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

Read the full judgment text of CACV 142/2009 on BabelCite. This Court of Appeal judgment was delivered on 12 January 2010.

1. The applicant, DLA Piper Hong Kong (a firm) (“DLA”), is the stakeholder in a stakeholder agreement contained in a letter in Chinese dated 16 November 2007.  The parties to the stakeholder agreement are DLA as stakeholder and China Property Development (Holdings) Limited (“CPDH”) and Best China Holdings Limited (“Best China”) as the principals.

Cited by 7 cases · Cites 3 cases

Application to Court of Final Appeal for a stay of the court orders dismissed. Please refer to FAMP2/2010 dated 29 January 2010
Case No.CACV 142/2009[2010] 1 HKLRD 903
Court
Court of Appeal
Date12 Jan 2010
Judge
Case Document
100%Judiciary

CACV 142/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 142 OF 2009

(ON APPEAL FROM HCMP NO. 2377 OF 2008)

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  IN THE MATTER of Order 17, Rule 3 of the Rules of the High Court, Cap. 4
  and
  IN THE MATTER of an Application by DLA Piper Hong Kong (a firm) for interpleader reliefs against the claims of China Property Development (Holdings) Limited and Best China Holdings Limited for funds in the amount of USD6,400,182.75 plus interest accrued thereon stakeheld by the Applicant (the “Funds”)
  and
  IN THE MATTER of sections 6 and 7 of the Arbitration Ordinance, Cap. 341

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BETWEEN    
  DLA PIPER HONG KONG (a firm) Applicant
  and  
  CHINA PROPERTY DEVELOPMENT (HOLDINGS) LIMITED 1st Claimant
     BEST CHINA HOLDINGS LIMITED 2nd Claimant

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Before: Hon Tang VP and Cheung JA in Court

Date of Hearing: 12 January 2010

Date of Judgment: 12 January 2010

Date of Reasons for Judgment and Ruling on Costs: 19 January 2010

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REASONS FOR JUDGMENT
AND RULING ON COSTS

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Hon Tang VP:

1.The applicant, DLA Piper Hong Kong (a firm) (“DLA”), is the stakeholder in a stakeholder agreement contained in a letter in Chinese dated 16 November 2007.  The parties to the stakeholder agreement are DLA as stakeholder and China Property Development (Holdings) Limited (“CPDH”) and Best China Holdings Limited (“Best China”) as the principals. 

2.The background to stakeholder agreement is a Sale and Purchase Agreement in Chinese also dated 16 November 2007 (the “SPA”) made between CPDH as vendor and Best China as purchaser of the entire issued share capital of a Hong Kong company.  The consideration was the equivalent in US dollars of RMB 464,100,000.  The parties have provided the court with an agreed translation of certain clauses in the stakeholder agreement and SPA.

3.Under the SPA the consideration was payable as follows:

(English Translation)

“3. Relevant Consideration

3.1    As consideration payable to [CPDH] for the sale of the Shares, [Best China] shall in accordance with clause 3.3 pay to [CPDH] the Relevant Consideration and fulfil its undertakings as required under this Agreement. The Relevant Consideration shall be the equivalent in USD of a sum of RMB464,100,000 (RMB464,100,000) (as calculated in accordance with clause 3.2)

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

3.3.1 Subject to satisfactory result of [CPDH]'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] shall transfer 90% of the Relevant Consideration from the Escrow Account to [CPDH], and the remaining 10% of the Relevant Consideration shall remain in the custody of [DLA] to stand as guarantee monies in relation to [CPDH]'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 [CPDH]'s Guarantee Period, [DLA] 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 and Phase I Contingent Tax Liabilities that have accrued and materialised (assuming this to be a positive figure), to [CPDH].

3.4    All parties agree that [CPDH]'s guarantee in relation to Phase I Contingent Liabilities and Phase I Contingent Tax Liabilities shall not exceed a maximum amount which equals to 10% of the Relevant Consideration.

3.5    The [CPDH]'s Guarantee Period for Phase I Contingent Liabilities and Phase I Contingent Tax Liabilities shall be one year.

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

4.As a result of the SPA, the stakeholder agreement was made.  The stakeholder agreement recited that the consideration would be paid into an Escrow Account pursuant to clause 3.3 of the SPA.  The stakeholder agreement went on to require SPA:

(English translation)

“1.1   to hold the monies in the Escrow Account accruing 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 instruction; and

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

5.The other relevant terms which have been translated are:

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

6.  Your firm shall, on the first business day after the expiry of [CPDH]’s Guarantee Period, pay the Funds (if at the time the original of the notice mentioned in clause 3.6 of the [SPA] has been received, but your firm has not released the Amount of Deduction in accordance with Clause 4 above, then the Amount of Deduction shall be deducted first) to [CPDH]’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 [CPDH and Best China] pursuant to Clauses 4 or 5 of this letter. For the avoidance of doubt, your firm shall not be required to verify the audited notification or whether the Funds is correctly calculated or payable pursuant to the [SPA].”

6.It is common ground that the entire consideration, namely, the equivalent in USD of RMB 646,100,000 was paid into the Escrow Account in accordance with clause 3.3 of the SPA.  It is also common ground that 90% of the money paid-in has been paid out to CPDH on completion in accordance with clause 3.2 of the SPA.

7.These proceedings are concerned with the remaining 10% of the consideration and interest thereon (“the Funds”), which under clause 3.3.2 of the SPA:

“3.3.2   … shall remain in the custody of [DLA] to stand as guarantee monies in relation to [CPDH]'s guarantee for Phase I Contingent Liability and/or Phase I Contingent Tax Liability;”

8.There is a dispute between Best China and CPDL over the existence of such Phase I contingent liabilities and if they exist whether or not they had been disclosed.  Para. 23.2 of the SPA provides that all disputes arising out of the SPA should be referred to the Hong Kong International Arbitration Centre (“HKIAC”) for arbitration.

9.It is common ground that the DLA had not received any notice referred to in clause 3.6 of the SPA prior to the expiry of the guarantee period or at all.  It is common ground that the guarantee period expired on 16 November 2008.  It is CPDH’s case that it was entitled to be paid the funds on expiration of the guarantee period.

10.By letter dated 17 November 2008, Messrs. Arculli Fong & Ng (“AFN”), on behalf of Best China, threatened to sue DLA if DLA released the funds to CPDH.

11.On 26 November 2008, DLA issued an interpleader summons in HCMP 2377/2008 for an order that:

“(CPDH) and (Best China) appear and state the nature and particulars of the respective claims to the Funds, and maintain or relinquish the same, and abide by such order as may be made hereon, and for such other order as the Master may think fit to make as to the costs of such application;”

12.By an Inter-Partes Summons dated 30 January 2009, Best China applied for an order that the issues as to the CPDH and the Best China’s respective entitlement to the funds and whether the CPDH had acted in breach of the SPA be determined between the CPDH and the Best China by arbitration in accordance with clause 23 of the SPA.

13.Fung J, by his judgment of 26 May 2009, ordered that:

(1) DLA be granted interpleader relief in respect of the sum of US$6,400,182.75 plus interest accrued thereon.

(2) The claims between CPDH and Best China be stayed for reference to arbitration under sections 6 and 7 of the Arbitration Ordinance, Cap. 341.

14.On 9 June 2009, Fung J granted leave to appeal.

15.The learned judge said in para. 54 of his judgment:

“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.”

16.With respect, I agree with the learned judge that the relevant clauses are clauses 4, 6 and 7 of the stakeholder agreement.  However, I am unable to agree that clause 6 qualified DLA’s action with “if at the time of the original notice under cl 3.6 of the SPA has been received”.  Since it is common ground that no notice under clause 3.6 of the SPA had been received, the words in parenthesis in clause 6 should be ignored.  In other words, clause 6 for the present purpose should read:

“… your firm shall, on the first business stay after the expiry of (CPDH’s) Guarantee Period, pay the Funds to (CPDH) account”.

17.In my opinion, the stakeholder agreement provided for two triggering events.  One is the receipt of a clause 3.6 notice, the other is the expiration of the guarantee period.

18.Mr. Tommy Lo, who appeared for the Best China, submitted that the stakeholder agreement is not exhaustive.  He submitted that no payment should be made if on the expiry of the guarantee period, there was a dispute between CPLD and Best China over the Phase I contingent liabilities and Phase I contingent tax liabilities (“Phase I contingent liabilities”).  He also submitted that any such dispute should be resolved by arbitration pursuant to clause 23 of the SPA.

19.Mr Lo relied on clause 5 of the stakeholder agreement which unfortunately has not been translated.  Briefly stated, it provided that, in the event either CPDL or Best China should obtain a final determination by a court of competent jurisdiction that it was entitled to payment from the stakeheld amount, DLA should abide by that decision and pay the relevant party, the amount payable under that determination or the amount being stakeheld whichever is lower.  Mr Lo contended that clause 5 supports his contention that no payment under clause 6 should be made even after the expiry of the guarantee period if any dispute over the Phase I contingent liabilities remained outstanding. 

20.It is noted that clause 5 is not confined to a determination over Phase I contingent liabilities.  Nor has there been any such determination.  So it has no direct relevance.

21.Mr Lo submitted that it is an implied term of the stakeholder agreement that no payment should be made under clause 6 unless there was no outstanding dispute over Phase I contingent liabilities.  But I can see no basis for the implication of such a term.  It is not necessary to give the stakeholder agreement business efficacy.  Mr Lo also submitted that given the guarantee period of only one year, a dispute could not be resolved in time to prevent payment under clause 6.  That is not a reason for an implied term.  The parties could have agreed a longer guarantee period.  Indeed, it was open to them to agree explicitly that the funds should not be paid to CPDH even after the guarantee period except with the express agreement of Best China that there was no outstanding dispute.

22.Fung J has correctly stated the principles relating to interpleader relief.  He said:

“20.   ……

(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.The learned judge had also referred to the judgment of Millett LJ (as he then was) in Manzanilla Ltd v Corton Property and Investment Ltd & Ors CHANI 95/1014/B (CA) (unrep., 13 November 1996) and in para. 25 of the judgment cited the propositions regarding the position of a stakeholder which Millett LJ said emerged from the authorities.  Only the fourth of Lord Millett’s seven propositions is relevant, namely that:

“(4)   … 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.”

24.Sometimes the event could only be discovered by analysing the bilateral agreement between the two principals.  But this is not such a case, Clause 1.2 of the stakeholder agreement instructed DLA to transfer and deal with the Funds “only in accordance with the following clauses of this letter”.  Mr Lo did not dispute that a stakeholder agreement could be a self-contained agreement.  Indeed the judgment of Robert Walker LJ and Laddie J in Gribbon v Lutton & Anor [2002] QB 902 show that a stakeholder agreement may be enforceable even in the absence of a bilateral agreement between the principals. 

25.Here, the question is who was entitled to be paid the Funds under the stakeholder agreement?  On my interpretation of clause 6, upon the expiry of the guarantee period, the deposit should be paid to CPDH.  Best China has no claim (prima facie or at all) to the Funds under the stakeholder agreement.  This is a case where had the parties asked for a summary determination pursuant to O. 17 r. 5(2), I would have been prepared to say that under the stakeholder agreement, DLA was liable to pay the Funds to CPDH and that Best China has no claim to the Funds against DLA or CPDH under the stakeholder agreement.

26.CPDH invited the court to make an order dismissing the interpleader summons.  Neither DLA nor Best China contended otherwise.  Accordingly, we dismissed the interpleader summons.

27.Mr Lo submitted that we should in any event stay the matter for arbitration.  It is true that any dispute under the SPA should be referred to arbitration, but CPDH has not made a claim under the SPA.  Its claim against DLA was made under the stakeholder agreement which provides expressly in its penultimate paragraph that:

“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.”

28.It follows that I should also dismiss Best China’s summons for a stay for arbitration.

Costs

29.I turn to costs.

30.Mr Paul Shieh, SC, referred to clause to O. 17 r. 8 which provides:

“Subject to the foregoing rules of this Order, the Court may in or for the purposes of any interpleader proceedings make such order as to costs or any other matter as it thinks just.”

31.Mr Shieh compared the position of a stakeholder to a trustee and referred us to the judgment of Kekewich J in Re Buckton [1907] 2 Ch 406 where when dealing with cost of a trustee who has applied to the court for direction his lordship said at page 414:

“… I act on the principle that trustees are entitled to the fullest possible protection which the Court can give them, and that I must give them credit for not applying to the Court except under advice which, though it may appear to me unsound, must not be readily treated as unwise. …”

32.A stakeholder is not a trustee.  Its position is governed by the stakeholding contract.  I am of the view that Best China has no prima facie claim against DLA.  Whilst it was eminently sensible for DLA to seek the protection of the court by an interpleader summons, I believe between DLA and CPDH, costs should follow the event.

33.The real dispute is whether DLA should be indemnified by Best China in respect of any costs which it may be held liable to pay to CPDH. 

34.Mr Lo submitted that DLA should have ignored its claim.  I do not agree.  Best China must take the consequence of its unsuccessful claim.  I believe the appropriate order is that CPDH should have the costs of the interpleader summons and the appeal therefrom against both DLA and Best China.  Best China should indemnify DLA in respect of the costs which DLA has been ordered to pay the CPDH.  CPDH is to have the cost of the summons to stay for arbitration and the appeal therefrom against Best China.  I order accordingly.

Hon Cheung JA:

35.I agree.

(Robert Tang) (Peter Cheung)
Vice-President Justice of Appeal

Ms. Lisa K. Y. Wong, SC, instructed by Messrs Richards Butler, for the 1st Claimant/Appellant.

Mr. Paul Shieh, SC, instructed by Messrs DLA Piper Hong Kong, for the Applicant/1st Respondent.

Mr. Tommy Lo, instructed by Messrs King & Wood, for the 2nd Claimant/2nd Respondent.

Application to Court of Final Appeal for a stay of the court orders dismissed. Please refer to FAMP2/2010 dated 29 January 2010
Other Judgments in This Case

Further hearings and rulings under CACV 142/2009