XCHRX ORIENMET MINERALS CO. LTD. v. WINNER DESIRE LTD.

1996, No. A14689

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This is an application by the Plaintiff for summary judgment against the Defendant.

The facts

2. Very briefly, the facts are these. The Plaintiff and Defendant are two Hong Kong incorporated companies, although, according to the Plaintiff, the Defendant was and still is the business arm of a Chinese company in the People's Republic of China ("PRC") known as the Wuzhou Foreign Economics Relations and Trading Company, Guangxi. The Plaintiff and the Defendant entered into two agreements in July 1996 in which the Defendant agreed to transport 800 metric tons of aluminum ingot ("the goods") to the PRC for the Plaintiff. The Defendant agreed to handle the documentation and paying the proceeds of sale to the Plaintiff after selling the goods with the consent of the Plaintiff. After taking possession of the goods, the Defendant sold the goods without the consent of the Plaintiff and refused to pay the proceeds of sale to the Plaintiff.

Defendant's case

3. The Defendant's case is that the Defendant did not enter into any agreement with the Plaintiff. They were entered into by one Mr Chung Hui Kin who was a director of the Defendant. Mr Chung had disappeared since November 1996 and the Defendant could not locate him. The Defendant denied that Mr Chung had the authority to enter into the agreements; he was never authorized by any resolution of the Board of Directors of the Defendant to enter into the agreements. Mr Chung had misappropriated the proceeds of sale.

4. Although the lack of authority of Mr Chung was originally relied upon by the Defendant as the defence, it is no longer relied by Mr Tsang, Counsel for the Defendant. In my view, this concession is properly made. Mr Chung was not merely the director of the Defendant, but also its Deputy General Manager. He was the person in charge of the daily management of the Defendant and its business operation in Hong Kong. Prior to the two agreements, the Plaintiff had entered into numerous transactions with the Defendant. The contracts for these transactions were all signed by Mr Chung for the Defendant. The contracts were disclosed in the Plaintiff's affidavit and the Defendant did not disown any of these contracts. The defence of the absence of authority of Mr Chung is clearly an after thought and is not a credible defence.

Violation of PRC law

5. The real defence raised in this matter is that the terms of the agreements are in violation of the PRC law. The Defendant accepts that the governing law of the agreements is Hong Kong law. Reliance was made by Mr Tsang on the case of Regazzoni v. K.C. Sethia (1944) Ltd [1958] AC 301 (House of Lords) in which the head note reads :

"... the contract was unenforceable since an English court would not enforce a contract or award damages for its breach if its performance would involve doing an act in a foreign and friendly state which violates the law of that state. The principle is based on public policy and international comity. It does not follow from the fact that today the court would not enforce a revenue or penal law at the suit of a foreign state that today it will enforce a contract which requires the doing of an act in a foreign country which violates such law, but, whether or not an exception must still be made in regard to the breach of a revenue law in deference to old authority, the present case could not fall within any such exception."

6. The Defendant contends that the agreements are in serious violation of article 39 of the Regulations on Foreign Exchange Control ("the Regulations") of the PRC which provides that :

"Anyone who has committed any of the following acts of illegal procurement of foreign exchange shall be given a warning by the foreign exchange control authority and the foreign currency shall be seized and compulsorily exchanged, and he shall pay a fine equal to 30% or more but not more than 3 times of the amount of the illegally procured foreign exchange. If the case constitutes a crime, criminal liability shall be imposed in accordance with the law :-

Section (1) Make payment for goods imported or make similar payments in Reminbi or in kind in violation of State regulations when payment should be made in foreign exchange;

Section (2) Pay in Reminbi for other person's expenses in the country and paid back by that other person in foreign exchange."

The PRC legal expert of the Defendant stated that :

"According to the said two contracts, the goods money for the imported aluminum ingots are to be collected in Reminbi; and not paid in foreign exchange according to normal procedure. It is clearly an act of illegal procurement of foreign exchange which is prohibited by section (1) of Article 39. It is serious illegal conduct.

Furthermore, it is stipulated in the said two contracts that the collected goods money in Reminbi shall be privately converted into foreign currency and remitted out of China. It is a clear violation of the requirement of administration and verification of payment made in foreign exchange in respect of import laid down in Article 11. It is also an act of illegal procurement of foreign exchange which is prohibited by Section (2) of Article 39. It is also serious illegal conduct."

No evidence of application of the Regulations

7. The starting point is on what basis is the Regulations applicable to the agreements in question? Just when one prays in aid of a Hong Kong legislation such as the Sales of Good Ordinance or the Conveyancing and Properties Ordinance, one has to show why the statutory provisions are applicable, the Defendant's expert must show that the Regulations applies to the agreements. This is not done. The Defendant's expert simply proceeded on the basis that the Regulations applies.

8. On the other hand, the Plaintiff's Chinese law expert stated that the Regulations is Chinese law, and before it can be applied, it is necessary to ascertain which of the three contract laws in PRC applies to the agreements. The three laws are:

1) Economic Contract Law

2) Technology Contract Law

3) Economic Law Involving Foreign Elements (i.e. Foreign Economic Contract Law)

The Plaintiff's expert said that none of the three contract laws applies because the first two laws apply to contracts between Chinese entities while the third applies to "contracts concluded between enterprises or other economic organizations of the PRC and foreign enterprises, other economic organizations or individuals. (Article 2). In other words, in order to make the foreign economic law apply, one of the contracting party must be "foreign" while the other Chinese. In the present case, both parties are "foreign" legal persons and neither party is an "enterprise" or "organization" of the PRC." There is no response from the Defendant's expert to this view.

9. It is not appropriate in an O.14 application to comment, as if one is dealing with a Hong Kong legislation, on whether, if the Regulations applies to the agreements, Article 39 of the Regulations is infringed. However, the prerequisite for the Defendant obtaining leave to defend must be that there is credible evidence showing that the Regulations is the governing regulation and that the agreements belonged to the category of contracts in which payment should be made in foreign currency and not in Reminbi as prohibited by Article 39. There is no such evidence.

Other argument

10. Mr Tsang further relied on the speech of Viscount Simonds in Regazzoni at page 323 in which he said that "the common intention of the parties was to violate the law of India and it is no consequence that the documents did not disclose their intention." Mr Tsang relied on the contractual terms of the agreements, the previous transactions in which they showed that the Defendant had never acted as an agent for the Plaintiff and one occasion in which Mr Chung remitted money directly to one Ms Lu of the Plaintiff. He submitted that these are suspicious circumstances that one ought to find that the common intention of the parties was to violate the law of PRC. I really cannot see how such inference can be drawn from the matters he had relied upon.

Conclusion

11. The conclusion is that the Plaintiff is entitled to summary judgment as no credible defence has been shown. Damages are to be assessed by the Master. The Plaintiff is to have the costs of the application and of the action.