Dla Piper Hong Kong (A Firm) v. China Property Development (Holdings) Ltd and Another

HCMP 2377/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2377 OF 2008

----------------------

----------------------

---------------------

Before:  Hon Fung J in Chambers

Date of Hearing:  16-17 April 2009

Date of Decision:  26 May 2009

----------------------

D E C I S I O N

----------------------

1.There are 3 applications before me:

(1) The Applicant’s (“DLA Piper”) Originating Summons for interpleader relief in respect of the stakeheld sum of US$6,400,182.75 plus interest;

(2) The 2^nd Claimant’s (“Best China”) summons for stay of all proceedings in the action for reference to arbitration;

(3) Best China’s amendment summons for stay of all the issues between itself and the 1^st Claimant (“China Property”) for arbitration in the event that interpleader relief is granted.

2.The amendment in (3) above was allowed in terms.

3.China Property was the seller and the Best China was the purchaser under a Sale and Purchase Agreement dated 16 November 1997 (“SP Agreement”) for the entire share capital of World Lexus Pacific Ltd, which held through its subsidiary BPP the residential development of Richmond Park in Beijing.   Best China’s parent company, Jade Bird, was also a party to the SP Agreement, acting as guarantor to Best China’s obligation.  The purchase price was US$62,716,216. 

4.DLA Piper was the former solicitor acting for China Property in the sale.

5.By an Escrow Agreement dated also 16 November 1997, China Property and Best China jointly appointed DLA Piper as stakeholder of the consideration.  DLA Piper is now holding 10% of the consideration.

6.The relevant terms of the SP Agreement are:

“1.1   Definitions

‘Disclosure’ means complete, accurate and fair disclosure to [Best China] with sufficient clarity and details to enable [Best China] to ascertain clearly and accurately the nature, scope and effect of the disclosed matter.

‘Escrow Account’ means the interest bearing bank account set up in the name of [DLA Piper], details of which are set out in the [Escrow Agreement].

‘Escrow Agreement’ means the Escrow Agreement to be signed by [China Property] and [Best China] on the same day as this agreement.  The Escrow Agreement appoints China Property’s solicitors to hold, as stakeholder, the relevant Consideration according to the terms and conditions set out in the Escrow Agreement.

‘Phase I Contingent Liabilities’ means all liabilities incurred by [World Lexus] and BPP outside their ordinary course of business relating to the Phase I Project on or before the Completion Date, which have not been disclosed on or before the Completion date (and such liabilities have accrued prior to the Completion date).

‘Phase I Project’ means [certain blocks] which have been completed and [certain blocks] which are still under construction]. 

‘Vendor’s Guarantee Period’ means the 1 year period after the signing of this Agreement.

3.  Relevant Consideration 

3.1    As consideration payable to [China Property] for the sale of the shares, [Best China] shall in accordance with clause 3.3 pay to [China Property] the Relevant Consideration and fulfils its undertakings as required under this Agreement.  The Relevant Consideration shall be the equivalent in US$ a sum of RMB464,100,000 …

3.2    …

3.3    The Relevant Consideration shall be paid in accordance with the following method:

3.3.1    Subject to satisfactory result of China Property’s due diligence exercise under clause 4.1.5 and satisfaction of other conditions precedent, [Best China] shall, within 30 days after signing this Agreement, deposit all the relevant Consideration into the Escrow Account;

3.3.2    At the time of completion, [DLA Piper] shall transfer 90% of the Relevant Consideration to China Property, and the remaining 10% of the Relevant Consideration shall remain in the custody of [DLA Piper] to stand as guarantee monies in relation to [China Property’s] guarantee for Phase I Contingent Liability and/or Phase I Contingent Tax Liability; and

3.3.3    On the first business day after the expiry of [China Property’s] Guarantee Period, [DLA Piper] shall transfer a sum, which equals to the amount then remaining in the Escrow Account after deducting any amount representing the Phase I Contingent Liabilities … that have accrued and materialized (assuming this to be a positive figure) to China Property.

3.4    All parties agree that China Property’s guarantee in relation to Phase I Contingent Liabilities … shall not exceed a maximum amount which equals to 10% of the Relevant Consideration.

3.5    [China Property’s] Guarantee Period for Phase I Contingent Liabilities … shall be one year.

3.6    [Best China] shall, at the time when any Phase I Contingent Liabilities … accrue, or at the time when BPP becomes aware of any Phase I Contingent Liabilities …, provide all relevant information, documents and the accrued amount relating to such liabilities, to [China Property] as soon as possible.  If there is no dispute by [China Property] in relation to the alleged Phase I Contingent Liabilities …, [China Property] and [Best China] shall, on or before the expiry of [China Property]’s Guarantee Period, issue a notice to [DLA Piper] signed by both parties, stating the relevant amount of Phase I Contingent Liabilities … as the basis of making deduction under clause 3.3.3.  If [China Property] does not agree with the amount for the alleged Phase I Contingent Liabilities …, [Best China] shall, on or prior to the expiry of [China Property’s] Guarantee Period, send an audited notification to [China Property] and [DLA Piper], prepared by one of the big four international accountancy firms stating the amount of Phase I Contingent Liabilities … as the basis of making deduction under clause 3.3.3.”

7.For the present purpose, the notice to be signed by China Property and Best China is called the “Joint Notice”, and the audited notice to be issued by the accountant is called the “Accountant Notice”.

“7. Relevant Warranties

7.1   [China Property] gives to [Best China] all the warranties set out in Appendix 3. The information warranted is, to [China Property's] knowledge, true, accurate and not misleading in all material aspects.

8.  Limitation of the liabilities of [China Property]  

8.1   The aggregate liabilities of [China Property] for all claims made under this Agreement shall not exceed RMB464,100,000.

8.2   Subject to clause 8.1, [Best China] shall not under any circumstance be entitled to claim any damages in respect of the Relevant Warranties, except where the amount of a particular claim exceeds RMB1,000,000.

8.3   If the event or circumstance causing the breach of the Relevant Warranties has already been disclosed, then [China Property] shall not be liable in any way for any claim under the Relevant Warranties.

8.4   Subject to clause 8.5, [Best China] shall not make any claim against [China Property] for any breach of the Relevant Warranties or for any indemnity conferred by this agreement unless [Best China] shall have issued to [China Property] a notice in writing (with reasonable details) in respect of such claim within 1 year of the date of signing of this agreement setting out the matters giving rise to the breach of contract or claim, the nature of the breach of contract or claim and the amount of the claim (setting out in detail [Best China's] calculation of the loss estimated to have been thereby suffered by [Best China], [World Lexus] or BPP.

8.5   Notwithstanding clause 8.4, [China Property]'s liability for any claim in respect of which notice has been given shall absolutely cease (if the same has not already been satisfied, settled or withdrawn) if legal proceedings in relation to such claim have not been commenced within six (6) months after the date of issue of the notice under clause 8.4. For this purpose, legal proceedings shall not be considered to have been commenced unless the documents in respect thereof have been duly issued and effectively served upon [China Property].”

8.Cl. 23 of the SP Agreement contains a choice of Hong Kong law clause, and an arbitration clause for any disputes arising from or relating to the agreement.

9.The Escrow Agreement was signed by China Property and Best China and DLA Piper.  The relevant terms are:

“This letter set out the stakeholding arrangement for the Relevant Consideration received from [Best China] (“the Purchaser”) under the [SP Agreement].  Subject to other stipulation in the context, the definitions in the [SP Agreement] shall have the same meaning in this letter.

1.  We hereby instruct your firm:

1.1   to hold the monies in the escrow Account from time to time, including all accrued interest, but excluding any sums charged by the bank for fees and charges for the Escrow Account (the ‘Funds’) according to our joint instructions; and

1.2   to transfer or deal with the Funds only in accordance with the followings clauses of this letter.

4.  Upon your firm receiving the original of the notice referred top in clause 3.6 of the [SP Agreement], your firm shall as soon as possible release the amount stated in the notice or the Funds (whichever is less) (“the Deducted Amount”) from the Escrow Account to [Best China’s] account.

6.  Your firm shall, on the 1^st business day after the expiry of [China Property’s ] Guarantee Period, pay the Funds (if at the time the original notice under clause 3.6 of the [SP Agreement] has been received,  but your firm has not released the Deducted Amount in accordance with clause 4 above, then deduction shall be made of the Deducted Amount first) to [China Property’s] account.

7.  Your firm shall not be required to undertake any verification but shall rely on the notice or documents provided to your firm by either of us pursuant to clauses 4 or 5.  For the avoidance of doubt, you firm shall not be required to verify the audited notification or the Funds is correctly calculated or payable under the [SP Agreement].

14.    The instruction contained in this letter are irrevocable and remain in force until the whole of the Funds have been disposed of in accordance with the terms of this letter.

(Penultimate paragraph)

This letter should be governed and interpreted by the laws of Hong Kong and the Courts of Hong Kong shall have non-exclusive jurisdiction over all disputes arising from or in connection with this letter.”

10.Best China has raised claims of Phase I Contingent Liabilities, but China Property has not signed any Joint Notice.  Best China has not issued the Accountant Notice either.

11.On 11 September 2008, Best China sent an e-mail to China Property on the subject of undisclosed accrued liabilities by World Lexus and asked for China Property’s signature on the draft Joint Notice.

12.The e-mail referred to a meeting between representatives of Jade Bird/Best China and China Property on 31 July 2008.  There is now dispute as to what has been discussed and/or agreed in this meeting.

13.China Property sought advice from DLA Piper on whether it had any obligation to sign the documents.  DLA Piper advised that provided the relevant information had been disclosed to Jade Bird before the SP Agreement was signed, China Property was not obliged to sign the documents.  DLA Piper asked China Property to double check the position.

14.By a letter dated 10 November 2008 sent by Messrs. Arculli Fong & Ng (“AFN”), solicitors for Best China, to DLA Piper (“1^st AFN letter”), AFN listed out 7 items of accrued Phase I Contingent Liabilities:

(1)    Undisclosed contracts by BPP with 300 contractors amounting to RMB 16,630,150.71;

(2)    Undisclosed audit fees for World Lexus in the sum of HK$300,000;

(3) to (6)   Undisclosed loans due from World Lexus to various entities;

(7)    Undisclosed management agreement dated 30 September 2006 between China Property and World Lexus with possible liability for management fee by World Lexus to China Property.

15.AFN requested China Property to sign within 3 days the following documents:

(1) Draft Joint Notice for deduction of RMB 16,630,150.71and HK$300,000 from the stakeheld sum;

(2) Draft deed of assignment for China Property (and various associated creditors) assign the debts owed to them by World Lexus to Best China,

(3) Draft termination agreement of the management contract between World Lexus and China Property. 

16.The letter stated that if China Property unreasonably refused or delay in signing the notices, causing Best China unable to issue the Accountant’s Notice on or before the expiry of the Guarantee Period, Best China would reserve all rights of recourse against China Property, and would not consent to DLA Piper (as stakeholder) to release any sum remaining in the Escrow Account under clause 3.3.3 of the SP Agreement or under the Escrow Agreement.

17.By a letter dated 15 November 2008 sent by DLA Piper to AFN, DLA Piper stated they were instructed to respond that clearly the allegations and claims are without basis, and in their view, cannot be substantiated based on information and documents provided, and China Property was not obliged to sign the loan assignment or service termination, and China Property vigorously denied that it had agreed to sign those documents (para. 1.10).  Regarding release of the escrow money, DLA Piper drew to the attention of AFN the clear provisions in clauses 4 and 6 of the Escrow Agreement (para. 1.11).

18.By a letter dated 17 November 2008 sent by AFN to DLA Piper (“2^nd AFN letter”), AFN reiterated their earlier position, and stated if DLA Piper would release the remaining sum in the escrow Account on its own accord, Best China would reserve all rights to claim compensation against them.

Relevant principles

19.O. 17, rr.1 and 5 of the Rules of the High Court (Cap. 4A) provides that:

“1.    Entitlement to relief by way of interpleader 

(1) Where —

(a) a person is under a liability in respect of a debt or in respect of any money, goods or chattels and he is, or expects to be, sued for or in respect of that debt or money or those goods or chattels by two or more persons making adverse claims thereto, or

(b) … [Provision relating to bailiffs]

the person under liability as mentioned in sub-paragraph (a), or (subject to rule 2) the bailiff, may apply to the Court for relief by way of interpleader.

5.  Powers of Court hearing summons

(1) Where on the hearing of a summons under this Order all the persons by whom adverse claims to the subject-matter in dispute (hereafter in this Order referred to as “the claimants”) appear, the Court may order-

(a) that any claimant be made a defendant in any action pending with respect to the subject-matter in dispute in substitution for or in addition to the applicant for relief under this Order, or

(b) that an issue between the claimants be stated and tried and may direct which of the claimants is to be plaintiff and which defendant.

(2) Where-

(a) the applicant on a summons under this Order is a bailiff, or

(b) all the claimants consent or any of them so requests, or

(c) the question at issue between the claimants is a question of law and the facts are not in dispute,

the Court may summarily determine the question at issue between the claimants and make an order accordingly on such terms as may be just.”

20.The principles of law relating to interpleader relief are set out in my judgment in China Dragon International Ltd v Pang Hong [2007] 2 HKLRD 655 at 663D-E:

(1) Where two or more persons claim the same thing or fund, the holder of the thing or fund does not claim -any interest in the property, and not knowing to which of the claimants he ought to deliver the property, and he is sued or fears that he may be sued by some of them, he may apply for interpleader relief against the claimants.

(2) The relief is discretionary and it will not be granted unless there appears to be some real foundation that the applicant may be sued.

(3) The applicant does not in any manner collude with any claimant, or has not voluntarily put himself into the situation from which he calls on the court to extricate him.

(4) He is ready to bring into court, or to payer dispose of the subject matter of the action in such manner as the court may direct.

21.The test for para. (2) above is whether a prima facie case exists (see Chan King Sheen v KC Tsang & Co [2002] 3 HKC 209 (CA) at 221I).

22.The test is whether each of the rival claimants has a prima facie case against the interpleading party, but not whether the adverse claimant has a claim against each other (see de La Rue v Henru, Peron & Stockwell Ltd  [1936] KB 164 per Greene LJ at 170-173, cited in my judgment in Tsun Fat Finance Co Ltd v Commissioner for Police [2002] 3 HKC 232 at 246).

23.In Staryork Investment Ltd v Cheung Chi Keung & Anor HCA 2176/03 (21 October 2003), Reyes J held that a person seeking to interplead should be “in a real position of impartiality between the parties” (p. 11N), and the exercise of Court’s discretionary jurisdiction “must be judicial so that, if the requisite criteria are demonstrated, an order will normally be made” (p. 10Q).

24.Where the issues between the claimants are questions of law and the facts are not in dispute, the Court may summarily determine the claims between claimants, otherwise the Court shall direct a trial of the matter (see O. 17, r. 5(2)(c), RHC; Fredericks & Pelhams Timber Buildings v Wilkins, Read [1971] 1 WLR 1197, 1201G-1202A per Sachs LJ).

25.As to stakeholder, Millet LJ (as he then was) set out the position from the authorities in Manzanilla Ltd v Corton Property and Investment Ltd & Ors CHANI 95/1014/B (CA) (unrep., 13 November 1996) at pp. 10-12:

“(1)   The relationship between the stakeholder and the depositors is contractual, not fiduciary. The money is not trust money; the stakeholder is not a trustee or agent; he is a principal who owes contractual obligations to the depositors: Potters v Loppert [1973] Ch 399, 406; Hastingwood Ltd v Saunders Bearman [1991] Ch 114, 123. The underlying relationship is that of debtor and creditor, and is closely analogous to the relationship between a banker and his customer.

(2) Until the specified event occurs, the stakeholder is entitled to retain the interest on the money. This is usually described as his reward for holding the money: see Harington v Haggart (1830), 1 B&Ad 577. This right may be excluded by special arrangement and was excluded in the present case.

(3) Until the event happens the stakeholder holds the money to the order of both depositors and is bound to pay it (strictly speaking an equivalent sum) to them or as they may jointly direct: Rockeagle v Alsop Wilkinson [1992] Ch. 47.

(4) Subject to the above, the stakeholder is bound to await the happening of the event and then to pay the money to one or other of the parties according to the event. The money is payable to the party entitled on demand, and if the stakeholder fails to pay in accordance with a proper demand he is liable for interest from the date of the demand: Lee v Munn (1817) 8 Taunt. 45; Gaby v Driver (1828) 2 Y&J 549.

(5) If the occurrence of the event is disputed, the stakeholder cannot safely pay either party, for if he mistakenly pays the party not entitled the payment will not discharge his liability to the other. In these circumstances he may (i) interplead and pay the money into Court; (ii) retain the money pending the resolution of the dispute; or (iii) take the risk of paying one party. The choice is entirely his.

(6) If he takes the second course, he may notify the parties that he is content to abide the outcome of the dispute. There is then no need to join him in any proceedings which are taken to resolve it. If he is not joined, the Court cannot order the money to be paid to the successful party. All it can do is to declare that the successful party is entitled to give a good receipt for the money: see Smith v Hamilton [1951] Ch 175.

(7) If the stakeholder is not content to abide the outcome of the proceedings, he may be joined in order to bind him. This was done in the present case, albeit on the application of the stakeholder.”

26.In Gribbon v Lutton & Anor [2001] EWCA Civ 1956; [2002] QB 902 (CA), Laddie J considered the question of whether Gribbon (vendor) was entitled to the deposit held by Lutton (solicitor), and said at 908D-909A:

“11.   The starting point in answering this question is a determination of the nature of the relationship between the stakeholder and the parties who have an interest in the deposit. Since this case relates to the proposed purchase of land, it is convenient to refer to the parties as the vendor, the purchaser and the stakeholder. It is important to bear in mind that in a normal case there exist two distinct contracts. The first is the contract between the vendor and purchaser which determines when and to whom the deposit will be paid. The second is the contract between the vendor and purchaser on the one hand and the stakeholder on the other. Since in the type of situation being considered here there are three parties, this latter contract has been referred to in the authorities as tripartite. The scope and purpose of the tripartite contract is very limited. It provides that the stakeholder shall keep the deposit pending a triggering event and then shall pay in response to that event. It is no part of the function of the tripartite agreement to create the triggering event. The matter can be put another way: the vendor/purchaser contract determines who is entitled to the deposit after the triggering event, the tripartite agreement provides that the stakeholder must deal with the deposit in accordance with the entitlement to it defined by the vendor/purchaser contract and, until the triggering event, he must retain it in accordance with the joint instructions of the vendor and purchaser. Therefore the tripartite contract does not create either the vendor's or purchaser's entitlement to the stake, but gives effect to the entitlement as between them which is determined by the vendor/purchaser contract. Although the two contracts may be entered into at the same time, that need not be so.

12.    Since the tripartite contract does not define entitlement between vendor and purchaser but responds to an entitlement determined elsewhere, what happens in a case where the deposit is paid by the purchaser to the stakeholder in advance of there being any enforceable contract between him and the vendor? Prima facie, since it is the purchaser's money and the vendor has no legal entitlement to it, the purchaser can demand its return to him at any time in advance of an enforceable vendor/purchaser contract being put in place. Thus, if there is an unenforceable promise by the purchaser to pay a sum of money to the vendor, the vendor acquires no legal entitlement to it and the fact that the sum may have been paid to a stakeholder does not create an entitlement to it. The stakeholder can and must respond to a demand for repayment by the purchaser. The tripartite agreement does not alter who is and who is not entitled to the deposit.”

27.In applications for a stay to arbitration, there are four questions which a Court must generally deal with:

(1) Is there an arbitration agreement between the parties;

(2) Is the clause in question capable of being performed;

(3) Is there in reality a dispute or difference between the parties;

(4) Is the dispute or difference between the parties within the ambit of the arbitration agreement.

(see Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Ors [2003] 1 HKC 418, 425D-426C).

28.And s. 7 of the Arbitration Ordinance (Cap. 341) provides that:

“Where relief by way of interpleader is granted and it appears to the Court that the claims in question are matters to which an arbitration agreement, to which the claimants are parties, applies, the Court may direct the issue between the claimants to be determined in accordance with the agreement.”

Applicant’s case

29.The Applicant’s case is that as no Joint Notice or Accountant Notice has been presented upon the expiry of the Guarantee Period, there is no triggering event to direct the stakeholder to pay the stakeheld sum.

30.Mr. Chan SC, for the Applicant, stated that the Applicant is neutral and impartial in the dispute between China Property and Best China, but is expectant of being sued.  The 1^st AFN letter alluded to the “prevention principle” in Kensland Realty Ltd v Whale View Investment Ltd & Anor [2001] 4 HKCFAR 381, in that once China Property was informed of the claims of Phase 1 Contingent Liabilities, prima facie it was under a implied duty to give an answer so as to allow Best China reasonable time to obtain the Accountant’s Notice, and if Best China failed to do so, it would be prevented from relying on the notice provision in the SP Agreement.

31.Although cl. 7 of the Escrow Agreement exempts DLA Piper from checking the details of the documents provided under cl. 4 or 5, the exemption from verifying compliance with the SP Agreement only extended to where a notice under cl. 4 was given.  Cl. 7 is not applicable as no notice has been presented.

China Property’s case

32.China Property’s case is that unless Best China could produce the Joint Notice or Accountant Notice, DLA Piper should release the Funds to them on the 1^st business day after the Guarantee Period.  Best China shall have no case, prima case or at all, against DLA Piper in acting in accordance with the Escrow Agreement.

33.Ms. Wong SC, for China Property, submitted that entitlement to interpleader relief is based upon the real foundation of the interpleading party’s expectation to be sued by two or more rival claimants.  The test is whether each of the claimants has a prima facie case against the interpleading party, not whether they have a claim against each other (see de La Rue case above).

34.Ms Wong submitted that the dicta in Manzanilla and Gribbon are not of general application but are limited to the situation where the stakeholder held the deposit on terms under the bipartite contract between the depositors and they have not entered into any specific tripartiteagreement with the stakeholder with express terms of how to deal with the stakeheld sum.

35.Here, the three parties have signed the Escrow Agreement, and upon proper construction, the Escrow Agreement is the only agreement regulating the stakeholding position, whereby Best China and China Property have given express joint instructions to DLP Piper to transfer and deal with the Funds only in accordance with the Escrow Agreement (cl. 1.2) until the whole of the Funds have been disposed of in accordance with the Escrow Agreement (cl. 14).

36.Cl. 1.2 of the Escrow Agreement provides that DLA Piper is to deal with the Funds “only in accordance” with clauses of the Escrow Agreement, hence there is no scope for any implied terms in the Escrow Agreement.

37.The references to the SP Agreement in the Escrow Agreement do not give Best China the licence to bind DLA Piper to the SP Agreement where DLP Piper was not a party.  Reference to cl. 3.3 of the SP Agreement in the preamble of the Escrow Agreement only explained the background of the stakeholding, and reference to cl. 3.6 of the SP Agreement in cl. 4 and 6 of the Escrow agreement identified the notices pursuant to which DLA Piper should make deductions from the Funds.

38.Cl. 6 of the Escrow Agreement is clear and unambiguous: on the 1^st business day after the expiry of the Guarantee Period, DLA Piper shall transfer the Funds to China Property unless:

(1) DLA Piper has received a notice under cl. 3.6 (i.e. Joint Notice or Accountant Notice);

(2) DLA Piper has not yet paid to Best China out of the Funds the amount of deduction set out in the notice;

in which event DLA Piper should pay to China Property the balance of the Funds less the deduction(s) stated in the notice.

39.The triggering event of payment of the Funds (without deduction) is the expiry of the Guarantee period, subject only to deduction stated in the Joint Notice or Accountant Notice.  There is no provision in the Escrow Agreement that DLA Piper could withhold the Funds merely upon notice of Best China’s intention to claim against China Property in respect of the Phase 1 Contingent Liabilities.  The plain reason for the absence of provision for any other event is simply that the parties did not intend any such other event to prevent release of the Funds by DLA Piper to China Property.

40.Cl. 7 provides that DLA Piper shall not verify the cl. 3.6 notice against liability under the SP Agreement.  A fortiori, where no cl. 3.6 notice has been given, there is no need to look to the SP Agreement either.

41.The above interpretation accords with the commercial sense of resolving the issue quickly and simply by the Accountant Notice.

42.Even if one were to look at the SP Agreement, the result would have been the same: Best China could not claim against China Property if they had not presented the Accountant Notice within the Guarantee Period.

43.Ms Wong also submitted that the Applicant has argued overzealously for Best China to have in effect sided with them, so as to lose impartiality and the entitlement to interpleader relief.

Best China’s case

44.Best China’s case is that entitlement to the Funds is determined under the bipartite agreement (i.e. SP Agreement) and the tripartite stakeholding agreement (i.e. Escrow Agreement) does not create entitlement to the Funds.  The Escrow Agreement only mandates DLA Piper to deal with the Funds in accordance with the SP Agreement, and it cannot override the entitlement under the SP Agreement.  The Joint Notice or Accountant Notice are mere conclusive evidential mechanism to quantify the amount of deductions, but not the exclusive mechanism to determine entitlement to the Funds.

45.Mr. Ng SC, for Best China, made it clear that he is not relying on the “prevention principle” against China Property.

46.Mr. Ng submitted the principles in Manzanilla and Gribbon are of general application.  In Manzanilla, although there was no separate written stakeholder agreement, the Court found there was a tripartite agreement as distinct from the bipartite agreement between the vendor and purchaser.  And in Gribbon, the parties entered into a tripartite agreement, but the vendor and purchaser failed to enter into the bipartite sale and purchase agreement.  Hence, according to Manzanilla per Millet LJ at p. 11 point (4), DLA Piper’s obligation is to pay the Funds to the party entitled.

47.On proper construction of the SP Agreement, China Property is only entitled to a sum equal to the Funds less deduction for any Phase I Contingent Liabilities which had accrued or materialized (see Cl. 3.3.3).

48.The Escrow Agreement should be construed in such a way as to be as consistent with cl. 3.3 of the SP Agreement as possible because:

(1) the Escrow Agreement was drafted on the basis of cl. 3.3 of the SP Agreement (see preamble of Escrow Agreement);

(2) the parties could not have intended that one party is entitled to the Funds under the SP Agreement, but DLA Piper shall pay the Funds to the other party;

(3) there is no evidence that the Escrow Agreement was intended to be a variation of the SP Agreement;

(4) cl. 1.2 of the Escrow Agreement cannot be read alone, and it does not preclude reading together with the SP Agreement.

49.Upon proper construction of the Escrow Agreement, cl 4 and 6 only deal with the scenario of DLA Piper having received a notice under cl. 3.6 of the SP Agreement.  In that case, DLA Piper shall pay China Property in accordance of the notice and is protected by the immunity under cl. 7 of the Escrow Agreement, but not otherwise.  What the Escrow Agreement has failed to cater for is the scenario where Phase I Liabilities have materialized and accrued but where no cl. 3.6 notice has been issued.

Discussion

50.The issue is whether the tripartite Escrow Agreement governs the stakeholding entirely and is to be construed alone, or whether it is subject to the bipartite SP Agreement.

51.It will be helpful to remember that a stakeholder is appointed jointly by the parties, and he shall act in accordance with joint instructions of the parties, whether given from time to time, or by standing instruction with regard to a pre-determined triggering event.  Otherwise, he should pay according to the entitlement of the parties under the law.

52.I shall first look at the Escrow Agreement, as there is the  contention that is a self contained agreement.

53.Ms Wong contended that DLA Piper should pay the Funds to China Property after the expiry of the Guarantee Period subject only to such deductions stated in the Joint Notice or Accountant Notice.

54.As I see it, cl. 1.1 of the Escrow Agreement directs DLA Piper to hold the Funds according to the joint instructions of China Property and Best China, and to transfer or deal with the Funds only in accordance with the following clauses.  The relevant clauses are cl. 4, 6 and 7.  Cl. 4 begins with “upon your firm receiving the original of the notice”, cl. 6 qualifies DLA Piper’s action with “if at the time the original notice under cl. 3.6 of the [SP Agreement] has been received”, and cl. 7 states that DLA Piper is not required to verify the notice and documents provided pursuant to cl. 4 and 5.  Although cl. 7 also contains the “For the avoidance of doubt” provision that DLA Piper is not required to verify the Accountant Notice or that the Funds is payable under the SP Agreement, it is an exemption from verification as opposed to a direction to payment without verification in the absence of the relevant notice.  Hence, I agree with Mr. Chan and Mr. Ng that cl. 4, 6 and 7 are not engaged and there is no provision of any triggering event in the absence of the Joint Notice or Accountant’s Notice.

55.As to the entitlement under the SP Agreement, I cannot and in any case in sufficiently seized with the evidence and arguments to deal it.

56.As to the so-called collusion between Best China and DLA Piper, there is one thing in assuming the interest of one of the claimants, and another in adopting similar views on the law, especially where the issue is one of applicability of interpleader relief as opposed to entitlement substantively.  I have no doubt there is no collusion.

Conclusion

57.In the premises, I grant the interpleader relief.  DLA Piper is at liberty to pay the stakeheld sum into Court.

58.As DLA Piper drops out of the case, the arbitration agreement China Property and Best China covering any dispute between them applies.  I grant the stay of the claims between the Claimants pending reference to arbitration under ss. 6 and 7 of the Arbitration Ordinance.

Costs

59.I shall await submissions on costs, if any.

60.Lastly, I thank counsel for their learned submissions.

Mr Anthony Chan, SC, instructed by Messrs DLA Piper Hong Kong, for the Applicant

Ms Lisa Wong, SC, instructed by Messrs Richards Butler, for the 1^st Claimant

Mr Peter Ng, SC & Ms Eva Sit, instructed by Messrs Arculli Fong & Ng, for the 2^nd Claimant