LONGLIFE INTERNATIONAL (HONG KONG) CO LTD v. MAY DELIGHT LTD AND OTHERS

HCA 2544/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2544 OF 2016

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DECISION

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Background

1.  The plaintiff is a Hong Kong company.  The defendants are companies incorporated in the British Virgin Islands (“BVI”).  The parties entered into various agreements for the sale and purchase of the shares in a Hong Kong company called Gobest China Limited for the total sum of about RMB1.851 billion.  Gobest China Limited was the owner of a large piece of land in Hongqiao Town, Shanghai, People’s Republic of China (“PRC”).

2.  The plaintiff claims against the defendants for monetary compensation or alternatively for loss of profits by reason of breach of contract.  The claim is quite simple.  The plaintiff alleges that the contract amongst the parties provide that should the saleable area of the land after development was less than 140,000 square meters, the defendants should pay the plaintiff compensation in accordance with the terms of the agreement.

3.  A total of nine agreements were entered into by the parties.  It would be useful for the understanding of the case to set out the details of the agreements, including any provision on the choice of forum for the determination of disputes.

  (1)   the deposit agreement dated 10 July 2009 signed in Hong Kong (the “1^st Agreement”).  The parties agreed to submit to arbitration at the China International Economic and Trade Arbitration Commission in Beijing (“CIETAC”);

  (2)   the memorandum to deposit agreement dated 10 July 2009 signed in Hong Kong (the “2^nd Agreement”).  The agreement is silent on the choice of forum;

  (3)   the agreement signed in Taipei on about 19 June 2010 (the “3^rd Agreement”).  The parties agreed to submit to CIETAC arbitration;

  (4)   the supplemental agreement (I) signed in Taipei on about 19 June 2010 (the “4^th Agreement”).  The agreement was silent on choice of forum;

  (5)   the supplemental agreement (II) dated 19 June 2010 signed in Taipei (the “5^th Agreement”).  The parties agreed to submit to CIETAC arbitration;

  (6)   the agreement dated 10 December 2011 signed in Hong Kong (the “6^th Agreement”).  The parties agreed to submit to the non-exclusive jurisdiction of Hong Kong courts;

  (7)   the supplemental agreement (III) dated 31 March 2012 signed in Shanghai (the “7^th Agreement”).  The agreement was silent on choice of forum;

  (8)   the agreement dated 23 August 2012 signed in Taipei (the “8^th Agreement”).  The parties agreed to submit to the exclusive jurisdiction of Hong Kong courts; and

  (9)   the memorandum dated 23 August 2012 signed in Taipei (the “9^th Agreement”).  The parties agreed to submit to the exclusive jurisdiction of Hong Kong courts.

4.  Under the 3^rd Agreement, the parties agreed to apply Hong Kong law.  There is no mention or change of this choice of law in the other eight agreements. 

5.  In around June 2016, the defendants commenced action against, inter alia, the plaintiff in the Shanghai Intermediate People’s Court (the “Shanghai First Instance Court”) claiming for alleged profits under the parties’ agreements.

6.  In October 2016, the plaintiff commenced the present action against the defendants.  The Writ of Summons was amended on 7 November 2016.  On 12 January 2017, the plaintiff obtained leave to issue a Concurrent Amended Writ of Summons and to serve it out of jurisdiction on the defendants.

7.  On 30 March 2017, the Shanghai First Instance Court gave its ruling declining to exercise jurisdiction over the action brought by the defendants on the ground that Hong Kong has exclusive jurisdiction over the case.  The defendants appealed against the ruling to the Shanghai Higher People’s Court.

8.  The defendants filed an acknowledgement of service but not the defence.  On 3 April 2017, the defendants took out this application under Order 12, rule 8 of the Rules of the High Court for an order challenging leave given to the plaintiff to issue a concurrent Writ and to serve it out of jurisdiction on the defendants.  The defendants also applied for a stay of this action and for costs.

9.  On 2 June 2017, the Shanghai Higher People’s Court affirmed the Shanghai First Instance Court’s decision to decline jurisdiction.

Legal principles

10.  Leaving aside Ms Ho’s complaint that the defendants had failed to state their grounds in the summons, the defendants are making this application on the ground of foreign non conveniens.  Mr Chung confirmed their contention is that Shanghai court is the most appropriate forum for this dispute.  In addition, the defendants also challenged the plaintiff for material non-disclosure in applying for leave to serve out of jurisdiction.

11.  Ms Ho submitted that whilst the general rule is that the plaintiff has the burden of proof, where it is the defendant who applied for a stay based on foreign non conveniens, the burden is reversed on the defendant.  She relied on Dynasty Line Ltd v Sukamto Sia and Another [2009] 4 HKC 184 at paras 56 and 75, where the Court of Appeal referred with acceptance the principles set out in the leading case of Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460. 

12.  Mr Chung also accepted that the burden is on the defendants. He relied on para 11/1/10A of the Hong Kong Civil Procedure:

“ It is still often said … that where a plaintiff has commenced and served proceedings in Hong Kong as of right the jurisdiction should not “lightly” be disturbed … Various authorities … suggest that such propositions are no more than a reflection of where the burden of proof lies (i.e. on the defendant) rather than of how heavy it is.”

13.  I disagree with Ms Ho and Mr Chung’s interpretation of the authorities.  In the Dynasty case, the Court of Appeal referred to a reversal of burden of proof in cases where a stay was sought in respect of proceedings started in Hong Kong “as of right”.  The 1^st defendant in that case, even though he was non Hong Kong resident, was considered to be sued as of right as he was served whilst in Hong Kong.  In that case, the burden was reversed and it was for the 1^st defendant to show that not only is Hong Kong not the natural or appropriate forum, there is another jurisdiction available which is clearly or distinctly more appropriate than the Hong Kong forum. 

14.  However, in the present case where the defendants are BVI companies with no place of business in Hong Kong, the proceedings cannot be considered to be brought against them as of right.  In Breams Trustees Ltd v Upstream Downstream Simulation Services Inc [2004] EW HC 211, Patten J, it is stated that:

“ 12. In the present case neither Defendant is either resident or has a place of business within the jurisdiction, and both have contested the jurisdiction of the English court. It is not a case, therefore, where they have been served with the English proceedings as of right, and although the application is not in terms one to set aside service on them out of the jurisdiction, in substance it is. I therefore take the view that prima facie the burden is on the Claimant to satisfy me that England is clearly the natural and appropriate forum for the resolution of the dispute.”

15.  I consider that in the present case, the burden remains on the plaintiff to demonstrate that Hong Kong is the natural or appropriate forum for this claim. 

16.  The plaintiff applied for leave to serve out of jurisdiction under Order 11 of the Rules of the High Court.  The plaintiff said the contract was governed by Hong Kong law and that the resolution of the dispute is subject to the exclusive jurisdiction of the Hong Kong courts.  Order 11, rule 1(1)(d)(i), (iii) and (iv) provides that service of a writ out of jurisdiction is permissible with the leave of the court if:

“ the claim is brought to enforce, rescind, dissolve, annual or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract, being (in either case) a contract which:

(i) was made within the jurisdiction;

(iii) is by its terms, or by implication, governed by Hong Kong law; or

(iv)  contains a term to the effect that the Court of First Instance shall have jurisdiction to hear and determine any action in respect of the contract.”

17.  The effect of the exclusive jurisdiction clause was discussed by Patten J in Breams Trustees Ltd v Upstream Downstream Simulation Services Inc [2004] EW HC 211.  At paras 19 and 20:

“ 19. It is convenient at this stage to look at the Commercial Court decisions relied on by the Claimant. They begin with the decision of Waller J in British Aerospace Plc v Dee Howard Co [1993] 1 Lloyd’s Rep. 368. This was a dispute between an English company and an American corporation concerning an agreement for technical assistance and information in connection with a re-engineering programme which the Defendant (“DHC”) was undertaking. The agreement was governed by English law and contained an exclusive jurisdiction clause specifying England as the forum. DHC sued British Aerospace in Texas. About four months later British Aerospace commenced proceedings against DHC in England. DHC applied to set aside service on it out of the jurisdiction and for a stay on the basis that proceedings were pending in Texas and Texas was the appropriate forum. The case therefore has distinct similarities to the present proceedings.

20.  Waller J held that, whether the jurisdiction clause was exclusive or non-exclusive, it had been freely negotiated, and it was not open to DHC to argue the relative merits of suing in Texas as opposed to England.  Those points were determined against DHC by the jurisdiction clause. Therefore even on the basis that the burden was on British Aerospace to satisfy the Court that England was the appropriate forum, it had done so by relying on the jurisdiction clause…..”

18.  And at para 21:

“ 21. Waller J took as his starting-point a passage from the judgment of Hobhouse J in S & W Berisford Plc v New Hampshire Insurance Co. [1990] 1 Lloyd’s Rep. 454, where (at page 463) he said this:

“… the fact that the parties have agreed in their contract that the English Courts shall have jurisdiction (albeit a non-exclusive jurisdiction) creates a strong prima facie case that that jurisdiction is an appropriate one; it should in principle be a jurisdiction to which neither party to the contract can object as inappropriate; they have both implicitly agreed that it is appropriate.”…..

In the British Aerospace case Waller J dealt with the Defendant’s reliance on the prior Texas proceedings in these terms (at p376):

“……Adopting that approach it seems to me that the inconvenience for witnesses, the location of documents, the timing of a trial, and all such like matters, are aspects which they are simply precluded from raising………” ”

19.  The authorities are clear that there is no difference to this approach as between an exclusive jurisdiction clause and a non-exclusive jurisdiction clause.  In the case of an exclusive jurisdiction clause, both parties are bound to commence action in the agreed forum.  In a non-exclusive jurisdiction clause situation, the plaintiff is not bound to commence action in the forum chosen but if he does bring an action there, the defendant is bound to submit to the jurisdiction of that forum (see Breams Trustees Ltd v Upstream Downstream Simulation Services Inc [2004] EW HC 211, para 21 and JP Morgan Securities Asia Private Ltd.  v Malaysian Newsprint Industries Sdn Bhd [2001] 2 Lloyd’s Rep 41 (at para 43)).

20.  I also refer to what Aikens J said about the effect of a jurisdiction clause in Marubeni Hong Kong & South China Ltd v Mongolian Government [2002] 2 AER (Comm) 873, at para 64:

“ The court will still have to consider all the circumstances of the case before reaching a decision. But one of the most important factors it has to bear in mind is that the parties have effectively agreed that England is the proper place to try cases. That is why the defendant will have to show ‘strong reason’ why, despite the agreement to English jurisdiction, England is not the proper place to try the claim. In these circumstances the usual discussion of Spiliada factors, such as the connection of the parties with this or that jurisdiction; the whereabouts of witnesses and documents; the prospects for a speedy trial and the putative proper law of the agreement in dispute and so forth, are all far less powerful than they would be without the agreement as to jurisdiction.”

21.  The effect of the above is that since the defendant has agreed to the exclusive (or non exclusive) jurisdiction clause, there is a strong prima facie case that the jurisdiction is an appropriate one.  The court will still have to consider all the circumstances of the case.  However, in order to obtain a stay, the defendant will have to show strong reasons why, in view of their agreement to the exclusive jurisdiction clause, Hong Kong is not the proper forum to try the case.  Furthermore, the party is precluded from raising issues about the inconvenience of witnesses, location of documents etc or at least these factors are much less powerful since those issues are taken to have been considered by the parties when they agreed to submit to a particular jurisdiction.

Discussion   

22.  The defendants sought to argue that the Hong Kong jurisdiction clauses in the 6^th, 8^th and 9^th Agreements only apply to disputes over the terms of those agreements.  Since the plaintiff only relied on the terms of the 3^rd and 5^th Agreements, it should apply the jurisdiction clause of the 3^rd Agreement, namely, CIETAC arbitration (the 5^th Agreement was silent on forum). 

23.  I do not agree that the 6^th to 9^th Agreements can be conveniently excluded from consideration as suggested by the defendants.  For example, in clause 9 of the 6^th Agreement, the parties expressly amended or supplemented the 3^rd Agreement on how to deal with the situation if the saleable area exceeds 140,000 square meters.  Furthermore, in the defendants’ pleaded case in the Shanghai legal proceedings, they confirmed that clause 9 of the 6^th Agreement formed part of the 3^rd Agreement. 

24.  I consider that all nine agreements between the parties were part of the agreement for the sale and purchase of the shares in Gobest China Limited.  Many of the agreements provide that in case of discrepancy with the earlier agreements, the terms of the subsequent agreements will prevail.  For example, the 8^th Agreement was entered into to amend the 6^th and 7^th Agreements.  Under clause 6 of the 8^th Agreement, the parties agree to submit to the exclusive jurisdiction of the Hong Kong courts.  Clause 6 provides that in case of differences between the terms of the 8^th Agreement and the 6^th/7^th Agreement, the provision in the 8^th Agreement will prevail.  Similar clause can be found in the 9^th Agreement which was signed on the same date as the 8^th Agreement. 

25.  It is clear that where there is a difference in the choice of forum, the terms of the subsequent agreements prevail.  In the premises, I find that for the choice of forum, the parties have agreed to change from Beijing CIETAC arbitration to the non-exclusive jurisdiction of the Hong Kong courts and then to exclusive jurisdiction of the Hong Kong courts. 

26.  I should note that both courts in Shanghai, in declining jurisdiction over the contractual disputes between the parties, also concluded that the various agreements entered into by the parties are part of the same agreement relating to the sale and purchase of shares and that the earlier agreement to submit to CIETAC arbitration had been superseded by subsequent agreements agreeing to the exclusive jurisdiction of the Hong Kong courts. 

27.  Applying the above legal principles, since the defendants have agreed to submit to the exclusive jurisdiction of the Hong Kong courts, the defendants have to show strong reasons why Hong Kong is not the appropriate forum. 

28.  Mr Chung submitted three general points in argument :

 (1)   The subject matter in dispute is a piece of land located in Shanghai and the applicable law for the land is PRC law.  It is not for Hong Kong courts to determine matters of PRC law;

 (2)   The parties had agreed that any disputes should be dealt with by CIETAC; and

 (3)   The plaintiff had abused the process by initiating a claim in Hong Kong even after the defendants had commenced proceedings in Shanghai.

29.  I do not see any substance on the first point. The agreements relate to the transfer of shares of a Hong Kong company.  The disputes relate to the interpretation of the terms of contract which can be dealt with by applying Hong Kong law (which is the agreed choice of law).  The defendants have not explained what PRC land law issues would need to be dealt with and their significance.  Even if there are PRC issues, expert evidence can easily be adduced to assist the court in arriving at its judgment.  After all, it is common for Hong Kong courts to receive expert evidence on PRC law. 

30.  The 2^nd and 3^rd points can be dealt with together.  As I have said, the parties’ agreement on forum has changed from CIETAC arbitration to the exclusive jurisdiction of the Hong Kong courts.  Furthermore, by this application, the defendants have effectively abandoned CIETAC as the forum.  The defendants have not even sought to bring the disputes before CIETAC.  Instead, it had commenced proceedings before the Shanghai First Instance Court.  Even after the case had been finally dismissed on 2 June 2017, the defendants still chose to bring new proceedings in June 2017 in Shanghai rather than commencing arbitration in CIETAC.

31.  According to the defendants, the underlying subject matter is a piece of land in Shanghai.  Yet, in none of the agreements the parties have agreed to apply PRC law or to nominate Shanghai court as the forum to adjudicate disputes. 

32.  There is no abuse of process by the plaintiff in commencing the proceedings in the agreed forum for dispute resolution.  This is confirmed by the ruling of the courts in Shanghai that they have no jurisdiction to hear the disputes and that exclusive jurisdiction rests with Hong Kong courts. 

33.  Mr Chung further relied on the following as to why Hong Kong is not the natural or appropriate forum:

  (1)   The majority of the witnesses are in Taiwan and in mainland China; 

  (2)   The case would require expert evidence on PRC law and quantity survey issues as to whether the land is less than 140,000 square meters;

  (3)   It would be inconvenient for the witnesses and experts to testify in Hong Kong and that would add to the time and costs of proceedings.

  (4)   It would also be inconvenient if the judge hearing the case would like to arrange a site visit to the land in Shanghai. 

34.  Based on the applicable legal principles, the defendants are precluded from raising issues relating to inconvenience of witnesses.  In any event, I do not see any of those as strong reasons in favour of Shanghai courts.  Mr Chung can only point to one paragraph in the affirmation filed by the defendants’ PRC lawyers in support of his argument.  That paragraph stated that:

“ 13. Indeed, all the aforesaid agreements were signed by the Plaintiff and the Defendants in Taiwan and Shanghai and were drafted in Chinese and the subject matter of the agreement, such as the Memorandum, relates to the Land in China Moreover, the Plaintiff alleges that the saleable area mentioned in the Memorandum was less than what was agreed between the parties. On this point alone, I would think that witnesses, preferably experts, will need to be called in order to illustrate what the actual saleable area of the Land was. Such witnesses and /or experts would undoubtedly be from China as they would know about land law in China and how saleable area is calculated.”

35.  No particulars were given on who would be the witnesses and expert, where they reside and why there would be difficulty or inconvenience for them to testify in Hong Kong.  I agree with Ms Ho that the contract provides that the saleable area would be based on what the relevant government department certifies and that the relevant government certificates had been produced.  So, on the face of it, one would question the need for expert evidence on the saleable area of the land.  It is common nowadays for witnesses and experts from mainland China to come to Hong Kong to give evidence without any logistical or procedural difficulties.  The fact that witnesses and expert are from China cannot, in itself, be good reason why Hong Kong is not the natural or appropriate forum. 

36.  In the present case, the defendants have clearly failed to show any strong reasons why Hong Kong is not the proper forum to try the plaintiff’s claims and that Shanghai is a better forum.   

37.  Mr Chung submitted that the new proceedings in Shanghai was based on a tortious claim as the Shanghai courts have already refused to accept the claim based on contract.  Mr Chung argued that the court in Shanghai have yet to decide if they would accept this tortious claim.  With respect, I cannot see how the new set of proceedings would help the defendants to meet the burden of proof.  The new proceedings is based on tort whereas the present proceedings is based on contract.  In any event, the Shanghai courts have already declined to hear the contractual disputes amongst the parties. 

38.  Apart from the fact that the parties have chosen Hong Kong as the place to resolve the parties’ disputes, I consider that the plaintiff has demonstrated that Hong Kong is the most appropriate forum: the plaintiff is a company incorporated in Hong Kong.  The transaction in question relates to the sale and purchase of shares of a Hong Kong company.  The parties have agreed to apply Hong Kong law.  Three important agreements, namely, the 1^st, 2^nd and 6^th Agreements were signed by the parties in Hong Kong, as opposed to only one agreement (the 7^th Agreement) signed in Shanghai.  On the other hand, not only Shanghai courts are not the appropriate forum, they have declined jurisdiction over the case.  As Ms Ho submitted, if a stay is granted in Hong Kong and in view of the Shanghai courts’ decision, there will be no place where the plaintiff can pursue its contractual claims against the defendants. 

39.  Accordingly, even if I am wrong that the exclusive or non-exclusive jurisdiction clause applies, I am satisfied from the materials before me that the plaintiff has shown that Hong Kong is the appropriate forum.  I consider that the interest of all the parties and of justice are best served by proceedings in Hong Kong. 

Material non-disclosure

40.  I shall deal briefly with the other allegation of material non-disclosure.  The defendants, by an affidavit filed by their PRC lawyers, alleged that the plaintiff had failed to provide specific details about the legal proceedings in Shanghai when they applied for leave to serve the Writ out of jurisdiction in December 2016. 

41.  I see no substance in the attack.  I do not consider the matter material in the light of the agreement by the parties to submit to Hong Kong courts’ exclusive jurisdiction.  In any event, the plaintiff had already dealt with in its supporting affirmation about the Shanghai proceedings and its status.  They had also exhibited a copy of the pleadings filed by the defendants with the Shanghai First Instance Court.  The plaintiff had also mentioned that they were disputing jurisdiction of the Shanghai First Instance Court. 

42.  In fact, the Shanghai First Instance Court issued its ruling dismissing the defendants’ claims on 30 March 2017, just the day before the affirmation of the defendant’s lawyer was made on 31 March 2017. Yet, this was not mentioned by the defendant’s lawyers apparently for the reason that they only received it on 1 April 2017.  Notwithstanding the receipt of the ruling, the defendants had failed to produce it when they file the affirmation of Shih Hsiao Chung on 28 April 2017. 

43.  By reason of the foregoing, the defendants’ summons is dismissed.  For case management purposes, I direct that the defendants shall file their defence within 21 days from the date of this decision.

Costs

44.  Normally, costs should follow events.  Ms Ho applied for indemnity costs against the defendants in the event that the defendants’ summons was dismissed.  It was the plaintiff’s case that the defendants’ stay application was vexatious and it was made with improper motive of wasting the plaintiff’s costs and delaying the final adjudication of the claims.  Ms Ho relied on paragraph 11/1/13C of the Hong Kong Civil Procedure. She also set out a number of matters in support. 

45.  The said paragraph 11/1/13C was dealing with a different situation where a plaintiff might be guilty of forum shopping and had commenced proceedings in a jurisdiction where it was clear that it was not the proper forum.  In those cases, costs were awarded against the plaintiff on an indemnity basis.  Here, the defendants were seeking to contend jurisdiction in response to action brought by the plaintiff.  I accept that there are circumstances where the court can order indemnity costs against a defendant.  However, having considered the matters advanced by Ms Ho and even though the defendants’ conduct in some of those matters are unsatisfactory and quite suspicious, I am not satisfied that this case warrants the order of an indemnity costs. 

46.  For example, Ms Ho complained that even though the defendants argued that Shanghai courts are the proper forum to hear this case, they knew on 1 April 2017 when they received the ruling of the Shanghai First Instance Court that it had no jurisdiction to hear the case and concluded that Hong Kong courts have exclusive jurisdiction.  Nevertheless, they made the present application for a stay on 3 April 2017.  Ms Ho also submitted that in breach of the requirements under Order 12, rule 8, the defendants had failed to state its ground of stay and that they had failed to produce the rulings from the Shanghai courts declining jurisdiction. 

47.  The way the defendants have conducted their case so far might be less than satisfactory but they did not result in any substantial delay in the proceedings.  On the timing of filing of the present application, the defendants might be excused for doing so as they were going to appeal the decision of the Shanghai First Instance Court.  Unless they made the stay application, they would have to file their defence thereby losing the opportunity to challenge jurisdiction. 

48.  In the premises, I order that the costs of this application be to the plaintiff, to be taxed if not agreed, with certificate for counsel.