Hong Ziyun v. Chan Kwan Ming and Others

HCA 1957/2015

[2019] HKCFI 2125

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1957 OF 2015

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D E C I S I O N

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Background

1.This is an application made by the 3^rd to 5^th Defendants (together referred to hereinafter as “Defendants”), by summons dated 12 November 2015, to stay this action in favor of the court of Xiamen in Fujian, on the Mainland (“Mainland Court”).

2.With leave of the Court, the application has been amended to seek the stay on the ground that, firstly, the Plaintiff and the Defendants have agreed, by a written agreement, that the dispute which forms the subject matter of these proceedings should be exclusively adjudicated by the Mainland Court (“Exclusive Jurisdiction Clause Ground”); and secondly, that the proceedings should be conducted in the Mainland Court considering the best interests and convenience of the parties and the witnesses (“Forum Non Conveniens Ground”).

3.The background facts are not in dispute.  On 5 July 2010, the Plaintiff agreed to extend a loan of RMB 50 million (“1^st Loan”) to the 1^st and 2^nd Defendants (“Principal Debtors”), who are Husband and Wife.  There was a written agreement in Chinese, and the 1^st Loan was provided to the Husband’s bank account on the Mainland.

4.The Principal Debtors then requested for a 2^nd loan of RMB 50 million from the Plaintiff (“2^nd Loan”).  A further loan agreement in Chinese was signed on 3 September 2010, between the Plaintiff, the Principal Debtors and 4 Mainland entities as guarantors, whereby the 2^nd Loan was granted for a term of 7 months, repayable on 5 April 2011, with provision for payment of liquidated damages to the Plaintiff at 0.2% per day in the event of default in payment.

5.Since the Principal Debtors had been in default of payment of interest under the 1^st Loan agreement, it is the Plaintiff’s case that she had only agreed to extend the 2^nd Loan upon the Husband’s suggestion that he would secure additional guarantees from the 3^rd, 4^th and 5^th Defendants.  The 3^rd Defendant is the Husband’s father.  The 4^th Defendant is the Husband’s brother.  The 5^th Defendant is a company incorporated in Hong Kong, of which the Father and Brother are the directors and the Father is the majority shareholder.  The Plaintiff claims that she had only agreed to extend the 2^nd Loan, upon the Husband’s inclusion of the Defendants as guarantors “with Hong Kong background”, “to increase reliability”.  The guarantors under the 1^st Loan were all Mainland enterprises, which the Plaintiff had not considered to be sufficient at the time of the 2^nd Loan.

6.A separate guarantee in writing (“Guarantee”) was signed between the Plaintiff, the Principal Debtors, and the Defendants on 3 September 2010, the same day of the 2^nd Loan agreement.

7.As with the 1^st Loan, the 2^nd Loan was paid into the Husband’s bank account on the Mainland.

8.The Principal Debtors defaulted in payment of the interest due under the 2^nd Loan agreement, and also defaulted in payment of the 1^st Loan which fell due on 10 January 2011.

9.In April 2011, the Plaintiff, Principal Debtors, the Defendants and the Mainland guarantors signed a Supplemental Agreement (“Supplemental Agreement”).  This refers in its recitals to (inter alia) the 2^nd Loan agreement and the Guarantee signed by the Defendants.  It provides for the Principal Debtors’ acknowledgment that they had been in default of payment of the principal sum of the 2^nd Loan of RMB 50 million and interest thereon, and further provides for the Principal Debtors’ agreement to pay additional interest at the rate of 0.1% per day from 6 April 2011, as well as the Plaintiff’s costs and expenses.  The Defendants expressly agreed to continue to assume their liability as guarantors, in respect of the debt obligations of the Principal Debtors.

10.The Supplemental Agreement states that it was executed in Xiamen, Fujian, and by clause 4 of the Supplemental Agreement, the parties agreed to submit to the Mainland Court disputes in connection with the loan agreement which cannot be resolved through negotiation.  The original language is as follows:

“四方同意有關借款協議的爭議協商不成的，提交本補充

協議簽訂地法院管轄。”

11.There was default in the Principal Debtors’ payment under the 2^nd Loan agreement, and the Defendants also failed to make payment upon the Plaintiff’s demand under the Guarantee.  As a result, these proceedings were instituted by the Plaintiff on 26 August 2015.  In her Statement of Claim, the Plaintiff claims that the Principal Debtors were in breach of the 1^st Loan agreement and the 2^nd Loan agreement, and that the Defendants were in breach of the Guarantee.  Accordingly, the Plaintiff seeks, as against the Principal Debtors, payment of the principal debts and interest due under the agreements for the 1^st Loan and 2^nd Loan, and as against the Defendants as guarantors, RMB 50 million under the Guarantee, and interest thereon. 

12.On 12 November 2015, the Defendants which were served with the proceedings applied for stay of the action. 

Exclusive Jurisdiction Clause?

13.The only jurisdiction clause is contained in the Supplemental Agreement. None of the 1^st Loan agreement, the 2^nd Loan agreement, the Guarantee and the Supplemental Agreement contains any choice of law clause.

14.On behalf of the Plaintiff, Counsel emphasized that there is no reliance or plea of the Supplemental Agreement in the Statement of Claim.  Counsel argued that the jurisdiction clause in the Supplemental Agreement is not applicable and does not cover disputes relating to the Guarantee and the Plaintiff’s claims made against the Defendants under the Guarantee.  The Plaintiff contends that in any event, the jurisdiction clause in the Supplemental Agreement (should the Supplemental Agreement apply) is not an exclusive jurisdiction clause.

Governing law

15.In deciding whether the Jurisdiction Clause confers exclusive or non-exclusive jurisdiction on the Mainland Court, the first consideration is the law applicable to govern the clause.  In the absence of an express governing law clause in the Supplemental Agreement, the applicable law is that system with which the transaction has the closest and most real connection (paras 7-002 & 7-003, Chitty on Contracts – Hong Kong Specific Contracts, citing Coast Lines Ltd v Hudig & Veder Chartering NV [1972] 2 QB 34, CA).

16.Paragraph 7-011 of Chitty on Contracts – Hong Kong Specific Contracts cites various examples of factors which are relevant in the determination of the closest and most real connection.

17.The debt which is secured by the Guarantee from the Defendants and referred to in the Supplemental Agreement is situate in the place where the Principal Debtors reside.  The 2^nd Loan was expressed in RMB, and was paid into the Husband’s bank account on the Mainland. The Supplemental Agreement was expressly stated to have been signed on the Mainland, which fact is admitted by the Brother, although the Wife claims to have no recollection of signing it.  All these factors connect with the Mainland, rather than Hong Kong.

18.On behalf of the Plaintiff, Counsel emphasized that the Plaintiff, the 2 Principal Debtors, the Father and the Brother are all Hong Kong permanent residents, and the 5^th Defendant is a company incorporated in Hong Kong.

19.The Plaintiff claims in her evidence that she herself had migrated to Hong Kong in 2009, and that she and her husband are now Hong Kong residents.  However, she gave an address in Xiamen as her address in her affirmation, and accepts that she travels to and fro between Hong Kong and the Mainland.

20.There is no evidence from the Husband, but the Wife claims that she and the Husband “ordinarily and habitually reside” in Quanzhou, Fujian, and that the Father and Brother also ordinarily and habitually reside on the Mainland. 

21.The Plaintiff relies on the fact that according to the annual returns filed on behalf of the 5^th Defendant, the Father and Brother have since 2006 been using an address in Chai Wan, Hong Kong as their address.  It was only in 2015 that the Father’s address was changed to a residential address in North Point, and the Brother’s address was changed to a dormitory in Donguan on the Mainland. 

22.The address of the Father and Brother in Chai Wan, as stated in the annual returns of the 5^th Defendant until 2015, is that of an industrial building and cannot be evidence of their residence in Hong Kong.  The Father and Brother seek to rely on their records of travel, issued by the Hong Kong Immigration Department, which show that at least for the period between September 2010 and April 2016, they had traveled frequently in and out of Hong Kong, making day trips to Hong Kong only, and had (for the Brother) stayed in Hong Kong for a maximum of a week only (at least so far as the records show for up to March 2011).  No explanation has been given as to the North Point residential address stated for the Father after 2015. 

23.There is no dispute that the Father and Brother are holders of Hong Kong identity cards, and that the 5^th Defendant of which they are directors and the Father is a majority shareholder, had been established in Hong Kong since 1989 and had been carrying on paper manufacturing business in Hong Kong, and then on the Mainland.  The Plaintiff’s evidence is that the Guarantee from the Father and Brother were offered to the Plaintiff by the Husband, and accepted by the Plaintiff, as the “Hong Kong connection” at the time of the 2^nd Loan, to induce the Plaintiff to agree to the 2^nd Loan.

24.Counsel for the Plaintiff argued that the Supplemental Agreement is (as its name suggests) to supplement the 2^nd Loan, and the Guarantee for the 2^nd Loan.  The Plaintiff contends that the governing law of the Guarantee must be Hong Kong law, as all the parties to it are Hong Kong permanent residents, and the Guarantee was offered as the key security for the 2^nd Loan, with the “Hong Kong connection”.

25.On the evidence presented, I cannot place significant reliance on the permanent “residence” of any of the parties in Hong Kong as showing any real or closest connection with Hong Kong, when it appears from the evidence available that the Plaintiff, the Principal Debtors, the Father and the Brother were all at the time of the 2^nd Loan agreement, Guarantee and Supplemental Agreement frequent travelers between Hong Kong and the Mainland, where much of the business of the Principal Debtors and the Defendants was conducted.  The only connection with Hong Kong was the Father’s North Point address furnished in 2015, and the business address maintained by the 5^th Defendant in Chai Wan.  Against these, all the other factors such as the location of the debt secured, the place of performance of the 2^nd Loan, and the place of execution of the Supplemental Agreement, bear connection with Xiamen and the Mainland.

26.Significantly, the Supplemental Agreement contains a jurisdiction clause which provides for disputes connected with the loan to be submitted to the Mainland Court.  That in my judgment is an important factor and raises a strong implication that the law of the Mainland is to govern the Supplemental Agreement and the disputes arising thereunder (Compagnie d’Armement Maritime SA v Companie Tunisienne de Navigation SA [1971] AC 572).  It is quite inconceivable that, at the time of the Supplemental Agreement, the parties could have intended that the Mainland Court to which any dispute was to be submitted would apply Hong Kong law in the determination of such dispute.

27.Considering all factors, I find that the Supplemental Agreement is governed by PRC law.  According to the Defendants’ expert evidence, which is not disputed by the Plaintiff, clause 4 of the Supplemental Agreement is an exclusive jurisdiction clause.

28.Even if Hong Kong law is to apply to the Supplemental Agreement, I agree with the analysis set out in paragraphs 31- 35 of the judgment in Bank of China Ltd v Yang Fan [2016] 3 HKLRD 7. The Exclusive Jurisdiction Clause in the Supplemental Agreement is of course differently worded, but the key question is to construe its meaning as it would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, and having regard to the ordinary meaning of the language used.  The absence of the words “exclusive”, “must” or “shall”, “應” or “須” in Chinese, is not fatal or conclusive.  The test is whether the agreement obliged the Plaintiff to litigate in the chosen jurisdiction (Agreements on Jurisdiction and Choice of Law para 4.09- 4.12, Dicey, Morris & Collins: The Conflict of Laws at para 12- 105).

29.Under clause 4, the parties had obviously agreed (“同意”), to submit to the Mainland Court, disputes connected with the loan agreement.  Taking into consideration the factual matrix of the 2^nd Loan in renminbi, paid on the Mainland, for the acquisition of land on the Mainland (as stated in the 2^nd Loan agreement), I conclude that the parties could only have intended that the resolution of any disputes relating to the 2^nd Loan is to be resolved by the Mainland Court, and not any other court.

Scope of the Exclusive Jurisdiction Clause

30.The Exclusive Jurisdiction Clause extends, by its plain language used, to disputes “connected with” the 2^nd Loan agreement.  This language is wide in scope.  A dispute as to the Principal Debtors’ liability under the 2^nd Loan agreement itself, and a dispute relating to the Guarantee and the Defendants’ liability thereunder, are disputes which are “connected with” the 2^nd Loan agreement.  The Defendants’ liability as guarantors depend on the Principal Debtors’ liability and rights under the 2^nd Loan agreement.

31.The 2^nd Loan agreement, the Guarantee and the Supplemental Agreement are closely associated, the Supplemental Agreement being expressed to supplement the loan agreement.  The approach of the courts should be to favor resolution of all disputes associated with a transaction in one jurisdiction (Hong Kong Civil Procedure 2019, para 11/1/12Q), and my conclusion is that the claims made in this action by the Plaintiff against the Defendants under the Guarantee fall within the scope of the Exclusive Jurisdiction Clause.

Whether the Exclusive Jurisdiction Clause is rendered unenforceable by the Money Lenders Ordinance

32.The Plaintiff argued that the Exclusive Jurisdiction Clause is unenforceable under Hong Kong law, as the Supplemental Agreement provides for payment of interest at an effective rate of 72% per annum, which is in contravention of s 24 (2) of the Money Lenders Ordinance.

33.I have found that the Supplemental Agreement is governed by the law of the Mainland.  The Money Lenders Ordinance is therefore not applicable.  In any event, as Counsel for the Defendants highlighted, s 24 (2) (if it applies) does not render the Supplemental Agreement null and void, but only unenforceable.  The Exclusive Jurisdiction Clause in the Supplemental Agreement is not rendered void, or unenforceable by any effect which s 24 (2) may have on the Supplemental Agreement. 

Effect of limitation defence under Mainland law

34.Since the jurisdiction clause is exclusive in effect, the Court should give effect to the parties’ choice of forum and stay the present proceedings, unless the Plaintiff can demonstrate strong reasons not to do so (para 4.52, Civil Jurisdiction and Judgments (6^th edition 2015); Dicey, Morris & Collins: The Conflict of Laws at para 12R-098).

35.In this case, the Defendants have alleged that under Mainland law, they are entitled to rely on a time limitation defence if the action is heard by the Mainland Court.  Under Mainland law, an action based on contract including a guarantee must be brought within 2 years from the date of the alleged breach.  The Defendants claim that the 2^nd Loan was due for payment on 5 April 2011, but the Writ in these proceedings was only issued in August 2015, after the expiry of 2 years.

36.For the purpose of the hearing of the application for stay, the Defendants were prepared to accept that the expiration of a limitation period in the chosen forum amounts to a potential ground in favor of non-enforcement of the Exclusive Jurisdiction Clause.  (They reserve their position in this regard should the matter proceed on appeal.)

37.The Plaintiff argued, as a reason for the Court not to enforce the Exclusive Jurisdiction Clause, that she had acted reasonably in having allowed the claim to become time-barred under Mainland law.  She claimed that she, and her husband (“Lu”) on her behalf, had made substantial efforts to try to recover the loan from the Principal Debtors.  The Husband had repeatedly assured Lu that he would be able to obtain funds and make repayment.  The Husband was then detained by the public security institution on the Mainland in early 2014.  On his release in June 2014, the Plaintiff and Lu had met with the Husband, but he asked for more time as he had only just been released from detention.  The Plaintiff then discovered that the Husband was detained again by the authorities in August 2014, and thereafter, she was not able to get in touch with the Principal Debtors.  When the Plaintiff finally decided to seek legal advice, she realized that her claims were time-barred, and so had no alternative but to commence the present action against the Defendants in Hong Kong.

38.Even adopting the realistic and common sense approach advocated by the Court in Duan Qi Gui v Upper Like Investments Ltd, unreported, CACV 320/2007, 17 June 2018, as Counsel for the Plaintiff urged this Court to do, I cannot conclude that the Plaintiff has not acted unreasonably in letting the limitation period expire under Mainland law, such that there is “strong reason” for refusing a stay.  Even before the Husband was detained or incarcerated in early to June 2014, the Plaintiff and Lu had not taken any action against either the Principal Debtors, or the Defendants as guarantors, to seek recovery of the loan.  The Plaintiff was obviously content and had decided not to issue legal proceedings, but to give time to the Husband to obtain funding in his own way.  By the time of the Husband’s first detention in 2014, the 2^nd Loan was already time-barred.  His later detention and the Plaintiff’s subsequent inability to contact the Husband was therefore irrelevant.  Her ignorance of the law is of course not an answer.  Independent of her claim against the Principal Debtors, it had always been open to the Plaintiff to take action and seek recovery against the Defendants as guarantors at any time, but she failed so to do.  Having made the conscious decision not to take action until 2015, I cannot find any good or strong reason to afford to the Plaintiff an excuse to avoid the consequences of her action.

Disposition

39.Since my finding is that the jurisdiction clause comprised in Clause 4 of the Supplemental Agreement is exclusive, the Court should give effect to it and stay the action, when I am not satisfied that there are strong reasons not to grant such stay. 

40.The application is accordingly granted, and the order nisi is that the Plaintiff should pay the costs of the action and of the application for stay, with Certificate for 2 Counsel.

Ms Rachel Lam and Ms Sharon Yuen, instructed by Fongs, for the plaintiff

Mr Douglas Lam SC and Mr Tom Ng, instructed by Deacons, for the 3^rd to 5^th defendants