative. 

20.  By the P9 attorney agreement, P9 agreed with the joint attorneys that P9’s business and assets[8] form an integral part of the sale of the entire business to AOS Barbados.  The purchase price of RMB 30 million would be paid to P9 within one month of receipt by the attorneys of the 1^st instalment in respect of the transfer of the entire business.

21.  §7 of the P9 attorney agreement mirrored §15 of the authorization agreement.

22.  Chanitex Shanghai and P9 also signed a document dated ‘September 2009’ entitled “Enterprise Equipment Asset Transfer List” (“the asset transfer document”) whereby P9 transferred title of the listed assets to Chanitex Shanghai retaining ownership rights pending payment to P9 of RMB 30 million.

23.  For convenience, the authorization agreement and the P9 attorney agreement will be referred to collectively as “the authorization agreements” unless the context otherwise requires. 

(c)  The asset purchase agreement (“the APA”)

24.  The APA is said to be dated 18 September 2009 and was made between (1) the 8 plaintiffs as sellers, (2) Hong Kong Tianlong Industrial Co Limited[9] as shareholder and (3) AOS Shanghai as purchaser.  In the course of his submissions, Mr Smith SC (who appeared for the plaintiffs), proceeding on the basis that the 2^nd party named in the APA was D2, referred the court to the APA as the instrument that effected the transfer of the assets and businesses of the 8 plaintiffs to AOS Shanghai/WOFE.

25.  However, in the course of the hearing the defendants highlighted the fact that D2 is “Tianlong Holding Co Limited” whereas the second named party to the APA is “Hong Kong Tianlong Industrial Co Ltd” and that no company incorporated in Hong Kong is registered under that name. 

26.  Under §4.1 of the APA, AOS Shanghai/WOFE agreed to purchase “the Transferred Assets” a term defined in the SPA as all the assets used by the 8 plaintiffs in their respective businesses.  The purchase price (which was not specified) was payable within one month of completion of the SPA.

27.  Further, under §2.2, the 8 plaintiffs undertook to terminate the employment contracts of all its employees who would then become AOS Shanghai/WOFE’s employees with effect from the closing date.

28.  The assets and businesses were duly transferred to AOS Shanghai/WOFE upon completion of the SPA.  On 24 November 2009 (the completion date under the terms of the SPA) AOS duly paid a sum of US$66,780,788.70 into D2’s Hong Kong bank account as D1 had directed in the power of attorney.  D1 was the sole signatory to D2’s bank account.

(4)  Subsequent events

29.  D1 was released on bail on 9 December 2009.  On the same day the power of attorney granted to Zhang was revoked and 6 weeks later, on 30 January 2010, Zhang was terminated as a director of Chanitex.  While still married to each other, by this time their relationship had obviously soured, culminating in their divorce in 2015.

30.  It was subsequently discovered that between January 2010 and April 2012, D1 had withdrawn all the money in D2’s bank account in Hong Kong but which are traceable to various individuals overseas.

31.  It was also subsequently discovered that the defendants had transferred the remaining 20% shareholding in Earl Smiths (then known as AOS (HK)) to AOS Barbados on 15 October 2010 in settlement of AOS’s claims against D2 for breach of the SPA which settlement was reached with AOS without the plaintiffs’ knowledge or authority.

32.  During the period from January 2011 to July 2014, P1, P3 and P8 commenced various proceedings against the defendants in the PRC (collectively “the 1^st PRC action”) to obtain relief including the commencement of a private prosecution.  They also attempted to report the case to the Shanghai Public Security Bureau for contract fraud but the case was not taken up.  The 1^st PRC action was discontinued in July 2014.

33.  In 2015, P8 commenced another civil action in the PRC against the defendants (“the 2^nd PRC action”).  D1 applied to have the 2^nd PRC action dismissed or transferred to Hong Kong on the basis that P8’s claim arose out of the SPA which expressly provided for disputes to be referred to the ICC for arbitration under Hong Kong law as the governing law.  Her application was dismissed.

34.  The writ in the present proceedings was issued on 14 October 2016.

35.  The 2^nd PRC action was withdrawn on 30 March 2017 on the advice of the plaintiffs’ Hong Kong lawyers.

The defendants’ case

36.  At the outset of the hearing Mr Chan SC who appeared for the defendants submitted that the appropriate forum for this action would be the PRC court in the Minhang District of Shanghai (“the Shanghai court”), that being the forum with the most real and substantial connection with the action.

37.  He proceeded to deal with the jurisdiction clause on the basis that if his submission were to prevail, the burden on the plaintiffs would be very onerous.  His case as to the jurisdiction clause were made on two grounds both of which were premised on the plaintiffs’ claims and defendants’ obligations all stemming from the authorization agreements.  The grounds are that:

(1)  the jurisdiction clauses in the authorization agreements conferred exclusive jurisdiction on the PRC court whether as a matter of PRC law or Hong Kong law; and

(2)  in the event that the jurisdiction clause is held to be non-exclusive, applying the principles enunciated by Lord Goff in Spiliada Maritime Corp v Cansulex Limited [1987] AC 460 (“the Spiliada principles”) which the Court of Final Appeal reaffirmed in SPH v SA [2014] 17 HKCFAR 364 at §51, the Shanghai court is the more appropriate jurisdiction.

C.   THE ISSUES

38.  The main divide between the plaintiffs and the defendants stems from their divergent analysis regarding the true nature of the plaintiffs’ claims in this action.  The defendants consider the claims to be purely contractual for breaches of the authorization agreements.  The plaintiffs present a different analysis, that in substance they are claims for breach of trust or breach of fiduciary duty claim which arose in Hong Kong by operation of law entitling the plaintiffs to bring proceedings in Hong Kong.

39.  In determining or ascertaining the appropriate forum for this action it is necessary to form a view as to the nature of claim brought by the plaintiffs and whether they are maintainable as a matter of law.  

(1)  The true nature of the plaintiffs’ claims

40.  Mr Smith SC who appeared for the plaintiffs analysed the claims as follows.

(a)  The trust claim

(1)  The injection of the 8 plaintiffs’ assets and businesses into AOS Shanghai/WOFE was pivotal to the AOS transaction.  While the 8 plaintiffs were not parties to the SPA which was signed the previous day, its completion was dependent, inter alia, on the envisaged injection of assets taking place.

(2)  As appears from the authorization agreement, the common objective of the parties was to accomplish the sale of the entire Chanitex operations to AOS.  Those were the circumstances under which the joint attorneys undertook to ensure the collection of the 8 plaintiffs’ share of the proceeds of sale under the SPA and its timely distribution to the 8 plaintiffs in accordance with the distribution ratio agreed under the memorandum. 

(3)  The 8 plaintiffs’ case is that the subject matter being dealt with was the purchase price for 80% of the shares in Earl Smiths and the 8 plaintiffs’ share in such proceeds upon the sale.  Mr Smith submitted that in those circumstances, the authorization agreement took effect as or was in substance an assignment by the defendants of that part of the proceeds receivable under the SPA that corresponded to the 8 plaintiffs’ 45% share for good consideration (in the form of the 8 plaintiffs’ injection of assets into Earl Smiths which was implemented through the APA) without which completion of the SPA could not have taken place. 

(4)  Mr Smith referred to the House of Lords’ decision in Tailby v The Official Receiver (1888) 13 App Cas 523 where, in his speech, Lord Macnaghten stated (at 543) as follows:

“ It has long been settled that future property, possibilities and expectancies are assignable in equity for value. The mode or form of assignment is absolutely immaterial provided the intention of the parties is clear. To effectuate the intention an assignment for value, in terms present and immediate, has always been regarded in equity as a contract binding on the conscience of the assignor and so binding the subject-matter of the contract when it comes into existence, if it is of such a nature and so described as to be capable of being ascertained and identified.”

(5)  That principle was applied by the Court of Final Appeal in Secretary for Justice v Global Merchant Funding Ltd (2016) 19 HKCFAR 192 where (at §§37 – 44) the court explained the essential elements of an equitable assignment.  It was submitted that by applying that statement of principle to the facts of this case, the defendants’ undertaking in the authorization agreements to collect and make timely payment to the 8 plaintiffs operated as an equitable assignment of that part or portion of the sale proceeds that correspond to the 8 plaintiffs’ share which upon receipt became subject to a trust in their favour.

(6)  In principle, P9’s position would be no different because of theP9 attorney agreement which evidenced the common intentionto include P9’s assets and business as part of the subject matter of the sale of the entire Chanitex operations contained in the SPA.  That is reinforced by the provision in the asset transfer document with P9 retaining beneficial ownership until payment.  Further, given the terms of §2.4 of the SPA, D2’s 55% portion of the proceeds of sale included the purchase price of RMB 30 million payable by D2 out of the same. 

(b)  Breach of fiduciary duty by agent

(1)  The plaintiffs further submitted in the alternative that if the joint attorneys became agents by reason of the authorization agreements, the existence of a contractual relationship would not preclude the existence of a simultaneous trust relationship, or a fiduciary relationship.  It is a question of the intention of the parties to be objectively interpreted.

(2)  The plaintiffs rely on the fact that the appointment was for the collection of a specific sum of money in respect of a specific transaction and relates to a single transaction that was clearly identified.  Those considerations are typically those that are found to give rise to a fiduciary relationship and may also give rise to a duty on the agent to hold such money or property separately: see generally Bowstead & Reynolds on Agency, 20^th Edn, §6-041.

41.  While the defendants do not accept that any trust or agency arose at all, it was not their case that the legal analysis put forward was somehow not maintainable as a matter of law.  Their position is simply that the authority given to collect the proceeds “on their behalf” amounted to no more than a simple agency agreement rather than a “convoluted assignment of expectancies”.  Further, as all the plaintiffs’ claims arose out of the authorization agreements only, there would be no claims even if the plaintiffs were the beneficial owners of the assets transferred but for those agreements and any claim under those agreements would be contractual.

42.  The defendants criticised the plaintiffs’ approach to an analysisof the trust claim as if they were parties to SPA when they were not.  It was emphasised that the plaintiffs made no claim either under the SPA or the APA.  As to the latter, the fact that the second named party to the APA is anon-existent entity was relied on as testimony to the defendants’ contention that the APA formed part of a series of documents (the others being the memorandum and the authorization agreements) fabricated to support the plaintiffs’ claims in these proceedings.

43.  However, as regards the APA, it is to be noted that several references to “APA” can be found in the SPA itself.  There even appears to be a definition of the term “APA” in Schedule 11 [10]: see §3(T) as well as §§4.1 and 6.2(F) of the SPA. 

44.  In the context of the structure of the AOS transaction, the instrument effecting a transfer of the “Sales Companies” (ie the 8 plaintiffs’ assets and businesses) was obviously an essential component.  When one considers the contents of the APA, they fit neatly into that framework and make perfect sense had D2 been the second named party.  That an error had somehow crept in is a distinct possibility and does not render the trust claim untenable.  Therefore, there would not appear to be any firm basis for denying the genuineness of the APA.

45.  The defendants submitted that the plaintiffs’ claims do not amount to anything more than a claim for breach of contract which sounds indamages only.  Further, in so far as there is a duty to account, no trust arises because a simple duty to account is not a fiduciary duty but a contractual one: Coulthard v Disco Mix Club Limited and Ors [1999] 2 All ER 457 at 476H.

46.  While I appreciate that the defendants’ case is that D1 was the sole owner of the plaintiffs, given the evidence before the court, at this stage and in the absence of supporting evidence for D1’s claim (whether in the form of initial funding and/or her “control” over the plaintiffs’ management and businesses, and given the company records exhibited, I have to approach the matter on the basis that the plaintiffs are independently owned and controlled, albeit by individuals who are relatives and friends of Zhang. 

47.  Looking at the broader picture, the corporate structure for the AOS transaction, the sequence of events and the key documents, they point to there being some overall arrangement between the parties to achieve a sale of the entire Chanitex operations to AOS.  That the authorization agreements as well as the APA then followed hotfoot the following day reinforces that impression.

48.  At the hearing, the defendants posited the scenario that for whatever reason the defendants ‘chose to give the appearance’ to the purchaser (AOS Barbados) that D2 was the seller and to facilitate D2 being able to do so they would inject assets into D2 in return for a promise that they would be paid an amount calculated by a percentage of the sales proceeds. It was submitted that in those circumstances the plaintiffs’ claim would be nothing more than a debt claim. 

49.  The reason why the sale was so structured is not entirely clear despite the reference in Zhang’s affirmation (§23) it being “more convenient” to nominate one person/entity as the “owner” of the various businesses of the plaintiffs to be sold in a “package”.  The subject matter being dealt with in the authorization agreements consisted of the plaintiffs’ share of the proceeds of sale: see the second main paragraph and §§2, 4, 8 and 10 of the numbered terms in the authorization agreement.

50.  Proceeding (as I must at this stage) that the plaintiffs’ financial stake in the proceeds is real and significant, the fact that the beneficial owners were Zhang’s friends or relatives of itself is neutral.  It would not necessarily mean that business dealings between the plaintiffs and the defendants would not be what one would expect in ordinary commercialtransactions or at arm’s length or that a high degree of trust must have existed between the defendants and those relatives and friends such that nothing beyond their word to make payment in due course would be sufficient.  In my view, the fact thattheir financial stake in the transaction have significant value would strongly militate against a characterization of it being nothing more than a simple debt claim, absent any evidence (other than D1’s bare assertion) that the plaintiffs were nominees. 

51.  On the facts that are presently known, on balance I consider the trust analysis (whether arising by reason of the authorization agreements through the equitable assignment route or agency route) the more likely.  Such trust arose by operation of law as soon as the sale proceeds were received in Hong Kong.

52.  For those reasons, I accept that trust claim is clearly arguable.  Whether it will ultimately prevail is another matter for determination on another occasion. 

(2)  The governing law of the action

53.  The governing law of the action has to be ascertained on the basis that it is a trust claim that arose in this jurisdiction and, as such, would not be subject to any contractual provision providing for jurisdiction over contractual claims.  The subject matter of the equitable assignments were receivables due under the SPA.  As the equitable assignments formed the basis of the claim in trust to monies paid under the SPA, Hong Kong law would be the governing law that being the law with which the trust claim (which arose by operation of law here) has the most substantial and closest connection.

54.  Alternatively, if they had the effect of making D2 an agent, a fiduciary relationship would have arisen upon receipt of the proceeds by D2.  It would have become subject to fiduciary obligations in relation to the plaintiffs’ portion of those proceeds.  The considerations mentioned in §53 would similarly arise, rendering Hong Kong law the governing law.   

55.  In the event that the jurisdiction clause in the authorization agreements remains relevant, the issue whether that clause conferred exclusive jurisdiction is considered next.

(3)  Whether the jurisdiction clause conferred exclusive jurisdiction

56.  The jurisdiction clause in the authorization agreements appears in §18 above.  It did not expressly confer exclusive jurisdiction.  While the authorization agreements contain a jurisdiction clause they do not have a governing law clause.  The plaintiffs’ current stance is that the initial viewin §101 of their skeleton of 30 December 2016 in support of the ex parte application (that PRC law is the governing law) was incorrect.  That being the case, there is no common ground between the parties as to PRC law being the governing law.

57.  The appropriate governing law is either PRC law or Hong Kong law.  The defendants’ position is that the jurisdiction clause has the effect of conferring exclusive jurisdiction on the PRC court whether as a matter of PRC law or as a matter of the Hong Kong law.

(a)  Under PRC law

58.  For the position under PRC law, the defendants relied on the 2^nd opinion of their PRC expert Prof Cheng Xiao for the following legal propositions: (1) unless the parties expressly state that the jurisdiction of a chosen court is non-exclusive, the jurisdiction clause will be exclusive; and (2) even where there is an agreement as to non-exclusive jurisdiction, once the parties have submitted a dispute to that court or other competent courts will be excluded from seizing jurisdiction.

59.  Pausing there, it is to be noted that Prof Cheng’s proposition (1) to be found in his 2^nd opinion is expressed somewhat differently:

“ … if the parties have not expressly agreed on a certain court to have non-exclusive jurisdiction or non-sole basis, they are deemed to have provided for an exclusive jurisdiction clause or on a sole basis for that certain court.” (Emphasis added)

60.  As the opinion of the plaintiffs’ expert Prof Lin predated that of Prof Cheng’s 2^nd opinion, it was not a matter Prof Lin commented on and no further expert evidence has been adduced.

61.  The legal propositions stated in Prof Cheng’s 2^nd opinion (at §12(1) - (2)) are said to be based on views expressed in an “essay” by Xi Xiaoming in a publication called Legal Forum 2002, volume 4 at pp 30-31 (but which was not exhibited) and nothing else.  They appear under part (C) of Prof Cheng’s 2^nd opinion where he was ‘reiterating’ the most important points made in his 1^st opinion relating to the authorization agreement and the memorandum.

62.  However, nowhere in his 1^st opinion do those propositions feature.  In his 1^st opinion he was simply opining that the PRC court was a competent court and that the claims do not involve matters over which PRC courts have exclusive jurisdiction under PRC law. But then at §12(4) of his 2^nd opinion Prof Cheng opined that because the parties agreed:

“ to assign the competent court to be the place of entering into the contract … [i]t is manifestly illustrated that clause was an exclusive jurisdiction clause.” (Emphasis added)

I must confess to having some difficulty following the legal reasoning underlying the conclusion.

63.  The conceptual foundation for ‘deeming’ the jurisdiction clause exclusive is entirely opaque.  In those circumstances, I do not consider the evidence sufficient to make it appropriate for the court to make a factual finding that under PRC law, the 2 legal propositions put forward (whether as expressed in §58 or §59 above) state the PRC legal position.  I have to conclude that the jurisdiction clause in question did not confer exclusive jurisdiction on the Shanghai court.

(b)   Under HK law

64.  The defendants submitted that if construed under HK law, the contractual provision in the authorization agreements would be no different from that under PRC law.  Given my conclusion under (a) above, it cannot assist their case.

65.  In view of the conclusion of the position under PRC law and HK law, it is unnecessary to address the further issue that would otherwise arise — whether the defendants are debarred from relying on the exclusive jurisdiction clause because their case is that the authorization agreements are forgeries.

(4)  Where jurisdiction is non-exclusive 

66.  The defendants’ submitted that if the clause is held to be non-exclusive and Hong Kong law were applicable in construing the provision, the applicable principle is as stated in Dicey & Morris, The Conflict of Laws, 15^th edition (p 606) as follows:

“ … the true question is whether on its proper construction the clause obliges the parties to resort to the relevant jurisdiction, irrespective of whether the word ‘exclusive’ is used.”

67.  The defendants attached significance to the use of the word “unanimously” in the jurisdiction clause.  It was submitted that it was a “discriminating choice of a specific jurisdiction” relying on an observation made in Hwoo Huang Linda v Fu Being San [2013] 1 HKLRD 259 at §44.  Mr Chan also drew attention to aspects of the relevant factual matrix itemised in §13 of the defendants’ submissions as important connecting factors.

68.  As we are concerned with a question of construction of a provision in a particular contract, an observation made in one case is not necessarily apposite in another or intended to be of general application.  It must depend on the context and the language used.   

69.  It was further submitted that the proper approach of the courts to contractual non-exclusive jurisdiction clauses can be found in the Court of Appeal’s judgment in Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631 at §§24 and 36.

70.  I do not consider that Noble Power is relevant in the present context.  Although it is stated in §36 that “strong or overwhelming reasons or exceptional circumstances” must be demonstrated to the court before it allows the parties to be freed from their contractual bargain,those remarks were made in the context of a defendant who had been sued in Hong Kong (which was the specific forum named) to challenge the appropriateness of Hong Kong jurisdiction. That is not the situation in the present case to render the test in Noble Power relevant.

71.  In my view, under Hong Kong, the clause in question does not oblige the parties to resort to the Shanghai court.  While undoubtedly it is a competent court, the clause did not confer exclusive jurisdiction on it.

72.  As I have concluded that the jurisdiction clause is non-exclusive, forum non conveniens is to be considered next.

(5)  Forum non conveniens

73.  It is common ground that the Spiliada principles on forum non conveniens apply.  Under those principles, D1 has to establish first that Hong Kong is not the natural or appropriate forum (ie the forum that has the most real and substantial connection with the action) and second there is another available forum which is clearly or distinctly more appropriate than Hong Kong.

74.  As noted in §33 above, when challenging the PRC’s jurisdiction in the 2^nd PRC action, D1 herself on 12 January 2016 considered the claim as fundamentally arising out of the SPA and that P8’s claim be arbitrated by the ICC in Hong Kong as per the jurisdiction clause in the SPA. 

75.  As I understand it, D1 advances two reasons as to why Hong Kong would not be an appropriate forum: D1 claims that because there is a restraining order obtained by Zhang on 30 November 2015 preventing her from leaving the PRC until resolution of her divorce proceedings.  She therefore cannot come to HK.  But Zhang has intimated that he is willing to consider applying to the Shanghai court for the discharge of that order.

76.  While it is true that in the past, despite a restraining order being in place in the PRC prohibiting her from leaving the PRC for 3 years from 17 June 2010, D1 was able, nevertheless, to leave illegally for HK on 20 occasions in 2011 – 2012, it is not relevant for present purposes.  Rather, more to the point is the fact that D1 is a permanent HK resident and is resident in HK, that being the address given when she made the stay application.

77.  The second reason given was that Zhang himself would not be available to attend trial in HK.  It was said that it was highly unlikely for Zhang to come to Hong Kong because a three-month imprisonment term had been ordered against him for contempt of court on 1 June 2012 which he has not served.  However, that order was discharged by a further order dated 21 July 2014.  There is therefore no reason why Zhang would not be available as a witness in the Hong Kong.

78.  For completeness, I should mention that the defendants also submitted that if the plaintiffs’ claims are purely contractual for breach of contract, those claims would be time-barred: the obligation to pay under the P9 attorney agreement was within one month of completion of the SPA and under the authorization agreement within one month after the expiry of 6 months after receiving it.  On that basis, the breach of the P9 attorney agreement would have occurred by 24 December 2009 and a breach of the authorization agreement by about 24 June 2010.  The relevant six-year limitation period would have expired in December 2015 and June 2016.  The writ was not issued until October 2016.

79.  The limitation defence is limited to the breach of contract claim.  As regards the trust claim, no limitation issue would arise: see Peconic Industrial Development Limited v Lau Kwok Fai (2009) 12 HKCFAR 139, §19 and Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400, §§412 – 414.

D.  CONCLUSION

80.  Applying the principles in Spiliada, I conclude that the defendants have not shown that the action should not be tried in Hong Kong.

81.  It follows that the stay application is dismissed and I so order.  There is to be an order nisi of costs in favour of the plaintiffs with certificate for two counsel.