Fortune Pharmacal Co., Ltd v. Falcon Insurance Company (Hong Kong) Ltd and Another
Read the full judgment text of CAMP 526/2021 on BabelCite. This 高等法院上訴法庭 judgment was delivered on 13 January 2023 before Kwan VP, Au JA.
Case management — Arbitration — Stay of court proceedings — Surety bond — Undertaking to be bound by arbitration result — Abuse of process — Res judicata — Issue estoppel — Whether stay appropriate pending arbitration findings on contractor’s breach — High threshold for appeal of case management decisions. The plaintiff commenced court proceedings alleging breach of performance bond issued by 1st defendant and contract breach by 2nd defendant. The 2nd defendant commenced arbitration pursuant to contract arbitration clause. Court ordered stay of proceedings against 2nd defendant under Arbitration Ordinance and a case management stay of plaintiff’s claims against 1st defendant pending arbitration resolution, based on 1st defendant’s undertaking to be bound by arbitration result. The plaintiff sought leave to appeal the stay against 1st defendant but was refused. The Court of Appeal upheld the stay, holding that the identical issues of breach and damages were for arbitration and that allowing parallel litigation against the surety would be abusive and an abuse of process. The undertaking by the 1st defendant avoided risk of inconsistent findings despite absence of arbitration clause binding it. The court emphasized the high threshold for appellate intervention against case management stays and found no error in principle or failure to consider relevant factors. Leave to appeal was refused and costs for the 2nd defendant awarded. The judgment clarifies the application of principles of res judicata, abuse of process, and the exercise of case management powers in stay applications involving surety bonds and arbitration.
Legal issues: Whether case management stay against 1st defendant was appropriate
Outcome: Leave to appeal refused; plaintiff’s renewed application dismissed
Cited by 2 cases · Cites 5 cases
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CAMP 526/2021 [2023] HKCA 66 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL MISCELLANEOUS PROCEEDINGS NO 526 OF 2021 (ON AN INTENDED APPEAL FROM HCCT NO 6 OF 2021) ________________________
________________________ Before: Hon Kwan VP and Au JA in Court Dates of Written Submissions: 18 November 2021 and 15 December 2021 Date of Judgment: 13 January 2023 ________________________ J U D G M E N T ________________________ Kwan VP (giving the Judgment of the Court): 1.This is the plaintiff’s renewed application for leave to appeal against the decision of Mimmie Chan J on 21 September 2021 (“Decision”)[1]. By the Decision, it was ordered that all further proceedings in the action against the 2nd defendant be stayed pursuant to section 20 of the Arbitration Ordinance, Cap 609 and all further proceedings in the action against the 1st defendant be stayed pending the resolution of the arbitration between the plaintiff and the 2nd defendant. The stay of proceedings against the 1st defendant was granted under the case management powers of the court. 2.The plaintiff sought leave to appeal only in respect of the case management stay against the 1st defendant. Leave was refused by the judge on 4 November 2021 (“Leave Decision”)[2]. 3.The plaintiff issued a summons on 18 November 2021 to seek leave to appeal from the Court of Appeal. The grounds of appeal in the draft notice of appeal are the same as those placed before the judge. 4.Having considered the papers and the submissions, we think it is appropriate to exercise our power under Order 59 rule 2A(5)(a) to determine this application without an oral hearing. Background 5.The relevant background matters may be stated as follows. 6.The plaintiff as the employer engaged the 2nd defendant as the contractor to carry out construction works in Yuen Long under the main contract (“Contract”) which was formally executed by way of the Articles of Agreement dated 21 April 2016. The Contract contained a provision[3] by which the contractor was to obtain a guarantee from an insurance company or bank for the due performance of the Contract under the terms of a surety bond and an arbitration clause[4]. 7.The 1st defendant is the insurance company that issued a surety bond dated 3 February 2016 in favour of the 2nd defendant in the amount of $58,880,000. The conditions under which payment under the surety bond is to be made appear in clause 2, which reads as follows:
8.The surety bond was not a single bond which is payable on demand but a double or conditional bond consisting of two parts: first, the obligation, and secondly, the condition. To claim under the surety bond, the plaintiff has first to prove breach by the 2nd defendant and secondly damages[5]. In this instance, payment under the bond is in part dependent upon certification by the architect, which is subject to opening up in the arbitration. 9.By clause 6 of the bond, the 1st defendant agrees to submit to the non-exclusive jurisdiction of the Hong Kong courts. The 1st defendant is not a party to the arbitration agreement set out in the Contract between the plaintiff and the 2nd defendant. 10.On 14 January 2021, the plaintiff issued the writ in this action claiming $54,369,814.10 alternatively damages against the 1st and 2nd defendants for breach of the bond and damages against the 2nd defendant for breach of the Contract and/or negligence in carrying out the works. 11.On 1 March 2021, the 2nd defendant issued a summons for stay of all further proceedings in this action pending the publication of an award in the arbitration already commenced by the 2nd defendant by its notice of arbitration dated 5 January 2021 pursuant to the arbitration agreement in the Contract. 12.The day before the hearing of that summons, the 2nd defendant provided to the court an undertaking document signed on behalf of the 1st defendant headed “To whom it may concern” with the caption of the present proceedings and it reads as follows:
13.As between the plaintiff and the 1st defendant, and since there is no arbitration clause in the bond, the 2nd defendant sought a case management stay on the basis it would be just to stay the plaintiff’s claims against the 1st defendant in the event of a stay of this action against the 2nd defendant. 14.The 2nd defendant’s summons was heard before Mimmie Chan J on 11 June 2021. On 21 September 2021, the judge handed down the Decision in the terms as aforesaid. 15.After the plaintiff renewed its application for leave to appeal by the present summons, the solicitors for the 1st defendant wrote to the court on 10 December 2021 stating that the 1st defendant maintains a neutral stance in the plaintiff’s renewed application and would not file a statement in opposition. Grounds of appeal 16.The grounds of appeal in the draft notice of appeal may be summarised as follows:
Legal principles 17.Under section 14AA(4) of the High Court Ordinance, Cap 4, leave shall not be granted unless the intended appeal has a reasonable prospect of success, or there is some other reason in the interests of justice why the appeal should be heard. 18.To meet the threshold of reasonable prospect of success, it must be shown that the prospect of succeeding is more than fanciful, without having to be probable (SMSE v. KL [2009] 4 HKLRD 125 at §17). In other words, the applicant is required to show more than just an arguable case, although he does not have to demonstrate that the appeal will probably succeed (Wynn Resorts (Macau) SA v Mong Henry [2009] 5 HKC 515 at §19). 19.Case management decisions are only subject to appeal in rare circumstances. An applicant who seeks to appeal in this situation faces a very high hurdle. He has to show that the trial judge had gone clearly wrong and made orders which clearly involved an injustice or an inability for the trial court to carry out its task or had erred in principle or that the order was irrational having regard to the issues to be resolved (Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at §31). Analysis 20.The main thrust of Mr Maurellet SC’s argument for the plaintiff[6] is directed towards these parts of §36 of the Decision and §5 of the Leave Decision which we have italicised below for easy reference:
21.Mr Maurellet submitted the judge is wrong in law in holding that as a result of the 1st defendant’s undertaking, the plaintiff would also be bound as against the 1st defendant in the court proceedings (the 2nd defendant has ceased to take part in this action as all further proceedings against it have been stayed) in respect of any findings in the arbitration between the plaintiff and the 2nd defendant. Any findings in the arbitration would only bind the plaintiff and the 2nd defendant as parties to the arbitration in respect of res judicata and/or issue estoppel. As for the undertaking given by the 1st defendant, this does not extend res judicata or issue estoppel to bind the plaintiff and the 1st defendant inter se. At best, it only takes effect as a promise of the 1st defendant to the court to refrain from advancing a different position from the determination in the arbitration. In the court proceedings which relate to the plaintiff’s claim against the 1st defendant under the bond, the plaintiff is entitled to argue the issues whether the 2nd defendant was in breach of the Contract and whether the plaintiff has thereby sustained damages, irrespective of the adjudication on these issues in the arbitration. Hence, inconsistent findings in the arbitration (between the plaintiff and the 2nd defendant) and the court proceedings (between the plaintiff and the 1st defendant) cannot be avoided. 22.We do not agree with his contentions. 23.For cause of action estoppel and issue estoppel, Mr Maurellet is correct in that the estoppel operates in favour of, and against, parties and privies, not strangers. Cause of action estoppel or issue estoppel cannot be invoked in the absence of mutuality as in this instance, where the parties in the arbitration and the parties in the court proceedings are not the same. 24.However, cause of action estoppel and issue estoppel are not the only legal principles embodied in the “portmanteau term” of res judicata. As analysed by Lord Sumption JSC in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2014] AC 160 at §17, this term covers a number of different legal principles with different juridical origins, one of which is the general procedural rule against abusive proceedings. Mutuality is not required. The abuse of process may take the form of a collateral attack on a previous decision thereby bringing the administration of justice into disrepute so that the abusive proceedings should be struck out (Hunter v Chief Constable of the West Midlands Police [1982] AC 529 at 542C; Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72 at §83(4); Ho Kin Man v Commissioner of Police [2014] 3 HKLRD 478 at §§10, 17, 26, 35). 25.By clause 2 of the bond, the 1st defendant’s liability only arises if the plaintiff suffered damage due to the 2nd defendant’s breach of the Contract. These issues will be determined in the arbitration, which is the parties’ agreed dispute resolution procedure. Whether any amount is payable under the bond is wholly dependent on these issues to be decided by arbitration, which is the subject of a compulsory stay. 26.It is accepted by the plaintiff that it is bound by the findings in the arbitration on these issues which determined the rights between the plaintiff and the 2nd defendant. The amount payable (if any) by the 2nd defendant is the only matter relevant to the 1st defendant’s obligations as the surety under the bond. The underlying issues between the plaintiff and the 1st defendant in the court proceedings are the same as the underlying issues between the plaintiff and the 2nd defendant in the arbitration. 27.In the event those issues are found in the plaintiff’s favour in the arbitration, the court will rule in favour of the plaintiff on the 1st defendant’s liability under the bond in the court proceedings, as the 1st defendant has agreed to be bound by the result of the arbitration by its undertaking. 28.If it should transpire that those issues are found against the plaintiff in the arbitration, should the plaintiff be allowed to have a second bite of the cherry in the court proceedings against the 1st defendant? We do not think there are any valid reasons for allowing the plaintiff to do so. This is not a situation where a party who seeks to re-litigate an issue has not had his day in court. To the contrary, the very same issues would have been fully litigated by the plaintiff and the 2nd defendant in the arbitration. They are the parties involved in the incidents giving rise to the dispute and would be well placed to raise or defend any point relevant to the resolution of the dispute in the arbitration, unlike the 1st defendant who is the surety and would have to rely on input from the 2nd defendant to defend the same issues in the court proceedings, now that the 2nd defendant has dropped out of the action owing to the stay for arbitration. If the plaintiff is permitted to run a case in the court proceedings contrary to the findings in the arbitration, this is in effect a collateral attack on the findings in the arbitration and amounts to an abuse of process bringing the administration of justice into disrepute. Such abusive litigation is liable to be struck out. 29.For the above reasons, we reject the main contention of Mr Maurellet. The judge is correct in holding that there is no way in which the plaintiff can claim it is not bound by the findings in the arbitration on those two underlying issues and that inconsistent findings on those identical issues can be avoided by the stay of the plaintiff’s claim in the court proceedings pending the determination in the arbitration. 30.The other points raised on behalf of the plaintiff may be dealt with shortly. 31.Mr Maurellet submitted that the undertaking of the 1st defendant, which is headed “To whom it may concern”, is not addressed to the court, and there was no indication that the signatory (whose identity is not known) was properly authorised. We do not agree with this. As pointed out by the judge, the 1st defendant’s solicitors were present in court when the undertaking document was furnished to the court, so there is little room for argument that the undertaking was invalid or unauthorised[7]. 32.Mr Maurellet contended that 1st defendant agrees “to be bound by the result of the arbitration”, this is just the award and there is no clear reference to the factual findings in the arbitration binding on the 1st defendant. We do not consider it reasonably arguable that the undertaking is deficient. In agreeing to be bound by the result of the arbitration, the purport of the undertaking is sufficiently clear. 33.As for the contentions that the 1st defendant did not undertake to refrain from raising defences not put forward by the 2nd defendant in the arbitration and there was no undertaking of the 1st defendant to pay interest and costs of the arbitration, all these are of little or no substance. The stay is in relation to the plaintiff’s claims against the 1st defendant under the bond, and this entails the resolution of the two underlying issues required to be established to give rise to the 1st defendant’s liability, which will be determined in the arbitration. The 1st defendant has agreed to be bound by the result of the arbitration. It is unnecessary for the 1st defendant to further undertake it would refrain from raising defences not put forward by the 2nd defendant in the arbitration. As for interest and costs of the arbitration, we agree with Mr Clayton SC that the 1st defendant is not required to pay such amounts under the bond, as clause 2 provides it is only to “satisfy and discharge the damages sustained by the Employer thereby as certified by the said Architect”. 34.Nor do we think it would be appropriate to allow the arbitration and the court proceedings to proceed in tandem, as argued by Mr Maurellet. The judge had apparently considered this and rejected it for the reasons given in §6 of the Leave Decision, with which we agree. And in the event that the issues giving rise to liability of the 1st defendant were found against the plaintiff in the arbitration, the duplicated costs incurred in the court proceedings (if they were ongoing) would be completely wasted. 35.We are not persuaded that the high threshold for appellate intervention in a case management decision is met in this instance. It has not been shown there is more than just an arguable case that the judge has gone clearly wrong in granting a case management stay, or that she has erred in law or in principle, or has failed to take into account any relevant consideration. 36.We do not think there is some other reason in the interests of justice why the intended appeal should be heard. The judge granted a case management stay in the particular circumstances of this case. As rightly submitted by Mr Clayton, no appellate guidance is desirable or would be in the interests of justice because the inherent flexibility of a case management stay already allows for each case to be considered on its own facts and circumstances and a stay be directed as appropriate. Orders 37.For all the above reasons, we refuse to give leave to appeal and dismiss the plaintiff’s summons. We make a further order under Order 59 rule 2A(8) that no party may under rule 2A(7) request the application be reconsidered at an oral hearing inter partes, as this application is entirely without merits. 38.Costs of the application should follow the event. We order the plaintiff to pay the 2nd defendant’s costs of this application. Having considered the 2nd defendant’s revised statement of costs for summary assessment, we allow costs to the 2nd defendant in the sum of $201,905. We wish to point out that costs for gathering information and drafting of statement of costs for summary assessment are generally not granted, see Practice Direction 14.3 §13. 39.The costs order and summary assessment are orders nisi. They will be made absolute if there is no application for variation within 14 days of the handing down of this judgment.
Mr Jose Maurellet SC and Mr Brian Fan, instructed by Hogan Lovells for the Plaintiff (Applicant) Au & Associates, for the 1st Defendant Mr Peter Clayton SC instructed by Minter Ellison LLP, for the 2nd Defendant (Respondent) | |||||||||||||||||
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