HEBEI PEAK HARVEST BATTERY CO. LTD. v. POLYTEK ENGINEERING CO. LTD.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1997, No. 224
(Civil)

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J U D G M E N T

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Liu, J.A.:

1. An arbitral award (PRC Award) was made in the People's Republic of China (PRC) in favour of the plaintiff against the defendant on a Chinese contract dated 8 March 1991 (the Supply Contract). The Supply Contract contained an arbitration clause 8.9 which enabled the parties to refer "any dispute arising from the performance" to arbitration in PRC. Leave was granted by Leonard, J. to enforce the PRC Award and to enter judgment against the defendant (the Enforcement Order).

2. Pursuant to "liberty to apply" in the Enforcement Order of Leonard, J., the defendant applied by summons to Findlay, J. under the general law and/or s. 44(2)(a) of the Arbitration Ordinance, Cap. 341 to stay or set aside the Enforcement Order on the ground that the plaintiff lacked legal capacity to enter into the Supply Contract, to invoke the arbitration clause therein, to embark upon arbitration and to receive the PRC Award. Findlay, J. dismissed the defendant's application, and from that dismissal the defendant now appeals. The plaintiff seeks to fortify the dismissal by a Respondent's Notice.

3. S. 44(2)(a) of the Arbitration Ordinance reads:

"Enforcement of a Convention award may be refused if the person against whom it is invoked proves - (a) that a party to the arbitration agreement was (under the law applicable to him) under some incapacity."

The PRC Award was a Convention award and it is alleged that under PRC law, the plaintiff was at all material times suffering from some incapacity so that a Hong Kong court may, in its discretion, refuse to enforce it.

4. It is quite unnecessary to deal specifically with the grounds in the Notice of Appeal and in the Respondent's Notice. The issues central to this appeal are whether the plaintiff was duly incorporated under PRC law and, if so, whether the plaintiff had ceased to exist as an incorporated company by the time of the Supply Contract dated 8 March 1991, the PRC Award of 26 May 1995 made on its submission to arbitration pursuant to clause 8.9 of the Supply Contract or the Enforcement Order of Leonard, J. granted on 27 October 1997.

5. Three parties signed a Joint Venture Agreement. In fact the promotion of the joint venture was aligned with the formation of the plaintiff as a limited company. These three parties would become its shareholders and contributors to its capital. After incorporation, the plaintiff company was expected to enter into the Supply Contract with the defendant, committing itself to pay the defendant various sums thereunder. An initial deposit 10% of the contract price of the Supply Contract was payable upon the signing thereof. The three parties in the Joint Venture Agreement, as potential shareholders of the plaintiff company, were obliged to make in stages their capital contributions from which the sums payable under the Supply Contract would be met. The shareholders' obligation so to contribute to the plaintiff's capital was wholly detached from the defendant's performance of the Supply Contract. Difficulties arose and necessitated the initial 10% deposit to be paid by the three parties in the Joint Venture Agreement direct to the defendant. The Supply Contract was not performed and the plaintiff obtained the PRC Award for the return of the 10% deposit. 10% was US$730,000. As the 10% deposit was paid direct to the defendant by the three parties in the Joint Venture Agreement and arguably not from the plaintiff, other claims arose in the course of the enforcement proceedings against the defendant.

6. The balance of the contract price, 15%, 60% and 15% respectively was to be paid to the defendant under the Supply Contract within certain prescribed periods. As to the 60%, payment was clearly unconnected with performance of the Supply Contract. It was fixed exclusively by reference to the contract commencement date on 29 April 1992. The staged capital contribution by the plaintiff's shareholders was linked to the payment table (except for the initial 10% deposit) in the Supply Contract, which related in term to the Joint Venture Agreement. No capital of the plaintiff company was paid and it collapsed.

7. The judge would seem to be wrong in concluding that "there [was] no acceptable evidence that the defendant performed the contract so that the staged payments became due". Payments under the Joint Venture Agreement, in the Supply Contract and towards the plaintiff's capital were inter-related, but in truth only the time for the scheduled payments in these transactions was synchronised. The judge fell into error again in assuming that the defendant signed the Supply Contract on 23 January 1992 and plaintiff on 24 February 1992. The false information must have been derived from the recital of the plaintiff's allegations in the PRC Award. Counsel for the plaintiff directs our attention to the reference made to a newly amended Supply Contract in the PRC Award, which was signed by the plaintiff and the defendant on 24 February 1992. The PRC arbitrator accepted that later in time the Supply Contract was signed in a newly amended version but "again just for confirming the amendments and supplements". The newly amended version was not produced, and it is not possible to evaluate the effect, if any, of the amendments and supplements on the signing date 8 March 1991 of the Supply Contract . In the PRC Award, the time for signing the Supply Contract was laid to rest by the arbitrator who found it signed on 8 March 1991.

8. The Approval Certificate for the plaintiff company was issued on 2 August 1991 and its Business Licence was granted on 12 September 1991. The plaintiff company came into being on the issuance of the Business Certificate. By that date, no capital was paid. The 10% deposit had been paid by the plaintiff's would-be shareholders to the defendant.

9. According to PRC law, unless 15% capital of a company such as the plaintiff was paid within 3 months from its Business Licence, its Approval Certificate shall cease to be effective. See Articles 4 and 5 of PRC's "Several Provisions Concerning The Investments Made By The Various Parties To Chinese-Foreign Equity Joint Ventures" (PRC's Joint Venture Regulations). Further, unless the entire capital of a company such as the plaintiff was paid up in 3 years from the date of its Business Licence, its Approval Certificate shall automatically terminate. See Articles 6 and 9 of PRC's "Notice On Strengthening Of Control Over The Examination, Approval And Registration Of The Establishment Of Foreign Investment Enterprises (FIEs) And Their Business Registration". (Notice of Examination, Approval and Registration). That was how the law stood, but the judge would seem to be inaccurate in holding that the staged payments of the plaintiff's capital were conditional upon performance of the Supply Contract.

10. To recapitulate : the Approval Certificate for the plaintiff was issued on 2 August 1991 and its Business Licence granted on 12 September 1991. The Supply Contract was signed previously on 8 March 1991. Arguably therefore, the plaintiff had no legal capacity under PRC law to sign the Supply Contract and could not invoke the arbitration clause and proceed thereupon to PRC arbitration. The plaintiff's legal expert agreed that the plaintiff company would only acquire the status of a legal person upon the issuance of its Business Licence on 12 September 1991. Therefore the Supply Contract could not be validly signed on 8 March 1991 when the plaintiff company had yet to gain corporate status.

11. No capital of the plaintiff was paid up at all. Since full payment of capital contribution had not been made before the expiration of three years from the plaintiff's Business Licence of 12 September 1991 i.e. on or before 12 September 1994, some two months before even the commencement of the PRC arbitration proceedings, the plaintiff's Approval Certification automatically terminated by virtue of Articles 6 and 9 of the Notice of Examination, Approval and Registration.

12. For the plaintiff's alleged lack of legal capacity, it would seem arguable that it was not duly incorporated and could not enter into the Supply Contract, take advantage of the arbitration Award and enforce the PRC Award in Hong Kong.

13. PRC law, as applied to the known facts, would seem to have the effect of barring the plaintiff from enforcing the PRC Award under the general law and, subject to the court's discretion, s. 44(2)(a) of the Arbitration Ordinance. The judge seemed to have overlooked the PRC law as to incorporation and continued existence of a limited company. But the plaintiff produced two certificates to demonstrate that the plaintiff company was a legal person at all material times. The first was from Baoting City Bureau of Foreign Economics And Trade, which certified the validity of a renewed Approval Certificate issued to the plaintiff. The other certificate came from Zhuozhou City Administrative Bureau For Industry And Commerce, which seemed to hold the plaintiff out as still holding a valid Business Licence.

14. At the hearing of this appeal, the defendant sought to produce two documents which came into its recent possession. These documents are, prima facie, credible and they would, if accepted, fortify the defendant's challenge to capacity. The defendant had used its best endeavours to procure evidence in this direction, which only came into their possession shortly before the hearing of the appeal. We read these documents de bene esse and we now admit them. The first document is a certificate issued by the same PRC department which was responsible for the two documents produced by the defendant. It lists the plaintiff as a company which should be struck off the registration. The second document is from the provincial government in response to the first document recording the approval of the application from the local government in the first document for revocation of the Approval Certificate of, inter alia, the plaintiff. The provincial government advised the local government to proceed accordingly. These documents reinforce the defendant's contentions.

15. On behalf of the plaintiff, it is further contended that as the defendant did not question the plaintiff's legal capacity before the PRC arbitrator but instead sought to proceed to arbitration on the basis of a valid Supply Contract at a time when it must be presumed to have known the law about automatic termination of the plaintiff's Approval Certificate, it would not be open to the defendant to challenge the plaintiff's legal capacity in the later enforcement proceedings in Hong Kong. It is further submitted that the defendant has also failed to challenge the PRC Award for lack of legal capacity within the 6-month limit laid down by Articles 58 & 59 of the Arbitration Law of the People's Republic of China. Thus, the defendant must be, so counsel argues, estopped from questioning the plaintiff's legal capacity. Counsel prays in aid China Nanhai Oil Joint Service Corp Shenzhen Branch v. Gee Tai Holdings Co. Ltd., [1994] 3 HKC 375 at pp. 384H-387C. In that case, the defendant acknowledged a defect in jurisdiction but nevertheless made no application to set proceedings aside. See China Nanhai Oil, supra pp. 386I-387C. In this appeal, the defendant had restricted access to information and data relating to the plaintiff company. The latest two documents came into the defendant's possession only days before the hearing of the appeal. In the circumstances prevailing, the defendant could hardly be said to have evinced any intention to abandon its challenge to the plaintiff's legal capacity. Further, leading counsel Mr Tong would seem to be right in his submission that the defendant was not even entitled to canvass before the PRC arbitrator the plaintiff's alleged lack of capacity in an arbitration exclusively for breaches of the Supply Contract under its arbitration clause 8.9.

16. The arbitral proceedings in PRC and the enforcement proceedings in Hong Kong were discrete and the defence omission to take advantage of Articles 58 and 59 of the PRC arbitration legislation to apply for a revocation of the PRC Award within 6 months would be unlikely to impair or eliminate the defendant's right to challenge the plaintiff's legal capacity in the enforcement proceedings in Hong Kong. See Paklito Investment Limited v. Klockner East Asia Ltd., [1993] 2 HKLR 39. If the defendant were barred by conduct from relying on lack of legal capacity, the plaintiff would arguably be unjustly enriched on account of illegality because it was legally incapable of enforcing the PRC Award and accepting the US$730,000. This case would seem to involve illegality, not a mere defect in jurisdiction, and no estoppel may be invoked to aid illegality. Put another way, no estoppel by conduct would "arise against [the defendant] precluding [it] from asserting the invalidity of [the arbitration clause in the Supply Contract] into which [it] has purported to enter while legally incapable of doing so, for to estop [it] must be to allow validity to that which the law has declared void." See para. 168 Spencer Bower & Turner on Estoppel by Representation 3rd Edn. If the allegedly void Supply Contract entered into by the plaintiff with impugned legal capacity could, by operation of estoppel, lead to an unjust enrichment of the plaintiff under the Enforcement Order of Leonard, J., there would be all the more reason for the courts to refuse to entertain an estoppel plea.

17. Lastly, it is submitted on behalf of the plaintiff that PRC law as given by its legal expert would provide a defunct company with the representation of a liquidation committee and that consequently the fruit of the Hong Kong enforcement would have a rightful recipient. As the plaintiff company is said to have been unincorporated or subsequently ceased to exist, no liquidation committee could be appointed to represent it as a non-entity.

18. It is also complained that if the plaintiff company truly had no existence at the time of the Enforcement Order of Leonard, J., the defendant could not thereafter have effectively served its summons on a non-entity for setting aside that Enforcement Order. But before the legal capacity of the plaintiff or the lack of it is ultimately determined, the plaintiff remains on the court record as a party to the instituted Hong Kong proceedings, on whom legal process could be served. After all, the defendant proceeded under "liberty to apply" in the Enforcement Order. There is no substance in this submission.

19. Finally, it is pressed upon us that under Article 5 of PRC's Joint Venture Regulations, a public announcement of the revocation of a Business Licence is necessary. But Article 5 merely provides that should a joint venture company fail to take steps to de-register or surrender its Business Licence, then its Business Licence shall be officially revoked. An official revocation of a Business Licence is decidedly different from an automatic termination of an Approval Certificate. It would seem that Article 5 is quite irrelevant to the automatic termination in this case.

20. The plaintiff applies for the introduction of two further documents. The plaintiff does not seek to establish, by affidavit or otherwise, the usual criteria in support of admission of further documents on appeal. I would not be disposed to admit them. One comes from the same official source in Baoting City, verifying the renewed Approval Certificate referred to in the certificate of its Bureau of Foreign Economics and Trade previously submitted by the plaintiff at the hearing before Findlay, J. This further document, if admitted, would add little to the challenged legal incapacity of the plaintiff, which needs to be fully investigated. The other document is legal advice from a Chinese law expert explaining, in substance, the validity of the renewed Approval Certificate despite the further documents proposed to be adduced in this appeal. Again, that would not take the matter further.

21. I should not be taken as doing more than identifying the core issues and related principles for a full investigation. No determinative pronouncement is or is intended to be made.

22. The matter has clearly to be re-ventilated. I would allow the appeal for that purpose and set aside the judge's order. It may not be necessary and the parties would no doubt prefer to avoid as far as possible duplicating the costs already incurred by the matter being heard de novo. I would accordingly leave this and other aspects of the re-hearing for directions in the Court of First Instance, subject to two essential issues being determined:

1. With reference to the plaintiff's alleged lack of legal capacity, whether the parties to this action effectively made an Arbitration Agreement on 8 March 1991;
2. Whether the plaintiff company had, at any time, ceased to exist and, if so, when.

23. Preferably, as indicated, the matter should be reheard by the same judge.

24. I would make an order nisi of costs against the plaintiff here and below.

Leong, J.A.:

25. The unusual features of this case as analyzed by my Lord, Liu J.A. warrant a rehearing. The facts clearly call for this case to be remitted for determination of the two issues posed. For the reasons given by Liu, J.A., I agree with his conclusions and the orders he proposes to make.

Nazareth, V.-P.:

26. I also agree that the appeal should be allowed.

27. For the reasons Liu JA has given it is apparent that the plaintiff company's legal capacity and existence as a legal entity at the different times material have to be addressed and determined. Only then it seems to me, can the question be answered of whether enforcement in Hong Kong of the PRC award should be permitted to continue.

28. I accordingly agree that the matter should be remitted to the Court of First Instance for the defendant's application for a stay to be determined, preferably but not necessarily by the same judge with due regard to the questions raised as to the plaintiff's legal capacity and existence as a legal entity at material times. Any directions necessary would best be given by that Court.

29. Finally, I would concur in the costs order nisi proposed.

30. The appeal is accordingly allowed, the order below set aside. There will be an order and a costs order nisi in the terms indicated.