WINLAND ENTERPRISES GROUP INC. v. WEX PHARMACEUTICALS INC. AND ANOTHER

HCCL 4/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 4 OF 2011

(Transferred from HCA 1573/2010)

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BETWEEN

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J U D G M E N T

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1.  There are 2 applications before the Court. Winland applies for summary judgment against Acro Pharm. WEX applies to set aside the leave granted by the Master to serve the Writ on WEX outside the jurisdiction. Acro Pharm is a wholly-owned subsidiary of WEX.

2.  In my view, this is not a case where summary judgment against Acro Pharm would be appropriate.  On the other hand, I think that the leave to serve out of the jurisdiction against WEX should be set aside.

3.  Let me first deal with summary judgment.

4.  Winland claims that Acro Pharm breached an Agreement by failing to supply a drug known as “Tetrodin” and “Tetrodonin” (TTX) to Winland for sale in Peru.  TTX is manufactured in the Mainland.  Prior to October 2002 Nanning (a WEX subsidiary) held the patent for TTX in the Mainland.  After October 2002 Nanning lost ownership of the patent to the People’s Liberation Army Institute of Pharmaceutical Chemistry and Mr Qiu Fang Long (collectively, the Third Party).

5.  Winland’s case is essentially that Acro Pharm breached the Agreement because, not holding the intellectual property rights in TTX through WEX or any other associated company, Acro Pharm could never have supplied TTX to Winland for distribution in Peru.

6.  Acro Pharm says (among other things) that the parties had agreed at the end of 2004 to delay commencement of the Agreement.  In the event, Winland (Acro Pharm notes) never placed any orders for TTX other than for free samples or placebos for carrying out tests.  Acro Pharm accepts that it did not have TTX in stock.  But Acro Pharm argues that it was obliged to provide samples or placebos for free as demanded by Winland.  It follows by cl. 5.25 of the Agreement (Acro Pharm reasons) that the Agreement never commenced at all.  The latter clause provides that “subject to availability [of TTX]” Acro Pharm agrees “to supply to [Winland] in Peru [TTX] in accordance with orders received from [Winland]”.

7.  Acro Pharm further alleges that Winland’s Peruvian agents “insisted” that there be further testing of the effectiveness of TTX as a drug capable of alleviating cocaine withdrawal symptoms among Peruvians.  It was for Winland (Acro Pharm contends) to arrange such trial as it deemed necessary.  For this reason, according to Acro Pharm, commencement of the Agreement was postponed.  But (Acro Pharm complains) Winland did not carry out any trial.  Not surprisingly (Acro Pharm suggests) Winland could not place orders for TTX which it could not sell until a successful trial had taken place.  Winland then (Acro Pharm says) allowed the Peruvian Sanitary Registration Authorisation which it had acquired for TTX to lapse.  Without that Authorisation, TTX could not be marketed in Peru.

8.  It may possibly be that Winland has a valid argument to the effect that on a true construction of the Agreement, without the patent rights to TTX, Acro Pharm would never be in a position to perform its obligations under the Agreement.  In that case, it would be irrelevant (the argument might go) whether or not Winland carried out a particular trial or placed any order.

9.  But I am not persuaded that, in light of the events alleged by Acro Pharm, such argument on the part of Winland will ultimately prove correct.  I am unable to say now that Acro Pharm’s case would be untenable if the facts alleged by it are found to be true.  I note in particular cl. 7.7 of the Agreement which arguably exempts Acro Pharm from liability in the event that it decides (as it appears to have decided) not to contest the Third Party’s claim to the patent rights for TTX.

10.  For this reason, I grant Acro Pharm unconditional leave to defend.

11.  Let me proceed to the setting aside application.

12.  Leave was obtained to serve WEX in British Columbia under Order 11 Rules 1(1)(d) and (f).  The former concerns claims brought to enforce (or obtain relief for the breach of) a contract made in Hong Kong or governed by Hong Kong law.  The latter concerns claims founded on (among others) damages sustained in Hong Kong from a tort committed elsewhere. It appears that Winland is now only pursuing a case for service out under Order 11 Rule 1(1)(d).

13.  I will assume (as appears to be the case) that the Agreement was made in Hong Kong.  WEX, however, was not a party to the Agreement.  Instead, Winland’s case is that the Court should lift the corporate veil and treat Acro Pharm as WEX’ alter ego.  Acro Pharm (Winland submits) was merely “a facade to cloak the fact that in truth, the Agreement and the business was carried on by WEX and ... Acro Pharm was a corporate structure used by WEX to evade its legal obligation and liabilities”.

14.  Winland is in effect alleging that WEX acted fraudulently.  The gist of the fraud (according to Winland) is that WEX never told (but rather concealed) the fact that Nanning had lost the ownership of the intellectual property rights to TTX.  This was despite cl. 5.2.10 of the Agreement whereby Acro Pharm was bound to “make timely disclosure of all ... circumstances and everything known to it concerning the ... transaction that would likely influence the conduct of [Winland]”.  WEX (it is said) so dominated Acro Pharm that the latter had “no separate will of its own”.  Acro Pharm (it is suggested) was a mere shell with none of its own staff or offices.

15.  Here I can see no arguable case of fraud on the materials adduced to this Court.

16.  To begin with, it is difficult to see how WEX can be accused of actively concealing the transfer of intellectual property rights from Nanning in the Mainland.

17.  Winland’s own Statement of Claim pleads that WEX’ 2005 Annual Report observed that WEX had been notified in April 2005 that “its appeal with the Chinese Patent Office concerning ownership of a patent relating to addiction withdrawal ... was not successful”.  Winland’s pleading quotes from a WEX press release to similar effect in June 2005.  That press release states that WEX “has decided to temporarily postpone development and testing of its opiate addiction withdrawal drug in China”.

18.  WEX’s 2006 Annual Report noted that WEX was negotiating with others in the Mainland for the transfer of ownership of the rights in TTX to Nanning “on terms to be finalized that the Company believes will be satisfactory”.  The Report continued that “[t]he ultimate outcome of this matter is uncertain at this time ... [and t]here can be no assurances this matter will be resolved on a timely manner or that the outcome will be resolved on a favorable basis for the Company”.

19.  According to WEX’s 2007 Annual Report (as pleaded by Winland), WEX decided “not to pursue the development of [TTX] ... in Canada and China until intellectual property issues are resolved and additional financing is available”.  The Report further stated: “The Company has taken no action to counter this decision [that is, the adverse decision on WEX’s appeal to the Mainland authorities] and the Company does not currently expect to incur further costs in relation to this matter”.

20.  Winland’s Statement of Claim pleads that by an Annual Information Form dated 12 February 2010 WEX noted that the Third Party had been requesting transfers of the corresponding German, Belgian and French patents.  The Information Form stated: “These developments affect the patents related to use of TTX for drug withdrawal, which indication the Company has decided not to pursue”.

21.  In light of such publicly available material, I doubt that it can be plausibly argued that WEX actively concealed the transfer of Nanning patent rights in TTX.  The available evidence is to the contrary.  Acro Pharm may or may not have been in breach of its disclosure obligations under the Agreement.  But that is a wholly different question.

22.  It is further suggested by Mr Leo Remedios (appearing for Winland) that, at the time Acropharm and Winland entered into the Agreement in 2003, WEX ought to have (but did not disclose) to Winland that it had lost the patent rights to TTX.  That may possibly found a distinct cause of action (presently unpleaded) against WEX for misrepresentation in breach of some alleged contractual or common law obligation owed by WEX to Winland.  But it seems to me that is a wholly separate matter and cannot be used as a ground for piercing the corporate veil and treating Acropharm and WEX as identical.

23.  At the end of the day, Winland’s case against WEX boils down to little more than that Acro Pharm is a wholly-owned subsidiary of WEX.  That bare fact is insufficient to found a piercing of the corporate veil so as to treat Acro Pharm and WEX as one and the same.  That Acro Pharm may not have had offices or staff of its own, or may have relied for its decision-making on persons who were incidentally also officers of WEX, is neither here nor there.  Many subsidiaries of multi-national corporations operate on a similar basis.

24.  The bottom-line is that Winland entered, eyes wide open, into a contract with Acro Pharm, not WEX.  Winland would have been aware that, as a subsidiary of WEX, Acro Pharm was a distinct personality from WEX.  Winland was prepared to do business with Acro Pharm, on the basis of Winland’s perception of the creditworthiness of Acro Pharm, not WEX.  In those premises, in the absence of exceptional circumstances (such as cogent evidence of fraud), the Court will merely enforce the bargain struck between Acro Pharm and Winland.  The Court cannot arbitrarily pierce the corporate veil to bring in WEX as a potentially liable party when that has not been contemplated under the relevant contract.

25.  Consequently, there is no arguable case for holding WEX liable under the Agreement between Acro Pharm and Winland.  No other basis for leave having been suggested, the leave to serve outside Hong Kong granted by the Master must be set aside.

26.  I shall now hear the parties on costs and consequential orders.