China Chance Corporation Ltd v. Rockefeller Group International, Inc

HCA2165/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2165 OF 2009

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BETWEEN

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Before : Hon Suffiad J in Chambers

Date of Hearing : 3 May 2010

Date of Decision : 3 August 2010

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DECISION

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1.This is the defendant’s application by Summons dated 31 December 2009 (as amended on 29 April 2010) to set aside the leave granted by the Master to serve a Concurrent Writ of Summons out of the jurisdiction and for dismissal of the action.

2.Such leave was obtained upon the ex parte application of the plaintiff, supported by affidavit, on 28 October 2009 from the Master whereby the plaintiff was granted leave to issue a concurrent writ of summons against the defendant and to serve it on the defendant at its registered office in New York, United States of America.

Background

3.The plaintiff and the defendant entered into an agreement dated 13 December 2004 (“the Agreement”) whereby the defendant retained the plaintiff as a consultant to assist the defendant to acquire land use rights for a real estate project in Shanghai (“the Waitanyuan Project”) and for which the defendant agreed to pay the plaintiff a success fee.  It was an express term of the Agreement that New York law was to apply.

4.The plaintiff having performed the service required of it under the Agreement, tendered an invoice dated 23 December 2005 for services rendered.

5.The defendant disputed whether payment was due as well as the amount due to the plaintiff. As a result a series of correspondence followed between them arising from such dispute.

6.In one such correspondence from the plaintiff to the defendant dated 6 March 2006 the plaintiff stated that “we have an urgency to take care of our long overdue obligations to our other consultants and lobbyists”. These words gave rise to concern by the defendant as to whether their position had been placed in jeopardy in relation to the Foreign Corrupt Practices Act (“FCPA”), a penal statute in the United States which, generally speaking, prohibited corrupt payment to foreign officials, even if such corrupt payment was made through a third party. (The provisions of the FCPA will be gone into in greater detail when I come to the expert reports.)

7.Such concern by the defendant was seemingly raised by the defendant only in December 2006, almost one year after the plaintiff’s invoice when by letter dated 13 December 2006 the defendant stated that since the Agreement was governed by U.S. law, they would require the plaintiff to certify that it has acted and will continue to act in compliance with all applicable laws and to provide the defendant in writing the identities of the parties to which the plaintiff had or has, in the course of providing consulting services to the defendant in acquiring the land use rights and building ownership certificates for the Waitanyuan Project and the joint venture, any obligation to make any payment.

8.By letter dated 21 December 2006, the defendant sought assurance from the plaintiff that the services performed by the plaintiff in relation to the Agreement did not violate any U.S. or Hong Kong or Chinese law including the FCPA as any violation of that act would render the Agreement void and unenforceable as a matter of law. That was the first mention by the defendant of the FCPA.

9.In early January 2007 Messrs Deacons was instructed to act for the plaintiff in their demand for payment from the defendant.

10.By email dated 16 January 2007 and also by letter of 25 January 2007, the defendant requested the plaintiff to provide them with a chart listing out:

(1)  every entity to whom the plaintiff has paid money directly or indirectly in connection with the Agreement;

(2)  the title, company affiliation or government affiliation of such entity;

(3)  the services rendered by such entity;

(4)  the amounts paid to such entity;

as well as a sworn certificate from the plaintiff confirming that in connection with the services rendered by the plaintiff, it has not bribed any government person or agency.

11.By letter dated 31 January 2007, the plaintiff assured the defendant that “no money has ever been paid or will be paid or is obliged to be paid by China Chance to any consultants, lobbyists, or any person in connection with or relation to China Chance’s performance of services under the Letter of Agreement…”and that “China Chance would have, to say the least, moral obligations to the consultants and lobbyists in ensuring the smooth progress and a successful conclusion of investment in the project.”

12.By a further letter of the same date, the plaintiff reiterated that no money has ever been paid to consultants or lobbyists in connection with or related to the plaintiff’s performance of services under the Agreement.

13.The plaintiff also gave a signed declaration dated 31 January 2007 confirming that the plaintiff, in connection with its performance of services under the Agreement, has not bribed and will not bribe any government person or agency.

14.This however, did not appear to satisfy the defendant who by its reply by letter dated 31 January 2007 stated that the FCPA requires there be disclosure of these persons and entities and that was why the defendant has been repeatedly asking the plaintiff to provide full disclosure information.

15.By email dated 1 February 2007, Daisy Tong of Messrs Deacons wrote to the defendant again confirming that there were in fact no such lobbyists and consultants and there has never been and there was no monetary obligation of whatever nature owed by the plaintiff to any one.

16.By a follow up email of 2 February 2007 to the defendant, Daisy Tong stated that she was advised unequivocally by Richard Lo of the plaintiff that there were in fact no such lobbyists or consultants ever in existence and that when he instructed Deacons that “there were no payments ever made or liable to be made to lobbyists and consultants”, he actually meant that “there were no such payments made or obliged to make and there were no such lobbyists and consultants in existence.”

17.By letter dated 7 February 2007, the defendant again required the plaintiff to provide them with the information which they had requested previously, and, additionally, with also a detailed description of the services which the plaintiff had performed in connection with the Agreement.

18.The response from the plaintiff by letter dated 27 March 2007 once again confirmed that no persons or agents, including consultants and lobbyists, paid or unpaid, acted with or on behalf of the plaintiff in performing the Agreement or in connection with the Waitanyuan Project and that, accordingly, there have not been and will not be any payments to such persons or agents. Enclosed with that letter was a list of what was done by the plaintiff relating to the Waitanyuan Project.

19.In response, the defendant by letter dated 12 April 2007 stated that the defendant was prepared to make payment provided there has been full compliance with the FCPA, but that the plaintiff’s earlier letter of 27 March 2007 had reinforced recent contradictory statements of the plaintiff regarding it previously admitted “obligations to consultants and lobbyists”. Therefore the defendant insisted on receiving and evaluating the information previously requested by them before they can process the plaintiff’s request for payment.  The defendant further requested the plaintiff to confirm that no PRC official has had any ownership interest in the plaintiff or any of its shareholders or affiliated companies.

20.By letter dated 19 April 2007 the plaintiff once again confirmed that no persons or agents, including consultants and lobbyists, paid or unpaid, acted with or on behalf of the plaintiff in performing the Agreement or in connection with the Waitanyuan Project, and accordingly there have not been and will not be any payment to such persons or agents.  The plaintiff further confirmed that all their activities were in compliance with the FCPA and that no PRC official has had any ownership interest in the plaintiff or any of its shareholders or affiliated companies.

21.By letter dated 26 April 2007, the defendant indicated to the plaintiff that their (both the plaintiff’s and the defendant’s) respective U.S. counsel are working towards finding a solution and that it would be best if the principals would not be in direct communication.

22.Thereafter the matter was taken up and handled by U.S. lawyers for both parties, namely, a Mr Benjamin Fishburne of Winston & Strawn LLP for the plaintiff and Debevoise & Plimpton LLP for the defendant.

23.By letter dated 22 September 2009 the defendant’s U.S. counsel confirmed that the defendant was content to have the plaintiff’s U.S. counsel conduct the required due diligence outlining the steps which they considered necessary to be taken.

24.While that exercise of due diligence was still in the process being handled by U.S. counsel for both parties but before the impasse between them had been resolved, the plaintiff issued the Writ of Summons herein dated 23 October 2009. The plaintiff then applied ex parte and obtained leave from the Master on 28 October 2009 to issue a concurrent writ for service out of the jurisdiction upon the defendant pursuant to Order 11 of the Rules of the High Court (“RHC”).

25.Pursuant to that order of the Master, the Concurrent Writ of Summons was issued on 2 November 2009 and served upon the defendant in New York, U.S.A.

26.As a result, the present application was taken out by the defendant.

Application to set aside the Order of the Master for service out of jurisdiction

27.By the Amended Inter Partes Summons, this application is made on two grounds, namely, (a) that this is not a proper case for service out of the jurisdiction having regard to all the circumstances of the case; and (b) that the plaintiff, in making the application before the Master, failed to make full and frank disclosure of matters material to the court’s discretion.

28.From the background given above, it is not difficult to see that the dispute between the parties revolves around the FCPA, in particular whether the defendant could be said to have been at risk of violating the FCPA provisions by making payment to the plaintiff under the Agreement when it has been alerted that some of that money may be used by the plaintiff to pay its “consultants and lobbyists” involved in the project and secondly, if there was a violation of the FCPA, whether the defendant can rely on the defence of illegality in so far as the Agreement is concerned.

29.In this respect, and bearing in mind that the governing law of the Agreement is New York law, the parties have engaged legal experts to give their opinion on those matters in question, both as to the effect of the FCPA as well as to the interrelationship between New York contract law and possible violation of the FCPA.

30.The plaintiff engaged Homer E. Moyer Jr (“Moyer”) as its expert on the FCPA and C. MacNeil Mitchell (“Mitchell”) as the expert on New York law.

31.The defendant engaged Richard W. Grime (“Grime”) as its expert on the FCPA and Andrew Frackman (“Frackman”) as its expert on New York law.

Expert opinion of Moyer and Grime on the FCPA

32.There is no dispute as to the expertise of Moyer and Grime being the parties’ respective experts on the FCPA.

33.Both experts gave their respective opinion based on factual assumptions which conform basically to what has been stated under  “Background” above in this judgment.

34.In so far as the provisions of the FCPA is concerned, there is little difference between them.

35.Generally speaking, the FCPA was enacted in 1977 to criminalize the bribery of “foreign officials” by U.S. companies and individuals for business purpose and the statute applies to indirect as well as direct payments to “foreign officials”.

36.In his report dated 18 March 2010, Moyer stated that:-

“38. In the case of a ‘domestic concern’ such as [the defendant], eight principal elements must be present for a violation of the anti-bribery provisions to occur. Under the FCPA, it is unlawful for a domestic concern to :

Corruptly;

Commit an act with the required territorial nexus;

In furtherance of;

A payment, offer, promise to pay, or authorization of a payment, promise, or offer;

Of money or ‘anything of value’;

To a ‘foreign official,’ or ‘any person’ while ‘knowing’ that all or a portion of such money or thing of value will be passed on to a ‘foreign official’;

For the purpose of : (a) influencing an official act or decision of that person; (b) inducing that person to do or omit to do any act in violation of his or her lawful duty; (c) inducing that person to use his influence with a foreign government to affect or influence any government act or decision; or (d) securing any improper advantage;

In order to obtain, retain, or direct business to any person.

39. …

40. Under the knowledge standard, as noted above, a company making a payment to a party other than a ‘foreign official’ (i.e. to a party such as [the plaintiff]) will commit a violation only if it makes the payment while ‘knowing’ that all or part of the payment will be passed on as a bribe to a ‘foreign official’.

41. …

42. While the current definition of ‘knowledge’ does not require actual knowledge, it requires more than a reason to know or constructive knowledge. Specifically, a company acts knowingly if it is ‘aware’ or has a ‘firm belief’ that prohibited conduct is occurring or is ‘substantially certain’ to occur. Alternately, knowledge may exist if a company is aware of a ‘high probability’ that improper conduct will occur.”

37.Moyer concluded on the question of ‘knowledge’ by saying:

“47. Accordingly, a U.S. company may violate the FCPA without itself paying a bribe if it pays a third party ‘knowing’ that the third party will take the prohibited action on its behalf. However as the statute indicates, and the Bourke case reflects, the statutory language of ‘high probability’ and ‘substantially certain’ make clear that such vicarious liability may exist ony when the risk of an improper payment is very high and the evidence very strong. A mere suspicion or simply the possibility of an improper payment would not meet the amended ‘knowledge’ standard of the FCPA.”

38.Moyer then went on to deal with the concept of “red flags”.  In this respect, Moyer stated that the FCPA does not make mention of “red flags” but that is a term of art used to describe circumstances that could possibly signal problematic behaviour by a third party.

39.When faced with a “red flag”, it would be prudent for a company to address the “red flag” by obtaining additional information or clarification.  By so doing, a company can reduce the risk of vicarious liability. If the company chose to disregard the “red flag” and proceeded, it may have assumed additional risk, but per se would not be a violation of the FCPA.

40.How a company respond to a “red flag” should be appropriate to the circumstances and different types of response are appropriate in different context depending on the nature of the “red flag” raised.

41.As for due diligence inquiry, neither the FCPA nor case law requires a company faced with a “red flag” to conduct “due diligence” but that may be a form of precautionary advice.

42.On the facts of the present case, Moyer deemed it appropriate for the defendant to have made enquiries in response to the email dated 6 March 2006 it received from Richard Lo of the plaintiff which referred to “government officials, consultants and lobbyists” as well as to “our long overdue obligations to our other consultants and lobbyists” since this could be viewed as a possible “red flag”.  However, Moyer also took the view that that email was not a serious “red flag” since it did not suggest that improper payments had been made to government officials, but only suggested that moneys were owed to lobbyists and consultants who assisted in the project.

43.Given the responses provided by the plaintiff to the defendant over the past four years with detailed information confirming that there were no third parties to whom the plaintiff would make payments in connection with the services it provided to the defendant, a detailed description of the services it provided to the defendant, confirmation that it used no third parties, paid or unpaid, and confirmation that there had not been and would not be any payment to third parties, together with a declaration signed in the presence of a solicitor that it had not bribed and would not bribe any government officials and that no government official has an ownership interest in the plaintiff or its affiliates and its confirmation that all of its activities were in compliance with the FCPA, Moyer opined that the defendant would not risk violating the FCPA by paying the plaintiff the fee owed by it to the plaintiff.

44.That opinion of Moyer was largely based on the absence in the known facts of any improper payment to any government official by any third party such that the red flag in the present case did not raise facts which suggest that any illicit payment was made but only indicate that the plaintiff had retained the services of other third parties to assist, which it was allowed to do.

45.On that basis, Moyer was of the view that:

“76. …[the defendant] has taken a variety of aggressive steps and put in place a number of safeguards in order to avoid any risk of liability. In my opinion, [the defendant] would not meet the FCPA’s knowledge standard for vicarious liability. The risk of Justice Department interest would be further lowered by the fact that there is no evidence of bribery, a due diligence investigation is not required by prudent U.S. business practices, and is certainly not required by the FCPA. In my opinion, no U.S. enforcement agency would bring an enforcement action based on these facts, and no U.S. court would view [the defendant’s] payment to [the plaintiff] as a violation.”

46.As already stated above, there is practically no dispute between Moyer and Grime as to the provisions of the FCPA.

47.As for the standard of knowledge required, Grime took the view that the requisite knowledge can be proved if there are sufficient “red flags” which a company ignored and how a company dealt with those “red flags” will determine whether the government will be able to prove “knowledge” with respect to the passing of something of value to a foreign official.  Moreover, since the definition of “knowledge” as a standard is less than actual knowledge, that places an obligation on U.S. companies to recognize and react appropriately to “red flags” where there is a suggested possibility of payments to foreign officials.

48.In this respect, Grime quoted a passage from Zarin, Doing Business under the Foreign Corrupt Practices Act paragraph 4.8.2  (2009) which is attached to his expert report dated 4 February 2010 as Exhibit 22 and which states as follows :

“When suspicious information [that is red flags] come to the attention of a U.S. company regarding the activities of its foreign sales/agent/distributor or other third party, the knowledge standard under the FCPA requires that [the company, in this case, RGI] undertake a due diligence inquiry into the suspicious activity. Otherwise, it could be deemed to have consciously disregarded or deliberately ignored information that would have alerted it to the likelihood of a violation. The failure to inquire, if significant, could result in the imputation to the U.S. company of knowledge regarding the illicit conduct.”

49.Grime also took pains to stress that a review of FCPA enforcement actions filed by Department of Justice (“DOJ”) showed that payments to agents form a significant portion of recent FCPA cases.  In many of those cases there were no allegation that payment was actually made to foreign officials. Instead, the company had settled the action based only upon allegations that the payment was made to the agent and that it was likely that some or all of the payment was to be made to a government official (paragraph 36 of Grime’s expert report refers).

50.Based upon the conflicting information which the plaintiff had supplied to the defendant to date, Grime took the view that it was presently unclear whether or not any consultants and lobbyists existed, and if they do what services they performed and whether the plaintiff has made or will make any offers, promises, payments or authorizations to such entities.  Given the inconsistent denials by the plaintiff that it has engaged such third parties or that such third parties exist, these are “red flags” to the defendant in respect of the FCPA.

51.Grime further took the view that the steps taken by the plaintiff in its attempt to demonstrate that the consultants do not exist are insufficient “because they carry (at best) the same weight as its earlier contention that it has consultants”.

52.Therefore until the defendant completes a credible inquiry, the defendant cannot adequately determine the true facts as to whether such consultants and lobbyists exist or not.

53.Grime further said that once the payment was made by the defendant, the plaintiff’s obligation to the defendant (to provide the information) will terminate and therefore it was especially important that the suggested measures should be taken before any payment was made.

54.Those measures suggested by Grime in paragraph 55 of his report are as follows :

“a. [The plaintiff] should permit [the defendant], through counsel of its choosing, to fully and completely investigate all the circumstances of [the plaintiff’s] comments regarding consultants and lobbyists. [The defendant] needs to properly and reasonably assure itself through credible evidence that no such consultants, lobbyists and/or other third parties exist in connection with the project, or if such third parties exist, that no promises or payments have been made to them, or if they have, that those same consultants, lobbyists and/or third parties have not made any promises or payments to foreign officials. This investigation should be conducted by knowledgeable FCPA counsel using outside investigative firms, if deemed necessary. The investigation should include face to face interviews of the relevant individuals, a review of relevant documents and accounting books and records maintained by [the plaintiff]. This investigation should cover a reasonable time before the December 13 agreement was executed through to the present.

b. [The plaintiff] should represent to [the defendant] under oath that no payments were made or promises made to officials of the foreign government in connection with Project. The precise form of the representation should be similar to that contained in Opinion Release 97-01”

55.Finally Grime concluded in paragraph 56 of his report that if payment was made by the defendant to the plaintiff without adopting the suggested measure above, then if the DOJ discovered the facts, it would likely commence an investigation to seek to determine the relevant facts, at the conclusion of which and based upon the available information it was likely that the DOJ would conclude that the defendant failed to conduct sufficient diligence and disregarded the “red flags”.  In so doing, the defendant would be deemed to have “knowledge” that the payments were likely made to foreign officials and the defendant would then face the consequences described in paragraphs 47‑51 of his report which deals with FCPA prohibitions and penalties.

Expert Reports of Mitchell and Frackman on New York law

56.Mitchell is the expert engaged by the plaintiff to provide a report concerning the law of the State of New York and how it stands in relation to violation of the FCPA.

57.For that purpose, Mitchell has relied on the factual assumptions relied on by Moyer in his expert report given in this matter.

58.Mitchell states at the outset that the plaintiff’s claim was for payment of the success fee.  In the absence of any dispute that the project was successfully completed, it would appear that the defendant is seeking to rely on the defence of “illegality” of a contract.  That is an affirmative defence under New York law and as such, the burden is upon the defendant to prove those facts giving rise to the illegality in order to establish its defence.

59.As a basic proposition of New York law, Mitchell opined that it is likely a New York court would refuse to enforce a contract as a matter of New York public policy if it made a finding that an FCPA violation had in fact been committed in the course of the performance of the contract.  This view was taken by Mitchell albeit that he was unaware of any decisions by a New York court where it has actually addressed the enforceability of a contract in the face of an affirmative defence based on even a proven FCPA violation, much less one based only on an alleged but unproven FCPA violation.

60.Mitchell then went on to state that if this case was heard by a New York court, the court would be required to find whether or not the defendant had met its burden of proving that payment to the plaintiff would constitute an FCPA violation.  That if the defendant proved only the plaintiff’s use of “suspicious” agents, but not the payment of actual bribes by those agents to government officials, that would not have met its required burden of proof and its affirmative defence would be dismissed.

61.Mitchell further stated that a final judgment entered in a New York court must fully and finally resolve all properly pleaded claims and defences raised in the pleadings.  An affirmative defence by the defendant of “illegality”, if pleaded, a New York court judgment could not simply recite that “there may have been illegality”; it would have to recite definitively whether, under the applicable burden of proof, this affirmative defence had been sustained or dismissed. There are no intermediate possibilities.

62.To the extent that the violation alleged is of the FCPA, under New York law, the defendant would have to prove to the court’s satisfaction that the plaintiff had paid or had agreed to pay a bribe, since the actual payment of a bribe or the agreement to do so is the illegal act under the FCPA.

63.Therefore using the FCPA as a test of “illegality”, in the absence of proven bribery or agreement to bribe, no payment by the defendant would be criminalized under the FCPA.

64.Without actual proof of actual bribery amounting to a FCPA violation, there would be no impediment to the plaintiff’s enforcement of the Agreement under New York law, even assuming that all its subsequent assurances to the defendant had been legally inadequate.

65.Summarizing the situation in a nutshell, Mitchell says that under New York law and judicial procedure, if

(a) actual bribery in the performance of a contract, and

(b) the defendant’s inability to get adequate assurances to the contrary from the plaintiff

can be proven to the court’s satisfaction, the defendant’s defence (of “illegality”) is viable, but if either ingredient is missing, that defence must be dismissed.

66.The defendant’s expert, Frackman, puts it on a different footing.  He adopted the factual assumptions stated by Grime in his expert report and started off by stating that the Agreement is governed by New York law and that the plaintiff is seeking payment of the amounts which the plaintiff claims to be due under the Agreement.

67.If such a claim was asserted against the defendant in New York, his understanding, based on the material which he has been supplied with, is that the defendant would likely assert by way of defence, that enforcement of the Agreement would violate New York public policy in that the payment of any amount to the plaintiff under the circumstances would constitute a violation of the FCPA and would put the defendant at risk of criminal sanctions, and that the contract is therefore void as against public policy.

68.Frackman goes on to say that his understanding from the expert report of Grime that the FCPA generally prohibit corrupt payments to foreign officials and that when suspicious information comes to the attention of a domestic concern like the defendant regarding the activities of its foreign agent, the FCPA requires that the domestic concern to undertake a due diligence inquiry into the suspicious activity, otherwise it could be deemed to have consciously disregarded or deliberately ignored that which would have alerted it to the likelihood of a violation of the FCPA.

69.In those circumstances the anticipated defence of the defendant does not require the court to determine whether the plaintiff in fact would use the proceeds unlawfully.  Rather, the defendant would likely argue that it should not be required to perform under the contract until the plaintiff has provided sufficient assurances under the FCPA so that the defendant did not face criminal liability under the FCPA.  The defendant would not have to prove that the plaintiff was in fact going to make an improper payment.  Rather, it would only have to prove that the plaintiff failed to provide adequate assurances within the meaning of the FCPA that it was going to engage in illegal activity, and that such a failure itself—i.e. a violation of the FCPA—made performance of the Agreement void as against public policy.

70.Therefore Frackman says that the anticipated defence of the defendant here is more subtle.  It is not a defence which contends that in fact the plaintiff will pay or has agreed to pay a bribe, but that the defendant’s perform of the Agreement without adequate assurances from the plaintiff is void as against public policy because the FCPA imposes criminal sanctions for making payments in the face of “red flags”, even if the ultimate use of the funds is uncertain.

71.In that sense therefore, the application of the public policy defence is subtly more different from the more direct case where the fact of the bribe is established.

72.Given the above, Frackman takes the view that the availability of the public policy defence will be a matter of New York law since that is the governing law of the Agreement.  Whether violation of the FCPA red flag rules would be a sufficient basis for relieving the defendant of its contractual payment obligations is a question of first impression (since that issue has never been decided by a New York court).  Frackman therefore takes the view that a New York court would be in a better position to resolve that novel question since it would require a court to apply New York “public policy” which effectively involves familiarity with New York norms.  On the other hand, a court outside of New York will be required to substitute its evaluation of New York norms if it had to determine this issue, a matter which most foreign court would be hesitant to do.

73.Lastly, Frackman states that there is a further practical consideration for the New York court to deal with this case, which is one of efficiency.  In this respect, even if a Hong Kong court gave judgment in favour of the plaintiff, the plaintiff would have to get a New York court to recognize that judgment and, in effect, convert it into an enforceable New York judgment in order to enforce it against the defendant in New York.  Recognition of foreign judgments is governed by CPLR Article 53, the Uniform Foreign Country Money—Judgments Recognition Act which applies to “any judgment of a foreign state granting or denying recovery of a sum of money, other than a judgment for taxes, a fine or other penalty” and which is “final conclusive and enforceable where rendered”.

74.For a New York court to recognize a final and conclusive money judgment from a foreign court, two mandatory factors have to be met, namely, that the judgment is (i) rendered under a system which provides impartial tribunals or procedures compatible with the requirements of due process, and (ii) the rendering court must have had personal jurisdiction over the defendant.

75.Even if a plaintiff satisfies these two mandatory grounds, the burden can shift to a defendant to show that the court should not recognize the money judgment under one of eight discretionary grounds for non-recognition enumerated in CPLR section 5304(b) and under sub‑section (4) thereof, a foreign judgment need not be enforced if the “cause of action” on which they are based is “ repugnant to the public policy” of New York.

76.Although the standard is high and infrequently met but would only avail a defendant in clear-cut cases, the New York courts have in the past refused to enforce foreign judgments on public policy grounds.

77.This would allow the defendant a plausible argument that such a judgment by a Hong Kong court would grossly offend public policy by ordering payment which would in effect be to violate U.S. penal law.  A judgment is against public policy if it “tends clearly to undermine the public interest, the public confidence in the administration of the law, or security for individual rights of personal liberty or of private property”.

78.Therefore if such a judgment from a Hong Kong court is sought to be enforced in New York, it would have the practical effect of requiring the New York court to reconsider the impact of the FCPA in respect of the plaintiff’s claim in this case upon the defendant.

79.In that sense, Frackman opines that the New York courts are the more appropriate forum for this case.

Material non-disclosure

80.The complaint by the defendant as to material non-disclosure is that in making the ex parte application to the Master for leave to serve a concurrent writ out of jurisdiction, no mention whatsoever was made by the plaintiff of the FCPA issue to the Master despite the extensive correspondence between the parties and their lawyers on this matter.  Neither was such issue even referred to by the plaintiff in its affirmation in support of the ex parte application.

81.The defendant further refers to the 2^nd Affirmation of Hall‑Jones (paragraphs 77 to 78) wherein the explanation was given as to why no mention was made to the Master of the FCPA issue in the ex parte application which was because (a) Mr Hall-Jones considered the duty of full and frank disclosure for Order 11 applications to be different from that in injunction applications and (b) that he did not think there was a “genuine” FCPA issue in this case.

82.In so referring to the explanation given, the defendant further says that such explanation clearly shows that it was a deliberate decision by the plaintiff (or those representing it) not to disclose the FCPA issue to the court at the ex parte application for service out of jurisdiction.

83.In response to the defendant’s contention of material non‑disclosure, the plaintiff submits that all the relevant requirements for this case to come within Order 11 has been stated to the court and there can be no question but that this case fulfils and complies with all the requirements of Order 11.

84.Furthermore, at the ex parte application, the court has been duly informed that the governing law of the Agreement was New York law.

85.As for the FCPA issue, that was raised by the defendant by way of defence to the plaintiff’s claim against them.  It was submitted by the plaintiff that there is no requirement for the plaintiff to bring to the attention of the court the defence raised when making an application for service out of jurisdiction under Order 11—relying on the decision of Saunders J in the case of Hong Jing Co. Ltd v Zhuhai Kwok Yen G. Ltd (HCA156/2006)

86.In coming to a decision on the issue of material non-disclosure, I have no hesitation in finding that there was material non-disclosure on the part of the plaintiff when making the ex parte application.

87.Whilst it is true, generally speaking, a party making an application for service out of jurisdiction is under no duty to disclose to the court the defence or any defence raised by a defendant.  That would be so in the majority of cases where the court, when exercising its discretion whether or not to grant leave to serve out of jurisdiction, would only be concerned to see whether the claim can properly come within the requirements of Order 11.  In the majority of cases, the defence relied upon will not necessarily come within the weighing operation of the court when exercising that discretion.

88.However, in the present case, the very nature of the defence raised by the defendant, namely the FCPA issue, goes to the very root of the question of proper forum and therefore forms part of the weighing operation of the court when exercising its discretion to consider an application under Order 11.

89.As such the FCPA issue should have been made known to the court at the ex parte application.

90.Morever, Mr Hall‑Jones is wrong to think that the duty to make full and frank disclosure is different in Order 11 applications to what it is in injunction applications.

91.The duty to make full and frank disclosure of material facts is the same in any and all ex parte applications and has its basis upon the fact that in an ex parte application, the person against whom the order is sought is not before the court and therefore has no opportunity of being heard.

92.Mr Hall‑Jones is also wrong in his explanation to say that he did not think that there was a “genuine” FCPA issue in the case since it is for the court and not him to decide what is material.

93.Accordingly, on the issue of material non-disclosure, I find that there was material non-disclosure by the plaintiff at the ex parte application before the Master as complained of by the defendant and the order of the Master granting leave to serve a concurrent writ of summons out of jurisdiction upon the defendant must be set aside with costs.

94.I now turn to deal with the question of suitable or appropriate forum.

Appropriate forum

95.In line with the observations made by Lord Goff of Chieveley in Spiliada Maritime Crop v Cansulex Ltd [1987 1 AC 460 as to the inaptness of the Latin tag (whether forum non conveniens or forum conveniens) to describe this principle, but that it should more properly be described by the words “suitable” or “appropriate” rather than the word “convenience”, I have, in this judgment, used the word “appropriate” for this sub-heading.

96.The legal principles governing the appropriate forum was gone into extensively by Lord Goff of Chieveley in the Spiliada case—both as to how the principle is applied in cases of stay of proceedings where jurisdiction has been founded as of right, and also when that principle is applied in cases where the court exercises its discretionary power for service out of jurisdiction under Order 11 of the RSC.

97.Having set aside the ex perte order obtained by the plaintiff, I am here dealing with the application by the plaintiff anew for leave for service out of jurisdiction under Order 11.

98.Lord Goff of Chieveley commented that those principles applicable to cases under Order 11 (as stated by Lord Wilberforce in the case of Amin Rasheed [1984]AC 50) bore a marked resemblance to the principles applicable in forum non conveniens cases (i.e. cases of stay of proceedings where jurisdiction has been founded as of right) and that the ultimate question in both group of cases must be to identify the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice.

99.Lord Goff of Chieveley went on to identify three distinctions between the two groups.  Those three distinctions are :

(a) In the Order 11 cases, the burden of proof rests on the plaintiff whereas in the forum non conveniens cases that burden rests on the defendant.

(b) A more fundamental distinction flowing from (a) above, is that in Order 11 cases, the plaintiff is seeking to persuade the court to exercise its discretionary power to permit service out of jurisdiction upon a defendant. Whilst statutory authority has specified the particular circumstances in which that power may be exercised, it is left to the court to decide whether to exercise its discretionary power in any particular case, noting that Order 11rule 4(2) provides that leave shall not be granted “unless it shall be made sufficiently to appear to the court that the case is a proper one for service out of the jurisdiction”.

(c) Special regard must be had for the fact that the jurisdiction exercised under Order 11 may be “exorbitant” which is explained by Lord Diplock in Amin Rasheed case (pages 65-66) as follows :

“… it is one which , under general English conflict rules, an English court would not recognize as possessed by any foreign court in the absence of some treaty providing for such recognition. Comity thus dictates that the judicial discretion to grant leave under [R.S.C. Ord 11, r.1(1)(f)] should be exercised with circumspection in cases where there exists an alternative forum, viz. the courts of the foreign country where the proposed defendant does carry on business, and whose jurisdiction would be recognized under English conflict rules.”

100.Lord Goff of Chieveley further stated that the effect of the above is not merely that the burden of proof rests on the plaintiff to persuade the court that England (Hong Kong in the present context of this case) is the appropriate forum for the trial of the action, but that he has to show that this is clearly so.  In other words, the burden is simply the obverse of that applicable where a stay is sought of proceedings started in the jurisdiction as of right.

101.Quite apart from the above distinctions as between the two groups of cases, the court must look at the connecting factors to ascertain the forum as being “that with which the action had the most real and substantial connection.”  These will include not only factors affecting convenience or expense (such as availability of witnesses) but also other factors such as the governing law of the relevant transaction and the places where the parties respectively reside or carry on business as well as the relevant ground invoked by the plaintiff when deciding whether to exercise its discretion to grant leave.

102.In so doing the court should give to such factors the weight which in all the circumstances of the case, it considers to be appropriate.

Application of the principles to the facts of the present case

103.The plaintiff sought to rely on the following factors to show that the Hong Kong court is the natural and appropriate forum for this case :

(a) the Agreement was executed in Hong Kong;

(b) performance of the Agreement by the plaintiff substantially took place in Hong Kong and the PRC and the payment of the success fee by the defendant was to be in Hong Kong;

(c) a significant number of documents involved are written in Chinese;

(d) the key witnesses would be mainly those from the plaintiff, with its main witness, Richard Lo who resides in Hong Kong, as well as other potential witnesses from the PRC;

(e) although the governing law of the Agreement is New York law, there can be no prejudice to the defendant for the Hong Kong court to apply New York law by relying on expert witnesses;

(f) even where the FCPA is involved, the dispute between the parties is one of illegality which, according to the plaintiff’s experts is a question of fact, namely, whether or not there is any evidence of an actual bribe (including an agreement to bribe) which would be a violation of the FCPA provisions. That disputed issue will be decided on the documentary evidence as well as the viva voce evidence of the plaintiff’s witnesses all of which are in Hong Kong;

(g) the Agreement is silent as to jurisdiction;

(h) this is a straightforward case with no material difference between New York law and Hong Kong law; and

(i) there is a legitimate juridical advantage to Hong Kong because it has less extensive discovery obligations.

104.In answer to the above points put forward by the plaintiff, the defendant submitted as follows (in the same order as the points made by the plaintiff above) :

(a) where the Agreement was executed has little bearing as to the forum where the case can be tried more suitably for the interests of all the parties and for the ends of justice;

(b) the dispute between the parties was never about where the Agreement was performed or the amount of the work done by the plaintiff, but whether the requirements of the FCPA has been sufficiently complied with such as to allow the defendant to make payment of the success fee without the risk of attracting criminal sanctions under the FCPA;

(c) whether the case is tried in Hong Kong or New York, translations of Chinese documents put in evidence will have to be made;

(d) whether the trial is in Hong Kong or New York, witnesses will have to travel one way or another;

(e) the advantage of having a trial in a New York courts is that New York law can simply be applied by the New York court without having to rely on expert witnesses;

(f) the dispute between the parties is far more extensive than what is alleged by the plaintiff to be simply factual (which can be seen from the expert reports), and which also involves ground breaking issues such as the interrelationship between New York contract law and FCPA violation, which in turn touches on New York public policy;

(g) the Agreement being silent as to jurisdiction is at best neutral, but when considered in the context of the governing law being New York law and the real dispute between the parties, would point if anything to the New York court being the more appropriate forum;

(h) the defendant says that this point of the plaintiff is clearly wrong when viewed against the expert reports; and

(i) the defendant says that more extensive discovery (and not less) is generally considered as a juridical advantage as was observed by the House of Lords in the Spiliada case.

105.In coming to a decision in the matter, I note firstly that the plaintiff carries on business in Hong Kong while the defendant carries on its business in New York.  Although the Agreement is expressly stated to be governed by New York law, there is no jurisdiction clause in the Agreement.

106.Secondly, the fact that the Agreement was executed in Hong Kong and the payment was to be made in Hong Kong coupled with the fact that the Agreement was largely performed in Hong Kong and the PRC, and that the plaintiff’s witnesses and documents are mainly in Hong Kong, with perhaps some in PRC, will tend to show that if the trial was in Hong Kong, this will make it easier, more convenient and perhaps less expensive to the plaintiff.  However, these are only peripheral matters.

107.In my view, where the court is enjoined to identify the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice, it is incumbent upon the court to consider more deeply the nature of the dispute between the parties and the impact of those issues when deciding on the appropriate forum for adjudicating such dispute.  Far more weight will have to be put on this aspect where the appropriate forum has to be decided.

108.In this respect, the plaintiff has pitched its case on the footing that this litigation is no more than a fact finding exercise, and as the evidence stands at the moment, there is no evidential basis upon which the defendant can point to there having been a bribe (or an agreement to bribe) such that there can be a violation of the FCPA.  At best, the defendant can only point to the inconsistent statements made at various times by the plaintiff as to the existence or non-existence of “lobbyists and consultants” and there had been some suggestion by the plaintiff of payment to such consultants and lobbyists.  But even taken to its highest, none of those inconsistent statements by the plaintiff would or could show that the payments were in the form of bribes or agreement to bribes (as opposed to lawful payments which the plaintiff was entitled to make).

109.In the absence therefore of any actual bribe (or an agreement to bribe), it is the plaintiff’s contention that there can be no defence of “illegality” by the defendant to the plaintiff’s claim for the success fee since it cannot be shown any violation of the FCPA, and therefore no risk to the defendant in making payment under the Agreement.

110.It was on this basis that the plaintiff submits that the alleged defence of “illegality” raised by the defendant as to a possible violation of the FCPA was designed only to delay the payment of the success fee by the defendant.

111.Also on this basis, the plaintiff says that the matter can be decided by a Hong Kong court with no difficulty since the dispute between the parties is no more than a fact finding exercise in which the defendant’s defence is bound to fail.

112.On the other hand, the defendant’s contention was largely based on the contents of the two reports from their legal experts, Grime and Frackman, namely, that the defence run by the defendant is more subtle than what had been suggested by the plaintiff and its experts, which is that even in the absence of evidence to show an actual bribe, the defendant runs the risk of criminal sanctions for possible violation of the FCPA without there being a complete due diligence exercise being carried out to fully ensure that the payment made by the defendant to the plaintiff, some or all of it, will not be used to corruptly pay foreign officials by the plaintiff in the light of the “red flags” raised by the plaintiff in their communications with the defendant.

113.In this respect the defendant says that it would be against public policy for the defendant to make the payment under the Agreement if some part of the payment may be used for corrupt purposes thus violating the FCPA.  In that sense the defence put forward by the defendant touches upon the public policy of New York and therefore it must, by far, be more appropriate for this litigation to be decided by a New York court applying New York law and being more familiar with New York public policy than a Hong Kong court.

114.In so far as applying New York public policy is concerned, Deputy High Court Judge Carlson in the case of GFI Group Pvt. Ltd v Prince (HCA170/2008) stayed the Hong Kong proceedings in favour of the Singapore courts on the basis that the Singapore courts were better placed to apply questions of Singapore public policy than would a Hong Kong court.

115.In so doing, deputy judge Carlson applied the words of Bingham LJ in Du Pont v Agnew [1987] 2Ll. Rep. 585 at 594 where he said :

“The primary question, as I regard it, is the effect of this contract as a matter of English public policy, and that is a question which I do not think any foreign Judge could conscientiously resolve with any confidence that he was reaching a correct answer.”

116.Clearly, there is here a very wide gap between the plaintiff and the defendant on this issue as to what is involved in the defence which the defendant wishes to run.  However, it has to be recognized that how a defence is pleaded and how it is run is a matter for the defendant.

117.Therefore by taking account of what are the issues involved in the defence which the defendant will raise to the plaintiff’s claim, quite clearly the appropriate forum should be the New York court, in applying New York law, in determining the degree and sufficiency of explanation or assurances given in the context of the FCPA when a “red flag” is raised, and also to determine the interrelationship between New York contract law and possible violation of the FCPA, as well as to apply New York public policy.  These considerations by far outweigh all the other factors in determining the appropriate forum.

118.The evidence from the defendant’s experts, both Grime and Frackman, cannot be ruled out and ignored off hand.  Therefore giving effect to all the expert evidence as contained in their reports, there is a clear and distinct advantage to be gained (for the interests of all the parties and for the ends of justice) for this case to be dealt with in the New York courts. 

119.Moreover, one cannot lose sight of the further matter suggested by Frackman, namely, that if there is a judgment of the Hong Kong courts and which is sought to be enforced against the defendant in New York, it will have the practical effect of the New York court having to reconsider the impact of the FCPA in respect of the plaintiff’s claim upon the defendant.  Should that happen, it further accentuates the clear advantage to be gained by having this matter adjudicated by the New York courts rather than the Hong Kong courts since considerable legal expenses will be saved in not having the dispute heard twice over, once in the Hong Kong courts, then again in New York.

120.For the reasons given, I have come to the conclusion that the plaintiff have failed to show clearly and distinctly that Hong Kong is the appropriate forum to hear this case.  Rather the overwhelming consideration arising from the defence which the defendant seeks to put forward indicates that quite clearly the courts in New York must be the appropriate forum for hearing and determining this litigation.

121.Accordingly, I decline to grant leave to the plaintiff for service out of jurisdiction under Order 11, and having set aside the ex parte order of the Master granted herein, it follows that these proceedings ought to be stayed rather than to be dismissed as asked for by the defendant.

Order

122.There will be the following order :

(1) The leave obtained ex parte from the Master to serve a Concurrent Writ out of jurisdiction upon the defendant herein be set aside with costs;

(2) This action be stayed in favour of the New York courts.

Costs

123.There will also be a costs order (being an order nisi) that the costs of this application and of this hearing be to the defendant, to be taxed if not agreed.

Mr Russell Coleman, SC, instructed by Messrs Luk & Co., for thePlaintiff

Mr Robert Whitehead, SC and Mr Robert Y.H. Pang, instructed by Messrs Gall & Lane, for the Defendant