CHEN ER HU v. WEI WEN AND ANOTHER

HCA 1306/2022

[2023] HKCFI 2762

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1306 OF 2022

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REASONS FOR DECISION

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1.  This is the application of Wei Wan (“D1”) and Chen Qinglan (“D2”) (collectively “the Defendants”) by summons dated 30 January 2023 for a stay of the proceedings commenced by Chen Er Hu (“the Plaintiff”) on 7 October 2022 to recover a loan made to D1 secured by properties owned by the Defendants in Hong Kong. At the conclusion of the hearing, the summons was dismissed with costs to be summarily assessed. My reasons appear below.

Background

2.  On 20 March 2013, the Plaintiff and D1 entered into an agreement (“the 1^st agreement”) under which the Plaintiff invested RMB 30 million (“the investment fund”) in a mining project in Shanxi province for a guaranteed return up to RMB 66 million. Clause 6 provided that “disputes are to be resolved by the Court where the project is located.”.

3.  By early 2014, D1 fell into arrears with interest payments and the parties agreed to convert the investment fund into a loan. Accordingly, on 18 April 2014, the Plaintiff and D1 entered into a 2^nd agreement whereby the 1^st agreement was rescinded and the Plaintiff and D1 agreed that the investment fund be treated as a loan for a term from 1 January 2014 to 30 April 2015, specifying the amount of interest to be paid by various dates during the term with the principal repayable before the end of the term (“the 2^nd agreement”). It provided for disputes to be litigated in Jinzhong City, Shanxi province.

4.  The Plaintiff and D1 entered into a 3^rd agreement on 30 May 2014 (“the 3^rd agreement”) by which the Defendants agreed to offer a vehicle and 2 properties in Hong Kong as security for the sum still owed to the Plaintiff. D2, as co-owner of the properties and the vehicle, also signed and printed her fingerprint on the 3^rd agreement.

5.  In brief outline, the 3^rd agreement shows that

(a)  the amount outstanding from D1 was RMB 33.5 million: clause 1;

(b)  security for debt repayment would consist of two HK properties jointly owned by the Defendants (with a set-off price agreed at RMB 37.5 million) and the vehicle: clause 2 (1) and (2);

(c)  the Plaintiff would pay RMB 6 million to D1 as compensation for the value of the properties: RMB 2 million to be paid after the signing of the 3^rd agreement and RMB 4 million after D2 signs the 3^rd agreement within 30 working days of the signing of the 3^rd agreement clause 3 (2);

(d)  D1 shall not sell, mortgage or otherwise dispose of the properties during the period when D1 is holding the properties on behalf of the Plaintiff: clause 6 (3);

(e)  clause 9, in pertinent part, provided as follows:

“If no settlement can be reached through consultation, either Party may file a lawsuit with the People’s Court with jurisdiction in Jinzhong City, Shanxi Province, where this Agreement is signed.”

6.  Pursuant to the 3^rd agreement, the Plaintiff paid D1 a total sum of RMB 6 million.

7.  Subsequently,

(a)  in breach of clause 6 (1), despite repeated requests, D1 failed to repay any part of the outstanding loan of RMB 37.5 million to the Plaintiff; and

(b)  in breach of clause 5 (3) and clause 6 (3), the Defendants severed their joint interest in the properties in 2018, and D1 entered into legal charges with Gold Dynasty International Finance Limited (“Gold Dynasty”) in 2021 and 2022.

The Defendants’ case

8.  At the hearing, Mr Chan Yip Hei, counsel for the Defendants, addressed the court on 3 specific matters: (a) the weight to be attached to a non-exclusive jurisdiction clause; (b) connecting factors; and (c) special features.

9.  On the 1^st matter, Mr Chan fairly acknowledged that clause 9 of the 3^rd agreement is a non-exclusive jurisdiction clause. He highlighted the fact that the Shanxi court is the only identified court in all 3 agreements. While the courts of other jurisdictions were not expressly excluded and the parties had agreed to rescind the earlier agreements, he submitted that it is telling and indicative that on all 3 occasions, the Plaintiff and D1 once again submitted themselves to the jurisdiction of the Shanxi court. That, it was said, is a weighty factor.

10.  As regards the 2^nd matter i.e. “connecting factors”, article 35 of the Civil Procedure Law of the People’s Republic of China (2021 Amendment) (“CPL”) refers to factors such as the choice of law, where the defendant is domiciled, where the contract is performed, where the contract is signed, where the plaintiff is domiciled or where the subject matter is located et cetera.

11.  In the present case, it was submitted that not only did the transfers of funds take place in China, that is also where the parties are domiciled and the place where the 3^rd agreement was made.

12.  Peregrine Fixed Income Limited v JP Morgan Chase Bank, [2005] 3 HKLRD 1 was mentioned but without stating or identifying the particular proposition or statement considered to be relevant.

13.  The 3^rd matter, i.e. “special features”, turns on PRC law. Under article 279 of the CPL, the People’s Court in the People’s Republic of China has exclusive jurisdiction over disputes arising from the development of natural resources contracts within the territory of the People’s Republic of China.

14.  The Defendants’ expert opined that

(a)  the present case is a contractual dispute arising from the 1^st agreement[1] which was for the cooperative development of natural resources;

(b)  the 2^nd agreement is not an independent contract but an agreement closely related to the 1^st agreement;

(c)  no loan was actually delivered under the 2^nd agreement, so it is not a loan agreement in the true sense;

(d)  in substance the 2^nd agreement is a settlement resolving the dispute over the exploration and development of natural resources contract between the Plaintiff and D1; and

(e)  applying the same ‘origin/root’ analysis to the 3^rd agreement, it is also a dispute that arises from the development of natural resources in the PRC.

15.  The Defendants submitted that it is the People’s Court in Jinzhong city that has jurisdiction to determine the dispute among the parties and the current Hong Kong proceedings must be stayed.

16.  Mr Avery Chan, counsel for the Plaintiff submitted that in reality the Plaintiff’s action concerns two Hong Kong properties used as security for the debt. The proper law is governed by the lex situs and that is the position under both the common law and PRC law.

17.  The Plaintiff’s expert explained that under article 35[2] of the CPL, the parties’ choice of forum cannot violate provisions of the law regarding court-level jurisdictions and exclusive jurisdictions.

18.  An action involving a dispute over immovable property comes under the jurisdiction of the People’s Court of the place where the immovable property is located: Article 34 (1) of the CPL. Under Article 28 of the Interpretation of the Supreme People’s Court on the Application of the CPL (2022 Amendment), “dispute over immovable property” as prescribed in Article 34 (1) refers to any property rights dispute arising from the confirmation of rights, division and neighbouring relations of immovable property.

19.  5 authorities were cited by the Plaintiff’s expert in support of that analysis. They include (2022) Yue 15 Min Xia Zhong No. 117 Civil Judgment of the Intermediate People’s Court of Shanwei Municipality which was about debt repayment with houses. It was held that as it involved the disposal of property rights, it is a dispute over immovable property. The mortgaged property was not at the same place as the court with jurisdiction the parties had agreed to and the court held that the agreed jurisdiction was in violation of the provisions of the CPL on exclusive jurisdiction on dispute over immovable property.

20.  In the present case, the Defendants intended to use the 2 properties to pay off the debt to the Plaintiff. It is thus an agreement on repayment with houses. As the court with jurisdiction agreed by the parties (i.e. clause 9) is not where mortgaged property is located, the agreed jurisdiction is invalid.

21.  Further, Article 34 (1) of the CPL which confers exclusive jurisdiction to the court where the property is located applies even if the property is outside the Mainland. 3 cases were cited to show that the Mainland court deemed that it had no jurisdiction over any dispute arising from overseas properties.

22.  Those examples covered overseas properties in Macau, Dubai and, relevantly, (2018) Yue 0111 Min Chu No. 10286 Civil Judgment of the People’s Court of Baiyun District, Guangzhou Municipality concerned a HK property transferable pursuant to a divorce agreement.

23.  Based on those authorities, the Plaintiff’s expert concluded that clause 9 does not give exclusive or proprietary jurisdiction to the Mainland court.

24.  The Defendants’ expert has not cited any authority where a Mainland court has exercised jurisdiction over foreign property. Nor has there been any meaningful attempt at distinguishing the authorities cited by the Plaintiff’s expert.

25.  The central theme of the Defendants’ expert opinion has revolved around the exploitation of mineral resources being the basis of the 1^st agreement.

26.  The Defendants’ expert (Ms Huang Bing) considered the 2^nd agreement to be “a settlement resolving the dispute over the Sino-foreign cooperative exploration and development of natural resources contract”. She appeared to have proceeded on the footing that there was a “dispute” that was resolved by entering into the 2^nd agreement which may have colored her characterization of its nature. However, there is no suggestion, much less evidence, of the existence of any “dispute”.

27.  Rather, nothing in the 2^nd agreement itself supports the existence of any “dispute”. The 2^nd agreement was nothing more than an agreement negotiated between the parties, expressly rescinding the 1^st agreement and converting the investment fund into a loan, repayable on the terms specified in the 2^nd agreement.

28.  For those reasons, I do not accept the Defendants’ expert’s use of the ‘origin/root’ approach in considering the nature of the 2^nd and 3^rd agreements.

29.  The opinion of the Plaintiff’s expert on the validity or otherwise of clause 9 of the 3^rd agreement which is based on solid authorities is persuasive. I accept that opinion and hold that, as a matter of PRC law, clause 9 to be invalid and unenforceable.

Forum non conveniens

30.  Turning to the balancing exercise for forum non conveniens which remains applicable even though clause 9 is invalid, a convenient statement of the relevant principles can be found in High Hope Zhongding Corp v 廈門墩峰進出口有限公司, HCA 2485/2015, 16 January 2017 at §28:

“28. The legal principles for forum non conveniens applications are well settled[3]:

(i) The single question to be decided is whether there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action, i.e. in which the action may be tried more suitably for the interests of all the parties and the ends of justice?

(ii) In order to answer this question, the applicant for the stay has to establish that first, Hong Kong is not the natural or appropriate forum (“appropriate” in this context means the forum has the most real and substantial connection with the action) and second, there is another available forum which is clearly and distinctly more appropriate than Hong Kong. Failure by the Applicant to establish these two matters at this stage is fatal. This stage of the inquiry is commonly described as “Stage I” inquiry;

(iii) If the applicant is able to establish both of these two matters, then the plaintiff in the Hong Kong proceedings has to show that he will be deprived of a legitimate personal or juridical advantage if the action is tried in a forum other than Hong Kong. This stage of the inquiry is commonly described as “Stage II” inquiry; and

(iv) If the plaintiff is able to establish this, the court will have to balance the advantages of the alternative forum with the disadvantages that the plaintiff may suffer. Deprivation of one or more personal advantages will not necessarily be fatal to the applicant for the stay if he is able to establish to the court’s satisfaction that substantial justice will be done in the available appropriate forum. This stage of the inquiry is commonly described as “Stage III” inquiry.”

31.  As regards Stage I, the Defendants have pleaded the 2 defences considered below.

(i)  D2 has not signed the 3^rd agreement[4]

32.  The version of the 3^rd agreement exhibited by the Plaintiff bears D2’s signature and fingerprint. The Defendants chose not to address this at all in their evidence. That silence speaks volumes: plainly, this defence is simply not credible.

33.  There is also the parties’ conduct subsequent to the execution of the 3^rd agreement which is inconsistent with the allegation that D2 never signed the 3^rd agreement. The Plaintiff has paid D1 the RMB 6 million pursuant clause 3(2) of the 3^rd agreement including RMB 4 million which was only payable after D2 signs the 3^rd agreement within the stipulated 30 working days of the signing of the 3^rd agreement[5].

34.  For those reasons, the defence based on the allegation that D2 had not signed the 3^rd agreement is a non-starter.

(ii)  Limitation

35.  The 3^rd Agreement was made in May 2014. The Defendants submitted that the Plaintiff’s pleading did not indicate the time when the breach is alleged to have occurred and it is common ground that keys and documents in relation to the properties were delivered within 3 days of this of the 3^rd agreement. It was submitted that the Plaintiff’s action faces limitation difficulties.

36.  But the relief the Plaintiff seeks in this action is not limited to repayment of the outstanding amounts. The relief sought includes specific performance which is not susceptible to any time bar: see Limitation Ordinance, Cap 347 at section 4(7).

37.  So far as arrears of interest payments are concerned, interest accruing within 6 years of the commencement of the proceedings is recoverable and is not time-barred. Limitation is thus also not a credible defence.

38.  The failure of a defendant to raise or identify any defence to the plaintiff’s claim in an application for a stay on the forum non conveniens ground, is fatal: see四川順利昌隆科技有限公司 v Sze Ming Yee and Others [2021] HKCFI 2289 at §22 and the authorities[6] referred to.

39.  Accordingly, the Defendants’ application to stay the proceedings on the forum non conveniens ground must fail. Since the Defendants fail at Stage I, it is unnecessary to consider the remaining 2 stages.