THE PRIDE OF TREASURE FUND v. CANADIAN FOREST NATURAL BEVERAGE LTD AND ANOTHER

HCCT 37/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 37 OF 2011

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REASONS FOR DECISION

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A. Introduction

1.  The Applicant obtained a final arbitral award (“the Award”) dated 12 August 2011 against the 1^stand 2^ndRespondents for the principal sum of HK$25,000,000.00 and interest at 60% p.a on the principal sum.    The relevant arbitration took place in Hong Kong on 27 July 2011, whereby the Respondents did not appear.

2.  On 30 August 2011, on the Applicant’s ex parte application, Saunders J granted an order (“the Enforcement Order”) that the Applicant be at liberty to enforce the Award and to enter judgment thereof.

3.  On 4 November 2011, after hearing, I dismissed the Respondents’ application under their Summons dated 28 September 2011 to set aside the Enforcement Order, with reasons to follow. 

4.  I now give my reasons.

B. Brief background

5.  Pursuant to a share purchase agreement dated 16 December 2009 (“the Purchase Agreement”), the Applicant as seller agreed to sell 350,000,000 ordinary shares (“the Shares”) of a Hong Kong company known as Huasen Health International Group Ltd (“the Company”) to the 1^stRespondent as purchaser for the consideration of HK$80,000,000.00.

6.  Pursuant to a supplementary agreement dated also 16 December 2009 (“the Supplementary Agreement”) between the Applicant, the 1^st Respondent, and the 2^nd Respondent, the 2^ndRespondent agreed to guarantee the 1^stRespondent’s performance under the Purchase Agreement.

7.  The 2^ndRespondent was a sole director of the 1^stRespondent.

8.  Both agreements expressly provided that the governing law was Hong Kong law, and contained an arbitration clause.

9.  The Shares were transferred to the 1^stRespondent, while the 1^stRespondent had paid HK$55,000,000.00 to the Applicant.  It has however failed to pay the balance of the consideration in the sum of HK$25,000,000.00.

10.  The Applicant chased for payment without any success and therefore resorted to arbitration. 

11.  On the face of the evidence filed in this application, relevant correspondence and documents relating to the arbitration and the appointment of arbitrator, as well as the Applicant’s pleading, had been sent to the 1^stand 2^nd Respondents at the service of notice address of the 1^st Respondent set out in the Purchase Agreement, by fax and by email.   The said address was the business address of the Company in the Shenzhen. 

12.  The Respondents took no step and did not appear in the arbitration, which was held on 27 July 2011.  However, the arbitrator was satisfied that proper notice had been given to the Respondents and proceeded with the hearing in their absence.

13.  As mentioned above, the arbitrator handed down the Award on 12 August 2011.

C.      The application to set aside the Enforcement Order

14.  The Respondents’ setting aside application is made under s. 86 of the Arbitration Ordinance (Cap 609) (“the AO”). 

15.  In gist, the Respondents say the Award should not be enforced because (a) the Respondents were not given proper notice of the arbitration (under s. 86(1)(c)(i) of the AO), (b) the Award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration (under s. 86(1)(d)(i)), or (c) for any other reason (under s. 86(2)(c)).

16.  I will deal with these grounds in turn below.  But before that, I have to first address a procedural objection raised by the Applicant.

C1.    A procedural objection

17.  The 2^nd Respondent has purportedly made three^[1] “affirmations” to support this application.  However, all these “affirmations” were made in the Mainland and not sworn or affirmed before a solicitor or someone who is qualified to administer oath.  They are therefore not made in compliance with O 41 r 1(8) of the Rules of High Court and are defective as evidence (see: Hong Kong White Book 2012, paras 41/1/8-10)

18.  The Applicant therefore asks this court to ignore these “affirmations”, in which case the Respondents’ application to set aside must also be dismissed on this basis.

19.  Notwithstanding the defects, Mr Li (counsel for the Respondents) asks me to grant leave to allow the evidence be used. Under O.41 r.4, the Court may grant leave for an affidavit be filed or used in evidence notwithstanding any irregularity in the form.

20.  The 2^ndRespondent has given two explanations as to why these “affirmations” were not properly sworn before a solicitor:

(1) First, he said he was told by his doctor in the Mainland to take a few days rest at home after treatment of his haemorrhoids.  He provided a copy of a medical certificate from a Shenzhen hospital giving him some sick leave.

(2) Later, in his 2^nd“Affirmation”, he further said his entry permit to Hong Kong had expired, and the renewal was now being processed by the Public Security Bureau (“PSB”).  He was therefore not able to come and enter into Hong Kong.  He produced a copy of a paper stating that his said entry permit document is now being processed.  The paper is without any letterhead, although it was signed with a chop bearing the title in Chinese of a PSB branch. 

21.  As far as I can see, the explanations are not convincing.   In particular, the allegation that his entry permit has expired and is now being renewed was not even mentioned in his first “Affirmation”. The alleged letter from the PSB which does not even have an official letterhead also looks suspicious to me.

22.  Notwithstanding these, to avoid any further delay or unnecessary arguments, in considering the Respondents’ application, I am still prepared to look at the 2^ndRespondent’s said three “affirmations” as evidence in support of this application.

C2.    The Respondents were not given proper notice of the arbitration

23.  It was provided under Schedule 1 of the Purchase Agreement that the service of notice address of the 1^stRespondent was the address of the Company in Shenzhen (“the Service Address”) to the attention of the 2^ndRespondent.  It also provided a fax number (“the Service Fax Number”) of the 1^st Respondent for the same purpose. 

24.  The Purchase Agreement was signed by the 2^ndRespondent on behalf of the 1^stRespondent.  As mentioned above, the 2^ndRespondent is the sole director of the 1^stRespondent.

25.  The Supplementary Agreement was also signed by the 2^nd Respondent, both for the 1^stRespondent and for himself.  Clause 4.3 of the Supplementary Agreement provided that “[a]ll other terms and conditions of the [Purchase Agreement] shall remain in full force and effect].

26.  Both agreements contain an arbitration clause.

27.  It is the Applicant’s case and evidence that proper notice of the arbitration had been given to the Respondents at least in the following ways:

(1) The appointment of Mr. Cheung Kwok Kit as the arbitrator by the HKIAC was notified to all the parties by the HKIAC in a letter dated 29^th April 2011 sent to the Service Address.  The letter was properly addressed to the Respondents.

(2) In May 2011, the Respondents' lawyer in Shenzhen, namely, one Mr. Victor H. Yu of Fangda Partners ("FP") contacted a Mr Wan of the Applicant direct to explore any possibility for a settlement.  In order to ensure the Respondents were fully aware of the arbitration proceedings, the Applicant’s solicitors Fred Kan & Co (“FK”) sent a letter to FP on 23^rd May 2011 (“FK’s Letter to FP”) asking FP if they had instructions to represent the Respondents in the arbitration and accept service of the Statement of Claim. 

(3) On the same day, FK sent another letter to the Respondentsreminding them of the deadline to file a defence.  FK's letter was delivered by fax to the Service Fax Number and by post to the Respondents on 23^rd May 2011 at the Service Address. 

(4) Throughout the preparation for the arbitration, various letters relating to the arbitration were delivered by FK to the Respondents by fax to the Service Fax Number, by post at the Service Address and by email.  No delivery failure reports had been received.

28.  In particular, the Applicant has provided, inter alia, the following documentary evidence in support of the above giving notice to the Respondents about the arbitration:

(1) In the 2^ndRespondent’s name card, he has provided the same Service Address as his business address, and an email address (“the 2^ndRespondent’s Email Address”).

(2) The FK’s Letter to FP A letter, whereby it was stated as follows:

“We act for The Pride of Treasure Fund, the Claimant in the above manner.

It has come to our attention that your firm's partner Mr. Victor H.Yu has been representing the 1^st and 2^nd Respondents in the course of some negotiations for settlement with our client's Mr. Lewis Wan.

Please be informed that a copy of the Statement of Claim was duly served to each of the 1^st and 2^nd Respondents on Friday, 20^th May 2011, pursuant to the Arbitrator's Order for Directions No.1 dated 20^th May 2011.

Without prejudice to our position that the Statement of Claim has been properly served on the 1^st and 2^nd Respondents and in order to make sure that the 1^st and 2^nd Respondents are aware of the contents of our client's Statement of Claim and of those arbitration proceedings, please advise by return within the next 2 days if your firm has instructions to accept service of the Statement of Claim for and on behalf of the 1^st and 2^nd Respondents in this arbitration.”

(3) An email dated 23 May 2011 (“FK’s Email”) sent by FK to the 2^ndRespondent’s Email Address, whereby FK provided to the 2^nd Respondent a copy of its firm’s letter of the same date and addressed to the 1^stand 2^ndRespondents at the Service Address.  In this letter, FK reiterated that the Applicant’s Statement of Claim was served on both of them on 20 May 2011 pursuant to the arbitrator’s direction and reminded them that they were required by the direction to serve their Defences on or before 24 June 2011.      FK’s Email was replied to on 24 May 2011, which said “your message was read on Tuesday, May 24 2011…”.

29.  The arbitrator explained at paragraphs 2 to 8 of the Award why he was satisfied that proper notice of the arbitration had been brought to the attention of the 1^stand 2^ndRespondents as follows:

“2. The Claimant commenced arbitration against the Respondents by issuing a notice of arbitration dated 1 February 2011 to the Respondents by fax at [the Service Fax Number] and by post at [the Service Address].

3. By a letter dated 29 April 2011, the Hong Kong International Arbitration Centre (‘the HKIAC’) appointed me as the sole Arbitrator to resolve the present dispute. That appointment letter was directed to the Claimant's solicitors, Fred Kan & Co. and to the Respondents at the [Service Address] by post. It was also sent by fax to the 1^st Respondent at [the Service Fax Number] and to the 2^nd Respondent at [the Service Fax Number/ the 2^nd Respondent’s Fax Number (defined below)]. For the 2^nd Respondent, the letter was also sent by e-mail at [the 2^nd Respondent’s Email Address].

4. The [Service Address] is set out in Schedule I of the [Purchase Agreement]. It is the official address for service of notice on the 1^st Respondent under the [Purchase Agreement] pursuant to clause 9.5 of the [Purchase Agreement]. Pursuant to Schedule I of the [Purchase Agreement], the [Service Address] shall be marked for the attention of the 1^st Respondent.

5. In response to my request, the Claimant's solicitors confirm the following in their letter dated 19 May 2011:-

(1) according to the official website of [the Company]; the 2^nd Respondent is the Chairman of the Board of Directors of [the Company];

(2) according to the business card of the 2^nd Respondent (enclosed to the aforesaid letter), the address of the 2^nd Respondent is the [Service Address] and his fax no. is [the 2^nd Respondent’s Fax Number]; and

(3) all communications in this arbitration have been sent to the [Service Address] and none of their letters posted to the Respondents pertaining to this arbitration has ever been returned from the post office.

6. I note from the business card of the 2^nd Respondent that his e-mail address is [the 2^nd Respondent’s Email Address].

7. Throughout this arbitration, various letters have been sent to the Respondents by post at the [Service Address], by fax and e-mail as mentioned above. The Claimant also produced in the 1^st Affirmation of Wan Mun Wah dated 7 July 2011 copies of fax reports confirming due delivery of letters to the Respondents by fax and e-mail. For letters issued by me to the Respondents by post, by fax and by e-mail, I have not received any reports of delivery failure.

 8. In the premises, I am satisfied that the Respondents have been given proper notice of my appointment as the arbitrator and of the arbitral proceedings.”

30.  In support of the present setting aside application, the 2^nd Respondent explained why none of the above communications concerning the arbitration were in fact brought to the knowledge of the 1^stand 2^ndRespondents.  In substance, his explanations are that:

(1) He had been at all those material times travelling in other parts of the Mainland and was therefore not aware of these communications that were sent by mail, fax and email.

(2) In relation to the reply made to FK’s Email, he said in his 2^nd “Affirmation” that his emails were checked and replied by his assistants as he himself “devoted full time in taking care of his business with clerical work handled by his assistants” and he also “do[es] not use or ha[s] any knowledge about computer operation”.  He further said that after now making further enquiries, his assistants all said that they did not have any idea about the email message.

(3) In relation to FP’s involvement and the FK’s Letter to FP, he further said in his 2^nd“Affirmation” that he had made enquiry with his assistant and understood that his assistant “had talked to a PRC lawyer about the arbitration and the PRC lawyer had contacted the Applicant to enquire about the arbitration”.

31.  I am not persuaded by the Respondents’ case and evidence that they were not given proper notice of the arbitration. My reasons are as follows.

32.  First, it is expressly provided in clause 9.5 of the Purchase Agreement that any notices permitted pursuant to the agreement sent to the Service Address or faxed to the Service Fax Number shall be deemed to be effected.  Thus, insofar as the 1^stRespondent is concerned, good service of the notice of arbitration and the appointment of arbitrator had been achieved by sending these documents to the Service Address and faxed to the Service Fax Number.

33.  Secondly and in any event, it is not the Respondents’ case that there was no one manning the office at the Service Address while the 2^ndRespondent was travelling around.  Quite to the contrary, it is the 2^ndRespondent’s case that his matters have been handled by his assistants when he was away.  Moreover, the same address is also provided in the 2^ndRespondent’s name card and his three “affirmations” filed herein as his business address.

34.  It must also be remembered that it is not the 2^ndRespondent’s case or evidence that, while he was away from the office, all the business operations or day to day operations of the 1^stRespondent, the Company or the office at that address had ceased.

35.  In the circumstances, even if the 2^ndRespondent had been travelling around the Mainland at the materials as he alleges, when all the above mentioned documents and correspondences about the arbitration were sent to the Service Address as well as by fax to the Service Fax Number, it is simply unbelievable that, in the course of normal business operations, no one (or none of the 2^ndRespondent’s said assistants) in the office at the Service Address had dealt with them and conveyed the message or information contained in these documents to the 2^ndRespondent.  In this regard, it is worth noting that, as noted by the arbitrator in his Award, none of these documents delivered to the said address by mail and fax were returned or reported undelivered.  The 2^ndRespondent in all his three “affirmations” filed has also singularly failed to explain what had happened to these documents while he was away.

36.  Thirdly, in relation to the FK’s letter to FP, the 2^nd Respondent in fact admitted (as quoted above) that his assistant “had talked to a PRC lawyer about the arbitration and the PRC lawyer had contacted the Applicant to enquire about the arbitration”.   In those circumstances, it is again unbelievable that, while his assistant was fully aware of the arbitration (to the extent that he even “asked” a PRC lawyer to approach the Applicant to enquire about it), the said assistant had somehow failed to convey to or inform the 2^ndRespondent about this or the existence of the arbitration.  In particular, it is also not the 2^nd Respondent’s case that he did not authorize his assistant to do so.  Thus, it is more likely than not that it was with the 2^ndRespondent’s instruction or authority that his assistant had “talked to the PRC lawyer” about the arbitration.   In my view, the 2^ndRespondent was fully aware of the ongoing arbitration and had thus asked his assistant to instruct a PRC lawyer to approach FK to “talk” about it.

37.  Finally, in relation to the FK’s Email, again it is incredible that even if it was the 2^ndRespondent’s assistant who had opened and read it (as now alleged by the 2^ndRespondent), the said assistant would not have conveyed the message in the email (and the content of the FK’s letter attached to this email) to the 2^ndRespondent.   Again, in my view, looking at the evidence (including the 2^ndRespondent’s “affirmations”) as whole, I am satisfied that the 2^ndRespondent (and thus the 1^stRespondent) were fully aware of the FK’s Email and the attached letter, and therefore also the ongoing arbitration.

38.  For the above reasons, I reject the Respondents’ case that they were not given proper notice of the arbitration.

C3.    The Award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration

39.  There is nothing in this ground.

40.  Clause 9.4(i) of the Purchase Agreement provides the scope of the arbitration as follows:

“Any dispute, controversy or claim arising out of, in connection with or relating to this Agreement, including interpretation, validity, invalidity, breach or termination thereof, shall be settled by arbitration”.

41.  It is the 2^ndRespondent’s case (as set out in his 2^nd“Affirmation”) that the Purchase Agreement was not enforceable because (a) the Purchase Agreement was not supported by valid consideration as the Applicant was already under a legal duty pursuant to what the Respondents said to be a prior agreement reached on 7 April 2008 to transfer the shares of the Company, and (b) the Purchase Agreement was entered into under economic duress.

42.  Mr Li for the Respondents contends that these two issues do not fall within the scope of the arbitration clause. Therefore, submits Mr Li, they amount to a difference not falling within the terms of the arbitration clause.

43.  I am not sure if the argument that the arbitration dealt with a difference not falling within the terms of the submission to the arbitration is open to the Respondents, when these alleged defences were not even raised in the arbitration and thus the arbitration in fact did not deal with them. 

44.  But in any event, I am of the view that these issues, even if raised, do fall within the scope of the arbitration as they constitute issues relating to the “validity or invalidity” of the Purchase Agreement.

45.  This application must also fail on this ground.

C4.    Any other reason

46.  Mr Li for the Respondents has not submitted that there are anything other than the matters relating to above two grounds which the Respondents could rely on to ask this Court to set aside the Enforcement Order.

47.  This ground adds nothing and is therefore similarly rejected.

D.      Conclusion

48.  The Respondents have failed to establish any valid grounds under s. 86 of the AO to set aside the Enforcement Order.  Their application should be dismissed with costs.