ANNA DOROTHEA ERNA LUNGERSHAUSEN AND ANOTHER v. THOMAS JOSEPH DILLON, JR

CACV 226/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 226 OF 2003

(ON APPEAL FROM HCMP NO. 1751 OF 2002)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This was an appeal by the respondent from the order of Deputy High Court Judge Muttrie dismissing the respondent's summons filed on 21 May 2003 for an order that the originating summons dated 4 May 2002 taken out by the 1st and 2nd applicants be dismissed for lack of jurisdiction. At the conclusion of the hearing, the appeal was dismissed with reasons to be handed down later. This we now do.

3. The substantive relief sought by the originating summons was for declarations and orders that:

(1)	The firm of Dillon, Hall & Lungershausen ("DHL"), being a Hong Kong partnership between the applicants and the respondent, has been lawfully dissolved with effect from 14 November 2001.
(2)	The firm of Lungershausen & Smith ("L&S"), being a Hong Kong partnership between the applicants, has no responsibility, as between the applicants and respondent, for any liabilities or obligations of the dissolved Hong Kong partnerships, D&L and DHL or for any liabilities or obligations of the respondent.

4. On 6 May 2002, Master Ho granted leave ex parte to serve the originating summons on the respondent out of the jurisdiction. On 17 September 2002, the respondent issued the summons returnable on 24 September 2002 for (1) a declaration that the court had no jurisdiction and/or that it had not been shown that an order for service out of the jurisdiction was appropriate, it being alleged that the ex parte order was wrongfully obtained by material non-disclosure; (2) dismissal of the originating summons and the setting aside or discharge of the orders of the master; or (3) in the alternative, an order that the proceedings be stayed. The dismissal of this summons formed the subject matter of the appeal.

Background

5. The respondent is a bilingual US citizen, with US and German law degrees. From 1995, he was an in-house lawyer for Daimler-Benz AG ("DBAG"), and was based in Stuttgart, Germany in charge of their worldwide product liability defence strategy. In 1997/98, DBAG made a strategic decision to create a global coordination programme for the defence of product liability matters of worldwide. The respondent was offered an opportunity to participate in that programme as an external lawyer. He therefore terminated his employment with DBAG and through Dr Dillon Law Offices P.C., a professional corporation in Georgia, USA, he started providing legal services to DBAG under a contract with its attorneys, Carroll, Burdick and McDonough of California. In late 1998, DBAG merged with Chrysler Corporation and became Daimler-Chrysler AG ("DCAG").

6. The 1st applicant, Dr Lungershausen, is a German lawyer with German and American law degrees. She came to Hong Kong in 1995 and worked as an associate in the Hong Kong office of a German law firm retained by Mercedes-Benz China Limited and later by DCAG. In March/April 1998, Dr Lungershausen and Dr Dillon became acquainted in the course of dealing with a DBAG product liability matter which arose in the PRC.

7. On 15 June 1999, Dr Lungershausen and Dr Dillon entered into a Memorandum of Understanding, having decided to work together as partners although the precise structure had not then been decided. The partnership was known as Dillon & Lungershausen although the date when it came into being is a matter of dispute. In any event, it started operating in August 1999 and in December 1999, Dr Lungershausen established two Hong Kong companies, Product Safety Co-ordination Hong Kong Limited and Product Safety Co-ordination International Limited ("the Hong Kong companies") which were used for the invoicing of work done by D&L for its sole client, DCAG.

8. The 2nd applicant, Dr Smith, is a US attorney registered as a foreign lawyer in Hong Kong and is the German equivalent of a registered foreign lawyer in Germany. He began to work for D&L in mid-2000 and, whilst this is disputed, Dr Smith maintains that he became an equity partner in August 2001.

9. Meanwhile, on 19 January 2001, Dr Dillon and a Mr James E Hall, another US attorney, signed a letter of agreement whereby the latter joined D&L as a salaried partner and thereafter the name of the firm was changed to Dillon, Hall and Lungershausen. This firm was first registered with the Law Society as a registered foreign law firm on 11 April 2001.

10. On 14 November 2001, Dr Lungershausen and Dr Smith gave notice of dissolution of the partnership to Dr Dillon and Mr Hall and on the following day, they established the firm of Lungershausen and Smith ("L&S"). Shortly thereafter, L&S were appointed international case coordination counsel by DCAG. Dr Dillon took issue with the dissolution and other matters. He instructed Hong Kong solicitors. There was a "without prejudice' meeting in Germany on 15 April 2002. No agreement was reached although a further meeting was scheduled for May 2002. Meanwhile the originating summons came to be issued (on 4 May 2002) and shortly thereafter, on 15 May 2002, Dr Dillon issued proceedings ("the German proceedings") in Stuttgart although these were withdrawn six months later. In April 2003, he issued proceedings in the US District Court for the District of Columbia ("the US federal proceedings") against Dr Lungershausen, Dr Smith, DCAG and various other corporations and individuals.

The judgment below

11. The respondent's summons which was before the judge was based on four grounds:

(1)	the applicants' failure to satisfy the requirements of Order 11, rule 1(d)(iii);
(2)	mis-disclosure or non-disclosure of matters material to the Master's decision making process;
(3)	the applicants' failure to make out a case that Hong Kong is forum conveniens; and
(4)	on the materials available to the judge, Hong Kong was forum non conveniens.

12. The issue under Order 11 was whether the partnership was by its terms or by implication governed by Hong Kong law. The judge found that as a matter of law, there was jurisdiction under Order 11 and that the applicants had a good arguable case as to jurisdiction on the facts. He was also satisfied that they had shown a serious issue to be tried on the merits.

13. On the issue of the lack of disclosure, the respondent had specifically relied on two matters in his summons, namely, non-disclosure of the profit-sharing terms and the whereabouts of the partnership's principal places of practice which were Stuttgart and Sindelfingen in Germany. The judge did not consider that those matters were directly relevant to the question of whether the parties agreed that the partnership agreement should be subject to the jurisdiction of the Hong Kong courts.

14. The judge remarked that, at the hearing, the basis of the respondent's case on a lack of disclosure had broadened from those two matters to include seven other matters and three allegations of abuse of process. The judge, quite correctly, deprecated the raising of new grounds at the inter partes hearing. In his view, the seven new points ought properly to be rejected in limine since the party accused of failing to make proper disclosure at least ought to know the case he has to meet. In case he was wrong about that, the judge went on to consider the seven additional points.

15. For present purposes, it is sufficient to mention only the following point. It was said that the Master ought to have been told of the settlement discussions that took place in Germany on 15 April 2002. This was a 'without prejudice' meeting between the parties' lawyers. The judge noted that what transpired at the meeting was that the parties found that they had different versions of the Memorandum of Understanding. Each alleged that the other's version was forged. Dr Dillon's version contained a provision in clause 6.3 for the payment to him of US$2.5 million in the event of his retirement. The judge dismissed this point as being irrelevant to the questions raised in the originating summons.

16. As to the abuse of process allegations (described below), they were dealt with as part of the forum conveniens point. The judge considered it convenient to deal with these two matters - forum conveniens/forum non conveniens - together. In his view, the real question was whether Hong Kong was clearly the natural and appropriate forum for trial. If Hong Kong law was the governing law, then it was natural and appropriate for the issues raised in the originating summons to be tried by a Hong Kong court. The judge noted that there was strong evidence to show that D&L and DHL were themselves based in Hong Kong and that the whole business structure including the setting up of the Hong Kong companies was designed to suit Dr Dillon's tax position.

17. The judge then dealt with the abuse of process allegations which he summarised (at paragraph 42) as follows:

"... The first is that despite their knowledge that there were substantial disputes of fact, the applicants chose to proceed by way of Originating Summons which is inappropriate where there are disputes of fact. The second is that the application for a negative declaration, in circumstances where foreign litigation is in contemplation by the other party is itself an abuse of process; and the third is that there are various monetary claims which will have to be litigated in due course (with Dr Dillon as plaintiff seeking recovery of what is owed to him by the partnership(s) from which he has been ousted) and to mount partial litigation which raises only part of the matters in dispute is also an abuse of process."

It had been argued that Dr Dillon was the natural plaintiff since it was his complaint that the partnerships from which he had been ousted owe him a lot of money when all the applicants were seeking was nothing more than a set of declarations. The judge took into consideration the court's power to convert an action begun by originating summons into a writ action, for example, where there are substantial factual disputes and concluded that Dr Dillon was not, in any way, prevented from pursuing his monetary claims.

18. In the context of forum conveniens, the judge noted that all of the partners were persons who have long since left their own countries to live abroad as expatriates and to practise what the judge said was intellectual property law (when he must have meant product liability law) in a completely international setting. For this reason he did not consider that the fact that the respondent was a foreigner and owed no allegiance in Hong Kong should loom large in the decision.

19. The judge then turned to consider other factors which related to the "personal convenience of the parties, the location of witnesses, the location of documents and the like". He concluded that the matter could be dealt with easily enough either in Hong Kong or Washington DC.

20. The respondent argued that the originating summons was but a contrivance whereby the applicants sought to steal from the respondent who is the only natural or true plaintiff his choice of forum. That argument made little headway since if that amounted to "forum-shopping" by the applicants, the respondent was in no better position. As the judge noted, by the time the summons came before him, Dr Dillon was no longer contending that Germany was the more appropriate jurisdiction; the German proceedings commenced on 15 May 2002 were discontinued in November of that year, some seven months before the hearing of the summons on 30 June 2003. On that date, the US federal proceedings were on foot, having been commenced in April 2003. As to the other juridical advantages contended for by the respondent i.e. a trial by jury with lengthy US pre-trial procedures and its costs regime, the judge was not persuaded, at any rate so far as concerned a jury trial, that it would suit the interests of all the parties and the ends of justice. This was because in the US federal proceedings claims had been brought against a whole host of other defendants on myriad causes of action. The judge said this:

"65. ... I can well see that the action as mounted by Dr Dillon in the USA, unless arrangements are made for severance, would be likely to confuse a jury. Confusion may be to his advantage, but it does not suit the ends of justice."

The judge concluded that Hong Kong was forum conveniens and that Washington DC was the forum non conveniens.

This appeal

21. It was not the respondent's case that the judge had erred in law. The appeal was directed at the judge's exercise of his discretion. As Lord Templeman observed in Spiliada Maritime Corporation v. Cansulex Ltd [1987] 1 A.C. 460 at 465F and G:

"... the solution of disputes about the relative merits of trial in England and trial abroad is pre-eminently a matter for the trial judge ... An appeal should be rare and the appellate court should be slow to interfere ..."

22. At the outset of the appeal, Mr Graham who appeared for the respondent, accepted that it is arguable that the partnership was governed by Hong Kong law given Dr Lungershausen's allegation of an oral agreement as to the governing law of the partnership. That being so, he did not seek to pursue his challenge to the judge's finding of jurisdiction under Order 11. The appeal thus centered on three matters all of which had been raised below:

(1) non-disclosure such as to warrant the setting aside of the order of Master Ho;

(2) abuse of process; and

(3) a forum conveniens.

Non-disclosure

23. It was said that Master Ho had been misled. A major plank of that complaint was the alleged non-disclosure that Dr Dillon and Dr Lungershausen were not equal partners in that beyond the first US$500,000 which sum was to be shared equally, Dr Dillon was entitled to the lion's share of the profits, namely 80% whereas Dr Lungershausen share was only 20%. But after being referred to paragraph 41 of Dr Lungershausen's first affidavit which expressly mentioned the profit sharing ratio between Dr Dillon, herself and Mr Smith of 70:20:10, Mr Graham did not seek to take the point further.

24. That left complaints of non-disclosure of the 'without prejudice' meeting in Germany in April 2002 and the fact that the vast majority of the firm's business was performed and the revenues were earned outside Hong Kong. It was said that Master Ho should have been told that "negotiations concerning all matters and disputes between the parties had been taking place and were continuing [and that these were being] conducted by German lawyers in Germany". But what in fact transpired at the 'without prejudice' meeting (as to which see paragraph 15 above), was a far cry from what it was made out to be. In those circumstances, I agree with the judge that the non-disclosure of that meeting was of no moment. As regards the point about the firm's business and the revenues, suffice it to say that the respondent was content enough for D&L and subsequently DHL to be Hong Kong partnerships for fiscal purposes, a point amply supported by documentary evidence. See, for example, the respondent's explanation at a meeting on 9 September 2001 when asked by the General Counsel of Legal Affairs - Product Department of DCAG why VAT was not charged for the services of DHL and D&L to be found in paragraph 34 of the judgment. In short, none of the matters relied on can be considered "material" to the master's exercise of his discretion.

Abuse of process

25. As noted above, the judge dealt with this argument as part of the forum conveniens point and rightly so. The respondent's contentions were that the originating summons taken out by the applicants was a kind of "ambush" tactic to seize jurisdiction when Dr Dillon was "the natural plaintiff", being the aggrieved party. Mr Graham referred to the second declaration sought which was a negative declaration. It was said that that was symptomatic of 'forum-shopping': it was of no utility and it made the application abusive. It was further said that the originating summons procedure was entirely inappropriate where, as here, there are a substantial disputes of fact which disputes were known to the applicants at the time they took out the originating summons. It will be seen from paragraph 17 above that these arguments had been made below and were not new.

26. Mr Graham referred to the decision in Sohio Supply Co. v. Gatoil (USA) Inc. [1989] 1 Lloyd's Rep. 588. In that case, the day after the sellers obtained leave to issue a writ out of the jurisdiction against the buyers, the buyers commenced proceedings in Texas. The buyers applied to set aside the leave granted, to stay the English proceedings and to dismiss the English action for want of prosecution. The sellers applied for an injunction to restrain the buyers from continuing with the proceedings commenced in Texas. The judge granted the injunction and on appeal, Staughton L.J. made the following observations (at 593):

"... the Texan action is an action for a negative declaration, commenced by the buyers when, as is quite plain, they were apprehensive that proceedings might be commenced against them in England. I would not do anything to encourage that sort of proceeding."

27. It would not be right to read Staughton L.J.'s observations out of context or as stating a general proposition that it is never legitimate to seek negative declarations. The facts in the Sohio's case are distinguishable and that case is of little assistance in the present context. Even Mr Graham did not seek to suggest that the first declaration sought was of no utility. He confined his observation to the second declaration sought which is to the effect that L&S have no ongoing liabilities in respect of DHL and the prior partnership D&L. But it seems evident that any ongoing responsibility on the part of L&S for obligations and liabilities incurred by DHL and D&L would affect its ability to do business. I therefore fail to see how it can be said that the second declaration would have no utility.

28. As regards the appropriateness of the originating summons procedure, I agree that the declaratory relief sought does not preclude the resolution of financial and other claims arising out of the partnership should the respondent wish to raise them. On the papers before the court, I agree with counsel for the applicants that at the time the originating summons was issued, there was no known relevant dispute of fact. Should the dispute between the parties be broadened, it is of course possible to convert the originating summons into a writ action. But that does not mean that the issuance of the originating summons in the first place was unjustified.

Forum conveniens

29. As Staughton L.J. himself noted in the Sohio's case (at 593):

"... Judges of the Commercial Court should be allowed to determine these applications for choice between rival fora, and that appeals should be rare ..."

He was there echoing the observations of Lord Templeman in Spiliada cited in paragraph 21 above and it is important to bear these observations in mind when considering this part of the appeal.

30. Plainly, the respondent faces an uphill task in challenging the judge's exercise of his Spiliada discretion. The main criticism appears to have been directed at the judge's observations (in paragraph 65 of his judgment) set out in paragraph 20 above. It was said to betray "a highly patronizing and jaundiced view of litigation in Washington DC." But properly read, they were not criticisms of the US judicial system. Rather, they were directed at the width and scope of the US federal proceedings. Not only are there 10 defendants to those proceedings, there are numerous causes of action against some of them. For example, as against Dr Lungershausen there are no less than 6 heads of claim. I should add that since the date of the judgment below, the US federal proceedings have been withdrawn. It would appear however that there are now similar proceedings in the Superior Court of the District of Columbia (apparently filed on 28 November, 2003) although there is no evidence that these proceedings have ever been served on the applicants insofar as they are some the defendants therein named.

31. In my view, none of the points relied on by the respondent has any merit. The judge's exercise of his discretion was not susceptible of criticism. Had those advising the respondent had in mind the observations of Lord Templeman in Spiliada, I doubt if this appeal would have been brought.