The First National Bank of Chicago v. Carroway Enterprises Ltd and Others

HCA000148/1989

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H E A D N O T E

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Application for stay of proceedings on ground of forum non conveniens - action by American bank doing business here against local customer and Chinese guarantor - summary judgment obtained against customer earlier - guarantor's application for stay refused, it having failed to show that any other forum was as appropriate as, let alone more appropriate than, Hong Kong court for disposal of bank's claim.

Observations on, and illustration of, approach to :-

(i)    determining the proper law of a secondary obligation; and

(ii)    balancing the factors which point to one forum as opposed to another being the appropriate one.

1989, No. A148

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Bokhary, J. in Chambers

Date of hearing: December 18 and 19, 1989

Date of delivery of judgment: December 20, 1989

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J U D G M E N T

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1. This is an application for a stay of proceedings on the ground of forum non conveniens.

2. I will begin by identifying the parties, outlining the nature of the proceedings and noting the stage which they have reached.

3. The plaintiff is an American bank carrying on business in, among other places, Hong Kong. I will call it "the bank". Among the bank's customers in Hong Kong was the 1st Defendant, a company which was incorporated, and carried on business, here. I will call it "the customer".

4. It was on the strength of, among other security, guarantees given by the 2nd Defendant, a company incoporated in the People's Republic of China, that the bank lent money to the customer. I will call the 2nd Defendant "the guarantor". I need not say much about the 3rd Defendant, another Chinese company sued as a guarantor, because it has not been served.

5. The customer's indebtedness to the bank when the writ was issued on January 11, 1989, ran to US$15,931,056.60 with interest thereon accuring from December 30, 1988, at the daily rate of 2% per annum over the cost of funds. That is what the bank obtained summary judgment against the customer for on May 2, 1989. And that is what the bank continues to pursue the guarantor for - presumably because the customer is not good for that kind, or perhaps any kind, of money.

6. Service on the guarantor was by way of service out of jurisdiction under Order 11. The bank invoked items (c), (d)(i), d(iii) and (e) of rule 1(1) of that Order. In other words, the bank said four things - any of which would of itself provide a basis for seeking leave to effect service out of the jurisdiction. The first is that the guarantor is a proper party to the proceedings commenced against the customer who was served within the jurisdiction; the second is that the contracts of guarantee were made here; the third is that they are governed by our law; and the fourth is that they were breached here.

7. On January 30, 1989, the bank obtained leave from a Master to issue a concurrent writ and to serve a copy thereof out of the jurisdiction on the guarantor in Guangdong. This the bank duly did.

8. The guarantor's reaction was its Summons dated May 16, 1989. The Summons - quoting from it - seeks :-

"... an order pursuant to Order 12, rule 8 of the Rules of the Supreme Court declaring that this court has no jurisdiction over the 2nd defendant in respect of the subject matter of the claim or the relief or remedy sought in the action, and that the Order of Master Perrior dated the 30th day of January 1989, the Concurrent Writ of Summons issued pursuant thereto, the service thereof and all subsequent proceedings be set aside, and that this action be dismissed and that the Plaintiff do pay the 2nd defendant the costs of this action, including the costs of this application to be taxed, alternatively, in the event that this court should assume jurisdiction, for an order under the inherent jurisdiction of the court that all further proceedings in this action be stayed on the ground of forum non conveniens and that the Plaintiff do pay to the 2nd defendant the costs of this action, including the costs of this application to be taxed."

9. All that sounds rather complicated. But the application as advanced before me was not. Before coming to that, however, it would be convenient if I were to excise the dead wood by saying what the application does not - despite the rather wide terms of the Summons - involve. For reasons which I do not consider necessary to go into in detail, Mr Denis Chang Q.C. who leads for the guarantor, has made two concessions. The first is that even if the proper law of the contracts of guarantee is Hong Kong law there would still have been a basis for seeking leave to effect service out of the jurisdiction, so that the guarantor is unable to rely on any point of the sort characterised by Lord Diplock in Amin Rasheed Corp v. Kuwait Insurance [1984] 1 A.C. 50 at p. 59D as "jurisdiction" points. The second concession is that, for technical reasons, the guarantor is also unable to take what - against the letter E on the same page - Lord Diplock called the "discretion" point, being the one which arises by virtue of Order 11, rule 4(2) which provides that no leave to effect service out of the jurisdiction shall be granted "... unless it is made sufficiently to appear to the Court that the case is a proper one for ..." such service.

10. The guarantor's defence to the bank's claim against it under the contracts of guarantee is that it had no capacity to enter into those contracts. Why? Because, it is said, it had no power under its memorandum of association to provide guarantees and doing so was, accordingly, ultra vires conduct on its part. That - it is said on its behalf - is the position under the laws of the People's Republic of China. And - it is further said on its behalf - it does not matter for the purpose of this defence whether Chinese law or Hong Kong law is the proper law of the contracts of guarantee because the position is as summarised in rule 174 appearing at p. 1134 of the 11th edition of "Dicey & Morris, The Conflict of Laws", which rule reads:-

"(1) The capacity of a corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question.

(2) All matters concerning the constitution of a corporation are governed by the law of the place of incorporation."

At the conclusion of what was thought would be the final address of Mr Michael Thomas Q.C., who leads for the bank, Mr Chang went so far as to offer, on the guarantor's behalf, an undertaking which I noted in these terms:-

"Upon a stay of the proceedings on the ground of forum non conveniens, the guarantor undertakes to limit its defence to the point that it had no capacity to give the foreign exchange guarantees here in question, and accepts that if it had such capacity it would be liable to pay to the bank the sum and interest thereon claimed in these proceedings."

Mr Thomas then made certain observations on undertakings in cases such as these in general and on this undertaking in particular. One of the points which he made was that, given that the legal system in China is an inquisitorial one, the Chinese court before which the matter would come upon a stay might not regard it as proper to allow itself to be inhibited by an undertaking such as the one offered. The point appeared to Mr Chang to be sound; and, accordingly, he withdrew the offer.

11. Nevertheless, Mr Chang emphasises that the defence based on a want of capacity is the only defence which has been raised and that he has no instructions in regard to any other defence.

12. If it be right that only one issue would arise if the bank's claim fell to be determined in the Chinese courts and that that issue was whether or not the guarantor had the capacity to enter into the contracts of guarantee, there would be quite a lot to be said in favour of a stay. It is true that the Hong Kong courts could determine the point of Chinese law in question. But we would have to determine it as a question of fact after taking expert evidence. The Chinese courts, on the other hand, would determine the point as, of course, one of law.

13. On the question of a stay of proceedings on the ground of forum non conveniens, the basic principle is now well settled. It is as stated by Lord Goff of Chieveley in Spiliada Maritime Corp v. Cansulex Ltd [1987] 1 A.C. 460 where, at p. 476C, his Lordship said that such a stay would only be granted "... where the court is satisfied that there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of the action, i.e. in which the case may be tried more suitably for the interests of all the parties and the ends of justice."

14. Before dealing with Mr Chang's further arguments in support of a stay and Mr Thomas' arguments in opposition to such a course, I propose now to consider the proper law of the contracts of guarantee.

15. Here, Mr Chang concedes that the bank has made out what Mr Thomas contends is all that it has to make out in the present connection, namely, a good arguable case that Hong Kong law is the proper law of the contracts of guarantee. That, argues Mr Chang, is not good enough. What the bank has to show is, he says, that on the material now before the court the proper conclusion - for present purposes and subject to the possibility of a different conclusion being reached at a trial in Hong Kong if there is one here - is that Hong Kong law is the proper law of the contracts of guarantee. While denying that that is the correct test, Mr Thomas submits that the bank's case on the proper law passes even that test. I agree that it does. In fact, Mr Chang did not argue to the contrary at any great length, with any great force or - as it seemed to me - any great expectation of success. Nevertheless, I should - albeit with as much brevity as I can achieve - indicate why I think that the bank has passed the test suggested on behalf of the guarantor.

16. In the present case, no express choice of a proper law had been made by the parties. So what I have to do is to see if their intention in that regard can be inferred from the nature and terms of the contracts in question and the circumstances surrounding them, and to determine the proper law of such contracts on the basis of such an inferred intention if one can be gathered. If none can be, then I must decide which system of law is the one with which the transactions have the closest and most real connection, and hold that they are to be governed by that system.

17. It would seem that the bank deliberately refrained from seeking an express stipulation that Hong Kong law would govern the contracts of guarantee because it felt that an express stipulation of that kind might be more than a Chinese corporation would be prepared to accept. Even if - as the bank seems to suggest - such reluctance was grounded in considerations beyond commercial or forensic ones because appearances as opposed to substance came into the picture, it would nevertheless, in my judgment, make a determination of the proper law by reference to inferred intention a questionable one.

18. I therefore approach the issue by reference to connection. There are, in particular, three factors which point to the Hong Kong legal system as the one with which the contracts of guarantee have the closest and most real connection. There is, in my judgment, no countervailing factor or combination of countervailing factors capable of standing up to any one of those three factors on its own, let alone all three of them taken together.

19. The first factor involves the place of performance. That, in my view, is Hong Kong. Naturally, it was here that the customer had to make repayment; and "prompt" repayment by the customer "in accordance with" its contractual arrangement with the bank is what the guarantor guaranteed. The general rule here - and it is not suggested that the rule in China is otherwise - is that a party obliged to make payment must seek out the party entitled to receive it. It is here that the bank lent the money and plainly, therefore, it is here that it is entitled to repayment of it. No hard and fast rule can be laid down. But there is a tendency to regard the fact that payment under a contract is to be made in a particular place as a strong indication that the legal system of that place is the one with which the contract has the closest and most real connection. I cannot think of any better illustration of that tendency than the ones to be found in the speeches of Lord Radcliffe (at pp. 1058-1059) and Lord Morris of Borth-y-Gest (at pp. 1082-1083) in Tomkinson v. First Pennsylvania Banking [1961] A.C. 1007.

20. The second factor involves related transactions. It is conceded on behalf of the guarantor that the proper law of the contractual relationship between the bank and the customer is Hong Kong law. That does not mean that the guarantees of the customer's obligations under that relationship must be governed by the same law. But, in the normal way, the "most likely implication" - to use the expression employed by Bingham, J. (as he then was) in Broken Hill Proprietary v. Xenakis [1982] 2 Lloyd's Rep. 304 at p. 306 - is that a guarantee is governed by the same law as that which governs the primary obligation with which it is inter-related. That seems to me to be the position in the present case.

21. The third factor involves the legal terminology and language of the guarantees. They are in English and the terminology is - as far as I am able to judge - more in line with the system here than the one in China. The importance in the present context of legal terminology is, I think, nowhere better illustrated than in the speech of Lord Atkin in Rex v. International Trustee [1937] A.C. 500 in the course of which his Lordship considered it necessary to set out the whole of the documentation in question. In the present case, I do not consider it necessary, in the circumstances, to burden my judgment with a recitation of the guarantees. But I have, of course, read and re-read them with care.

22. Now, once I conclude - as I do for the purpose of this application - that Hong Kong law is the proper law of the contractual relationship between the bank and the guarantor, I am bound to recognize that a stay may well mean that a Chinese court would either ignore our law contrary to my conclusion or be burdened with having to determine a point, or a number of points, of Hong Kong law. In determining our law as it applies to the present matter, a Chinese court would face the same kind of difficulty which a court here would face in determining the relevant Chinese law.

23. Our rules of private international law would require us to consider Chinese law as it affects the guarantor's capacity to provide the guarantees. But - as what I have said eariler shows - such capacity may not be the only issue in the case. There may be other issues raising other points of law.

24. So far, therefore, the scales hang more or less evenly between the grant of a stay and a refusal thereof.

25. Accordingly, I move on to the other arguments and counter-arguments, which I must now must assess and balance.

26. In all the circumstances, I think that Mr Thomas is plainly right when he says that the Hong Kong legal system provides the bank's "natural forum" for the present claim in the sense that its selection was not in any way tainted by "forum-shopping", as it is sometimes called. On the other hand, Mr Chang is able to say - as he does - that the Hong Kong court's jurisdiction is "exorbitant" in the sense that the guarantor is a non-resident who has been brought before our courts by service out of the jurisdiction. I do not think that that renders the proceedings as constituted here in any way unnatural. But the fact that the jurisdiction being exercised over the guarantor in our courts is in the nature of what I believe is in the United States sometimes referred to as "long-arm" jurisdiction does go into the scales. I do not, however, think that it weighs as heavily in favour of the party seeking a stay as would the fact that service upon him - if an individual - had been possible merely because he happened to make a short visit to this territory.

27. Mr Chang has suggested that, in relation to the present case, litigating in China rather than in Hong Kong held better prospects in terms of discovery and the attendance of witnesses. It is for the guarantor to show that. On the material before me, I do not think that it has done so.

28. The bank has an office in Beijing. But it does not have one in Guangzhou, which is where the guarantor is resident and where it says the case should be heard. It seems to me that Hong Kong would be a more likely base for the bank than Beijing as far as litigation in Guangzhou is concerned. And I cannot see that the guarantor would be more incovenienced by having to use Guangzhou as a base for litigation in Hong Kong than the bank would be by having to use Hong Kong as a base for litigation in Guangzhou.

29. The bank, doing business here, lent money here to a local company which was obliged to repay the money here. Such repayment is what the guarantor guaranteed. The Hong Kong court appears to me to be the natural and appropriate forum for the trial of the bank's claim on the guarantees. I am not satisfied on the material before me that any other forum is as - let alone more - appropriate in the Spiliada, or any other, sense.

30. I reach this conclusion even without reference to Mr Thomas' point that the guarantor appears to have some corporate connection with the customer, or his related point that the money lent was, in the contemplation of all concerned, to be used to finance the customer's business with, among others, the guarantor. So I merely make this observation: If all that is so - and there seems to be some basis for thinking that such might well be the position - then the guarantor would have less justification than a wholly independent guarantor for bemoaning the fact that it has to face litigation in a place where it is not resident.

31. As far as costs are concerned, they are not very great in relation to the size of the claim. And the material suggesting that the expense of litigating in one place as opposed to the other is far from clear. So is the material relating to the recoverability of costs in one place as opposed to the other. I do not in any way base my decision on the matter of costs.

32. In the result, I dismiss the guarantor's application for a stay.

33. The bank has also taken a point based on considerations such as those dealt with by Lord Diplock in The Abidin Daver [1984] 1 A.C. 398 where, at p. 441B, his Lordship said:-

"The possibility cannot be excluded that there are still some countries in whose courts there is a risk that justice will not be obtained by a foreign litigant in particular kinds of suits whether for ideological or political reasons, or because of inexperience or inefficiency of the judiciary or excessive delay in the conduct of the business of the courts, or the unavailablity of appropriate remedies."

Serious criticism of the Chinese legal system was made on behalf of the bank. Such criticism was based on the views, as expressed on affidavit, by two lawyers with some experience of the Chinese legal system - principally practical in the case of one, a Canadian lawyer, and academic in the case of the other, an American lawyer. Their criticism was countered - on affidavit or affirmation - by Chinese and other lawyers.

34. Although I have arrived at a conclusion without having to resolve this point, it is necessary for me to say something on it for two reasons. First, it might arise in the event of an appeal. Secondly, it might be relevant to the question of costs.

35. I can be very brief. I resolve the point against the bank. Mr Thomas has recognized that the practitioner on whose views the bank had relied had - to quote Mr Thomas as best I can recall his actual words - "fired off criticism in all directions, sometimes off-target, and has had most of what he has said fairly countered". As far as the academic is concerned, Mr Thomas has relied on the fact that his view relies to a great extent upon statements by eminent Chinese lawyers to the effect that their legal system is not yet all that they hope it will be in the future. Despite the skill with which Mr Thomas developed the point, it fails. The criticism is far too wide-ranging and grave to sustain on the basis of the material before me. Indeed, I am inclined to think that if I had done that I would be displaying, in no small measure, the forensic xenophobia which the bank invites me to attribute to others.

36. Two things remain. The first is for me to acknowledge my very great indebtedness to counsel on both sides for their assistance. That I now do. The other is to hear counsel on costs and the directions for trial to be made since the bank's application for summary judgment, which is also before me, is not, I understand, being pursued.

[Argument thereon]

37. On these ancillary matters, I hope that I will be forgiven if I do not go into my reasons at any length.

38. What I do on the bank's summons for summary judgment is to make an order that the guarantor have unconditional leave to defend, and that the costs be in the cause, with a certificate for two counsel. That is what Mr Thomas has invited me to order. And Mr Benjamin Yu, for the 2nd Defendant, fearing that his participation in the argument thereon may prejudice his client's positon in relation to a stay should it wish to take the matter further, has chosen not to say anything on what Mr Thomas has suggested in regard to the summons for summary judgment.

39. As far as the guarantor's summons for a stay is concerned, I have of course dismissed that summons. Subject to one matter to which I will come in a moment, I award the costs - to be taxed on a party and party basis if not agreed - of the summons for a stay to the bank. Such costs will include the costs which Master Chan reserved on June 21, 1989.

40. As far as the costs dealt with by my brother Nazareth on September 11, 1989, is concerned, there is some dispute as to what he meant when he said that the bank should have the costs of the adjournment which he granted on that day "in any event".

41. Mr Thomas submits that by the use of that formula, the learned judge meant that the bank should have those costs whether it won or lost on the application for a stay itself. I will leave this problem to one side for the moment - for problem it is, since Mr Yu contends that what the learned judge meant when he said "in any event" is that taxation of the costs thrown away by the adjournment may not take place until the conclusion of the action.

42. The other matter of some controversy in regard to the costs of the summons for a stay pertains to those affidavits and affirmations directed principally, although not necessarily in the case of each of them exclusively, to the wide-ranging criticism of the Chinese legal system which I have found not to have been made out.

43. At the end of the day, all things considered, I do not propose to award the guarantor the costs which it incurred in obtaining the affidavits or affirmations which it filed on, inter alia, that aspect of the case. They also deal with matters on which the guarantor has not succeeded.

44. At the same time, however, I propose to exclude from the costs of the summons for a stay which I have awarded to the bank the costs of obtaining the affidavit of Mr Ansley dated September 6, 1989, the further affidavit of Mr Ansley dated September 14, 1989, and the affidavit of Prof. Edwards dated December 4, 1989.

45. I certainly certify the summons for a stay fit for two counsel.

46. That seems to have taken care of everything except the time for taxation and payment of the costs which I have awarded and those awarded by my brother Nazareth.

47. The guarantor's application was for nothing less than a stay of the proceedings as a whole. It has failed. I propose to order that the bank be at liberty to proceed forthwith to the taxation of its costs of the summons for a stay and to the recovery of those costs as taxed.

48. As far as the order of my brother Nazareth is concerned, there seems to be a genuine dispute as to what he intended. His order has not yet been drawn up. Much as I dislike having to do so, I propose to leave the parties to go before him for clarification of his order or, at least, their understanding of it. If his order as clarified is one to which either side takes strong objection so that they wish my brother Nazareth to consider altering it before it is drawn up, then that side must do as it sees fit in that regard. Whether, after the parties have been to see my brother Nazareth, the matter has to come back to me, I do not know. I certainly give them liberty to do so. The exercise of going back to my brother Nazareth may not be very cost - effective. But it does seem to me to be unavoidable save by some compromise which the parties may achieve. That is a matter for them. As far as I can tell, I have dealt with all outstanding ancillary matters; but if that is not so then no doubt counsel will tell me.

Representation:

Mr Michael Thomas Q.C. and Mr Joseph Fok (instructed by Baker & McKenzie) for the bank

Mr Denis Chang Q.C. and Mr Benjamin Yu (instructed by Kao, Lee & Yip) for the guarantor