Traffic Stream Infrastructure Co Ltd and Others v. Full Wisdom Holdings Ltd and Others

FAMV No. 15 of 2004

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION 

miscellaneous proceedings NO. 15 OF 2004 (civil)

(ON application for leave to APPEAL FROM
CACV No. 266 of 2003)

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Between:

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Appeal Committee: Mr Justice Bokhary PJ, Mr Justice Chan PJ and Mr Justice Ribeiro PJ

Date of Hearing and Decision: 24 September 2004

Date of Handing Down Reasons: 4 October 2004

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D E T E R M I N A T I O N

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Mr Justice Ribeiro PJ:

1.On 24 September 2004, the 5^th, 6^th and 7^th defendants applied for leave to appeal to the Court of Final Appeal out of time against the decision of the Court of Appeal (Ma CJHC, Le Pichon and Cheung JJA, CACV 266/2003; 16 June 2004) dismissing their appeal from the summary judgment granted in the plaintiffs’ favour by Chung J (HCA 1939/2002, 28 August 2003).  We dismissed the leave application with costs, stating that reasons would be handed down later.  Costs were not opposed.  Our reasons for refusing leave are as follows.

The underlying transactions

2.The first four defendants in the action are Hong Kong companies.  They have not taken part in the proceedings leading to this application.  I shall refer to them as “the corporate defendants”.  They are all wholly-owned subsidiaries of a British Virgin Islands company called Traffic Stream (BVI) Infrastructure Limited (“Traffic Stream”).  The 5^th and 6^th defendants were at the outset appointed as directors, and the 7^th defendant, as company secretary, of the corporate defendants. 

3.Financed by Traffic Stream, the corporate defendants entered into a series of joint venture contracts with certain Chinese entities (“the JV partners”) for the development and operation of toll roads on the Mainland. 

4.Traffic Stream raised funds to finance the toll road projects by issuing US$119 million worth of 14 1/4% Notes due in 2006.  Those Notes were placed through banks with various Noteholders.  This was done pursuant to an Indenture entered into by Traffic Stream on 6 May 1998 with the 4^th plaintiff (which I shall call “the Bank”) acting as Trustee for the Noteholders.

5.Under the Indenture, which is governed by New York law, Traffic Stream undertook to pay interest and to repay principal on the Notes.  As part of the security for those obligations, Traffic Stream and the applicants executed a Share Mortgage, also dated 6 May 1998, mortgaging to the Bank their shares in the corporate defendants. 

6.Certain matters were defined by the Indenture as events of default and, by clause 6.2 of the Share Mortgage, the Bank was entitled to exercise the rights and powers attaching to the mortgaged shares upon occurrence of any such events. 

Events of default and legal proceedings

7.It is common ground that certain events of default occurred in 1999.  This led to federal court proceedings in New York by the Bank against Traffic Stream.  The defendants sought to raise a defence of impossibility, arguing that a policy change by the Mainland government had caused the JV partners to default in making payments to the corporate defendants, thus making it impossible for Traffic Stream to perform its obligations under the Indenture.  That defence was rejected and, after considerable litigation in the US courts, summary judgment was entered against Traffic Stream.  

8.Relying on clauses in the Share Mortgage, the Bank appointed the other three plaintiffs as directors of the corporate defendants and, on 14 May 2002, they resolved to remove the 7^th defendant as secretary.  However, the applicants refused to acknowledge those plaintiffs as directors and refused to recognize the resolutions they had passed. 

9.This led to the present action against the defendants in which the plaintiffs seek declarations regarding the validity of the first three plaintiffs’ appointment as directors and of the resolutions passed by them.  The plaintiffs also claim delivery up of the corporate defendants’ books, statutory records and other property. 

10.The plaintiffs applied for summary judgment.  The applicants sought to rely on the “impossibility” defence which had failed in the US courts.  They also raised new defences involving illegality and mistake based on a Notice issued by the State Council of the PRC on 10 September 2002.

11.Chung J granted summary judgment, holding that the parties were bound by the US courts’ rejection of the impossibility defence and that the defences of illegality and mistake were unarguable, being based on evidence which was not credible and being in any event irrelevant to the plaintiffs’ cause of action and the relief sought.

The Court of Appeal

12.On the applicants’ appeal to the Court of Appeal, impossibility was no longer relied on as a defence.  Their arguments focussed on mutual mistake.  It was contended that the parties had mutually been mistaken as to the legality of the underlying joint venture contracts which, it was argued, had been rendered void ab initio by the State Council Notice.  In support of this contention, they put forward a legal opinion given by an entity known as the “Beijing Global Law Office” and an opinion given by Mr Craig Albert, an American lawyer, characterizing the State Council Notice as “supervening Chinese law ... that held [the joint venture agreements] to be void at the outset.”

13.It is important to understand the context in which these questions of Chinese law were raised and adopted as the basis of the application for leave to appeal to the Court of Final Appeal.  The Bank’s powers to appoint directors to the boards of the corporate defendants derive from the Share Mortgage which is subject to New York law.  There is no question of any illegality in that instrument or in the Indenture and so no question of any illegality affecting the appointment of the first three plaintiffs thereunder.  Evidence of Chinese law was adduced with a view to establishing that the joint venture agreements had been made illegal and void from inception by the State Council Notice.  This, it was argued, showed that the Indenture and Share Mortgage were premised on the parties’ mutual mistake regarding the legality of those joint venture contracts, vitiating those two instruments and invalidating the plaintiffs’ appointments as directors thereunder.

14.Section 501(11)(c) of the Indenture has an important bearing on this argument.  That clause defines as an event of default a situation where “any of the Joint Venture Contracts becomes wholly or partially illegal, invalid or unenforceable ......”.  This potentially negatives any mutual mistake since it shows that the possibility of the joint venture contracts becoming illegal was foreseen by the parties and had been expressly provided for.  The applicants, however, contended that the Beijing opinion showed that the clause 501(11)(c) was not engaged and could not be said to negative a mutual mistake since the contracts were, as a matter of Chinese law, void from their inception and had not “become” illegal or invalid as contemplated by that clause. 

15.The Court of Appeal rejected that argument and affirmed the summary judgment, holding that the mutual mistake defence was not arguable.  The evidence of PRC law as to the joint venture contracts being void from their inception was found to be unsatisfactory, involving no more than a bare conclusion.  It lacked analysis or explanation and was given no weight.  Le Pichon JA (with whom the other members of the court agreed) put it thus :

“[While the Beijing legal opinion] sought to summarize the effect of PRC administrative and contract law, it is unclear if the writer ever considered the underlying Joint Venture Contracts themselves. In studying the validity of any opinion based on foreign law, the court does not simply accept any stated conclusions as being correct, even where there may be no legal opinion contradicting it. The court is entitled to (and indeed must) look at the basis of the legal reasoning as well as the terms of the State Council Notice in determining what weight, if any, should be attached to the Opinion. It is to be noted that there was no mention of any distinction between profitable and loss making joint ventures or of restitution and there was no attempt to address the 'prospective' nature of Part III of the State Council Notice. The Opinion was singularly lacking in legal analysis. In these circumstances, as a matter of principle, it would be wrong to attach any weight to it.”

16.As Mr Albert’s opinion was found to consist of no more than an expression of his own view as to the weight of the Beijing opinion and not to take the applicants’ defence any further. 

17.The Court of Appeal therefore concluded that the Beijing opinion did not supply an acceptable evidential basis for neutralizing the effects of clause 501(11)(c).  Accordingly, it held that the mutual mistake defence was not arguable and sustained the summary judgment.

18.One other aspect of the Court of Appeal’s judgment (to which we will return) must be noted.  In paragraph 26 of her Ladyship’s judgment, Le Pichon JA stated:

“Much reliance was ...... placed on the use of the word ‘becomes’ in section 501(11)(c). But it was accepted by Mr Chua that prior to the State Council Notice, the underlying contracts were legal and it was only the publication of that Notice that caused them to 'become' illegal.  In those circumstances, it seems to be unarguable that section 501 and in particular, subsection (11)(C) did not apply.”

19.The Court of Appeal refused leave to appeal, holding that no question of great general or public importance arose and also that there had been substantial and inexcusable delay.

The present application for leave to appeal

20.The applicants submitted that the following questions of great general or public importance arise on the appeal and ought to be referred to the Court of Final Appeal for decision, namely, questions as to :

(a)  The correct approach of the Hong Kong courts in determining a summary judgment application involving questions or issues of foreign law, when there is no contradicting evidence on foreign law adduced by the other party.

(b)    In particular, when the expert evidence on foreign law adduced by one party is not challenged by contrary evidence from the opposing party, whether the Hong Kong court is right to attempt to analyze the expert evidence on foreign law itself using the court’s own approach, without expert assistance as to the proper foreign approach or legal reasoning process.

21.The court’s approach to assessing uncontradicted expert evidence of foreign law is well established.  As Ma CJHC pointed out when refusing leave, a good summary is provided in Dicey & Morris on The Conflict of Laws, 13th edition at paragraph 9-016 as follows (leaving out the numerous cited authorities):

“If the evidence of the expert witness as to the effect of the sources quoted by him is uncontradicted, ‘it has been repeatedly said that the court should be reluctant to reject it,’ and it has been held that where each party’s expert witness agrees on the meaning and effect of the foreign law, the court is not entitled to reject such agreed evidence, at least on the basis of its own research into foreign law.  But while the court will normally accept such evidence it will not do so if it is ‘obviously false,’ ‘obscure,’ ‘extravagant,’ or ‘patently absurd,’ or if ‘he never applied his mind to the real point of law’, or if ‘the matters stated by [the expert] did not support his conclusion according to any stated or implied process of reasoning’; or if the relevant foreign court would not employ the reasoning of the expert even if it agreed with the conclusion.  In such cases the court may reject the evidence and examine the foreign sources to form its own conclusion as to their effect.  Similarly, the court may reject an expert’s opinion as to the meaning of a foreign statute if it is inconsistent with the text or the English translation and is not justified by reference to any special rule of construction of the foreign law.  It should, however, be noted in this connection that quite simple words may well be terms of art in a foreign statute.”

This approach has also generally been adopted in Hong Kong: see The "Griesheim" [1983] 1 HKC 251; [1984] HKC 416; The "Adhiguna Meranti" [1986] HKLR 487; and Korea Data Systems, Co Ltd v Jay Tien Chiang [2001] 3 HKC 239.

22.Plainly, if the circumstances so warrant, the court is entitled to reject as unsatisfactory, uncontradicted evidence of foreign law.  The consequence of such a rejection depends on the context.  Where the rejected evidence is put forward to resist an application for summary judgment, the basis of any defence reliant upon that evidence falls away.  The courts below were therefore perfectly entitled to reject the evidence tendered on the grounds stated by Le Pichon JA. 

23.There is another reason why reliance on the Beijing opinion does not enable the applicants to escape the implications of clause 501(11)(c) adverse to their alleged mutual mistake defence.  The joint venture contracts were entered into before the State Council Notice was promulgated in 2002.  As recorded at paragraph 26 of Le Pichon JA’s judgment cited above, leading counsel appearing for the applicants in the Court of Appeal (not Mr Jat Sew-Tong SC who appeared before the Appeal Committee) conceded that the contracts could only have “become” illegal after issuance of the Notice in 2002 and so were not void at the time of their inception.  That is a concession that Mr Jat was unable to avoid.  It follows that the outcome of the debate as to the effect of the Notice on the joint venture contracts under Chinese law ultimately does not matter.  Whatever the effect of the Notice after its promulgation might be, it is conceded that prior to its promulgation, the joint venture contracts were valid and that only subsequently, if at all, they “became” void, thus engaging clause 501(11)(c) and making the mutual mistake defence untenable.

24.In the circumstances, no question of great general or public importance arises.  The formulated questions are at best academic and no independent reason exists for this matter to be placed before the Court. 

Mr Jat Sew-Tong SC and Mr Stanley C.K. Siu (instructed by Messrs T.C. Lau & Co.) for the applicants

Ms Yvonne Cheng (instructed by Messrs Coudert Brothers) for the respondents