FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

FACV No. 6 of 2011

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 6 OF 2011 (CIVIL)

(ON APPEAL FROM CACV NO. 126 OF 2008)

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J U D G M E N T

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Mr Justice Bokhary PJ :

1.  I agree with the judgment of Lord Collins of Mapesbury NPJ. 

Mr Justice Chan PJ :

2.  I agree with the judgment of Lord Collins of Mapesbury NPJ.

Mr Justice Ribeiro PJ :

3.  I agree with the judgment of Lord Collins of Mapesbury NPJ.

Mr Justice Mortimer NPJ :

4.  I agree with the judgment of Lord Collins of Mapesbury NPJ.

Lord Collins of Mapesbury NPJ :

I  BACKGROUND: THE FACTS

5.  This appeal concerns a joint venture between Macau and Fujian interests which went badly wrong.  In 1996 the parties entered into a series of agreements concerning a project for the production of non-linear crystals.  Later, following a change in management in the Fujian party, there was a deterioration in relations between the parties followed by litigation in Hong Kong and the Mainland concerning the validity of the agreements between the parties and the ownership of shares in one of the companies which was the subject of the joint venture.  The Supreme People’s Court decided that the agreements were invalid because no approval had been obtained for the transfer of the shares.  The principal issues on this appeal concern these questions: (1) whether Hong Kong law or Mainland law governs the principal agreement between the parties; (2) what is the effect of the judgment of the Supreme People’s Court on the validity of the agreement; (3) what remedies are available to an innocent party in the event of invalidity of the agreement; and (4) whether the Fujian party is precluded from denying that it holds an interest in shares for the other party (and whether Hong Kong law or Mainland law is to be applied to determine that question).

6.  The plaintiff/appellant First Laser Ltd (“First Laser”) is a company incorporated in Macau and is under the control of Mr Ngan In Leng(“Mr Ngan”).  He is a Fujianese who in 1980 migrated to Macau, where he is now resident.  He has significant business interests in, inter alia, property and electronics.  He is also a man of substance in the Mainland: he is a member of the National Committee of the Chinese People’s Political Consultative Conference and a member of the Standing Committee of the Fujian Provincial Committee of the Chinese People’s Political Consultative Conference.

7.  He has had business relationships with the first defendant (and first respondent) Fujian Enterprises (Holdings) Co Ltd (“FEHC”) since 1990.  FEHC (like the second defendant, which is its nominee and has no active role in the facts giving rise to these proceedings) is incorporated in Hong Kong, and is a “window company” of the Fujian Provincial People’s Government of China.  The directors of FEHC are employees of the Fujian Government and its shares are held on trust for the Fujian Government.

8.  In 1992, FEHC set up a company called Fuzhou Castech-Phoenix Inc (a Mainland company)as a joint venture with the Fujian Research Institute of Material Structures of the Academy of Science (“FRIMS”) for the production of non-linear crystals.  The company was mainly engaged in the production of two kinds of non-linear crystals known as LBO crystals and BBO crystals.  In 1996 disputes arose between FEHC and FRIMS, which led to litigation.  FRIMS obtained a court order restraining Fuzhou Castech-Phoenix’s use within the Mainland of technologies in relation to the incubation furnaces for producing LBO crystal and BBO crystal which were subject to patents held by FRIMS.  FEHC then bought out FRIMS’ interest in the joint venture and became the sole owner of Fuzhou Castech-Phoenix, which changed its name to Fujian Casix Laser Inc (“FCL”).  Thepart of FCL’s business which involved intellectual property rights of the products was transferred to a company called Fuzhou Casix Optronics Inc(“FCO”),which is a Mainland company then also controlled by FEHC.

9.  As a result of the litigation FCL was unable to use in Mainland China some of the processes necessary for its manufacturing operations.  Consequently FEHC decided to approach Mr Ngan as a new partner outside the Mainland who would be willing to contribute capital to the project in order to relocate the incubation furnaces and related operations outside the Mainland to avoid further disputes with FRIMS.  At that time the chairman of the board of FEHC, and its general manager, was Mr Kong Fanli (“Mr Kong”).

II  THE AGREEMENTS

10.  The Ngan/FEHC interests then entered into a series of agreements.  The agreements bear no clear relationship to what actually happened in practice.  There is also some confusion in the agreements of the distinction between sale of assets and sale of shares.  Only Mr Ngan gave evidence at trial, and it is possible that as a result a somewhat one-sided picture of what happened emerged.

11.  There were four agreements: (1) the Hang Wo Agreement; (2) the COM Agreement; (3) the First Laser Agreement; and (4) the COM/Casix/Kexin Agreement.

Hang Wo Agreement

12.  The first agreement (the “Hang Wo Agreement”) was entered into on 12 December 1996 between FEHC and Hang Wo Properties Investment and Management Company Limited (“Hang Wo”), a company controlled by Mr Ngan.  It was described as an agreement on the establishment of Casix Optronic Enterprises Ltd (later described as Casix Optronic Manufacturing Ltd or “COM”).  Hang Wo and Jenwing Holdings Ltd (“Jenwing”) are the sole registered shareholders of COM.  Jenwing is a BVI company.  The shares in Jenwing were said to be held on trust by Mr Ngan’s camp on behalf of FEHC.

13.  The preamble stated that the parties would make use of optronic technology set up by FEHC in Fujian province and other regions since 1992, and would jointly invest US$20 million to establish in Macau an enterprise with an annual output of 200,000 pieces of laser crystals, 50,000 small lasers and other laser optics.

14.  The operative part of the agreement provided:

(1) FEHC would transfer its interest in FCL and FCO to COM, and FEHC and Hang Wo would hold respectively 49% and 51% of the equity in COM (clause 1);

(2) Hang Wo would buy the 51% of equity held by FEHC in the “investment projects” for cash at the agreed price (clause 2);

(3) Hang Wo would be responsible for raising the first-phase US$10 million of the investment project in Macau (clause 3); and

(4) the parties understood that certain legal procedures in the Mainland were required for the transfer of the shares in FCL and FCO to COM, and meanwhile Jenwing, a BVI company whose shares were held by Mr Ngan’s interests, would hold FEHC’s shares in COM on behalf of FEHC, and Hang Wo would transfer all the equity of COM held by Jenwing to FEHC after FEHC transferred the equity of the investment projects in China to COM (clause 4).

The COM Agreement

15.  The second agreement was described as an agreement on equity transfer of optronic products in Fuzhou, and was between FEHC and COM (the “COM Agreement”).  It stated that it was executed in Hong Kong on 12 December 1996.  The preamble stated that COM was to acquire FEHC’s shareholding in FCL and FCO.  The operative part provided:

(1)   all assets and liabilities of FCL and FCO would be transferred by FEHC to COM at a price of US$6.25 million, and COM would have all rights and liabilities after the transfer (clauses 1 and 3);

(2)            COM would reorganize the boards of FCL and FCO after the transfer, and FEHC would actively assist COM in going through relevant legal procedures (clause 2);

(3)   COM would pay FEHC US$3.125 million within one month of signature of the agreement and the balance within three months (clause 5); and

(4)   the parties would immediately organise a working group to deal with relevant matters and engage lawyers to handle “relevant procedures of share transfer of the companies in China” (clause 6).

The First Laser Agreement

16.  The third agreement was called an agreement on equity transfer of high-tech optronic project in Fuzhou (which has been referred to in these proceedings as “the First Laser Agreement”).  It was expressedto be made in Hong Kong on 28 December 1996.  The parties were FEHC and First Laser.

17.  The judge accepted that this agreement replaced the earlier agreements, in particular because he was satisfied that FEHC felt it inappropriate to enter into a joint venture arrangement in the optronic industry with Hang Wo, which is a property company.

18.  The judge was no doubt justified by Mr Ngan’s evidence in deciding that the First Laser Agreement superseded the earlier agreements.  But this may have given an incomplete picture of the relationship between the parties.  The judge may have been handicapped by the fact that only Mr Ngan gave evidence.  The First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares, and in commercial terms was only part of the transaction.  The reality of the matter was that the arrangement was a joint venture.  But the terms of the joint venture were never agreed, and the relationship between the parties was fluid and decisions were taken on an ad hoc basis without reference to any underlying agreement.  This caused no problem until the management of FEHC changed.

19.  It is the First Laser Agreement which is the basis of the claim in these proceedings by First Laser.  The preamble stated that the parties had agreed that 51% of FEHC’s optronic project in Fuzhou would be transferred to First Laser.  The operative part provided:

(1)   after the equity transfer, the equity held by FEHC and First Laser would be respectively 49% and 51% (clause 1);

(2)   the equity would be priced by FEHC based on the net asset value of the project on 31 December 1996, namely US$6.25 million, and accordingly FEHC would transfer 51% of the equity to First Laser for US$3.1875 million (equivalent to HK$24.64 million) (clause 2);

(3)   after the involvement of First Laser, the boards of directors of FCO and FCL would be reorganized, and the composition of the new boards would be separately negotiated (clause 3);

(4)   FEHC agreed to move some production units to Macau, and both parties agreed to ensure that production and sales in Fuzhou and Macau went on smoothly (clause 6);

(5)   First Laser would pay FEHC HK$10 million within ten days of execution of the agreement and the balance by two instalments within three months (clause 7); and

(6)   both parties agreed to arrange working groups to coordinate and deal with relevant matters as soon as possible, and hire lawyers to go through relevant formalities for changes of [ownership] of the companies in the Mainland (clause 8).

The COM/Casix/Kexin Agreement

20.  COM and FEHC’s subsidiaries, Casix Limited and Fujian Kexin, also executed another agreement dated 12 December 1996 solely in relation to the transfer or the sale and purchase of the shares in FCO.  There were three different versions of this agreement, one produced by First Laser and two produced by FEHC.  In First Laser’s version (which the judge accepted as the authentic version), Fujian Kexin and Casix Limited agreed to transfer their capital investment respectively in the sum of US$63,000 and US$1,447,000 in FCO to COM and COM agreed to accept the transfer of the investment in the total amount of US$1,510,000 and thereafter to assume all the rights and liabilities of Fujian Kexin and Casix Limited in respect of FCO.

21.  The judge accepted Mr Ngan’s evidence that this agreement was a document generated solely for producing to the Mainland authorities for the purpose of obtaining approval for the transfer of the FCO shares to COM pursuant to the First Laser Agreement.  He held that the COM/Casix/Kexin Agreement was not a genuine agreement supported by any underlying transaction.  It did not have the effect of replacing or superseding any of the three agreements, particularly the First Laser Agreement which was executed subsequent to it.

III  PAYMENT OF THE PURCHASEPRICE FOR THE FCL AND FCO SHARES BY FIRST LASER AND TRANSFER OF SHARES

22.  The judge found that First Laser had made payment in full for the 51% interest in FCL and FCO. Two payments of HK$10 million were made (one through COM and one through First Laser) in December 1996 and April 1997.  The judge found that the balance of HK$4.64 million was agreed by the parties to have been paid byFirst Laser by treating a capital investment in the sum of HK$4.64 million made by First Laser in COM as investment by FEHC.

23.  On 30 December 1996, the day prior to the payment of the first sum of HK$ 10 million to FEHC due under the First Laser Agreement, the board of directors of FCO passed a resolution consenting to transfer all the shares in FCO to COM in accordance with the wishes of its shareholders, Casix Limited and Fujian Kexin.  The shares in FCO were transferred to COM in March 1997 instead of to First Laser pursuant to the First Laser Agreement, and on 10 May 1997, the Mainland State Administration of Industry and Commerce issued a business licence to FCO with Ngan as the chairman of its board of directors and Wang Hongrui as its general manager.

24.  The shares in FCL were never transferred to Mr Ngan’s camp.  Apart from the absence of a board of directors meeting approving the transfer, it appears from contemporaneous documents that the transfer was rendered impossible because governmental approval for the transfer would not be granted as the share capital of FCL had not been fully paid up.

IV   SUBSEQUENT EVENTS

The Casix Inc Project

25.  In July 1997 Mr Wang Hongrui, on behalf of FCL, recommended to FEHC that a project be undertaken in the United States by Casix Inc (a subsidiary of FCL), for the production of a special optical fibre instrument (“the Project”).  Mr Kong rejected the proposal, and suggested that Mr Ngan be asked to take on the Project as a personal investment.  Mr Ngan agreed, and First Laser’s case was that it invested US$410,000 and RMB 1 million in the Project.  The judge found (para 126) that COM paid (a) two sums of RMB 500,000 to FCL in August and October 1997; and (b) US$500,000 to Casix Inc in August 1997 and US$100,000 to Casix Inc in April 1998.  The judge found that FEHC and FCL accepted that the investment came from Mr Ngan’s camp, and that the Project was a success and enhanced the value of FCL.

1998 Memorandum

26.  On 13 March 1998, about a month before Mr Kong was due to vacate his office as chairman and general manager of FEHC, a Memorandum was signed on behalf of FEHC and First Laser setting out what was described as the rights of the parties and the capital arrangement of COM and FCL.  The Memorandum explained why the shares in FCL were not transferred to COM.  It acknowledged: (1) that for some historical reasons, such as the fact that US$2.5 million of the registered capital of US$7 million had not yet been injected into FCL and that there were some outstanding legal disputes relating to FCO, the FEHC was still temporarily wholly holding FCL while COM was still temporarily wholly holding FCO; (2) when those problems were resolved, the shareholding of First Laser and FEHC in COM and FCL would be regularised in the ratio of 51:49 (para 1); (3) that prior to the regularisation, COM’s and FCL’s investments and rights in respect of FCL, COM and FCO would be governed by the agreements of 1996 (para 2); and (4) that as First Laser injected a significant amount of capital in establishing COM, and as FEHC would hold 49% of the shares in COM upon the regularisation, the outstanding payment in the amount of HK$4.64 million due from First Laser to FEHC under the First Laser Agreement was treated as having been paid by First Laser and representing FEHC’s capital contribution to COM (para 3).

Deterioration in relations and sale of FCL to JDS

27.  The relationship between the parties deteriorated after May 1998 when Mr Kong left FEHC and Mr Xu Meixing became deputy chairman (and subsequently chairman) of the board of directors of FEHC, and attempted to re-negotiate the terms of the joint venture with Mr Ngan by suggesting that FEHC should become the controlling 51% shareholder in COM.  Mr Ngan refused, and asked FEHC to return his investment.  On 12 January 2000, FEHC replied that FEHC was the 100% legal owner and had de facto control of FCL and that FEHC had full right to dispose of FCL.  On 29 February 2000, FEHC sold all its FCL shares, including the benefit of the Project, to JDS Uniphase China Holdings Company (“JDS”) for US$60 million.

28.  In October 2000, the parties accompanied by their lawyers attended two meetings in Zhuhai in an attempt to resolve their dispute, but no solution could be reached.  The minutes of the meeting record that FEHC’s position was that the First Laser Agreement was not sufficiently certain to be a binding agreement, and that transfer of the FCL shares had not been approved under Mainland law; and that Mr Ngan’s camp’s position was that the subject matter of the Agreement was the FCO and FCL shares, and that the need for approval under Mainland law did not affect the validity of the Agreement.

V   PROCEEDINGS IN HONG KONG AND MAINLAND 

29.  On 9 October 2001, First Laser commenced the present action against the defendants in Hong Kong. The defendants also commenced an action in the Fujian Higher People’s Court (“the Fujian action”) seeking a declaration against Hang Wo, COM and First Laserthat the Hang Wo Agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum were of no effect.  Attempts by Mr Ngan to challenge the jurisdiction of the Fujian Court in the Fujian action, and an application by Mr Ngan for an anti-suit injunction in Hong Kong against the Fujian action, were also unsuccessful. 

The Mainland judgments

30.  On 18 July 2003, the Fujian Higher People’s Court gave judgment that the Hang Wo Agreement, the COM Agreement and the First Laser Agreement were of no effect.

31.  On appeal to the Supreme People’s Court by Mr Ngan’s camp, the Supreme People’s Court in its judgment of 3 December 2004held that at the time of the signing of the first three agreements FCL was a foreign investment enterprise and FCO was a Chinese foreign joint enterprise and any division or important changes of these enterprises would requireapproval from the relevant authority but such approval had not been obtained and on that basisthe court held that in respect of the Hang Wo Agreement, the part concerning the transfer of the FCO and FCL shares were invalid; the COM agreement was invalid; the First Laser Agreement was invalid; and also (contrary to the view of the lower court) since the first three agreements were invalid, the 1998 Memorandum was also invalid.

Assets in Hong Kong

32.  The FCL proceeds of sale were US$60 million.  The Court was told that the reason for the high price was that the sale was during the so-called dot.com bubble.  Prior to the commencement of these proceedings US$51 million had been paid to FEHC, and all of that sum has been passed on by FEHC (or the second defendant) to the Provincial Government (some of it shortly after these proceedings were commenced, and before an injunction was obtained).  On the hearing of an application for an injunction to restrain disposal of the proceeds of sale,the defendants gave an undertaking on 19 October 2001 to irrevocably instruct JDS to pay the balance of US$9 million into a specified HSBC account and to freeze the same pending further Order.  The defendants have no other substantial assets.

33.  FEHC has renewed in the course of this appeal an open offer to return the HK$20 million paid by First Laser to FEHC with interest to 6 July 2010 (with the balance of the US$9 million being returned to the defendants), and to forego the return of FCO shares and its claim to a share of dividends declared or paid by FCO.  First Laser has rejected the offer.

VI   THE DECISIONS OF THE TRIAL JUDGE AND COURT OF APPEAL

Deputy High Court Judge To

34.  Judge To decided that the First Laser Agreement was the determining agreement between the parties and that its subject matter was the shares in FCL and FCO.  There was no appeal from these findings.  On the matters which are still in contention on this appeal he decided:

Governing law and issue estoppel

(1) the First Laser Agreement was governed by Hong Kong law in accordance with Hong Kong rules of the conflict of laws, because it was Hong Kong with which the agreement had its closest connection;

(2) the finding by the Supreme People’s Court that the agreement was governed by Mainland law did not give rise to an issue estoppel because that court applied its own conflict of laws rules; and

(3) the finding of invalidity by the Supreme People’s Court did not give rise to an issue estoppel because the issues before it were different: it was not dealing with the validity of the agreement (or agreements) under Hong Kong law but with the validity of the transfer of shares in a Mainland company, and the validity of the three agreements and the 1998 memorandum under Mainland law.

Breach and remedy

(4) FEHC had broken the First Laser Agreement by not obtaining approval for the transfer of the FCL shares and by selling them to JDS, and First Laser was entitled to treat the sale to JDS as a repudiatory breach.

(5) Damages for the contractual claim were to be assessed as at the date of the sale to JDS and the price of the sale was the best evidence of market price.

(6) First Laser had a proprietary claim for the proceeds of sale attributable to 51% of the shares in FCL on the basis that having paid the full purchase price, First Laser obtained an equitable interest in 51% of the shares held by FEHC, which were then held on constructive trust for First Laser’s benefit.

Court of Appeal

35.  The Court of Appeal allowed the defendants’  appeal, and held:

Governing law

(1) The decision of the Supreme People’s Court that the agreements were governed by Mainland law and were invalid gave rise to an issue estoppel.

Remedies

(2) Under Mainland law invalidity of a contract gives an innocent party two remedies: (a) restitution and (b) compensation from the party at fault.

(3) If First Laser accepts the offer of restitution of HK$20 million (and interest) and of foregoing the return of FCO shares and dividends, judgment on such terms would be entered; if not accepted, the issue of restitution would be remitted to the trial judge for determination in accordance with Mainland law.

(4) Although any factual issues relating to fault would have to be remitted, the issue of compensation would not be remitted because the only compensation which First Laser had claimed was disgorgement of profits.  Since First Laser was not entitled to such profit, it was futile to remit the issue of compensation.

(5) There was no proprietary remedy: (a) there was no trust in favour of a purchaser under Mainland law; (b) there was no remedy of disgorgement because Mainland law neither recognised the principles of constructive trusteeship nor imposed obligations which imposed on the defendant a liability to disgorge a benefit.

Estoppel by convention

(6) The judge had found that the First Laser Agreement was a valid agreement under Hong Kong law.  He did not find it necessary to address First Laser’s alternative argument that, even if the agreement were governed by Mainland law and invalid under Mainland law, FEHC was estopped by conduct from denying that the agreement was valid and that First Laser had a 51% shareholding in FCL.

(7) The Court of Appeal held that (a) whether the evidence supported a case of estoppel by convention could not be fully dealt with on appeal; (b) whether there was an estoppel by convention was a matter of substance and governed by Mainland law (which it was not suggested led to any conclusion other than invalidity), and not (as First Laser argued) by Hong Kong law as the law governing procedure, or the law governing the communications between the parties.

VII  ISSUE ESTOPPEL: DOES THE JUDGMENT OF THE SUPREME PEOPLE’S COURT GIVE RISE TO ISSUE ESTOPPELS IN THE PRESENT ACTION?

36.  There are two aspects in which the question of issue estoppel arises from the decision of the Supreme People’s Court.  The first is whether its decision that the agreements are governed by Mainland law precludes First Laser from pursuit of its argument that the First Laser agreement is governed by Hong Kong law.  The second aspect is whether the Supreme People’s Court has decided on the validity of the First Laser Agreement in such a way as to give rise to an issue estoppel.

Decision of the Supreme People’s Court of 3 December 2004

Applicable law

37.  The Supreme People’s Court applied Article 145, sections 1 and 2, of the General Principles of Law of the PRC.  They provide:

“(1) The parties to a contract involving foreign interests may choose the law applicable to settlement of their contractual disputes, except as otherwise stipulated by law.

(2) if the parties to a contract involving foreign interests have not made a choice, the law of the country with to which the contract is most closely connected shall be applied.”

38.  The Court concluded on this aspect

“In this Case, the three agreements in this Case and the Memorandum did not specify the applicable law. Although the signatories are parties outside China, the four documents are mainly about the share transfer of Chinese enterprises, i.e. FCO and FCL. Therefore, according to the ‘closest connection principle’ in private international law, the disputes in this Case shall be governed by laws of the People’s Republic of China. All the parties involved in this Case have no objection to this.”

Validity of Agreements

39.  The Court applied Article 10 of the Mainland Law on Foreign Capital Enterprises, and clause 6 of Article 3 of the Response to Certain Questions Concerning the Application of the Foreign Economic Contract Law.

40.  Article 10 of the Law provides

“In the event of a separation, merger or other major change, an enterprise with foreign capital shall report to and seek approval from the authorities in charge of examination and approval, and register the change with the industry and commerce administration authorities”.

41.  Clause 6 of Article 3 of the Response provides

“Where an economic contract involving foreign interest subject to approval according to China’s laws and administrative regulations fails to be approved by the competent authority of the State or the original examination and approval authority on its major changes or transfer of rights and obligations, such contract shall be deemed to be invalid and of no effect.”

42.  The Court concluded

“To sum up, this Court rules that the Agreement on the Establishment of Casix Optronic Enterprises Limited signed by Fujian Enterprises and Hang Wo concerning those parts relevant to share transfer of FCL and FCO, the Agreement on Share Transfer of Optronic Project in Fuzhou by Fujian Enterprises and COM and the Agreement on Share Transfer of High-tech Optronic Project in Fuzhou by Fujian Enterprises and First Laser are invalid and of no effect. It is inappropriate that the original judgment held that the whole Agreement on the Establishment of Casix Optronic Enterprises Limited was invalid and of no effect, which shall be modified.”

The principles

43.  The starting point is clear.  Although the Hong Kong SAR and the Mainland PRC are part of one country, for the purposes of the conflict of laws they are separate law districts, and a judgment of the Supreme People’s Court is a foreign judgment, and will be enforced or recognized in Hong Kong only if it fulfils the conditions for enforcement or recognition at common law.

44.  At common law a judgment of a foreign court of competent jurisdiction which is final and conclusive and on the merits will be conclusive in Hong Kong proceedings if the parties are the same and the issue is identical: Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853. Lord Reid, at 918-919, said, however, that there were at least three reasons for being cautious in any particular case.  First, it might not be easy to be sure that a particular issue has been decided or that its decision was a basis of the foreign judgment and not merely collateral or obiter.  Secondly, it might be most unjust to hold that a litigant should be estopped from putting forward his case because it was impracticable for him to do so in an earlier case of a trivial character abroad with the result that the decision in that case went against him.  Third, there could be no estoppel of this character unless the foreign judgment was a final judgment on the merits.

45.  The questions in the Carl Zeiss case related to identity of parties and issues, and to whether the judgment was final and conclusive, but the meaning of “on the merits” arose in The Sennar (No 2) [1985] 1 WLR 490.  In that case the bill of lading contained a clause providing that “all actions under this contract” were subject to the exclusive jurisdiction of the courts of Khartoum or Port Sudan.  Dealers in Sudanese groundnut expellers claimed that the shipowners had wrongfully inserted a false date on the bill of lading.  The Dutch court held that their only claim was for breach of contract, and the effect of the jurisdiction clause was to make any remedy enforceable only in the Sudanese courts.  When the same claims were brought in England in tort, it was held that the plaintiffs were precluded by the Dutch decision from arguing that the exclusive jurisdiction clause did not apply.  Lord Brandon said (at 499):

“Looking at the matter negatively a decision on procedure alone is not a decision on the merits. Looking at the matter positively a decision on the merits is a decision which establishes certain facts as proved or not in dispute; states what are the relevant principles of law applicable to such facts; and expresses a conclusion with regard to the effect of applying those principles to the factual situation concerned.”

46.  On that test it was held that the decision of the Dutch court was on the merits, and was not purely procedural: see also Armacel Property Limited v Smurfit Stone Container Corporation(2008) 248 ALR 573.  By contrast, in Desert Sun Loan Corp v Hill [1996] 2 All ER 847 the question was whether a decision by a United States court that the judgment debtor had authorised one of his partners to instruct US lawyers in proceedings against him precluded him from denying that he had submitted to the jurisdiction of the United States court.  It was held that an issue estoppel could arise from interlocutory proceedings on a procedural issue.  But it was not clear that the point had been sufficiently identified and decided.  Evans LJ said (at 858-9):

“Practical considerations such as whether the issue was or should have been fully ventilated are likely to be especially relevant in relation to procedural, as distinct from substantive, issues and for this reason I would hesitate long before including issues which might have been, but were not in fact raised or decided by the foreign court … Moreover … there is some danger of injustice if an issue estoppel is based, not upon the foreign court’s adjudication on a claim or cause of action which is sought to be raised for a second time here, but upon a specific issue which can only be identified within it by a process of ‘refining down’ … ”

47.  In the present case there can be no doubt that the judgment of the Supreme People’s Court is a judgment of a court of competent jurisdiction, since First Laser plainly defended the proceedings and thereby submitted to the jurisdiction of the court.  Nor are any of Lord Reid’s caveats applicable.  The first two caveats do not apply in the present case.  The judgment of the Supreme People’s Court was clear as to the two issues that it had decided and the action before the Supreme People’s Court was not a trivial case.  Nor for the reasons given above, can there be any doubt that both aspects of the decision were on the merits.

48.  There are of course cases in which a decision on the applicable law will not give rise to an issue estoppel, for example, when the question whether a contract is governed by Hong Kong law arises on an interlocutory application under the Rules of High Court O 11, r 1(1)(d)(iii) or its equivalent in England (CPR, Practice Direction 6, para 3.1).  A ruling on the applicable law at that stage is not final, because it is purely provisional on the basis of good arguable case and can be re-opened at trial.  But a decision on the applicable law at what is in effect the final trial is both final and on the merits.  The decision that Mainland law was the applicable law was no less a decision on the merits than the final decision of the Dutch courts in The Sennar (No 2) that under Dutch law the claim could be brought only in contract and that the Sudanese jurisdiction clause applied.  It was not to be regarded simply as an adjudication that the Dutch courts had no jurisdiction.  Nor was it to be regarded simply as a decision that the clause applied under Dutch law.

49.  The fact that it is a decision on applicable law does not affect the position.  Mr Neoh, counsel for First Laser, accepted that if the issue had been whether First Laser had expressly agreed to a choice of law clause an issue estoppel would have arisen.  The same result must follow if a foreign court decides there has been an implied choice, for example by agreeing to arbitration in a particular country.  It would be very odd if the same result did not follow where the court applied the third stage (which is in effect what the Supreme People’s Court did) of considering with what system of law the contract was most closely connected.  The question whether rules of the conflict of laws are procedural in nature, or whether the process of classification has to be carried out according to the lex fori (much relied on by counsel for Laser) has nothing to do with the question.

Scope of the decision of the Supreme People’s Court

50.  It is of course true that questions of title and transfer may be governed by a law (lex situs) different from the applicable or proper law of the contract relating to them.  The trial judge took the view that the decision left open the question whether there was a contractual obligation to transfer the shares, and First Laser maintained that what was invalid under Mainland law was not the contract but the transfer of legal title.  It seems to me, however, to be plain on its face that the decision relates to the validity of the agreements, and not simply to the validity of the agreements to the extent that they related to the transfer of shares in FCO and FCL.

51.  There was much discussion in the written and oral argument whether the legal consequence 無效 meant invalid or of no effect, or both.  It seems to me to be a sterile debate since the terms are interchangeable in English and the sense is clear.

52.  It is not necessary to decide what would have been the law applicable to the First Laser Agreement under the common law principles in Hong Kong, but in my view the result would have been the same.

53.  The common law rule is that the law applicable to a contract is the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection: S Megga Telecommunications Ltd v Etowaru Co Ltd [1995] 2 HKC 761, 767, per Bokhary JA (as he then was); Chitty on Contracts: Hong Kong Specific Contracts (2^nd ed 2008), Ch 15 (Conflict of Laws, ed Johnston), paras 15-006 et seq; and other authorities cited in Dicey, Morris and Collins, Conflict of Laws, 14^th ed 2006 (“Dicey”),para 32-003, n 4.  The line between the search for the inferred intention and the search for the system of law with which the contract has its closest and most real connection is a fine one which is frequently blurred.  In theory, in the absence of an express choice as the first test, the court should consider as a second test whether there are any other indications of the parties’ intention, and only if there is no such indication to go on to consider the third stage, namely with what system of law the contract has its closest and most real connection.  But in practice the same result can be reached by the application of the second or third tests, and frequently the courts move straight from the first stage to the third stage.  This is largely because the tests of inferred intention and close connection merged into each other, and because before the objective close connection test became fully established the test of inferred intention was in truth an objective test designed not to elicit actual intention but to impute an intention which had not been formed: Dicey, para 32-006.

54.  The trial judge came to the view that the applicable law was Hong Kong law.  He relied particularly on these Hong Kong connections: (1) FEHC is a Hong Kong company with its principal place of business and central administration in Hong Kong.  (2) The three agreements, in particular the First Laser Agreement, were entered into in Hong Kong.  (3) Although the price was expressed in US dollars it was paid or credited in Hong Kong dollars.  (4) Although transfer of the shares was to be effected in the Mainland and the parties agreed to instruct lawyers in the Mainland to handle the transfer of the shares, performance was to be effected by FEHC, a Hong Kong company with directors and shareholders in Hong Kong.  (5) All correspondence relating to the joint venture emanated from Hong Kong.

55.  I agree with Court of Appeal that the judge placed insufficient weight on the subject matter of the agreement and its place of performance, and was influenced by the presumption in the Rome Convention (now superseded by the Rome I Regulation) that a contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration.  The Rome Convention rule does not reflect the common law, because it emphasizes the place where the party is based, rather than the place where performance is to be effected.

56.  The contract was part of an overall plan for a joint venture, with manufacturing to take place mainly outside the Mainland, but not in Hong Kong.  But the subject matter was shares in Mainland companies, and the only possible place of performance was the Mainland.  The intended place of performance has always been of great weight at common law: see Chatenay v Brazilian Submarine Telegraph Company [1891] 1 QB 79 at 83.  As the Court of Appeal said in this case the shares were “state assets” belonging to the window company of a PRC provincial government, the transfer of which would require approval of the Mainland authority.  Mr Ngan was aware of such circumstances; and the parties expressly agreed to engage Mainland lawyers to handle the transfer.  The fact that the agreement was executed in Hong Kong is of little weight in modern circumstances.  I am satisfied that, quite apart from the issue estoppel arising from the decision of the Supreme People’s Court, the agreement would be governed by Mainland law.

VIII  REMEDIES IN THE CASE OF INVALIDITY

57.  The Court of Appeal was handicapped in deciding what First Laser’s remedies were in the event of invalidity of the agreement or agreements under Mainland law.  Because the trial judge had dealt with the consequences on the basis of his decision that the proper law of the contract was Hong Kong law, he did not choose between the conflicting evidence of Mainland law on the consequences of invalidity.  As the Court of Appeal said (at [59]), it was handicapped in addressing fully the consequences in the context of Mainland law because of the absence of findings on this issue.

58.  The experts on Mainland law were agreed that if Mainland law is the proper law of the contract, and the contract is invalid under Mainland law by reason of FCL not having obtained approval to dispose of its shares, the innocent party is entitled to two remedies under Mainland law: first, restitution, or restoration of the parties to their pre-contractual position; second, compensation from the party at fault [過錯].

Restitution

59.  FEHChas made an offer of restitution, namely that it will return HK$20 million being the amount paid by First Laser to FEHC with interest and will forego the return of FCO shares and dividends declared or paid by FCO.  First Laser has rejected the offer. 

Compensation and constructive trust

60.  The Court of Appeal was also in considerable difficulty in dealing with the issue of compensation, because the trial judge had not dealt with it under Mainland law.  He held that, on the basis that the proper law of the contract was Hong Kong law, the obligation to procure the necessary approval for transfer of the FCL shares under Mainland law was on FCL, but that FEHC was at fault in not causing FCL to obtain approval.  That was because there was, on the basis of Hong Kong law, an implied term of the contract that FEHC would procure the approval.  In a curious passage ([116]) the judge referred to the fact that he had rejected the evidence of Professor Wang (for First Laser) that FEHC was a under a statutory obligation under Mainland law to procure the approval, and then said that it was open to him to presume that Mainland law was the same as Hong Kong law in implying a contractual duty on FEHC to procure the approval.  He held that FEHC was liable to pay compensation to First Laser in the amount of US$30.6 million.

61.  The consequence for the Court of Appeal, and for this Court, is that no relevant findings have been made on the expert evidence and the factual evidence.  In the Court of Appeal, First Laser, by way of an amendment to the respondent’s notice which was allowed, argued that the judge ought to have held also that First Laser was entitled to compensation under Mainland law as well, on the basis that the fault of FEHC lay in disposing of the FCL shares to JDS thereby preventing approval for the transfer of the FCL shares to First Laser.

62.  But First Laser did not, in its Amended Endorsement of Claim or in the prayers in the Statement of Claim, seek any relief for compensation for fault under Mainland law.  In the Re-Amended Reply and Defence to Counterclaim, First Laser pleaded by amendment (para 25A) in the alternative that if the proper law of the contract was Mainland law and the contract was invalid, then FEHC had been at fault, and consequently “the Trust pleaded in the Statement of Claim would still arise in favour of [First Laser] and [FEHC] would still hold 51% of the FCL shares or the JDS sales proceeds on trust for [First Laser]”.

63.  It took out a summons on 28 June 2010 to amend the Statement of Claim to rely on the new para 25A of the Re-Amended Reply, and to insert a claim for “monetary award, or compensation”, in addition to the claim for damages, but it did not proceed with that summons.

64.  Consequently, this Court, like the Court of Appeal, is in no position to rule on what amounts to “fault” in Mainland law (although the evidence suggests that it is similar to culpa in contrahendo in civil law countries), nor, inevitably, on whether FEHC has been at fault for the purposes of the rule.

65.  But I agree with the Court of Appeal that there is no need for this matter to be remitted, because on the pleadings the most that can be said (and even this is by no means clear) that First Laser is claiming in this connection is that the 51% interest or its proceeds are held on trust for First Laser.  What is said is that, although the applicable law is Mainland law, the trust arises not under Mainland law, but by virtue of the remedies available under Hong Kong law by reference to the principles stated in the line of cases represented by Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271.  The question, therefore, is whether there is an arguable case on this aspect of the appeal which would justify this court in remitting the matter to the judge.  In my judgment, there is not.

66.  There is a paucity of authority on the applicable law in restitution cases with a foreign element.  The prevailing view is the obligation to restore the benefit of an enrichment obtained at another person’s expense is governed by the proper law of the obligation; and that where the obligation arises in connection with a contract the proper law is the law applicable to the contract: see Dicey, para 34R-001; Johnston, Conflict of Laws in Hong Kong (2005), para 5.108.  But that does not mean that if that law does not recognize the concept of constructive trusteeship, the plaintiff has no remedy in a court applying the common law/equity system.  Theappropriate analysis is to ask whether, under the lex causae, the defendant owes obligations which would impose on the defendant under that law a liability to disgorge a benefit.  If so, the court may hold the defendant liable as constructive trustee when giving remedial effect to the substantive right arising under the lex causae: Dicey, para 34-049, citing Arab Monetary Fund v Hashim (No 9), 15 June 1994, unreported; Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271.

67.  The approach in these cases has been to look at the nature of the obligation under the foreign law, for example to see whether it could be characterized as fiduciary in character, and then consider whether it was therefore capable of supporting the equitable remedies in personam which would be available to a claimant in an English action.

68.  In Arab Monetary Fund v Hashim (No 9) the plaintiff sought recovery from the defendants on the ground that they had acted in breach of fiduciary duty under Abu Dhabi law, which had no conception of constructive trust.  Chadwick J said:

“In the context of a claim to invoke its equitable jurisdiction it is for the English court to decide whether the necessary fiduciary relationship exists. Where the duties to which a relationship gives rise are determined by foreign law, the question for the foreign law is what is the nature of those duties. It is for the English court to decide whether duties of that nature are to be regarded as fiduciary.

…

‘I find nothing in the rule [now Dicey, 14^th ed 2006, Rule 230] which is inconsistent with the view that, in cases involving a foreign element in which an English court is asked to treat a defendant as a constructive trustee of assets which he has acquired through misuse of his powers, the relevant questions are: (i) what is the proper law which governs the relationship between the defendant and the person for whose benefit those powers have been conferred, (ii) what, under that law, are the duties to which the defendant is subject in relation to those powers, (iii) is the nature of those duties such that they would be regarded by an English court as fiduciary duties and (iv), if so, is it unconscionable for the defendant to retain those assets.’”

69.  In Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271, Chadwick J’s decision was approved by the Court of Appeal, and it was held, in an action against officers of a Kuwaiti company for misappropriation of funds, that, although the concept of a trust was unknown under Kuwaiti law, the Civil Code imposed an obligation of restitution.  That was sufficient for the obligation under Kuwaiti law to be characterized as fiduciary in character by English law and thus capable of supporting the equitable remedies in personam.  Nourse LJ said (at [193]):

“In the present case the answers to Chadwick J’s four questions are the following: (i) the proper law which governed the relationship between the defendants and the claimants was the law of Kuwait; (ii) the duties imposed on the defendants by arts 264 and 267 of the 1980 Civil Code were to make restitution in respect of the sums misapplied by them respectively; (iii) the nature of those duties was such that they would be regarded by an English court as fiduciary duties; and (iv) it would be unconscionable for the defendants to retain the funds.”

70.  It is apparent that the expert evidence in this case on compensation for fault in the context of invalid contracts did not support a case for arguing that the nature of the duty under Mainland law to compensate for fault is such it is a duty to disgorge or a fiduciary or other form of duty which gives rise to a constructive trust.  Since the proprietary remedy is the only remedy sought under this head, there is no arguable case and therefore no basis for remitting the claim for compensation for fault.  There was discussion in the expert evidence on whether Mainland law had legal concepts akin to trust, but not in the present context.

71.  Nor, quite apart from the fact that the contract was governed by Mainland law and the shares were property situate in the Mainland, is there any basis for the application of the principle that the vendor holds the property agreed to be sold on trust for the purchaser, since that principle applies only to a specifically enforceable contract(see Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] 1 HKLRD 55), and obviously does not apply to an invalid contract.

72.  It is true that personal remedies may be available in one jurisdiction in relation to land or other property in another jurisdiction in which those remedies might not be available: British South Africa Co v De Beers Consolidated Mines [1910] 2 Ch 502; Re Anchor Line (Henderson Brothers) Limited [1937] 1 Ch 483; Webb v Webb [1991] 1 WLR 1410;Lightning v Lightning Electrical Contractors Ltd [1998] NPC 71.  But the obligation must be a valid obligation in the former jurisdiction, even though it may not be enforceable in the latter.  In Re Anchor Line Luxmoore J referred to “a valid equitable security according to English law,”and Peter Gibson LJ said in Kuwait Oil Tanker Co SAK v Al Bader(at [23]): “… it seems to me implicit that the English court not unnaturally regarded English law as applicable to the relationship between the parties before it in the absence of any event governed by the lex situs destructive of the equitable interest being asserted”.

73.  There is therefore no basis for a proprietary remedy.

74.  The Court of Appeal indicated that if the open offer is accepted, then there would be a judgment on such terms for First Laser, but if it were not accepted the issue of restitution would have to be remitted to the Court of First Instance for determination under Mainland law.  The offer has been rejected, and the issue will have to be remitted.

IX  ESTOPPEL BY CONVENTION

75.  At trial First Laser pursued the argument that FEHC was estopped from denying the validity of the First Laser Agreement (and the 1998 Memorandum) because First Laser and FEHC had mutually acted on the basis and mutual understanding that the Agreement and the Memorandum were valid and subsisting.  Because the judge decided that the First Laser Agreement was valid and subsisting, he made no findings of fact or law in relation to the estoppel argument.

76.  In the Court of Appeal First Laser was permitted to amend its respondent’s notice to argue that the judge’s decision should be upheld on the basis that, even if Mainland law were the proper law of the Agreement, FEHC was estopped from denying its validity and/or First Laser’s interest in, and beneficial ownership of, 51% of the shares in FCL.  The Court of Appeal rejected that argument, and held that estoppel by convention was a matter of substance, and not procedure, and therefore governed by Mainland law, namely the same law as the contract to which it was said to relate, and not a question of procedure governed by the lex fori, Hong Kong law.  The Agreement was invalid under Mainland law, and First Laser had failed to show that the parties had agreed that the proper law could be changed to Hong Kong law, and that Mainland law allowed such a change.

77.  Since there are no factual findings directly related to the plea of estoppel, the issue would have to be remitted to a trial judge if (a) there is a factual basis for the plea; and (b) the availability of the plea is governed by Hong Kong law.

78.  The uncontroverted evidence is that there is no doctrine equivalent to estoppel by convention in Mainland law.  If Mainland law applies to this question, then First Laser must fail.  Whether estoppel by convention is a question of substance (governed by the same law as the contract or transaction to which it relates) or a question of procedure (governed by the lex fori) is a controversial question, and is one which is not free from difficulty.

Elements of estoppel by convention

79.  In Unruh v Seeberger (2007) 10 HKCFAR 31 Mr Justice Ribeiro PJ re-stated the essential elements of an estoppel by convention:

(1) the parties entered into some transaction or legal relationship on the basis of an assumption that was shared by or common to them both, and it was the element of commonality of the assumption that marked out estoppel by  convention as a distinct form of estoppel [133];

(2) it must be shown that assumption was communicated between the parties and acted upon, and there must be some mutually manifest conduct by the parties [135];

(3) there was no necessity for the parties to believe that the assumed state of affairs was true, nor was there any necessity for the parties to have been mistaken [136];

(4) what is important is for them to act in the belief, manifested by words or conduct, that they are both proceeding with the transaction on the basis of the same shared assumption [137];

(5) the contents of the common assumption must be sufficiently certain to enable the court to give effect to it [138];

(6) estoppel by convention is concerned with a common assumption relied upon as a basis upon which the persons sharing such assumptions enter into a transaction or legal relationship [142]; and

(7) there must be an attempt by one party to depart from the common assumption which departure would be unjust because of the part taken by him in occasioning its adoption by the other party, and the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption if the opposite party were afterwards allowed to set up rights inconsistent with the assumption [150]. 

Factual elements

80.  At trial First Laser’s pleaded case on estoppel (paras 17 to 19 of the Amended Reply, incorporating paras 13 to 19 of the Statement of Claim) was that First Laser and FEHC having mutually acted on the basis and mutual understanding that the First Laser Agreement, and the 1998 Memorandum, were valid and subsisting, FEHC was estopped from denying their validity.  The plea of estoppel was not expressed to apply as such to the ownership of the 51% interest in the FCL shares, but it was pleaded (Amended Reply, para 19) that FEHC and FCL treated Mr Ngan, Ms Ngan and First Laser as having a 51% interest in FCL through First Laser pursuant to the First Laser Agreement, and led them to believe and act accordingly to their detriment.  Leave was given to First Laser to amend its respondent’s notice, and the appeal was conducted, on the basis that First Laser was also claiming an estoppel by convention as to two matters, the validity of the First Laser Agreement and the ownership of the FCL shares.

81.  The estoppels were said to arise from these matters (1) FEHC’s acceptance of the purchase price; (2) the joint participation of First Laser and FEHC from December 1996 in the control and management of FCL and FCO; (3) the appointment of Mr Ngan and Ms Ngan, representing First Laser, as directors of FCL on 30 December 1996; (4) the transfer of 51% of the shares in FCO to First Laser in March 1997; (5) the investment of US$410,000 and RMB 1 million by First Laser, via Mr Ngan and his companies, in the fibre optics project in the United States (undertaken by Casix Inc, an FCL subsidiary), when FEHC declined to do so, and without formal documentation as to the interest of First Laser (or Mr Ngan); (6) their financial assistance for the purposes of FCL and FCO for the purchase of staff quarters on October 16, 2001; (7) their procurement, together with FEHC, COM, of FCO to render financial and management assistance to FCL, on the basis that the shares in FCO and FCL were beneficially owned or interested in by the same parties in the same proportion, ie 51% by First Laser and 49% by FEHC.

82.  The judge made some factual findings in narrating the history of the relations between the parties, and in rejecting FEHC’s argument that the subject matter of the First Laser Agreement was uncertain, and in the context of proving the First Laser Agreement, and in this Court First Laser has relied on some of those findings in support of its case on estoppel by convention.  The findings on which First Laser relies are these:

(1) On 30 December 1996 Mr Ngan conducted a board of directors meeting of COM in which a resolution was passed appointing himself as the managing director and Mr Wang Hongrui as general manager of FCL.  On 20 January 1997, COM issued a notice appointing Mr Ngan, Miss Ngan and Mr Wang Hongrui as directors of FCL.  The appointments were invalid, but the meeting was attended by FEHC representatives and showed recognition by those who had control of FCL that Mr Ngan’s camp had a beneficial interest in the shares in FCL.

(2) From 31 December 1996 when the first sum of HK$10 million was paid, FEHC, FCL and FCO treated Mr Ngan’s camp as a shareholder of FCL and FCO, and Mr Ngan and Miss Ngan participated in the management of FCL and FCO as de facto directors.

(3) Decisions regarding the operation of FCL and FCO were referred to Mr Ngan and Mr Kong for approval. Financial statements of FCL and FCO, requests for increase in staff remuneration of FCL and FCO request for purchase of staff quarters for FCO and FCL, reports on construction of a building complex for FCL, request for payment of construction costs of the complex, requests for funds for setting up a branch office of FCL and recommendation of a bonus share scheme for the staff of FCL were referred to both Mr Kong and Mr Ngan for consideration and approval.

(4) In a report to the Fujian Provincial People’s Government dated 5 June 1997, FEHC acknowledged that Mr Ngan had 51% interest in the joint venture.

(5) The 1998 Memorandum acknowledged (a) that FEHC was still temporarily wholly holding FCL while COM was still temporarily wholly holding FCO; and the shareholding of First Laser and FEHC in COM and FCL would be regularised in the ratio of 51:49; (b) that prior to the regularisation, COM’s and FCL’s investments and rights in respect of FCL, COM and FCO would be governed by the agreements of 1996; and (c) that as First Laser incurred significant costs in setting up COM and as FEHC would hold 49% of the shares in COM upon the regularisation, the outstanding payment in the amount of HK$4.64 million due from First Laser to FEHC under the First Laser Agreement was treated as having been paid by First Laser and representing FEHC’s capital contribution to COM.

(6) Mr Ngan’s camp participated in the management of FCO and FCL, and FEHC also took an interest in COM.  The staff of FCO and FCL treated Mr Ngan and Mr Ngan’s camp as shareholders of FCO and FCL.

(7) The parties entertained no misunderstanding that the subject matter of the First Laser Agreement was 51% of the shares in FCO and in FCL; even after Mr Xu replaced Mr Kong as the chairman of the board of directors of FEHC, FEHC never disputed its obligation to transfer 51% of the shares in FCL to Ngan’s camp.  When the parties attempted to settle their differences after the FCL shares had been sold to JDS, FEHC acknowledged in the minutes of the meeting of 3 October 2000 its obligation to transfer the shares in FCL to First Laser and that the subject matter of the three agreements was FCL, FCO and COM.  COM was then holding all the shares in FCO on behalf of First Laser and FEHC.

(8) Mr Ngan had no regard for the concept of corporate identity and treated First Laser, Hang Wo, Bao Shing and himself as one in his dealing with FEHC.  The undisputed factual matrix was that the arrangement was to sell 51% of FEHC’s shareholding in FCO and FCL to Ngan’s camp so as to enable FEHC to transfer the operation of FCO and FCL from Fujian to Macau to avoid litigation with FRIMS.

(9) In the performance of the three agreements, FEHC also regarded Ngan and Ngan’s camp as one.  All the shares in FCO were transferred to COM on 13 March 1997 in accordance with the Hang Wo Agreement and the COM Agreement.  Although that was not in accordance with the First Laser Agreement, it was in accordance with the spirit of that agreement as the entirety of the FCO shares were transferred to COM which was held by Hang Wo as to 51% absolutely and by Jenwing as to the balance of 49% on trust for FEHC.

83.  As regards reliance, detriment and unconscionability, First Laser says that on the common assumption that it was a 51% shareholder, it participated in the management of FCL and FCO and solely funded the Casix Inc Project, when FEHC declined to participate and invited First Laser to do so instead; and that Mr Ngan gave unchallenged evidence that First Laser would not have invested in Casix Inc but for the assumption, and but for FEHC’s representations, that First Laser was a 51% shareholder. In particular it relies on the judge’s findings that (1) the Casix Inc Project turned out to be a success and enhanced the value of the shares in FCL; (2) the parties agreed, as recorded at the meeting on 3 October 2000, that Mr Ngan provided the capital for the research and development in relation to the Project while FCL provided the manpower and facilities for the subsequent product development and sale; (3) although the payments were made by COM, they were made at the direction of First Laser and were payments by it.

The international element: applicable law

Preliminary

84.  It is necessary to emphasise that this part of the discussion proceeds on the conclusion that (a) the First Laser Agreement is invalid under Mainland law and (b) Mainland law has no equivalent of estoppel by convention.

85.  Quite apart from any issue relating to the conflict of laws, even where estoppel by convention is in principle an available tool, it cannot normally be used in effect to validate an agreement which by statute would otherwise be invalid or unenforceable: Handley, Estoppel by Conduct and Election (2006), para 16-014; Treitel, Law of Contract (13^th ed 2011), para 3-99. In Actionstrength Ltd v International Glass Engineering SpA [2003] UKHL 17, [2003] 2 AC 541 Lord Walker of Gestingthorpe, speaking of an alleged estoppel by representation in relation to a guarantee which was unenforceable because of non-compliance with the Statute of Frauds 1677, s 4, said (at [53]):

“To treat the very same facts as creating as an unenforceable oral contract and as amounting to a representation (enforceable as soon as relied on) that the contract would be enforceable, despite section 4 – … would be to subvert the whole force of the section …”

and, as Lord Bingham of Cornhill put it (at [9]):

“The result would be to render nugatory a provision which, despite its age, Parliament has deliberately chosen to retain.”

86.  A similar same point in relation to estoppel by convention was made in this jurisdiction by Reyes J in Hyundai Engineering & Construction Co Ltd v Vigour Ltd [2004] 3 HKLRD 1 at [114], when he said that “if a contract is illegal because it is contrary to public policy or unenforceable because it is too uncertain, I do not see how estoppel by convention can turn that contract into something that is legal or certain”: see also [2005] 3 HKLRD 723 at [34] per Rogers VP.

87.  I have already come to the conclusion that the law applicable to the First Laser Agreement is Mainland law, not only because of the issue estoppel resulting from the decision of the Supreme People’s Court, but also through the application of the close connection test pursuant to the Hong Kong rules of the conflict of laws. It would be an odd result if the principles of estoppel by convention could be used to by-pass the invalidity under Mainland law to which the application of those rules of the conflict of laws leads.

88.  First Laser also argued, not only that estoppel by convention was a procedural matter governed by Hong Kong law as the lex fori (to which I will revert) but also that it was a principle of justice, fairness and good conscience such that if injustice or unfairness would be caused to First Laser were the defendants permitted to abandon the convention, then the principles of public policy reflected in Rule 210 of Dicey (“The application of a rule of law of any country specified by Rule 203 to 209 may be refused only if such application is manifestly incompatible with the public policy (‘ordre public’) of English law”) required that the defendants should precluded from going back upon it.

89.  This argument cannot be accepted.  First Laser did not suggest, nor could it have suggested, that the Mainland law requiring approval of the transfer of shares in Mainland companies could itself be contrary to public policy.  None of the requisite elements for the application of the public policy exception are present.  It follows that estoppel by convention cannot be used in effect to categorise the Mainland law as contrary to public policy by the back door.

Substance or procedure?

90.  The starting point for this part of the discussion is the elementary one that in the conflict of laws questions of procedure are governed by the lex fori. First Laser says that estoppel by convention is a matter of procedure, and consequently relies on Hong Kong law, and only on Hong Kong, irrespective of whether the First Laser Agreement is governed by Hong Kong law or Mainland law.

91.  The question whether a rule is a rule of procedure or a rule of substantive law depends on classification by the lex fori, here Hong Kong law.  But it does not follow that because a rule is classified as a rule of procedure for domestic purposes, it is also classified as a rule of procedure for the purposes of the conflict of laws.

92.  Traditionally, the various types of estoppel have been regarded in domestic law as rules of evidence: Low v Bouverie [1891] 3 Ch 82, 105 (“estoppel is only a rule of evidence; you cannot found an action upon estoppel.  Estoppel is only important as being one step in the progress towards relief on the hypothesis that the defendant is estopped from denying the truth of something which he has said”); London Joint Stock Bank v Macmillan [1918] AC 777 at 818; Evans v Bartlam [1937] AC 473, at 484 (“estoppel is a rule of evidence which prevents the person estopped from denying the existence of a fact”).

93.  But, again in domestic cases, it has been increasingly recognised that estoppel may have a substantive effect.  As Phipson,  Law of Evidence (17^th ed 2010), para 5-02, puts it: “Some of the modern varieties of estoppel have in themselves no particular claim to be discussed in a work on the law of evidence”. Lord Wright in Canada and Dominion Sugar Co Ltd v Canadian National (West Indies) Steamships Ltd [1947] AC 46 at 56 said:

“Estoppel is often described as a rule of evidence, as, indeed, it may be so described. But the whole concept is more correctly viewed as a substantive rule of law.”

and Lord Denning MR said in Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 at 241: “Estoppel [by representation] is not a rule of evidence.  It is not a cause of action.  It is a principle of justice and of equity”.

94.  In Unruh v Seeberger (2007) 10 HKCFAR 31 Mr Justice Ribeiro PJ said (at [154]):

“It has been said that estoppel in pais is merely a rule of evidence and not a cause of action (Seton v Lafone (1887) 19 QBD 68; Low v Bouverie [1891] 3 Ch 82; Re Ottos Kopje Diamond Mines, Ltd [1893] 1 Ch 618) but that proposition needs some explanation. If the estoppel relates to the existence of a contract between the parties, the legal relationship between the parties is ascertained by reference to the terms of the contract which has been assumed to exist. If, in the assumed state of affairs, the contract confers a cause of action on the party raising the estoppel, the cause of action may be enforced. The source of legal obligation in that event is the assumed contract; the estoppel is not a source of legal obligation except in the sense that the estoppel compels the party bound to adhere to the assumption that the contract exists.”

95.  How does this relate to the application of estoppel in cases with an international element? In the past there has been a tendency to classify rules as procedural for the purposes of the conflict of laws if those rules are classified as procedural in cases without an international element.  But the more modern, and preferable approach is to say that matters which affect the existence, extent or enforceability of the rights or duties of the parties to an action are matters that are concerned with issues of substance, not with issues of procedure:  John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503 at 543.

96.  According to Dicey, para 7-031, what law governs estoppel is an “entirely open question”:

“Estoppel. For the purposes of English domestic law, estoppel is sometimes said to be a rule of evidence. Whether, for the purpose of this Rule, it should be regarded as a rule of substance or as a rule of procedure is an entirely open question, the answer to which may well vary with the type of estoppel under consideration. Thus the question whether a principal is estopped from denying his agent’s authority to deal with a third party probably depends on the lex causae. On the other hand, the question precisely when an estoppel by record arises probably depends on the lex fori, although, of course that law may distinguish for this purpose between the effect of foreign and domestic judgments.”

97.  Two textwriters at least have gone further. Johnston, Conflict of Laws in Hong Kong (2005), para 2.010, expresses the view that estoppel by convention is a matter of substantive law for conflict of laws purposes:

“Issue estoppels based on foreign judgments are matters principally for the lex fori … The other species of estoppel most commonly encountered – promissory estoppel, estoppel by convention, proprietary estoppel – are, it is suggested, clearly matters of substance; their evidential clothing is essentially a legal fiction. The law applicable to an estoppel issue will therefore have to be determined: it is suggested in this regard that estoppels ought to be governed by law of the main issue to which they relate: for example, a promissory estoppel or estoppel by convention pleaded in connection with a contractual issue should be assessed according to the law governing the contract; and a proprietary estoppel raised in respect of property should be governed by the lex situs. The matter is essentially one of characterisation: whether the estoppel in question is, in effect, part of the law of contract, property or something else.”

98.  Yeo, Choice of Law for Equitable Doctrines (2008), para 4.104, is of a similar view:

“In domestic law, estoppel may be procedural or substantive depending on the context. Its choice of law characterization also depends on the context in which it arises. … In many cases, estoppel principles represent substantive policies of domestic law that shape the liabilities of the parties. Civil law systems may use the doctrine of good faith in situations where estoppel would be invoked in the common law. These issues should be seen as substantive for choice of law purposes. The following types of estoppel have been assumed (correctly, it is suggested) to be substantive for choice of law purposes: estoppel by convention, estoppel on the issue of title; and estoppel in the context of ostensible authority of an agent to bind a principal. Estoppel arising in the context of a claim in contract is arguably substantive. Waiver operates like estoppel, and may be substantive for the same reasons. For this purpose, there should be no difference between common law and equitable estoppel.”

99.  The only decision directly relevant is The Amazonia [1990] 1 Lloyd’s Rep 236, to which Yeo refers as support for his conclusion that estoppel by convention has been assumed to be substantive for choice of law purposes.  Before I deal with it I should also refer to three other decisions which were relied on by the parties.  First, reliance was placed by First Laser, in support of its argument that the lex fori applied, on what it said was an observation by Hooper J in Gucci Gucci srl v Siber Hegner & Co (HK) Ltd, 2 January 1987 (a decision refusing a stay of Hong Kong proceedings in favour of the Italian courts).  The passage relied on (at p 18) is this: “There is clear authority and indeed it is not disputed that the doctrine of estoppel will be decided by the lex fori”.  But the context shows that this is a recitation of counsel’s argument and not a holding by the judge.  Second, in Azov Shipping Co v Baltic Shipping Co (No 3) [1999] 2 All ER (Comm) 453, 477 (Colman J) it seems to have been assumed that English law (probably as the lex fori) applied to the question whether a party could rely on an estoppel by representation to found a claim that a party had assented to an agreement governed by Ukrainian law, but the issue of applicable law was not discussed. Third, in Dornoch Ltd v Westminster International [2010] Lloyd’s Rep IR 1, Tomlinson J referred to the discussion in Dicey but the question of applicable law did not arise for decision since English law was both the lex fori and the applicable law of the contract to which the estoppel (estoppel by convention from reliance upon endorsement as an election by underwriters not to take over vessel) related: see at [21].

100.  In The Amazonia [1990] 1 Lloyd’s Rep 236 charterers commenced an arbitration in London against owners under a charterparty which was expressly governed by English law and contained a London arbitration clause.  The owners took the point that the charterparty was also expressed to be subject to the Australian Sea-Carriage of Goods Act 1924 which invalidated any clause ousting the jurisdiction of the Australian courts.  It was held that the clause making the charterparty subject to the Australian Act overrode the choice of English law and arbitration; that the choice of English law and the arbitration clause were void, but that the parties had made an ad hoc contract, governed by English law, to arbitrate in London when they appointed an English arbitrator. That agreement, however, was vitiated by the mistake that the Australian Act contained no impediment to arbitration in London.  But there was an estoppel by convention, which was not defeated by Australian law.

101.  Staughton LJ said (at 247):

“The convention was that there was a valid arbitration agreement between the parties. In a case of estoppel by convention where a foreign element is involved, one has in my judgment to look for something which can conveniently be called the proper law of the estoppel. If the communings of the parties in this case had taken place in Australia, between their Australian lawyers, one might perhaps have concluded that the proper law of the estoppel was Australian law, just as one might have concluded that a contract made in that way was governed by Australian law. As it is, I have no doubt that the estoppel is governed by English law.”

102.  Dillon LJ agreed that the ad hoc contract to arbitrate in London was governed by English law, and that it was vitiated by mistake.  But as regards estoppel by convention, he said, without express discussion of the applicable law (at 251):

“It is urged for the disponent owners that there can be no estoppel, since it is established law that there can be no estoppel in the face of a statute; it is said that the estoppel if allowed, would defeat the Australian Act. I can well see that there may be many cases in which an estoppel would not be allowed because to allow it would defeat a statute. In the present context, however, the Australian Act is, in my judgment, irrelevant. If I am right, for the reasons given above, that the ad hoc contract, as a contract to be performed in England and governed by English law, is valid and enforceable in England despite the Australian Act, it must follow that the Australian Act cannot prevent a party to the ad hoc contract being precluded, by a principle of English law, from resiling from the ad hoc contract. It may well be correct that parties cannot achieve, by estoppel by convention, a result which they could not achieve by a direct contract because it is prohibited by statute. But in the circumstances of the present case, the parties can achieve by direct ad hoc contract in England the object of commencing or continuing the English arbitration, without regard to the Australian Act.”

103.  That passage indicates that he was applying the estoppel by convention as part of English law as the law governing the ad hoc contract, and not as the lex fori. If he had been applying the lex fori there would have no need to rationalise the irrelevance of Australian law on the ground that the law governing the ad hoc agreement was English law.  Nor is there any support in his judgment for Staughton LJ’s concept of the proper law of the estoppel.  Mann LJ agreed with both judgments.

104.  The decision is clear authority for the proposition that for the purposes of the conflict of laws estoppel by convention is a question of substance and not of procedure. Staughton LJ was not saying that the applicable law was the place of the “communings.” All he was saying is that if the communications had taken place in Australia with Australian lawyers that might have led to a conclusion that Australian law applied “just as one might have concluded that a contract made in that way was governed by Australian law.”

105.  In my judgment, both on principle and on authority whether an estoppel by convention is available is a question of substance to be determined according to the law of the transaction to which it relates.  In The Amazonia it was English law as the law of the ad hoc contract to arbitrate in London.

106.  In the present case there is no doubt in my judgment that the relevant transactions are the First Laser Agreement and the ownership of the FCL shares.  For the reasons I have given, the First Laser Agreement is governed by Mainland law, and there can be no doubt that questions of title to the shares in FCL, a Mainland company, are governed by a combination of the Agreement and Mainland law.  There is therefore no basis for the application of Hong Kong law to either of the matters to which the estoppel is said to relate.

If Hong Kong law had applied, would there have been an arguable case on estoppel to be remitted to the judge?

107.  This question does not arise in view of my conclusion as to applicable law, but since the matter has been fully argued I will express a view.  The question is whether the material relied on by First Laser and set out above supports an arguable case on estoppel by convention.  I put it in that way because the judge made no factual findings on estoppel, and therefore if the plea had been available, the matter would have had to have been remitted to the judge if there were a sufficiently arguable case.  FEHC has put before the Court in its Case dated 11 December 2011 a comprehensive argument designed to show that (1) there was no common assumption of validity; (2) there is no evidence that, notwithstanding the failure to obtain approval for the transfer of shares in FCL, First Laser was treated as being the owner of the shares; (3) on the contrary, First Laser did not participate in several capital contributions in FCL; (4) First Laser did not receive dividend payments from FCL; (5) much of what the parties did was inconsistent with the First Laser Agreement.

108.  First Laser’s written Case pre-dated FEHC’s Case, but it did not seek to answer these arguments when it amended its written Case on 1 June 2012, or in the oral argument of Mr Anthony Neoh SC at the hearing of this appeal.  In my judgment the arguments against an estoppel by convention are compelling.

109.  First, since all parties were well aware that approval for the transfer of the shares in FCL was required, the fact that the parties may have acted on the agreement (even if they did, which is in fact not the case) says nothing about whether they considered it to be valid.

110.  The judge found ([108]) that Mr Ngan was aware of the requirement for governmental approval for the transfer of the FCL shares.  The First Laser Agreement provided that both parties were to form a working group and instruct lawyers in the Mainland to handle the transfer of shares.  Both parties knew that approval had not been obtained, by contrast with the transfer of the FCO shares to COM.  There was therefore no common assumption that notwithstanding the absence of approval for the transfer of FCL shares, the agreement was valid under Mainland law and that First Laser had a 51% shareholding notwithstanding the lack of approval.

111.  As I have said, the judge held that the First Laser Agreement superseded the earlier agreements.  I have already expressed the view that this may have given an incomplete picture. 

112.  What the parties did bore little relationship to the First Laser Agreement.  If the parties had acted on the basis of the First Laser Agreement, FEHC would have transferred 51% of the shares in FCO to First Laser, but in fact FEHC transferred 100% (and not 51%) of the shares in FCO to COM (not to First Laser).  FCO was thereafter treated as being wholly owned by COM, and its profits were resolved to be distributed to COM alone.  The Agreement envisaged reorganization of the board, but this was not done properly, and instead COM went through the charade of appointing directors and management.

113.  Second, not only were the FCL shares not transferred to First Laser, but the evidence does not support First Laser’s thesis that the First Laser Agreement was treated as binding and effective by the parties, or that there was any requisite reliance:

(1)   There is no evidence that a working group had been formed to deal with the transfer in accordance with clause 8.

(2)   If the parties had acted on the basis of the First Laser Agreement, the reconstitution of the board of FCL pursuant to clause would have been done by the general meeting of FCL upon the transfer of shares in the Mainland.  What happened was a meeting of COM, a Macau company in which FEHC had no interest, which purported appointed directors of FCL.

(3)   The fact that Mr Ngan or COM was consulted on management decisions says nothing about any assumption that the First Laser Agreement was valid or that First Laser owned shares in FCL despite the absence of approval.

114.  Third, the investment in the Casix Project said to have been made in reliance on the common assumption was not made by First Laser but, as the judge found, by COM. As I have said, the judge found (para 126) that COM paid (a) two sums of RMB 500,000 to FCL in August and October 1997, and (b) US$500,000 to Casix Inc in August 7 and US$100,000 to Casix Inc in April 1998. FEHC has referred to material which was before the judge and which suggests that the RMB 1 million was in fact paid by Mr Ngan’s company Bao Shing (Group) Co Ltd, but the most that could be said about this point is that Mr Ngan made no distinction between the corporate entities which he controlled.

115.  Nor does the evidence support the thesis that the FCL shares were treated as owned as to 51% by First Laser:

(1)   First Laser did not participate in the capital contributions which took place after December 1996. According to the capital examination reports for FCL in the years 1997, 1999 and 2000, about US$4 million was contributed by FEHC, and this is inconsistent with First Laser owning 51% in accordance with the First Laser Agreement.

(2)   The memorandum of March 1998 made it clear that ownership in the FCL shares had not been transferred and that FEHC was still holding them (and in context this does not mean holding them for First Laser).

(3)   Only FEHC received dividend payments from FCL, and First Laser did not receive any dividend from FCL.  At a board meeting of FCL in September 1998 it was resolved that the undistributed profits of RMB 10.986 million be distributed to FEHC.

116.  The overall picture is that the terms of the joint venture were never agreed and, as I have said, decisions were made on an ad hoc basis.  An essential element of estoppel by convention is that the contents of the common assumption must be sufficiently certain to enable the court to give effect to it.  I have no doubt that that condition is not fulfilled by the constantly shifting relations between the parties.  Consequently I would have held that the elements of an estoppel by convention were not arguably made out, and that therefore there would have been no reason to remit the issue to the Court of First Instance.

Disposition

117.  I would therefore dismiss the appeal.  Since the offer of restitution made by the defendants has been rejected, the issue of restitution under Mainland law must be remitted to the Court of First Instance.

118.  I propose that costs, unless agreed, be dealt with on written submissions as to which the parties should seek procedural directions from the Registrar.

Mr Justice Bokhary PJ :

119.  The appeal is dismissed.  There will be the remitter referred to by Lord Collins in para 117 and the order as to costs which he proposes in para 118.  The Court is of course indebted to counsel on both sides for their assistance.