DESARROLLO INMOBILIARIO Y NEGOCIOS INDUSTRIALES DE ALTA TECHNOLOGIA DE HERMOSILLO, S.A. DE C.V. v. KADER HOLDINGS CO LTD

HCCL 19/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 19 OF 2012

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D E C I S I O N

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1. This is an application for security for costs by the defendant (“Kader”) against the plaintiff (“Desarrollo”) in the sum of about HK$3.35 million on the ground that Desarrollo is ordinarily resident out of the jurisdiction. It raises an interesting question of law as to whether a judgment creditor (“JC”) stands in a special position in an application of this kind. In this particular case, the judgment which Desarrollo is relying upon is a foreign one.

Background

2. The material facts are not in dispute and I adopt, with modifications and gratitude, those set out in the skeleton submissions of Mr Li, who appeared for Desarrollo.

The parties and their business dealings

3. Desarrollo is a real estate development company in Mexico.  It has been building industrial parks for the maquiladora industry, ie, manufacturing industry in free trade zones since 1986.  It is owned by members of the Mazon family in the State of Sonora.

4. Desarrollo is a substantial company.  Its audited financial statements showed a net asset position of US$15 million as at 31 December 2012.

5. Kader is a company incorporated in Bermuda and listed on the Stock Exchange of Hong Kong.

6. In 1991, Kader was looking to set up a factory in Mexico.  Its representative went around the country. Sometime in 1992, it decided on a site in Hermosillo, Sonora.  The site was held by a group of individuals of the Mazon family (the “Mazons”).

7. Negotiations ensued between Kader and the Mazons.  After some months, a deal was agreed.  It followed the usual arrangements for foreign companies setting up shop in free trade zones in Mexico:

(1) The Mazons would build a factory specifically for Kader on the site;

(2) Instead of charging for building costs, the Mazons would be compensated by way of a long-term lease;

(3) To qualify for the maquila program, Kader would incorporate a subsidiary in Mexico to enter into the lease; and

(4) Kader would guarantee all of the subsidiary’s obligations.

8. On 12 October 1992, Kader incorporated a local subsidiary named Kadermex.

9. On 21 October 1992, Kader, Kadermex, and the Mazons executed the relevant lease (the “Lease”) and guarantee (the “Guarantee”).  Kader signed both documents.

10. Clause 20 of the Lease stated that, through the Guarantee, Kader “accepts to be jointly obligated with [Kadermex] in the due fulfillment of each and all of the obligations arising from this Contract and accepts that such guaranty is valid and enforceable during the term of this agreement and any extension thereof”.

11. Clause 23 stated that the Lease was governed by and subject to the law of Sonora, Mexico, and the parties submitted to the jurisdiction of the courts in Hermosillo, Sonora.

12. Clause 7 of the Guarantee stated that the Guarantee was governed by and to be construed pursuant to the laws of Sonora, or the laws of Hong Kong, or the laws of Bermuda.

13. In the course of construction of the factory, the Mazons obtained financing from a bank in Arizona, USA.  At the bank’s request, Kader, Kadermex, and the Mazons executed amendment to the Lease to change Clause 23 in respect of applicable law and jurisdiction such that the Lease should be “subject of laws and courts of Arizona”.

14. Sometime later, the Mazons assigned their interest in the Lease and the Guarantee to Desarrollo and Kadermex changed its name to Sinomex.

The dispute and litigation in Arizona

15. There was a series of default in payment of rent.  With Kader’s knowledge, Desarrollo and Sinomex reached several successive work-outs or settlement agreements.

16. Unfortunately, in 2003, Desarrollo had to commence legal action against Kader and Sinomex before the Superior Court of Arizona.  Kader then applied to dismiss the action arguing that the court had no jurisdiction over it.

17. By a ruling on 24 January 2005, the court ruled against Kader.

18. Kader then engaged in litigating the substantive merits of Desarrollo’s claim without accepting the jurisdiction of the court:

(1)    In March 2005, Kader filed its Defence and Counterclaim;

(2)    In April 2005, Desarrollo applied to dismiss Kader’s Counterclaim.  In May, Desarrollo applied for partial summary judgment on liability.  Kader also applied for partial summary judgment on the same issue;

(3)    In December 2005, the court dismissed Kader’s Counterclaim;

(4)    By a ruling on 14 August 2007, the court granted Desarrollo’s application for partial summary judgment and denied Kader’s application;

(5)    Kader applied twice for the court to reconsider its decision.  By rulings dated 14 March 2008 and 6 October 2009, the court denied both applications;

(6)    In April 2010, the case proceeded to trial on the issue of damages;

(7)    By a ruling dated 4 March 2011, the court awarded Desarrollo US$3.5 million in damages plus interest and taxes;

(8)    On 8 June 2011, final judgment was entered against Kader (“Arizona Judgment”).

19. After final judgment, Kader appealed, arguing, inter alia, that the court had no jurisdiction over it:

(1)    On 24 June 2011, Kader lodged an appeal to the Court of Appeal;

(2)    By a decision dated 16 April 2012, the Court of Appeal dismissed Kader’s appeal.

20. Kader then petitioned the Supreme Court for review.  By an Order dated 25 September 2012, the Supreme Court denied leave to Kader.

Hong Kong Proceedings

21. By an Amended Statement of Claim dated 18 May 2012, Desarrollo seeks enforcement of the Arizona Judgment in Hong Kong.

22. By its Amended Defence dated 16 April 2013, Kader resists enforcement on the argument that the courts of Arizona did not have jurisdiction over it.

23. Desarrollo filed a Reply dated 30 April 2013.  Kader filed a Rejoinder dated 19 June 2013.

24. The parties have exchanged witness statements and will file Arizona and Mexican legal expert reports.  The trial is fixed for 4 days to take place on 15 to 18 July 2014.

25. It appears that the issues at trial will be legal issues – mostly about Hong Kong rules on conflict of laws. There are also some issues of Arizona and Mexican law.  Being a case of enforcement of a foreign judgment, this court will not go into the underlying dispute.

Enforcement proceedings in UK and Bermuda

26. Desarrollo has also taken action in the UK and in Bermuda to enforce the Arizona Judgment.  There are assets belonging to Kader situated in the UK and Bermuda is the place where Kader is incorporated.

27. In the UK, Desarrollo had obtained summary judgment against Kader before a Master, but that decision was overturned by Mrs Justice Carr on 29 July 2013.  Trial of that action has been set down to take place in the week of 24 March 2014, ie, 4 months before the trial in Hong Kong.

28. In Bermuda, Desarrollo has obtained summary judgment and a final order.  Kader is appealing that decision and for which purpose it has obtained leave to appeal and an order for stay of execution on 7 August 2013.

Applicable principles on security for costs

29. The principles applicable to an application for security for costs are well-established.  Security will not be ordered as of course against a foreign plaintiff, but only if the court thinks it just to do so in all the circumstances.  The matter is one of discretion of the court.  However, it is ordinarily just to require a foreign plaintiff who has no asset in Hong Kong to give security for costs.

30. Where the foreign plaintiff is able to demonstrate that his case has a high probability of success, security may not be ordered.  However, that threshold is “very high indeed”: see PT Graha Multimulia Cemerlang v Silver Tech Enterprising Ltd, unrep, HCCW 883/2004, March 1 2005, at §6 per Kwan J (as she then was).

31. Further, it is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim.  The court should not embark upon a detailed examination of the possibilities of success or failure unless it can clearly be demonstrated one way or the other that there is such a very high probability of success: Sunchase International Group (China) Ltd & Ors v Vincor Group of Companies (Investment) Ltd & Ors [2004] 1 HKLRD 731 at §5 per Rogers VP.

The arguments

32. There is no dispute that Desarrollo is a foreign plaintiff with no asset in Hong Kong.  The arguments here are sensibly confined to 3 issues, 2 on the exercise of discretion by the court (as will be seen below, the 2 issues actually converge to the argument whether a JC stands in a special position on security for costs) and lastly on the quantum of security.

Position of a JC

33. Mr Li argued that a JC stands in a special position when it comes to security for costs and it is normally inappropriate to order security against such a plaintiff.  In support of his contention, Mr Li relied heavily upon an obiter dicta of Longmore LJ (with whom Munby LJ and Thorpe LJ agreed) in Relational LLC v Robert Adrian Hodges [2011] EWCA Civ 774 at §§24-25:

“Postscript

24. If Mr Millett had succeeded on his arguments either before the judge or before us, there would then have been an unfettered discretion to be exercised by the court. I have to say that, although we were not addressed about this, I would, if it had come down to the exercise of a general discretion be doubtful whether it wold normally be appropriate to order security for costs when a claimant is suing upon a judgment obtained in a country which in general terms has a similar process for enforcement of judgments as we in this country do. That would certainly be the case if the foreign judgment was a judgment on the merits since the defendant would have to displace the judgment and would, therefore, effectively be a claimant who has the burden of proof. Even in a case such as this, where there has been no determination on the merits but there has been an agreement to submit to the foreign court, it is for the defendant to displace the judgment and he is thus effectively a claimant. In these circumstances, security for costs would not, in my judgment, normally be appropriate.

25.     There is a decision of this court in the somewhat analogous field of arbitration and enforcement of awards that, to the extent that there is jurisdiction to order security for costs of an action to enforce the award, it is inappropriate to do so see Gater Assets v Nak Naftogaz [2008] Bus L.R. 388.  It is true that the statutory scheme in relation to the enforcement of awards is tighter and more onerous on defendants to arbitration enforcement claims but the general tenor of the judgments of Rix and Moses LJJ should make any judge cautious about ordering security for costs in favour of a defendant to a claim to enforce a foreign judgment.”

34. Mr Whitehead SC, who appeared with Mr Chen for Kader, sought to distinguish Relational from the present case.  Before I deal with the arguments, I would like to trace the law on this subject.  Mr Whitehead submitted that there is no case which says that there is a special rule for a JC.  That is not correct.  Two authorities have been referred to in Hong Kong Civil Procedure 2014 (“HKCP”), vol 1, p 521, 1^st para.

35. Firstly, Bristowe v Needham (1842) 4 Mac & G 906.  In that case, the plaintiff had an unsatisfied judgment to a large amount against the defendant.  The court discharged a rule nisi for security for costs obtained against the plaintiff upon his undertaking that the judgment should be set off against any costs to which the defendant might become entitled.

36. The report is a very short one. Notwithstanding so, the reason for the decision is, in my view, quite plain. It would not be just for a defendant to be granted security for costs if in fact he is enjoying such “security” by reason of his debt to the plaintiff. This is actually the gist of the second argument of Mr Li.

37. Secondly, in Re Contract and Agency Corp (1887) 57 LJ Ch 5, a creditor having obtained summary judgment against a company, and issued execution proceedings which were not satisfied, was not required to provide security for costs of a petition to wind up the company.  After stating the facts of the case, Stirling J held as follows:

“Under these circumstances it seems to me that the case of De St. Martin v. Davis (2) distinctly applies. There, there had been a direct admission of the debt, and the Judge thought he had a discretion and refused the order. Here there is an unsatisfied judgment which has not been complied with by the company in any shape or form. They have in their hands the very security they are asking for, and they are keeping the petitioner out of his money and yet coming to ask for security. This appears to me to be unreasonable. …”

38. On the other hand, I have been referred by Mr Whitehead to the authority of Crozat v Brogden [1894] 2 QB 30.  That was a case where the plaintiff had obtained a judgment from the French court after a drawn out litigation on merits (the judgment was upheld by the French Court of Appeal).  When he sought to enforce the judgment in England, the defendant, whilst admitting the fact of the judgment, argued, inter alia, that it was obtained by fraud.  The defendant obtained an order for security for costs against the plaintiff at the commencement of the action.  After the dismissal of the plaintiff’s order 14 application, the defendant obtained an increase of such security.  The plaintiff’s appeal against such decision was successfully before the Divisional Court but was eventually dismissed by the Court of Appeal.  I should refer to one of the judgments of the Divisional Court given by Collins J and the judgments of Lopes LJ and Davey LJ:

Collins J

“The argument for the defendant goes the length of affirming that a person who sues here on a judgment recovered in a foreign Court stands in no better position than one who sues here upon an obligation which has not been the subject of a judgment. But however low a foreign judgment may be put, it cannot be put as low as that. It may be that such a judgment does not create an estoppel, as was at one time thought to be the case, but at least it is strong primâ facie evidence in favour of the party who has obtained it, if the other side appeared and litigated the matters in dispute. We are not here dealing with a judgment obtained in default of appearance. The matter was fought out in the Court of first instance, and again in the Court of Appeal; and in the course of those inquiries all the points which are now urged for the consideration of the English Court must have been before the French Courts and dealt with by them. Therefore, there being a strong primâ facie presumption that the defendant will fail in his defence to the action, I do not think he is in a position to insist upon security for costs.”

Lopes LJ

“… the principle is well established that where a person is instituting legal proceedings in this country, being resident abroad, so that no adverse order could be effectually made against him if unsuccessful, he is, by the rules of the Court, compelled to give security for costs. Speaking for myself, I certainly have always understood that to be, I may say, the inflexible rule of the Court; and I have always understood that no difference existed between an action on a foreign judgment and other actions.

…

Collins, J., seems to have proceeded on another ground.  He seems to have thought that there was a distinction to be drawn between an action brought on a foreign judgment and an ordinary action – for debt, I will say; and he seems to have put it on this ground: that there having been a decision by the foreign Court in favour of the plaintiff, there was a strong primâ facie case in his favour, and that, therefore, the ordinary rule ought not to apply.  But, as I have already said, as far as I understand, there is no difference between an action on a foreign judgment and any other action. …”

Davey LJ

“With regard to grounds stated by Collins, J., I can only say that I am not aware of any authority, nor has any been cited to us, to shew that, where security for costs is sought from a plaintiff resident abroad, there is any difference between an action brought on a foreign judgment and an action brought in respect of any ordinary contract, or for any other cause.”

39. I should mention that Re Contract and Agency Corp was cited to the Court of Appeal.  Davey LJ referred to it in his judgment as one of the well-known exceptions to the rule for ordering security for costs against a person resident abroad.  It was regarded as “an action against a defendant who has money of the plaintiffs in his hands, so that he can repay himself if necessary” (see pp 33 and 36 of Crozat).

40. It has been pointed out by Mr Li that Crozat is no longer good law.  I was referred to HKCP, pp 521 and 523, which stated that the inflexible rule for ordering security for costs against a foreign plaintiff has been replaced by the unfettered discretion of the court as provided for under O23, r1(1).  Further, the dicta of Collins J (see above) was cited with agreement.

41. Insofar as it may be argued that the Crozat has not be undermined in respect of the dicta that there was no special rule for a JC in respect of security for costs, I would say, with great respect, that there was no reason given for the dicta save that the two Lord Justices quoted above were not aware of any authority to that effect.  In the premises, Crozat is of no particular assistance on this issue.

42. Next, there is the authority of DSQ Property Co Ltd v Lotus Cars Ltd & Ors [1987] 1 WLR 127.  Mr Justice Millet (as he then was) said, after referring to the inflexible rule described in Crozat, at p 132H:

“This had already been displaced in favour of a general discretion, in cases where the plaintiff sued on a judgment or bill of exchange, by the Rules of the Supreme Court introduced in 1920, though it survived in other cases. In 1964, however, the new R.S.C., Ord. 23 defined the jurisdiction for the first time, …” [emphasis added]

43. Pausing here, in light of Bristowe, Re Contract and Agency Corp, the dicta of Collins J cited in Crozat and the development of the rule as encapsulated in the judgment in DSQ Property, it does appear that the position of a JC deserves special treatment in respect of security for costs.  I shall address later the issue as to why that should be so.

44. Is there any difference between a foreign plaintiff suing upon a local judgment (that appears to be the position in Bristowe and Re Contract and Agency Corp) and one who sues upon a foreign judgment (Crozat)?  There is one material difference.  A foreign judgment will only have the same effect as a Hong Kong judgment if the foreign court which granted the judgment is recognised by Hong Kong court as competent (see para 47 below).  In other words, there is an extra burden for a claimant suing upon a foreign judgment to discharge before he stands upon the same footing as a claimant suing upon a Hong Kong judgment.

45. Returning to Relational, the obiter dicta cited above certainly suggest that it would not normally be appropriate to order security for costs against a claimant suing upon a foreign judgment.  However, with great respect, it is not easy to discern from this brief passage the reason for the proposition.  In respect of the analogy to be drawn with the enforcement of arbitral awards, I do not find it a helpful exercise because of the significant difference in that regime.

46. Further, it is not clear what is meant by the defendant having to “displace the judgment”.  It would be unsatisfactory to enter into the sphere of speculation.

47. It may be said that the reason is boiled downed to the burden of proof, ie, where the defendant is effectively the claimant, no security for costs should be ordered (see para 24 of Relational). In this regard, I have been referred to the authority of Adams v Cape [1990] Ch 433 at 550B-C, per Slade LJ:

“However, as all the authorities show, it is only the judgment of a foreign court recognised as competent by English law which will give rise to an obligation on the part of the defendant to obey it. As a matter of principle it seems to us that in the first place the onus must fall on the plaintiff seeking to enforce the judgment of a foreign court to prove the competence (in this sense) of such court to assume jurisdiction over him. None of the authorities cited to us establish the contrary.”[emphasis added]

48. Mr Whitehead was at pains to remind the court that Kader has never accepted the jurisdiction of the Arizona court and therefore it is a matter which Desarrollo has the burden to discharge in the first place.

49. In the premises, I do not find that Relational is helpful for the present purpose.

50. What are the reasons which can be distilled from Bristowe, Re Contract and Agency Corp and the dicta of Collins J for treating a JC differently in respect of security for costs?  There are two.  Firstly, a JC can be said to have a strong prima facie case (Collins J and HKCP, p 521).  Secondly, it is unreasonable for a defendant who is indebted to the plaintiff to seek security for costs against him (Bristowe and Re Contract and Agency Corp). The defendant can repay himself if necessary (see para 39 above).

51. In this case, I do not believe that Desarrollo can rely upon the first reason.  It is the other side of the same coin that a plaintiff who can show that his case has a high probability of success should not be required to provide security for costs.  In light of the analysis of Mrs Justice Carr on the jurisdiction of the Arizona court in her judgment which set aside the summary judgment obtained in England against Kader, I do not believe that the merits of Desarrollo’s case are so clear that this court ought to try to assess the possibilities of success or failure at this stage (see paras 30 and 31 above).  The learned Judge’s conclusion at para 77 of her judgment was as follows:

“I can readily understand an instinct to grant summary judgment in a case like this if at all possible. Desarrollo has a final judgment for substantial amount of money after many years of no doubt expensive litigation – a judgment which remains today unsatisfied. But I have found myself unable to uphold the judgment below. The Master did not have the benefit of as full an argument as I have had. In my judgment Kader’s defence has a real prospect of success and there are issues which, as a matter of justice, merit ventilation at a full hearing. For all these reasons, I will grant permission to appeal and allow the appeal on summary judgment.”

52. Desarrollo stands upon much firmer ground when it comes to the second reason.  Its claim against Kader has withstood the test of the Arizona legal system.  As pointed out above, the merits of the claim have been investigated and upheld by more than one court in Arizona.

53. The only challenge to the enforcement of the Arizona Judgment is on the jurisdiction of the Arizona court.  The issue will have to be decided by Hong Kong court applying Hong Kong law.  On the other hand, there appears to be no dispute between the parties that, as a matter of law, some regard has to be paid to the decision of the Arizona court on this issue.  I certainly agree with Mr Li that the Arizona Court of Appeal judgment is well-reasoned and deserves careful consideration by this court.

54. However, this court is of the view that the merits of the arguments on jurisdiction are not sufficiently clear for the present purpose, and therefore it must be accepted that the issue is arguable.

55. Be that as it may, I cannot accept Mr Whitehead’s submission that by reason of an arguable case on jurisdiction the Arizona Judgment should be ignored. There are 2 reasons why I disagree with the submission.  Firstly, Desarrollo has obtained a summary judgment in Bermuda to enforce the Arizona Judgment. Until and less it is set aside, Kader is liable to be wound up by the Bermudan court on the strength of that judgment.

56. Secondly, even if, on a most optimistic projection for Kader, the courts in Hong Kong, England and Bermuda all declined to enforce the Arizona Judgment, it is very difficult to envisage that Kader can ultimately escape its liability to Desarrollo under the Guarantee, and there is no reason to doubt the decision of the Arizona courts on the substantive merits of the case.

57. Desarrollo is a substantial company.  This bitter dispute has gone on for many years.  In all probability, the claim against Kader will not go away.  Even if the Arizona Judgment turned out to be ineffective because it cannot be enforced, and that Desarrollo has to begin another set of proceedings to establish its entitlement, there is every reason to believe that it has the means and determination to do so.

58. There is force in Mr Whitehead’s submission that if Kader succeeds in resisting this action, that will be the end of the Hong Kong proceedings and the involvement of Hong Kong court.  This court ought not to speculate on what will happen next.  After careful consideration, I cannot accept that when it is asked to exercise a general discretion to answer the requirement of justice this court should ignore the fact that Desarrollo has, on any view, a claim which has been established after vigorous contests in a well-recognised court of law.  This important feature distinguishes this case from other cases where a foreign plaintiff has only a claim against the local defendant.

59. I cannot see how it sits well on the scale of justice to order security for costs against Desarrollo in favour of Kader when the latter is heavily indebted to the former.

60. For these reasons, I decline this application.

Quantum

61. For completeness, I should briefly state my view on quantum if I were to allow this application.

62. There is no argument that this court is entitled to take a broad brush approach on the amount of security to be provided.  Further, it is trite that such security is not intended as an indemnity for the defendant’s costs.

63. I take the view that the amount of costs claimed is excessive.  I am not convinced that such claim has been properly quantified on party and party basis.  However, I agree that the instruction of 2 counsel is justified in light of the complexity of the legal arguments in this case.

64. I believe that the appropriate amount of security should be HK$1.8 million.

Conclusions

65. This application is dismissed and I make an order nisi that the costs of this application, subject topara 66 below, be borne by Kader to be taxed if not agreed.

66. In breach of Practice Direction 5.4, para 4(4), Bundle B is excessively heavy.  For the reasons set out in UES International (HK) Ltd v Maritima Maruba S A, unrep, HCA 632/2011, 19 November 2013, paras 18-20, the costs of preparing that bundle should be borne by Kader’s solicitors.

67. Last but not least, I am grateful to all counsel for their assistance in these matters.