RICHWAY LEGEND LTD v. HOUTAI INVESTMENT HOLDINGS LTD

HCA 243/2022

[2024] HKCFI 71

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 243 OF 2022

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D E C I S I O N

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Background

1.  This is an action brought by the Plaintiff (“Richway”) against the Defendant (“HT”). In these proceedings, Richway as buyer claims against HT as the seller of various vessels and equipment referred to as the “Batch 1 Vessels” and “Batch 2 Vessels” (together “Vessels”). HT applied by its summons issued on 3 February 2023 for a stay of the action, because related proceedings between HT, Richway and others in HCA 1725 of 2019 (“HCA 1725”) have been stayed under an Order of this Court made on 27 May 2021 (“Stay Order”).

2.  According to HT, there is a substantial overlap between this action and HCA 1725 on factual issues; it will be a waste of costs and time and also unfair to HT to permit this action to proceed when there is a stay of HCA 1725; and there may be conflicting outcomes if the two proceedings are separately pursued.

Claims made in this action

3.  Richway claims in this action that HT as owner of the Vessels agreed under a written sale and purchase agreement (“SPA”) to sell the Vessels to Richway. The SPA provides for HT as seller to provide to Richway title documents for each of the Vessels, comprising inter alia the licence book and certificates, and a blank form of Notice of Transfer of Ownership duly signed by HT (“Title Documents”).

4.  According to the Statement of Claim, the Batch 1 Vessels were to be delivered upon the execution of the SPA, and the Batch 2 Vessels were to be delivered on or before 29 February 2016, or such later date as may be mutually agreed.

5.  The consideration for the sale and purchase of the Vessels was $62,597,500 (“Price”), and upon the execution of the SPA and delivery of the Batch 1 Vessels, a first payment of $33 million (“1^st Payment”) was made by Richway to HT. It was also agreed between HT and Richway that HT would provide Richway with a credit for the balance of the Price, in the sum of $29,597,500 (“Credit”), payment of which was subject to further mutual agreement between the parties. The Credit was in effect a long-term interest-free loan to Richway, and the sale and purchase of the Vessels was taken to have been fully completed upon the making of the 1^st Payment.

6.  HT itself was at all material times a Subcontractor under a contract for the construction of the Tuen Mun - Chek Lap Kok Link Northern Connection Sub-sea Tunnel section (“Project”). Crown Asia Engineering Limited (“CAEL”) was its own subcontractor for the Project under a Sub-subcontract (“Sub-subcontract”). On 30 December 2015, Richway and CAEL entered into a Bareboat Charter (“Charter”), whereby the Vessels were let by Richway to CAEL on a bareboat charter basis, for 60 months from 1 January 2016 to 31 December 2020 for the Batch 1 Vessels. For the Batch 2 Vessels, the term of the Charter was to commence upon delivery of the vessels on or before 29 February 2016, or such later date as may be mutually agreed.

7.  As a result of prior arrangement agreed between HT and CAEL, physical possession of the Batch 2 Vessels (but not the Title Documents) was with CAEL on 30 December 2015, the date of the Charter.

8.  Richway claims in the Statement of Claim that by an agreement made between HT and CAEL on 14 January 2016, CAEL assumed the payment obligations for the entire Price payable to HT under the SPA, including the loan facility of the 1^st Payment which Richway had obtained from another company (“Harbour”) and the Credit provided by HT for the balance (together “Loans”). The existence of such an agreement between HT and CAEL is admitted by HT. By agreement, the payments to be made to CAEL under the Sub-subcontract were to be applied to discharge the payment obligations of CAEL in respect of the Loans.

9.  According to Richway, HT failed to deliver any of the Title Documents of the Batch 2 Vessels to Richway by 29 February 2016, as agreed. Richway was unable to execute the Notices of Transfer of Ownership, and as a result sustained loss and damages including the loss of rental income of the Batch 2 Vessels.

10.  As the purchaser of the Vessels under the SPA, Richway claims in this action (inter alia): a declaration that the property in the Batch 2 Vessels was passed to Richway on 30 December 2015 (or a date to be determined by the Court); a declaration that all legal and equitable title and interests in the Batch 2 Vessels were transferred to Richway, and that HT has been holding such title and interests in the Batch 2 Vessels on trust for Richway; an order that HT should provide to Richway all the Title Documents for the Batch 2 Vessels; and damages.

11.  By way of Defence, HT claims that there was no agreement between the parties that the interests of the Batch 2 Vessels would pass to Richway upon the execution of the SPA. HT claims that Richway had knowledge that HT had rented out the Batch 2 Vessels to CAEL under an oral lease between HT and CAEL (“Oral Lease”), which lease was intended to continue until the completion of the sale and purchase of the Batch 2 Vessels, such that ownership of the said Batch 2 Vessels shall not pass to Richway until the actual delivery of the Batch 2 Vessels and the necessary documentation therefor.

12.  According to HT, Richway, CAEL and others had taken the Batch 2 Vessels away from the Project site without HT’s approval, which was in breach of the Oral Lease, and had converted same to their use. HT claims that on 21 December 2017, Richway had already exercised its right under the SPA to cancel the purchase of the Batch 2 Vessels. It claims that Richway has no title or interests in the Batch 2 Vessels by reason of its own cancellation of the purchase, and further, since there had not been any payment by Richway for the said Batch 2 Vessels.

13.  In its Reply, Richway denies that it had cancelled the purchase of the Batch 2 Vessels. It further denies the existence of any Oral Lease between HT and CAEL as alleged, and claims that HT had no standing to enter into the alleged Oral Lease with CAEL for the Batch 2 Vessels.

14.  On the face of the pleadings filed in this action, the key dispute is over the ownership of the Batch 2 Vessels, namely: (1) whether the title and interest in the Batch 2 Vessels had passed under the SPA on 30 December 2015, or any relevant subsequent date; (2) whether Richway as buyer under the SPA had validly cancelled the purchase of the Batch 2 Vessels; and (3) whether HT was in breach of the SPA, by failing to deliver the Title Documents for the Batch 2 Vessels.

Claims made in HCA 1725

15.  HT claims that the present proceedings should be stayed for the same period that HCA 1725 has been stayed pending arbitration of the dispute which has arisen under the Sub-subcontract between HT and CAEL.

16.  In HCA 1725, HT as plaintiff claims against CAEL as 4^th Defendant, Richway as 6^th Defendant and other individuals who were directors/shareholders/controllers of Richway and CAEL, for damages in respect of the defendants’ alleged conversion and detinue of the Batch 2 Vessels since June 2017. HT also claims damages for the defendants’ alleged unlawful means conspiracy.

17.  HT claims that from 11 December 2013 to 29 September 2014, HT had entered into Oral Leases of the Vessels with CAEL, for CAEL to use the Vessels only for the purpose of the Project. It claims that in repudiatory breach of the Oral Leases, CAEL had used the Batch 2 Vessels in projects and for works other than the Project, and that it had accepted CAEL’s repudiation and had demanded the return of the Batch 2 Vessels. On HT’s case, not only had CAEL refused HT’s demands for the Batch 2 Vessels, but it delivered the Batch 2 Vessels to Richway, and the defendants had wrongfully detained and converted the said vessels and deprived HT of the use and possession of the same.

18.  By way of relief, HT claims (inter alia): (1) outstanding rent for the Vessels under the Oral Leases made with CAEL; (2) a declaration that Richway was holding misappropriated rent which it had collected for the use of the Batch 2 Vessels on constructive trust for HT; (3) account of profits; and (4) return of the Batch 2 Vessels to HT.

19.  On 27 May 2021, HCA 1725 was stayed, as between HT and CAEL, for the claims to be arbitrated pursuant to the arbitration clause of the Sub-subcontract, since there was a prima facie case that the claims made by HT against CAEL fall within the scope of the arbitration agreement contained in the Sub-subcontract relating to the Project. The Court was satisfied on the evidence that the Oral Leases were not entirely different transactions made between HT and CAEL, but were closely related to the performance of the Sub-subcontract.

20.  If the Batch 2 Vessels were indeed delivered to CAEL for the purpose of use in the Project, and CAEL was entitled under the Sub‑subcontract so to do and to charge for the incidental expenses, these matters would all be taken into account in the claims and cross-claims in the arbitration under the Sub-subcontract (“Arbitration”).

21.  Apart from the fact that a stay of HT’s claims against CAEL was mandatory under section 20 of the Arbitration Ordinance (“Ordinance”), the Court was also satisfied that there was an overlap in the factual issues which require determination against the other defendants in HCA 1725 and those which arise in the Arbitration between HT and CAEL, and that it would be consistent with the objectives of the CJR to stay the determination of the claims, to avoid wasting time and costs and at the risk of conflicting outcomes in the proceedings. At paragraph 12 of the Decision of 27 July 2021, this Court explained that findings made in the Arbitration as to the terms of the Sub‑subcontract and the duties of HT to provide the Vessels to CAEL are binding on HT, as to whether it can claim that CAEL had wrongfully possessed, detained or used the Vessels. If the arbitrator should find that CAEL had the right to use the Vessels, and that they had been delivered by HT to CAEL pursuant to the Sub-subcontract rather than the alleged Oral Lease agreements, HT would be estopped from claiming otherwise in any other action.

22.  For HT’s claims against the directors/shareholders/ controllers of CAEL/Richway joined as defendants in HCA 1725, these were obviously dependent and contingent on whether it can be shown that CAEL/Richway itself is liable for the conversion and conspiracy alleged. A stay of these claims naturally follows from the stay of the action against CAEL/Richway.

23.  As between HT and the other defendants apart from CAEL, a case management stay was consequently ordered under the Stay Order, for HT’s claims to be stayed pending the outcome of the Arbitration.

Whether this action should be stayed on case management grounds

24.  On behalf of HT, it was argued that this action is the other side of the coin of HCA 1725. Richway’s claims and HT’s claims in this action are all related to the ownership of the Batch 2 Vessels, and Richway has admitted in the Statement of Claim in this action that the Batch 2 Vessels had been leased by Richway to CAEL, which had had the possession of the Batch 2 Vessels since 30 December 2015.

25.  According to Counsel for HT, there are the same overlapping issues as found for HCA 1725 and the Arbitration, and having asked for a stay of HCA 1725 pending arbitration, there is no reason why Richway should run a contrary argument in this action to resist a stay. Counsel argued for HT that Richway should not be permitted now to allege that the issue of the ownership of the Batch 2 Vessels should be decided first, when the other defendants in HCA 1725 are not bound by the outcome of the present action.

26.  In my judgment, there are important distinctions between the claims made in this action and those made in HCA 1725.

27.  There is of course no arbitration agreement between HT and Richway, and no question of the claims now made in this action falling within the scope of the arbitration clause in the Sub-subcontract, to make a stay mandatory under section 20 of the Ordinance. This is the first important distinguishing feature.

28.  Secondly, the claims against the directors/shareholders of CAEL in HCA 1725, for conversion/detinue and conspiracy, are dependent on such claims being successfully established against CAEL. The directors/shareholder/controllers were alleged to be liable simply by virtue of their being the directors and controllers of CAEL. The claims against CAEL must first be established, and CAEL’s liability depends on whether it has the right under the Sub-subcontract to possess and use the Vessels - which is to be determined in the Arbitration pursuant to the arbitration clause contained in the Sub-subcontract between HT and CAEL.

29.  In this case, the claim made by Richway against HT is that Richway is entitled under the SPA, as purchaser of the Vessels, to be given the Title Documents in accordance with the terms agreed, and that title in the Batch 2 Vessels passed to Richway upon execution of the SPA. At trial, the Court is tasked to construe the terms of the SPA, and to decide whether on the facts, HT was in breach by failing to deliver the Title Documents for the Batch 2 Vessels by the dates specified in the SPA, whether (notwithstanding such breach) title in the Batch 2 Vessels had passed to Richway in accordance with their agreement, and whether Richway had (as HT claims) exercised the right to cancel the purchase, such that it was no longer entitled to claim any interest in or title to the Batch 2 Vessels.

30.  The issues in dispute, as to the right to claim title to the Batch 2 Vessels under the SPA, are not related to the dispute as to the work done and claims for payment due under the Sub-subcontract, nor conditional or dependent on the liability of any other party apart from those subject to and bound by the SPA. Determination of the discrete issue of the rights and duties of HT and Richway under the SPA, as to the delivery of the Vessels and of the Title Documents, and where the title to the Batch 2 Vessels lies, may in fact determine the issue raised in HCA 1725 as to whether (if title to the Vessels had passed to Richway upon execution of the SPA) HT had any alleged right to claim conversion or detinue against Richway and CAEL.

31.  As Counsel for Richway rightly pointed out, the decision after trial of this action (solely concerning Richway’s rights and entitlement under the SPA) will bind both HT and Richway, and cannot be subject to relitigation in HCA 1725. There is accordingly no risk of any inconsistent judgment in any other proceedings.

32.  I cannot see, and reject the submissions made for HT, that HT will be prejudiced by a trial of this action without a stay. Contrary to Counsel’s submissions, HT is fully entitled to defend the claims made by Richway under the SPA at the trial of this action. It is entitled to pursue its defence, and to establish whether the parties had intended title to pass upon the execution of the SPA, or at any other agreed time, and to show that the purchase of the Batch 2 Vessels had been cancelled by Richway, as it alleged. If the present action results in a judgment that the title in or right to possession of the Batch 2 Vessels had not passed to Richway and had remained vested in HT, then it is entitled to pursue its claims in conversion, detinue or conspiracy under HCA 1725. If judgment in this action is to the effect that Richway is indeed the owner of the title and interests in the Batch 2 Vessels, such judgment binds HT for the purposes of its claims for conversion/detinue/conspiracy, thus saving the costs and time of a further trial on this issue in HCA 1725.

33.  As compared to the discrete issue of the passing of title in the Batch 2 Vessels under the SPA, as raised in this action, the Arbitration concerns the issue of the payments due and owing between the parties to the Sub-subcontract in respect of work done on the Project. There will be many issues raised, the use of the Vessels being only one of them. The issues raised in HCA 1725, as to whether Richway’s and CAEL’s use and possession of the Vessels (and the rental income derived from such use) constitute conversion are related to the determination of whether HT and CAEL had agreed as part of and related to the Sub-subcontract that the Vessels should be delivered to CAEL for use in the Project.

34.  Bearing in mind the discrete issues raised in this action, it is in my judgment appropriate and convenient for this discrete issue to be tried between Richway and HT in this action, rather than to have its determination postponed until the Arbitration has been decided, or until HCA 1725 is to be tried. Only a Statement of Claim was filed in HCA 1725 at the time of the application for stay. In contrast, the pleadings in this action have been completed since April 2023, and the action can proceed to trial without further delay.

Disposition

35.  With the objectives of ensuring an effective and expeditious trial, maximizing procedural economy and cost-effectiveness, I do not agree that the trial in this action should be stayed as sought by HT. The application for stay is accordingly dismissed, with costs to Richway (with certificate for Counsel).