CHINA RELIANCE FINANCE CO LTD v. CHINA THREE-GORGE ECONOMIC DEVELOPMENT CORPORATION, GUANGDONG CORPORATION AND OTHERS

cacv 296/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 296 of 2004

(on appeal from HCCL NO. 9 of 2004)

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Stone J given on 15 September 2004.  The matter before the judge was an application by the 2^nd defendant that the proceedings should be stayed on the ground of forum non conveniens.  The judge acceded to that application.  At the conclusion of the hearing of this appeal, judgment was reserved.

Background

2.  This action was brought against the 1^st defendant in respect of a loan of US$3.5 million.  The action against the 2^nd defendant is to enforce a guarantee dated 28 November 1995, which was the same date as the date of the loan agreement between the plaintiff and the 1^st defendant.  There was no difficulty in serving the writ on the 2^nd defendant because since 2002 it has had a branch in Hong Kong.  As a matter of completeness, it appears that for practical purposes it has to be assumed that there is no realistic possibility of recovery of any amount from the 1^st defendant.

3.  The loan agreement was executed in Hong Kong and under its provisions not only was the agreement subject to Hong Kong law but both the plaintiff and the 1^st defendant agreed to submit to the jurisdiction of the Hong Kong courts.  There was a further party to the loan agreement namely Modern Finance Company Ltd, which appears to have had some connection with the 2^nd defendant.  One of the provisions of the loan agreement was that the 1^st defendant should be secured by a letter of guarantee executed by “China Merchants Bank Guangzhou Branch”, to a Renminbi equivalent of US$3.5 million.  Interestingly, Modern Finance Company Ltd was required to pay in full any exchange differences between the US dollars and Renminbi.

4.  The guarantee which forms the subject of this action was written on the letterhead of the 2^nd defendant’s Guangzhou branch and, in contrast to the loan agreement which was written in traditional Chinese, it was written in simplified Chinese.

5.  The point which was at issue on this appeal was whether the judge was correct in holding that the 2^nd defendant had established a good arguable case that the proper law of the guarantee is PRC law.  This was fundamental to his decision to grant the stay of the proceedings on the ground of forum non conveniens since he held that a court in the Mainland was clearly in the best position to evaluate the issues that would arise under PRC law in the action.

6.  On this appeal Mr Shieh SC, who appeared on behalf of the plaintiff, opened the appeal on the basis that the only point now at issue was whether the judge’s view as to the proper law of the contract of guarantee was correct.  Both parties agreed that it was sufficient for the 2^nd defendant to establish that there was a good arguable case as to the proper law of the guarantee being PRC law, but that that meant that the defendant had to establish that with some degree of assurance at least on a provisional basis.  Counsel argued, correctly in my view, that the question of the proper law of the contract of guarantee was a mixed question of fact and law.  The question as to whether the action should be stayed was a matter of discretion and the plaintiff did not seek to argue that the exercise of the judge’s discretion should be disturbed if it did not succeed in showing that the judge’s view as to the proper law was incorrect.

7.  In paragraphs 40-42 of the judgment the judge referred to a number of factors which he took into account in coming to the conclusion that the 2^nd defendant had established a good arguable case that the proper law of the guarantee was PRC law.  Those factors included the following facts:

(a) that the guarantee was prepared on the paper of the 2^nd defendant’s Guangzhou branch;

(b) that it was written in simplified Chinese as opposed to the loan agreement which was in traditional Chinese;

(c) that it was intended to be security for a loan granted to a PRC party;

(d) that the amount of the guarantee was expressed in Renminbi and not in United States dollars;

(e) that the guarantee specified a Guangzhou branch of the People’s Bank at which the guarantor was to open an account;

(f) that it appeared that the guarantee had been executed in Guangzhou and then brought to Hong Kong;

(g) that in contrast to the loan agreement itself, the guarantee did not specify the proper law of the contract to be Hong Kong law.

8.  Although Mr Shieh went through each of these matters and sought to indicate that they were of less significance than it appeared the judge considered they had, having heard argument on both sides it seems to me that both individually and collectively the points which were referred to by the judge in coming to his conclusion as to the proper law of the contract being the PRC law were sound.  In simple terms they demonstrate that the document was a document of the 2^nd defendant and not a document of the plaintiff.  It might be said that it would be surprising if the plaintiff itself did not have its own guarantee forms.  The points made in relation to the denomination of the guarantee amount being in Renminbi appear to me to be significant, particularly given the time at which this guarantee was executed.  It would, as Mr Jat SC, who appeared on behalf of the 2^nd defendant, pointed out, be the almost inevitable consequence that if payment were made under the guarantee it would have to be made in the PRC.  Whether or not the reference to the account in the guarantee was a reference to an account from which payment would be made or a reference to some other account which might, for example, establish the financial credibility of the 2^nd defendant, seems to me to matter little.

9.  In the circumstances I would not disturb the judge’s holding that the 2^nd defendant had established a good arguable case that the proper law of the contract of guarantee was PRC law and in those circumstances this appeal falls to be dismissed.  I would therefore also make an order nisi of costs in favour of 2^nd defendant.

Hon Sakhrani J:

10.  I agree.