Autonomous Non-commercial Organization “Organizing Committee of Xxii Olympic Winter Games and Xi Paralympic Winter Games of 2014 in Sochi” v. Pico Projects (International) Ltd

CACV 163/2021

[2021] HKCA 1798

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 163 OF 2021

(ON APPEAL FROM HCA NO 359 OF 2019)

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Before: Hon Kwan VP, G Lam JA and Chow JA in Court

Date of Hearing: 19 November 2021

Date of Judgment: 3 December 2021

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J U D G M E N T

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Hon Kwan VP:

1.This is the defendant’s appeal against the judgment of Recorder Manzoni, SC on 17 March 2021 (“the Judgment”)^[1]. The appeal raises the question whether the plaintiff’s enforcement of a Russian judgment (“the Cassation Judgment”) would amount to indirect enforcement of Russian revenue law. If the answer is in the affirmative, it would fall foul of a well-established and almost universal principle of private international law set out in Dicey, Morris & Collins on The Conflict of Laws (15^th ed) at Chapter 5 Rule 3 (“Rule 3”)^[2]:

“English courts have no jurisdiction to entertain an action: (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State; or (2) founded upon an act of state.”

2.The judge resolved this question in the plaintiff’s favour and held that the enforcement of the Cassation Judgment would not breach Rule 3.  There being no dispute that the Cassation Judgment should be enforced at common law if he should find for the plaintiff on this question, judgment was entered for the plaintiff in the amount claimed of US$2,640,874.60.

Background

3.The background matters are set out in the Judgment at §§6 to 23.  The relevant paragraphs are set out below:

“6.  The plaintiff is an autonomous non-commercial organisation registered in Moscow and it was established for the purposes of organising the XXII Winter Olympic Games and XI Paralympic Winter Games (“the Games”) held in 2014 in Sochi, Russian Federation.  The defendant is a Hong Kong company.

7.  The plaintiff and the defendant entered into two contracts in 2012 and 2013 by which the plaintiff leased tents and other structures for use by the plaintiff at what was known as the Coastal Cluster at the Games.  The contracts are long and the majority of the clauses are not relevant to the dispute.  The amount which was found to be ultimately payable by the plaintiff to the defendant under the terms of the contracts was just over US$12 million, and that amount has been paid by the plaintiff.

8.  The contracts are silent as to any obligation of either party concerning the payment of profits tax in accordance with the laws of Russia.  In fact, as will become clear from an analysis of the Cassation Judgment, a profits tax of 20% is payable and, under the provisions of the relevant applicable law in Russia, ought to have been withheld by the plaintiff from the contract price otherwise payable to the defendant^[3].

9.  The plaintiff made an error in payment …, in that it failed to withhold the relevant profits tax.  The plaintiff wrote to the defendant asking for a return of an amount equal to the profits tax that should have been withheld, but the defendant refused, largely because, at that time, there was a dispute as to the amount which was due under the contracts.  That dispute has now been settled through the various court cases and is no longer an issue.

10.  On 22 April 2015 the plaintiff filed a claim at the court of arbitration for sport, pursuant to the arbitration clauses contained within the contracts.  The panel decided that the matter was outside of its jurisdiction because it related to the public obligation to pay tax and was not related to the jurisdiction granted to the court of arbitration for sport.  As a result on 1 July 2015 the plaintiff filed a new claim for return of the profits tax at the Arbitration Court of Krasnodar Region, which is part of the Russian Federation court system. 

11.  On 26 May 2017 that court gave a decision which was subsequently appealed by both parties to the 15th Arbitration Court of Appeal.  By a judgment dated 16 April 2018 (“the Court of Appeal Judgment”) the Court of Appeal allowed the plaintiff's appeal but dismissed the defendant’s appeal, and the defendant further appealed to the Arbitration Court of North Caucasian District, the Court of Cassation in the Russian Federation court system.  The Cassation Court rendered a final judgment (“the Cassation Judgment”) on 6 August 2018^[4].

12.  The essence of the Cassation Judgment is that the defendant is obliged to return the profits tax which ought to have been withheld on the basis that the plaintiff has paid that amount to the Russian Budget and the defendant has been unjustly enriched by the same amount.

13.  Much of the of the discussion in the Russian Judgments relates to quantification of the various claims, counterclaims and interest, and I do not need to deal with that.  The Court of Appeal Judgment sets out the position on profits tax as follows:

“According to para. 1, Article 310 of the Russian Tax Code, tax on income received by a foreign entity from sources in the Russian Federation is assessed and withheld by the Russian entity paying the income to the foreign entity.

According to Para. 1, Article 24 of the Russian Tax Code, persons required by the Code to assess, withhold from the taxpayer, and pay tax to the Russian Budget are classified as tax agents.

According to Para. 4, Article 24 of the Russian Tax Code, tax agents are required to pay amounts of tax, withheld from the taxpayer, according to the procedure established by the Code for the payment of tax by the taxpayer.

At the same time, pursuant to Para. 2, Article 44 of the Russian Tax Code, the taxpayer is the person incurring the obligation to pay the tax.

According to Subpara. 5, Para. 3, Article 45 of the Russian Tax Code, if the obligation to assess and withhold tax from the taxpayer’s funds is imposed by the Code on the tax agent, the obligation to pay the tax is deemed fulfilled by the taxpayer on the day when the tax agent withholds the tax amounts.

Thus, the tax agent pays to the budget the amount of tax the obligation to pay which is imposed on the taxpayer.

According to Para. 2, Article 287 of the Russian Tax Code, a Russian entity, or a foreign entity operating in the Russian Federation through a permanent representative office (tax agents), paying income to a foreign entity are required to withhold the tax amount from income received by the said foreign entity, … at each payment (transfer) of funds thereto or other receipt of income by the foreign entity, unless otherwise stipulated by this code.

The tax agent is required to pay a respective amount of tax not later than the day following the day of payment (transfer) of funds to the foreign entity or other receipt of income by the foreign entity.”

14.  The Cassation Judgment reports the position under the Russian Tax Code in almost identical terms.”

“19. The Russian Court of Appeal confirmed that the payment by the plaintiff to the Russian Budget had the effect of discharging the liability of the defendant to the Russian Federation in respect of the profits tax. Hence the Russian Federation no longer has any debt owed to it, and on the face of it has no interest in whether the plaintiff recovers from the defendant:

“In these circumstances, the court of appeal has no reason to state that the company remains liable to pay the tax.”

20.  The Judgments make it clear that they entered judgment for the plaintiff on the basis of “unjust enrichment”.

21.  The 1^st Instance judgment sets out all that is available as to what unjust enrichment means under Russian Law:

“By virtue of the provisions of Clause 1 of Article 1102 of the Civil Code of the Russian Federation, a person who, without a basis established by law, other legal acts or a deal, has acquired or saved property at the expense of another person, is obliged to return to the latter the unjustly acquired or saved property (unjust enrichment).”

22.  The Court of Appeal confirmed the juridical basis (under Russian law) of the judgment as follows:

“Since the [plaintiff] fulfilled its obligation to make the tax payments under the [contract], which is not contested by the parties and has been confirmed by the tax authority, the [defendant] has obtained an unjustified enrichment at the expense of the [plaintiff] in the amount paid in excess, which was subject to payment as tax to the Russian budget.”

23.  That was upheld by the Cassation Judgment.”

4.The judge noted in §§15 to 18 of the Judgment there is dispute between the parties on Russian law as to whether the plaintiff, as the “tax agent”, is an agent of the Russian Federation (the defendant’s contention) or an agent of the taxpayer (the plaintiff’s contention).  The judge did not think he is able to resolve that dispute despite the rule that foreign law is deemed to be the same as Hong Kong law if no difference has been identified in the evidence. He proceeded on the basis that it is unclear whose “agent” the “tax agent” is. The absence of finding on this issue is immaterial to the judge’s decision, as acknowledged by the defendant.

5.The writ in this action was issued on 6 March 2019, claiming the amounts awarded to the plaintiff by the Cassation Judgment in respect of the overpaid sum, interest and costs, which remain wholly unsatisfied. The defendant filed a defence pleading that the plaintiff’s claim is for enforcement of a revenue law of the Russian state and hence the Hong Kong court has no jurisdiction to entertain such a claim.

6.On 3 September 2019, the plaintiff issued a summons for summary judgment alternatively for determination of questions of law under Order 14A of the Rules of the High Court.  By a decision of 3 June 2020^[5] of Deputy High Court Judge Whitehead, SC, it was held that this is an appropriate matter to be dealt with summarily under the Order 14 and Order 14A procedure.  The summons then came before Recorder Manzoni, SC for hearing on 25 February 2021.

The judge’s decision on the application of Rule 3

7.The judge reminded himself of the rationale of Rule 3.  Two explanations have been given of the rule, both of which seem to have been endorsed by Lord Keith of Avonholm in Government of India v Taylor [1955] AC 491 at 511:

“One explanation of the rule thus illustrated may be thought to be that enforcement of a claim for taxes is but an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign^[6], is (treaty or convention apart) contrary to all concepts of independent sovereignties. Another explanation has been given by an eminent American judge, Judge Learned Hand, in the case of Moore v Mitchell (1929) 30 F (2d) 600, 604 … as follows: “While the origin of the exception in the case of penal liabilities does not appear in the books, a sound basis for it exists, in my judgment, which includes liabilities for taxes as well. Even in the case of ordinary municipal liabilities, a court will not recognize those arising in a foreign State, if they run counter to the ‘settled public policy’ of its own. Thus a scrutiny of the liability is necessarily always in reserve, and the possibility that it will be found not to accord with the policy of the domestic State. This is not a troublesome or delicate inquiry when the question arises between private persons, but it takes on quite another face when it concerns the relations between the foreign State and its own citizens or even those who may be temporarily within its borders. To pass upon the provisions for the public order of another State is, or at any rate should be, beyond the powers of the court; it involves the relations between the States themselves, with which courts are incompetent to deal, and which are intrusted to other authorities. It may commit the domestic State to a position which would seriously embarrass its neighbour. Revenue laws fall within the same reasoning; they affect a State in matters as vital to its existence as its criminal laws. No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper.”

8.The judge then referred to the distinction between direct and indirect enforcement of the foreign law, citing Dicey at §5-025:

“Indirect enforcement occurs where the foreign State (or its nominee) in form seeks a remedy, not based on the foreign rule in question, but which in substance is designed to give it extra-territorial effect; or where a private party raises a defence based on the foreign law in order to vindicate or assert the right of the foreign State.”

9.He reviewed a number of cases, none of which are binding on him.  He recognised that he must look at the matter from first principles and reach a conclusion as to whether allowing enforcement of the Cassation Judgment amounts to indirect enforcement of Russian tax law.

10.He regarded Re Reid (1970) 17 DLR (3d) 199, a decision of the British Columbia Court of Appeal, as perhaps the closest to the facts of the present case.  In that case, the English trustee of an estate was accountable to the English Revenue for estate duty.  The estate did not have sufficient assets in England to pay and the trustee sought to be reimbursed the shortfall (which it had paid) out of the estate’s assets in British Columbia.  A remainderman under the will challenged the trustee’s entitlement for reimbursement, on the ground that foreign revenue law could not be directly or indirectly enforced.  The remainderman’s application to require distribution of the assets without deduction for the UK estate duty was denied by the court.  Robertson JA said as follows:

“Under s 8 of [the Finance Act 1894] the respondent [i.e. the trustee] was accountable for the estate duty. It was a matter of no concern to the Estate Duty Office where the respondent found the money to pay the duty.” (at 203)

“The Estate Duty Office was not seeking to lay its hands on any property in British Colombia or otherwise to enforce its tax claims here. Acting in accordance with the Finance Act, 1894, it was seeking to gain from an English company the payment of duty for which the Act provided that the company should be accountable. At the time when these proceedings were commenced, the respondent was in a position where it would soon be compelled to pay; since then it has – reasonably, in my opinion – paid. The fact that it has paid makes no difference to the decision of this appeal.” (at 204)

11.The judge reasoned that similar to Re Reid, the plaintiff was obliged under Russian tax law to discharge the profits tax liability itself, which it has done.  In this case too, the Russian Budget was entitled under its own laws to look to the plaintiff to satisfy the tax liability and it had done so.  It is immaterial to the Russian Budget whether the plaintiff obtains reimbursement from the defendant.  As appeared from the second of the extracts quoted above in Re Reid, Robertson JA recognised that the fact of payment made no difference to the decision.  The court reached its decision based on the fact that the foreign state was not seeking enforcement because it was entitled to and had looked to the trustee to pay^[7].

12.The judge said in §§55 and 56 of the Judgment:

“Thus it was not the mere fact of payment which rendered Rule 3 inapplicable, but was the concurrent obligation of the trustee to satisfy the liability. Whether the trustee had in fact satisfied that liability or not was expressly stated by the court not to be relevant to the decision. Whether the payment had in fact been made or not, the foreign revenue would not be enriched by any success of the plaintiff because it was always entitled to recover the tax from the trustee, irrespective of whether the trustee was entitled to be indemnified. …”

“On the facts of this case, I am satisfied that the Russian Budget will not be enriched by success or otherwise of the plaintiff’s claims against the defendant. The Russian tax laws have been written in a way such that the Russian Federation does not need to look outside Russia for satisfaction of the taxes imposed. If a foreign entity is involved in any transaction where profits are made in Russia, the Russian Federation looks to the Russian entity involved in the transaction for satisfaction of the taxes. Whether the Russian entity is able to recover that money from the foreign entity is of no relevance to the Russian Federation.”

13.The judge also mentioned that notwithstanding the doubt expressed about Re Reid by the Alberta Court of Appeal in Stringam v Dubois [1993] 3 WWR 273, he was not persuaded by the proposition that Rule 3 would be undermined if it was affected by the actions of a tax agent paying the tax^[8].

14.The judge has an additional basis for his decision that there was no indirect enforcement^[9]. He noted that in every case referred to by the parties in which it was held there was enforcement of the foreign law, there was an outstanding debt owed to the foreign revenue. In Wahr-Hansen v Compass Trust Co Ltd (2007) 10 ITLR 283 at §§11 and 12, it was agreed by the parties that the existence of an unsatisfied tax claim is a prerequisite to the application of Rule 3.  The judge referred to the speech of Lord Mackay of Clashfern in Williams & Humbert Ltd v W&H Trade Marks (Jersey) Ltd [1986] 1 AC 368 at 440G to 441B:

“Having regard to the questions before this House in Government of India v Taylor [1955] AC 491 I consider that it cannot be said that any approval was given by the House to the decision in the Buchanan case^[10] except to the extent that it held that there is a rule of law which precludes a state from suing in another state for taxes due under the law of the first state. No countenance was given in Government of India v Taylor, in Rossano’s case [1963] 2 QB 352 nor in Brokaw v Seatrain U.K. Ltd [1971] 2 QB 476 to the suggestion that an action in this country could be properly described as the indirect enforcement of a penal or revenue law in another country when no claim under that law remained unsatisfied. The existence of such unsatisfied claim to the satisfaction of which the proceeds of the action will be applied appears to me to be an essential feature of the principle enunciated in the Buchanan case [1955] AC 516 for refusing to allow the action to succeed.”

15.The judge said in §§58 and 59 of the Judgment:

“Further, on the facts of this case it is clear that the tax has in fact been paid, and hence there is no unsatisfied tax claim. In the light of Humbert & Williams, I consider that the existence of an unsatisfied tax claim is an essential pre-requisite to the application of Rule 3. Although that case is not binding upon me it is highly persuasive and must be given due weight by the Hong Kong courts. I have not been shown a single case in which it has been said to be wrong, and it appears to have formed a significant part of the thinking in most, if not all, subsequent cases in which similar issues have arisen. I see no reason why Hong Kong should not take a similar approach, and consequently, I think that an unsatisfied claim by the foreign Revenue is an essential element.

The fact that indirect enforcement can be made by a liquidator (such as in Peter Buchanan, and other “Liquidator” cases), or could (in the right circumstances) be via a claim for dishonest assistance or other breach of obligation (such as in the way analysed in Wahr-Hansen v Compass) does not alter the position. In either case, where there is an unsatisfied debt and the factual circumstances justify a conclusion that the tax authorities are enforcing their own tax laws, the nature of the claim, and the identity of the claimant is immaterial. But if there is no unsatisfied debt, I fail to see how it can be said that the claim is an indirect enforcement of the foreign tax law. In its most simplistic form, all foreign tax law has already been enforced if there is no unsatisfied claim.”

The defendant’s arguments on appeal

16.The broad arguments of Mr Charles Hollander, who appeared for the defendant both before the judge and in this court, may be stated as follows.

17.He submitted that to give effect to the underlying rationale for Rule 3, indirect enforcement has to be decided by the substance of the underlying right being asserted, as understood by the lex fori.  It requires considering the substance of the rights and interests being vindicated, regardless of the shape of the civil suit.  The present claim is to enforce a judgment in unjust enrichment (that the payment lacked a “basis established by law” under Russian law), the entire foundation of which is a tax liability.  The only reason the payment to the defendant was unjust was because it represented the amount of tax the defendant owed to the Russian Federation.  Reference was made to §5 of the statement of claim^[11]. There could be no claim without the tax liability and the claim cannot be severed from the foreign revenue laws.  It is impossible to substantiate the claim without indirectly enforcing the tax.  Hence, the present claim contravenes Rule 3.

18.Furthermore, because of the way the Russian tax legislation is structured, this means that the tax authorities recoup the funds from the Russian entity which obtains the funds from the foreign entity.  The Russian entity is required to cooperate with the state by paying the tax due from the foreign entity and then sue the foreign entity to be reimbursed.  To locate the “central interest” being served directly or indirectly by the claim, it is necessary to look past the formalities of the collection process.  He argued that the Russian entity is acting as a collector and an enforcer of the tax liability as a matter of substance, and that the plaintiff’s claim indirectly benefits the Russian tax authorities.

19.Mr Hollander also emphasised that while the shape of the present claim is a private action, it has a public nature in that it indirectly enforces the rights of the Russian Federation rather than to remedy a wrong done to an individual party.  He prayed in aid that the public nature of the unjust enrichment claim was recognised by the Russian courts in that the court of arbitration for sport declined jurisdiction to hear the claim against the defendant because the dispute is “public in its legal nature as it is directly related to the assessment of profit tax in accordance with the tax legislation of the Russian Federation” and cannot be the subject of proceedings in the court of arbitration for sport.

20.Counsel contended that the judge drew an arbitrary and unworkable line by finding that Rule 3 depended upon whether the foreign revenue authority had in fact been paid (“the Debt Requirement”). This was wrong in principle and was based on a misreading of Williams & Humbert and Re Reid.  The Debt Requirement is not a touchstone of the authorities on indirect enforcement properly understood; it is a false distinction and is inconsistent with the decision of Andrew Baker J in Skatteforvaltningen (the Danish Customs and Tax Administration) v Solo Capital Partners LLP & Ors [2021] 1 WLR 4237 (“the SKAT case”), which was delivered not long after the Judgment.

21.He submitted that the SKAT case strongly supports the defendant’s appeal.  He placed particular reliance on these statements in the SKAT case:

(1)  Whether Rule 3 applies in a case “involves a question of characterisation, for any given claim, whether it is a claim to enforce, directly or indirectly [foreign] revenue law … and/or in some other way it amounts in substance to an attempt to exercise sovereign power extra-territorially.” (§17(iv))

(2)  “The rule demands an analysis of the substance of the claim rather than the form: the court must look past the cause(s) of action pleaded, or even … the identity of the claimant, to the substance of the right sought to be vindicated, or the nature of the acts or actions upon which the claim is founded.” (§§17(ii) and 75(iii))

(3)  “… the substance of the claim is determined by the central interest, in bringing the claim, of the sovereign by whom it is brought or in whose interests, directly or indirectly, it is brought.” (§75(iv))

22.In the SKAT case, the Danish Withholding Tax Act (“the WHT Act”) is at the heart of the case of the plaintiff SKAT, which was the Danish national tax authority, in its claims against numerous defendants (not the taxpayers) for damages that it had been induced by misrepresentation to pay out monies as tax refunds it had not in fact been liable to pay. In holding that Rule 3 applied, Andrew Baker J remarked that the WHT Act “provides the foundation for all of SKAT’s claims, as pleaded, without reliance on which none of SKAT’s claims could exist or be formulated” (at §76), and that “every cause of action against every defendant starts with and must be pleaded by reference to” the taxation laws (at §87).  It was held that properly characterised, the action was an attempt by SKAT to vindicate its right, a creature of the Danish tax law, and indirectly to enforce Denmark’s underlying sovereign right, given effect by the WHT Act (at §94).

23.Mr Hollander further submitted that the SKAT case, where there was no unpaid tax liability, also illustrated that the judge fell into error in treating the presence of an unsatisfied tax debt as an “essential prerequisite” for Rule 3 to apply.  The Debt Requirement has nothing to do with the rationale of Rule 3, which is whether the claim in substance vindicates the rights of the foreign sovereign.  It has perverse and artificial consequences; it means that Rule 3 can be easily circumvented by the intermediary making a payment to the tax authorities and then bringing a claim for recoupment against the taxpayer.  In principle, there should be no difference between a claim by a foreign tax authority against the taxpayer for unpaid tax and a claim by an intermediary against the taxpayer for recoupment of the tax liability discharged, “if they otherwise satisfy the rationale for [Rule 3]”.  The outcome in Rossano v Manufacturers’ Life Insurance Co [1963] 2 QB 352 and Indian and General Investment Trust Ltd v Borax Consolidated Ltd [1920] 1 KB 539 would be different had the defendant first paid the tax authorities and then claimed recoupment, as that would have been permissible according to the Debt Requirement.

24.Furthermore, enforcement in this context is not limited to the enforcement of debts.  Rule 3 prohibits the enforcement of foreign revenue laws, not the enforcement of revenue debts.  The enforcement of a law can be indirect in many different ways, and does not require considering whose account receives the payment.  The superficial conception of enforcement – as the calling in of debts – is attributable to a misunderstanding of Williams & Humbert and Re Reid.

25.Williams & Humbert is not an appropriate case from which to draw out the Debt Requirement; the foreign laws in that case were confiscatory laws and did not impose a tax liability and their enforcement was completed when the transfer of title to property was effected (at 429A and 431C, per Lord Templeman).  It was submitted that Lord Mackay’s references to unsatisfied claims at 441A were read out of context as imposing the Debt Requirement.

26.As for Re Reid, Mr Hollander pointed out that the claim was founded on the equitable principle in Hardoon v Belilios [1901] AC 118 (that a trustee has a personal right to be indemnified by a beneficiary for expenses and liabilities incurred in administering the trust, unless the beneficiary can show good reason why the trustee should bear them himself), which is different compared with the foreign state’s rights to tax the estate.  It may be argued that enforcing the trustee’s personal indemnity for expenses would not amount to indirect enforcement of a public law.  Besides, the Alberta Court of Appeal in Stringam v Dubois did not follow Re Reid and criticised its reasoning at §§36 to 40^[12].

27.Mr Hollander contended that Wahr-Hansen v Compass Trust Co Ltd did not take the matter further, as it was agreed by all parties that the existence of an outstanding debt is a prerequisite for the application of Rule 3.  And the report of the case was accompanied by an editor’s note expressing disagreement with the final conclusion that it was not an indirect attempt to collect foreign taxes^[13].

A question of characterisation

28.The crucial question is, in bringing this claim, whether the plaintiff is directly or indirectly doing an act which is of a sovereign character or which is done by virtue of sovereign authority, and whether the claim involves the exercise or assertion of a sovereign right extra-territorially.  The resolution of this issue involves a question of characterisation.  In so doing, the court looks at the substance of the matter and not the technical form of the claim.

29.Lex fori applies to the question of characterisation.  It is for the Hong Kong court to decide by reference to Hong Kong conflict of laws rules, whether, given its substance, a claim falls within Rule 3.  That applies even if Russian law is the governing law of the contracts in this case^[14]. Nor is it helpful or relevant to invoke the ruling of the Russian court of arbitration for sport in declining jurisdiction on account of the public nature of the unjust enrichment claim.

30.As stated in Dicey at §5-023, indirect enforcement is easier to describe than to define, and it is sometimes difficult to draw the line between an issue involving merely recognition of a foreign law and indirect enforcement of it.  I have considered the extensive review of cases undertaken in Wahr-Hansen v Compass Trust Co Ltd, the SKAT case, and by the judge as well.  I do not propose to embark on a similar exercise in this judgment.  As the judge has said, the analysis has to be approached from first principles with regard to the nature and rationale of Rule 3 to arrive at a conclusion whether allowing enforcement of the Cassation Judgment would amount to indirect enforcement of Russian tax law^[15].

31.The point of the rule is to look past the fact that the claim has been framed in a way that a claim might be framed between private parties, treating that as a matter of form, and to examine and identify the central interest served by the pursuit of the claim.  The substance of the claim is determined by the central interest in bringing the claim of the sovereign by whom it is brought or in whose interests, directly or indirectly, it is brought. The mechanism by which harm is said to have been suffered, in respect of which the plaintiff pursues a claim, may be important in judging whether the central interest in bringing the claim is a sovereign (governmental) interest rather than a patrimonial (private law) interest. (the SKAT case, §§67, 75(iv) and (v))

32.Thus, in the SKAT case, the mechanism of the alleged wrongdoing was the making of tax refund applications containing misinformation.  When characterising substance for the purpose of Rule 3, it is not right to distinguish between dividend tax never paid and dividend tax conditionally collected as withholding tax but paid away by SKAT by way of tax refunds.  Considering substance rather than form, SKAT’s claims against the defendants for the tax refund to be returned were, conceptually and functionally, the same as claims for tax due and unpaid. In bringing the claims, what SKAT sought to do was to repair the hole in its dividend tax take for the years in question caused by the misjudgement of its obligations to make tax refund payments, which was induced by the actionable conduct of the defendants.  The central interest in pursuit of which SKAT brought the claims remained that of taxing Danish company dividends properly in accordance with Danish tax law, a purely sovereign interest. And the central interest of SKAT and of the state of Denmark in whose interests the claims were brought, was to vindicate that sovereign right and to have it enforced indirectly in the UK. (at §§98, 102, 107, 114, 118, 119)

33.Unlike the SKAT case, there is no hole in the Russian revenue to repair in the present case.  The plaintiff’s counsel, Mr Alexander Stock, SC, made a cogent point it cannot be said that the central interest in pursuing this action is a sovereign interest in that the sovereign interest of the Russian tax authority is unaffected by this claim.  As a matter of form and substance, the central interest in bringing this claim is that of the plaintiff itself, in repairing the hole in the plaintiff’s own pocket as a result of the mistaken overpayment and reversing the matching windfall to the defendant, ie unjust enrichment.  All the proceeds of this claim are to go to the plaintiff and the only outstanding interest advanced by this litigation is the plaintiff’s own interest, not that of the foreign revenue.  The suggestions that the plaintiff’s claim indirectly benefits the Russian revenue and that the plaintiff is in substance acting as a collector and enforcer of the tax liability have no legal or factual basis.

34.I agree with Mr Stock this action does not amount to indirect enforcement of foreign revenue laws since those laws were enforceable in Russia at the point of payment and had already been enforced in Russia. By way of analogy, the confiscatory laws in Spain mentioned in Williams & Humbert had as their object the acquisition of direct ownership and control of the Spanish company and two banks and indirect ownership and control of Williams and Humbert.  “That object has been duly achieved by perfection of the state’s title in Spain.  Accordingly, on a simple but compelling view of the matter there is nothing left to enforce.”  The claim could not be described as an attempt to enforce the Spanish government decrees directly or indirectly, “so far as the decrees are concerned there is nothing left to enforce”. (Williams & Humbert at 428H to 429A, per Lord Templeman; and at 396G, per Fox LJ)

35.The judge made a similar point at §59 of Judgment that it cannot be said that the claim is “an indirect enforcement of the foreign tax law.  In its most simplistic form, all foreign tax law has already been enforced if there is no unsatisfied claim.”  There being no outstanding revenue claim, the proceeds would not be applied for the purpose of Russian tax.  There is no basis for any suggestion that this action was brought at the instigation of the Russian tax authority.  The bringing of this claim by the plaintiff is far removed from the type of cases in which it was held that a foreign tax authority was effectively behind the liquidator pursuing the claim.  The Russian tax laws are structured such that they are enforced in Russia, and have been enforced in Russia.  Under the Russian legislation, tax is withheld by the paying entity based in Russia, and paid to the Russian Budget in Russia.  As rightly submitted by Mr Stock, it was the happenstance of a mistaken overpayment by the plaintiff that led to a claim for unjust enrichment which only affected the plaintiff and the defendant, and it was due to the defendant’s failure to comply with the Cassation Judgment that led to the need to enforce that judgment in Hong Kong.

36.Mr Hollander had contended that in considering the substance of the right being vindicated, if the only reason that the payment to the defendant was unjust was that it represented the amount of tax that the defendant owed, the claim would be caught by Rule 3.  This approach appears akin to a “but for” approach; it is not supported by the authorities and is inconsistent with the test in the SKAT case, in that “the substance of the claim is determined by the central interest in bringing the claim”. Insofar as he relied on Lord Mackay’s statement in Williams & Humbert at 441B that “No provision of that law would provide a foundation for making any of the claims in question”, that was just one of the features mentioned by Lord Mackay who also mentioned in the preceding sentence the absence of “any unsatisfied claim” under the law in Spain.

37.In my judgment, the enforcement of this claim is plainly not an extension of the foreign sovereign power imposing taxes or an assertion of a sovereign right extra-territorially.

38.The present case is closest to Re Reid on the facts. As in Re Reid, the Russian tax authority is not seeking to lay its hand on any assets of the defendant in Hong Kong.  Under Russian revenue law, there is concurrent obligation of the Russian entity (as the tax agent) to satisfy the liability of the taxpayer and hence the tax authority was entitled to look to the plaintiff to satisfy the tax liability of the defendant.  Whether the plaintiff is able to recover from the defendant is of no relevance to the Russian tax authority.  As correctly explained by the judge in §55 of the Judgment, it was not the mere fact of payment which rendered Rule 3 inapplicable in Re Reid, but the concurrent obligation of the trustee to satisfy the liability.  The fact that Re Reid was concerned with the trustee’s personal right to be indemnified is not a relevant distinction.  As rightly submitted by Mr Stock, the correct comparator for that right in the present case is the plaintiff’s right against the defendant under the Russian law of unjust enrichment.

39.As for the criticism of Re Reid in Stringam v Dubois, I agree with the judge’s analysis in §§45, 53, 55 and 57 of the Judgment.  As rightly pointed out by the judge, the view expressed in Stringam v Dubois at §37 (that Re Reid did not adopt a proper basis for dis-applying Rule 3) was clearly obiter. Re Reid was referred to with approval by Slade J in In re Lord Cable, deceased [1977] 1 WLR 7 at 25F.

40.Mr Stock drew our attention to some authorities (QRS 1 ApS v Frandsen [1999] 1 WLR 2169 at 2176C to 2177C; Her Majesty’s Revenue & Customs v Shahdadpuri [2012] 1 HKLRD 223 at §§41 to 47; Wahr-Hansen v Compass Trust Co Ltd at §122) in which the courts emphasised the narrowness of Rule 3 as regards indirect enforcement, questioned the width or limited the scope of the prohibition against indirect enforcement, and queried “whether the general ban on indirect enforcement is not too rigid”, citing Cheshire and North, Private International Law (14^th ed) pp 124 to 125.  Regardless of whether a narrow approach is to be adopted, it is tolerably clear that this case does not fall foul of the prohibition against indirect enforcement of foreign revenue law.

41.For the above reasons, the defendant’s appeal should be dismissed.  It is not strictly necessary to consider the additional ground of the judge that an unsatisfied tax claim is an essential prerequisite to the application of Rule 3, ie the Debt Requirement. But as the Debt Requirement is heavily relied on by Mr Hollander in criticising the Judgment, I will deal with it.

The Debt Requirement

42.The Debt Requirement is drawn from Lord Mackay’s statements in Williams & Humbert at 440G to 441B, which have been set out earlier.  Mr Hollander contended that the reference at 441A to “The existence of such unsatisfied claim to the satisfaction of which the proceeds of the action will be applied appears to me to be an essential feature of the principle enunciated in the Buchanan case” was read out of context by the judge in §§58 and 59 of the Judgment.

43.In making the relevant statements at 440G to 441B, Lord Mackay was addressing a proposition advanced by the appellants to this effect:

“From the decision in the Buchanan case counsel sought to derive a general principle that even when an action is raised at the instance of a legal person distinct from the foreign government and even where the cause of action relied upon does not depend to any extent on the foreign law in question nevertheless if the action is brought at the instigation of the foreign government and the proceeds of the action would be applied by the foreign government for the purposes of a penal revenue or other public law of the foreign State relief cannot be given.” (at 440D to E)

44.The Buchanan case was cited with approval by Lord Keith in Government of India v Taylor, in which the English courts rejected the claims of the Government of India to prove in the liquidation of an English company in respect of income tax due under Indian revenue law.  As stated by Lord Mackay in Williams & Humbert at 437G to H, the questions raised in Government of India v Taylor were: “first, whether there is a rule of law which precludes a foreign state from suing in England for taxes due under the law of that state, and second, whether (assuming the first question to be answered in the affirmative) a claim for foreign taxes is nevertheless “a liability” within the meaning of section 302 of the Companies Act 1948 which the liquidators of a company in liquidation are bound to discharge.”

45.In rejecting the appellants’ proposition aforesaid, Lord Mackay first observed that in the Buchanan case, the action was pursued by a person whose title as liquidator of the company depended on his having been appointed by a petition to the court in Scotland on behalf of the Inland Revenue, and the ground of the action was that the transactions being attacked in the proceedings in Dublin were ultra vires and dishonest because “there existed at the time that they were effected in Scotland a claim by the Inland Revenue which the transactions were designed to defeat”. “Most important there was an outstanding revenue claim in Scotland against the company which the whole proceeds of the action apart from the expenses of the action and the liquidation would be used to meet.  No other interest was involved.” (at 440E to G)

46.Lord Mackay then continued to say that “Having regard to the questions before this House in Government of India v Taylor”, “it cannot be said that any approval was given by the House to the decision in the Buchanan case except to the extent that it held that there is a rule of law which precludes a state from suing in another state for taxes due under the law of the first state” and “No countenance was given” in Government of India v Taylor, Rossano v Manufacturers’ Life Insurance Co or Brokaw v Seatrain U.K. Ltd “to the suggestion that an action in this country could be properly described as the indirect enforcement of a penal or revenue law in another country when no claim under that law remained unsatisfied.”  He concluded that “The existence of such unsatisfied claim to the satisfaction of which the proceeds of the action will be applied appears to me to be an essential feature of the principle enunciated in the Buchanan case for refusing to allow the action to succeed.” (at 440H to 441B)

47.Lord Mackay was explaining the limits of the principles in Government of India v Taylor, Rossano v Manufacturers’ Life Insurance Co and Brokaw v Seatrain U.K. Ltd, which are all cases concerning the collection of the debts of a foreign revenue. Contrary to Mr Hollander’s contention, the statements of Lord Mackay at 440H to 441B did form part of the ratio decidendi, in that Williams & Humbert was decided upon two sets of independent grounds – the grounds set out in the speech of Lord Templeman who decided the issue as one of an act of state and were agreed upon by all the members of the court; and the grounds set out in the speech of Lord Mackay, which had the agreement of at least four members. On the basis that the appellants were unable to point to any unsatisfied claim under the relevant law of Spain, the defence was struck out(at 441B to D).  See the analysis of Williams & Humbert in: Air India Ltd v Caribjet Inc [2002] 1 Lloyd’s Rep 314 at §§44 to 52; Wahr-Hansen v Compass Trust Co Ltd at §§63 to 66; JSC BTA Bank v Ablyazov & Ors (No 4) [2011] 2 All ER (Comm) 10 at §§32 to 33.

48.For the above reasons, I do not agree with Mr Hollander that the judge had read Lord Mackay’s statements out of context.

49.Mr Hollander prayed in aid a passage in Rossano v Manufacturers’ Life Insurance Co at 377 in which McNair J referred to Indian and General Investment Trust Ltd v Borax Consolidated Ltd andquoted Sankey J in that judgment as saying at 549 that “There is no Act of Parliament which allows payment of income tax to another country to be reckoned as a discharge.”  McNair J went on to say: “If in the present case the defendants had actually remitted the amount of tax to the Egyptian authorities, this would not, on the basis of Sankey J’s judgment, have been reckoned a discharge. Still less, if no payment has been made, can a mere attachment of a debt by a foreign revenue authority amount to a defence.”

50.He submitted that the above extract in Rossano provides support for the proposition that discharge of the tax liability should not be a relevant consideration whether Rule 3 is applicable and Lord Mackay did not get this right in his statements at 440H to 441B.  I do not agree with his submissions.  In Borax^[16], Sankey J was concerned with a proposition of English law that “an agreement by A to pay B a certain sum is not discharged by the payment to B of a sum of less amount and the payment to C of the balance, unless (1) this position is created by statute or common law, or (2) by stipulation express or implied between the parties.”  It was in that context that he said the words quoted by McNair J (“There is no Act of Parliament which allows payment of income tax to another country to be reckoned as a discharge.”)  Sankey J was not laying down a general proposition that the discharge of foreign tax liability should not be relevant to considering whether Rule 3 is engaged.

51.Mr Hollander contended that the SKAT case showed that the Debt Requirement is not an essential feature for the application of Rule 3, as there was no “outstanding revenue claim” or a “claim under a foreign revenue law that remained outstanding”.  The real question in that case was “whether SKAT’s unsatisfied claim to recoup what it paid out by mistake is to be regarded for the purpose of Dicey Rule 3 as a revenue claim”.  As stated by Andrew Baker J at §51, “Lord Mackay cannot sensibly be taken to have been expressing a view on the point raised by [the SKAT case], and not raised by or considered in Williams & Humbert Ltd, which is whether, as the defendants say, there is no material distinction for the purpose of Dicey Rule 3, between a claim for tax due and unpaid, and a claim for the return of a tax refund mistakenly granted and paid.”

52.Andrew Baker J continued at §52:

“If the defendants are right about that, then SKAT’s unsatisfied claims for the return by the WHT refund applicants of tax refunds wrongly paid to them fulfil Lord Mackay’s requirement. If not, then Lord Mackay’s requirement is not fulfilled, but that will be because of the decision as to characterisation made now, not because what Lord Mackay said somehow already decided it.”

53.It was decided in the SKAT case at §§97 and 98 that SKAT’s claims to recover from a WHT reclaim applicant an amount it had assessed as payable and had paid by way of tax refund – founded on the proposition that the assessment was in error – was “conceptually and functionally the same, for SKAT, as a claim for tax due and unpaid”.  This is because “An obligation and a right will generally be opposite sides of a single legal coin”. “To say that SKAT is obliged to pay a WHT refund if eligibility conditions are satisfied is to say that SKAT is entitled to keep, as tax, what it collected up front only to the extent that those eligibility conditions are not satisfied.” Hence, a conditional entitlement to keep, as tax, amounts collected up front pending final assessment of the tax due, is “conceptually and functionally the same as an entitlement to assess and collect tax due by reference to those eligibility conditions”.

54.Thus, it was held in the SKAT case that Lord Mackay’s requirement was in effect fulfilled.  Properly understood, it does not appear that the SKAT case has cast doubt on the Debt Requirement in the tax context.  As the judge said in §58 of the Judgment, no case has been cited in which it was said that the Debt Requirement is wrong, and it appears to have formed a significant part of the thinking in most, if not all, subsequent cases in which similar issues have arisen.

55.Nor do I agree with Mr Hollander that the Debt Requirement is inconsistent with the rationale of Rule 3.  If there is no outstanding revenue claim, and the foreign authority is not behind or otherwise controlling the claim – as in the liquidator cases in the Buchanan case and QRS 1 ApS v Frandsen – it is difficult to see how the enforcement of the claim could be regarded as an extension of the sovereign power imposing taxes or an assertion of sovereign authority.

56.I reject also the defendant’s submission that the Debt Requirement has arbitrary, perverse and artificial consequences and would enable Rule 3 to be easily circumvented.  An unsatisfied tax claim is a necessary condition for the application of Rule 3, but it is not sufficient as there are other conditions that must be fulfilled for Rule 3 to apply (the proceeds of the claim will go to the foreign revenue authority, the claim is in substance an attempt to collect foreign tax, see Wahr-Hansen v Compass Trust Co Ltd at §§11 and 12).  As for the suggestion that Rule 3 may be circumvented by the intermediary making payment to the tax authority and then bringing a claim against the taxpayer for recoupment, I am inclined to agree with Mr Stock that the outcome may depend on the status of the intermediary and the basis and nature of the intermediary’s claim against the taxpayer.

Conclusion and costs

57.For all the above reasons, I would dismiss the defendant’s appeal and uphold the summary judgment entered by the judge.  Mr Hollander did not pursue the other ground in the notice of appeal that unconditional leave to defend should be given.

58.As there is no dispute that costs of the appeal should follow the event, I would make an order that the defendant is to pay the plaintiff’s costs of this appeal.

Hon G Lam JA:

59.I agree that the appeal should be dismissed for the reasons given by Kwan VP but would add a few words of my own.  The existence of an unsatisfied tax claim is likely generally to be highly relevant to the question whether an action seeks the indirect enforcement of foreign revenue law, but I would hesitate to hold that it is an absolute requirement in every case.  As Mr Stock SC recognises, where, for example, an intermediary has paid the foreign tax and brings a claim against the taxpayer, the application of Rule 3, instead of being dismissed off hand on the ground that the foreign revenue has been paid, may well depend upon consideration of various factors including the status of the intermediary and the basis and nature of his claim against the taxpayer. 

60.The present case is not simply one where a person, having been compelled under foreign revenue law to pay tax, claims reimbursement against another person on the ground that the latter is under the foreign law concurrently and primarily liable to pay that tax, seeking to rely on the restitutionary principle set out in domestic cases such as Moule v Garrett (1871-72) LR 7 Ex 101 and Brook’s Wharf and Bull Wharf Ltd v Goodman Brothers [1937] 1 KB 534.  This case is one where under a contract governed by Russian law, the defendant no longer had any basis to receive the sum in question as it did, in light of the fact that the plaintiff had “fulfilled its obligation to make the tax payments under the [contract]” (as held by the Russian Court of Appeal)^[17]. As the Russian Civil Code makes clear, “a person who, without a basis established by law, other legal acts or a deal, has acquired property at the expense of another person”, is obliged to make restitution^[18].  The Russian judgments simply upheld that civil obligation.  I am satisfied that, in the circumstances of this case, by enforcing the Cassation Judgment, the Hong Kong courts cannot be said in the context of Rule 3 to be indirectly enforcing Russian revenue laws.

Hon Chow JA:

61.For the reasons given by Kwan VP in paragraphs 28 to 41 of her judgment, a draft of which I have had the benefit of reading in advance, I agree that this appeal should be dismissed.  I would leave open for future consideration the question of whether an unsatisfied tax claim is an essential prerequisite to the application of Rule 3 in the tax context, a question which it is not necessary to determine in this appeal.

Mr Alexander Stock SC, instructed by Simmons & Simmons, for the plaintiff (respondent)

Mr Charles Hollander, instructed by Tanner De Witt, for the defendant (appellant)

[1] [2021] 2 HKLRD 246

[2] Dicey §5-020. The principle applies also to an action for enforcement of a foreign judgment based on a foreign revenue law, Dicey §5-029.

[3] Under Articles 284 and 309 of the Russian Tax Code

[4] “16 August 2018” stated in the Judgment is a clerical error.

[5] [2020] HKCFI 955

[6] A patrimonial claim by a sovereign state is an action which might equally be brought by an individual to recover losses for damage to property, when a state owns property in the same way as a private citizen (Mbasogo v Logo Ltd [2007] QB 846 at §§55, 67; Government of the Islamic Republic of Iran v The Barakat Galleries Ltd [2009] QB 22 at §136).

[7] Judgment, §§54, 55

[8] Judgment, §57

[9] Judgment, §§50 to 52, 58

[10] Peter Buchanan Ltd & Macharg v McVey, the decision of Kingsmill Moore J of the High Court of Eire was reported as a note to Government of India v Taylor at [1955] AC 516.

[11] This reads: “On 13 October 2014, the Plaintiff and the Defendant held a meeting to discuss settlement of the payments due under the Agreements.  In or around early November 2014, the Plaintiff discovered that when calculating the Payment Sum, it had erred in failing to withhold from the Payment Sum certain sums relating to the Defendant’s tax liabilities that the Plaintiff was required to withhold under Russian law.  As a result, the Plaintiff had overpaid to the Defendant the sum of USD2,460,630.47, being the amount which should have been deducted from the Payment Sum before the payments were made to the Defendant (the “Overpaid Sum”).”

[12] See the Judgment at §§45 and 55 where the judge dealt with the criticisms in Stringam v Dubois.

[13] The editor’s note criticised the finding on the facts in Wahr-Hansen v Compass Trust Co Ltd, not the analysis of the law by Henderson J of the Grand Court of Cayman Islands, as noted by the judge in §39 of the Judgment.

[14] SKAT case, §17(iii)

[15] Judgment, §49.

[16] This case was not cited to the House of Lords in Williams & Humbert.

[17] As quoted in §22 of the Judgment.

[18] As quoted in §21 of the Judgment.