First Laser Ltd v. Fujian Enterprises (Holdings) Co Ltd and Another
Read the full judgment text of CACV 126/2008 on BabelCite. This Court of Appeal judgment was delivered on 4 January 2011.
1. The plaintiff succeeded in its action against the defendants before Deputy High Court Judge To (as he then was).
Cites 5 cases
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CACV 126/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 126 OF 2008 (ON APPEAL FROM HCA 4414 OF 2001) ________________________ BETWEEN
________________________ Before : Hon Cheung, Yeung and Yuen JJA in Court Date of Hearing : 21-25 June, 30-31 August and 1 September 2010 Date of Further submission by the defendants : 15 September 2010 Date of Judgment : 4 January 2011 ________________________ J U D G M E N T ________________________ Hon Cheung JA : The appeal 1.The plaintiff succeeded in its action against the defendants before Deputy High Court Judge To (as he then was). 2.The Judge found that 51% of the shares of and in Fujian Casix Laser Inc. (福建華科光電有限公司) (‘FCL’) (formerly known as Fuzhou Castech-Phoenix Inc. (福州科鳯激光有限公司) (‘Castech-Phoenix’) belonged beneficially to the plaintiff. The Judge found that the 1st defendant was in breach of an agreement to sell the shares to the plaintiff and also in breach of the trust in favour of the plaintiff in respect of the shares when they were wrongfully disposed of by the 1st defendant. The 2nd defendant was a nominee or conduit of the 1st defendant for the receipt and transfer of the proceeds of sale of the shares in FCL. Based on the plaintiff’s election to proceed with proprietary remedy, the Judge ordered, amongst other things, an account and tracing inquiry in respect of the shares and their proceeds of sale. 3.The defendants now appeal against the judgment. Facts 4.The plaintiff is a company incorporated in Macau and is under the control of Mr. Ngan In Leng (顏延齡) (‘Mr. Ngan’). 5.The defendants are companies incorporated in Hong Kong. They are ‘window companies’ of the Fujian Provincial People’s Government of China. This means in practical terms the Fujian Government controls the defendants. The directors of the defendants are employees of the Fujian Government and the shares of the defendants are held on trust for the Fujian Government. 6.In 1991, the 1st defendant set up Castech-Phoenix as a joint venture with the Fujian Research Institute of Material Structures of the Academy of Science (‘FRIMS’) for the production of non-linear crystals. Castech-Phoenix was a Mainland company. 7.Following disputes with FRIMS, the 1st defendant bought out FRIMS’s shares in Castech-Phoenix and terminated the joint venture agreement in January 1996. 8.Subsequent to this, Castech-Phoenix changed its name to FCL. The part of FCL’s business which involved intellectual property rights of the products was transferred to a new company called Fuzhou Casix Optronics Inc (福州科騰光電技術有限公司) (‘FCO’), another Mainland company which is also controlled by the defendants. 9.The 1stdefendant then looked for a new partner. Mr. Ngan who had close contacts with the Fujian government was approached in 1996. Mr. Ngan had business dealings with the 1st defendant since 1990. He was regarded by the Fujian government as a ‘patriotic Chinese’. He was a member of the National Committee of the Chinese People’s Political Consultative Conference (中國人民政治協商會議全國委員會委員) and a member of the Standing Committee of the Fujian Provincial Committee of the Chinese People’s Political Consultative Conference (福建省人民政治協商會議常務委員會委員). The agreements 10.Eventually the parties entered into four agreements, namely,
11.This is what the Judge found in respect of the four agreements :
12.The Judge found that the First Laser Agreement superseded the two earlier agreements. He further accepted the plaintiff’s version of the COM/Casix/Kexin Agreement and found that the COM/Casix/Kexin Agreement did not represent the whole of the parties’ agreement under the joint venture but was a document generated solely for producing to the PRC authorities for the purpose of obtaining approval for the transfer of the FCO shares to COM pursuant to the First Laser Agreement. He held that the COM/Casix/Kexin Agreement was not a genuine agreement supported by any underlying transaction. It did not have the effect of replacing or superseding any of the three agreements, particularly the First Laser Agreement which was executed subsequent to it. 13.The Judge specifically rejected the defendants’ case that there was no sale of FCL and the only agreement between the parties was for the 1st defendant’s subsidiary to sell FCO. Payment of purchase price 14.The Judge found that pursuant to the First Laser Agreement the plaintiff paid HK$20 million to the 1stdefendant on 31 December 1996 and 30 April 1997. 15.The Judge further found that according to a Memorandum dated 13 March 1998 (‘1998 Memorandum’) the plaintiff had pursuant to the First Laser Agreement further paid another sum of HK$4.64 million by treating a capital investment in the sum of HK$4.64 million made by the plaintiff in COM as investment by the 1st defendant. 16.The Judge further found that the consideration for the full purchase price for 51% of the shares in FCL and FCO were fully paid by the plaintiff in accordance with the terms of the First Laser Agreement. The shareholders of COM 17.Hang Wo and Jenwing Holdings Limited (‘Jenwing’) are the sole registered shareholders of COM. Jenwing is a BVI company, the shares in Jenwing were held on trust by Mr. Ngan’s camp for the 1st defendant. Transfer of the shares in FCO 18.On 30 December 1996, i.e. one day prior to the payment of the first sum of HK$10 million to the 1st defendant due under the First Laser Agreement, the board of directors of FCO passed a resolution consenting to the transfer of all the shares in FCO to COM in accordance with the wishes of its shareholders, Casix Limited and Fujian Kenxin. The shares in FCO were duly transferred to COM in March 1997 instead of to the plaintiff pursuant to the First Laser Agreement. Non-transfer of the shares in FCL 19.On the other hand, the shares in FCL were never transferred to Mr. Ngan’s camp. Apart from the absence of a board of directors meeting approving the transfer, it appears that the transfer was not carried out because governmental approval for the transfer would not be granted as the share capital of FCL had not been fully paid up. The 1998 Memorandum 20.The Judge referred to the 1998 Memorandum which explained why the shares in FCL were not transferred to COM. The documents acknowledged :
Management of FCO and FCL 21.On 10 May 1997, the Mainland State Administration of Industry and Commerce issued a business licence to FCO with Mr. Ngan as the chairman of its board of directors and Wang Hongrui (王洪瑞) as its general manager. On 30 May 1997, COM issued a letter to FCO appointing Chen Tianbin (陳天彬) as director of FCO in place of Wang Hongrui. 22.According to the Judge’s finding, on 30 December 1996 Mr. Ngan conducted a board of directors meeting of COM in which a resolution was passed appointing himself as the managing director and Wang Hongrui as general manager of FCL. This meeting was stated to be the first board of directors meeting of COM and not of FCL. On 20 January 1997, COM issued a notice appointing Mr. Ngan, Miss Ngan and Wang Hongrui as directors of FCL. The appointments were invalid. However, the meeting was attended by Mr. Kong Fanli (孔凡立) and Wang Hongrui on behalf of the 1st defendant and Mr. Ngan, Miss Ngan and Mr. Huang Xiaodong (黃曉東) on behalf of Mr. Ngan’s camp. It, nevertheless, shows recognition by those who had control of FCL that Mr. Ngan’s camp had beneficial interest in the shares in FCL. 23.The Judge found that since 31 December 1996 when the first sum of HK$10 million was paid, the 1st defendant, FCL and FCO treated Mr. Ngan’s camp as a shareholder of FCL and FCO and Mr. Ngan and Miss Ngan participated in the management of FCL and FCO as de facto directors. Decisions regarding the operation of FCL and FCO were referred to Mr. Ngan and Mr. Kong for approval. Financial statements of FCL and FCO, requests for increase in staff remuneration of FCL and FCO requests for purchase of staff quarters for FCO and FCL, reports on construction of a building complex for FCL, requests for payment of construction costs of the complex, requests for funds for setting up a branch office of FCL and recommendation of a bonus share scheme for the staff of FCL were referred to both Mr. Kong and Mr. Ngan for consideration and approval. There was participation by Mr. Ngan in the management and important decision making of FCL and FCO. In a report to the Fujian Provincial People’s Government dated 5 June 1997, the 1st defendant acknowledged that Mr. Ngan had 51% interest in the joint venture. Investment of Mr. Ngan 24.FCL has a subsidiary called Casix Inc in the USA which required funds to produce a special optical fiber instrument (‘the project’). The Judge found that Mr. Ngan remitted RMB 1 million to FCL on 1 August 1997, US$500,000 to Casix Inc on 12 August 1997 and US$100,000 to Casix Inc on 17 April 1998 for the purpose of the project. Deterioration of relationship of the parties 25.In May 1998, there were changes within the internal management of the 1st defendant. Mr. Xu Meixing (許美星) became the deputy chairman of the 1st defendant. The persons who held the shares in the 1st defendant were also replaced. 26.After the change in the personnel, the relationship between the parties became strained. In August 1998, Mr. Xu attempted to renegotiate the terms of the joint venture with Mr. Ngan : the 1st defendant wished to be the majority shareholder of 51% in COM instead of the plaintiff. Mr. Ngan refused and sought help from high officials of Fujian government but to no avail. 27.Mr. Xu later also appointed himself as Chairman of the board of directors of FCL and installed other personnel in FCL. 28.By then Mr. Ngan wished to have his investment in the project returned but was ignored. Sale of shares to JDS 29.On 29 February 2000, the 1st defendant sold all its FCL shares including the benefit of the project to JDS Uniphase China Holdings Company (‘JDS’) for US$60 million. The actions 30.On 9 October 2001, the plaintiff commenced the present action against the defendants in Hong Kong. Attempts by the defendants to stay the present action was unsuccessful. 31.The defendants also commenced an action in the Fujian Higher People’s Court (‘the Fujian action’) seeking a declaration against Hang Wo, COM and the plaintiffthat the Hang Wo Agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum were of no effect (無效). 32.Attempts by Mr. Ngan to challenge the jurisdiction of the Fujian Court in the Fujian action and an application by Mr. Ngan for an anti-suit injunction in Hong Kong against the Fujian action were also unsuccessful. The Mainland judgments 33.Eventually on 18 July 2003, the Fujian Higher People’s Court gave judgment that the Hang Wo Agreement, the COM Agreement and the First Laser Agreement were of no effect but it dismissed the 1st defendant’s claim that the 1998 Memorandum was of no effect. 34.On appeal to the Supreme People’s Court by Mr. Ngan’s camp, the Supreme People’s Court in its judgment of 3 December 2004held that at the time of the signing of the first three agreements FCL was a foreign investment enterprise and FCO was a Chinese foreign joint enterprise and any division or important changes of these enterprises would requireapproval from the relevant authority but such approval had not been obtained and on that basisthe Court held that
The issues 35.The following are the issues in this appeal :
(I) Issue Estoppel 36.The question of issue estoppel is closely related to the second issue in this appeal, namely, what is the applicable law to resolve the parties’ dispute. The second issue arises because of the foreign elements in this case and the Hong Kong Court needs to find out what is the applicable law to resolve the dispute. This is by way of application of the rules in private international law or what is commonly known as conflict of laws rules. 37.The Supreme People’s Court relied on Article 145Sections 1 and 2 of 《中華人民共和國民法通則》(‘People’s Republic of China Minfatongze’), which is a statute on the general principles of civil law. The sections provide that the parties to a contract involving foreign interests can choose the law applicable to the contract disputes, unless prescribed by the law; if the parties have not chosen the applicable law, then the applicable law is that of the country which has the closest connection to the contract. The Supreme People’s Court also referred to the principle of closest connection in private international law. It held that Mainland law was the applicable law to resolve the contractual dispute. It held that the three relevant contracts were invalid by reason of the absence of approval being given by the relevant authority. 38.The defendants argued that the Supreme People’s Court had decided on the following two issues and based on the principle of issue estoppel, the decision of these two issues are binding on the Hong Kong Court : first, the applicable law governing the dispute of the parties was Mainland law, and, second, the contracts were invalid. 39.The Judge rejected the defendants’ argument. Binding effect of a foreign judgment 40.The binding effect of a foreign judgment is stated by Dicey, Morris & Collins, The Conflict of Laws(‘Dicey’) (14th Ed) at Rule 41 as follows :
41.Dicey, (14th Ed) at page 618 further stated
Rationale of the rule 42.The rationale of the rule is two-fold, first, public policy : it is in the interest of the public that there should be an end of litigation and second, hardship on the individual in that he should not be vexed twice for the same cause (Lockyer v. Ferrymen (1877) 2 App Case 519 at 530 per Lord Blackburn). Caution in respect of foreign judgment 43.It has been said that the domestic court should be cautious in applying issue estoppel based on foreign judgment. In Carl Zeiss Stiftung v Rayner & Keeler Ltd (No. 2) [1967] 1 AC 853, at 909, per Lord Reid, held that there are three reasons for this caution :
Three points 44.Three points should be noted : 44.1) The first two reasons of the Lord Reid do not apply in the present case. The judgment of the Supreme People’s Court was clear as to the two issues that it had decided and clearly the action before the Supreme People’s Court was not a trivial case. The judgment addressed the core issues between the parties, namely, the validity of the agreements and the applicable law. 44.2) Notwithstanding the majority decision of this Court (Cheung, Yuen JJA and Chung J) in李祐榮與李瑞群(Lee Yau Wing v. Lee Shui Kwan) [2007] 2 HKLRD 749 that because of the ‘trial supervision system’ under Mainland law (which entitles the Supreme People’s Procuratorate to apply to the Mainland Courts for a re-trial of an action), the judgment of the Mainland Courts may not be ‘final and conclusive’, the plaintiff in the present case did not challenge the final and conclusive nature of the judgment of the Supreme People’s Court. 44.3) Before the Supreme People’s Court, the plaintiff accepted that the applicable law was Mainland law. The Judge’s reasons 45.The Judge held that the Supreme People’s Court’s judgment did not result in issue estoppel being applied in the present case because the issues decided in the two sets of actions were different. He agreed with the plaintiff’s argument that the issues before the Supreme People’s Court were the transfer of shares in a legal person in the Mainland, the validity of the three agreements and the 1998 Memorandum under the laws of the Mainland and the remedy that was sought was a declaration that the three agreements and the 1998 Memorandum were of no effect; whereas the issues in the present case are the validity of the three agreements, breach of contract and breach of trust under Hong Kong law. 46.In this Court, the plaintiff further argued that issue estoppel is not engaged because the Mainland judgment on the applicable law was a decision on procedure and not substance. This argument proceeded on the decision by the Judge that ascertaining the applicable law (lex causae) is a matter of procedure for the Court which tries the case and is to be ascertained according to the domestic law of the forum (lex fori). My view on issue estoppel 47.In my view the Judge was incorrect in holding that issue estoppel does not apply. 48.1) I accept that on the contract issue, the Supreme People’s Court was concerned solely with the question of invalidity of the agreements and not with the consequence of them being invalid. However, the issue of invalidity of the agreements must clearly be a common issue in both proceedings. The issue of applicable law is a common issue as well. 48.2) Further it is not permissible to avoid the consequence of issue estoppel by re-characterizing the issue as one which is sought to be litigated in accordance with the law of a different jurisdiction : see The Sennar (No. 2)(Court of Appeal) [1984] 2 Lloyd’s Rep 142 at 149 per Kerr LJ :
48.3) See also Armacel Property Limited v. Smurfit Stone Container Corporation[2008] FCA 592, 2 May 2008 (Federal Court of Australia) (Lexis Copy) at paragraph 67 per Jaccobson J. 48.4) The Judge’s reasoning taken to the extreme would mean that no foreign judgment can ever be used as the subject matter of issue estoppel in Hong Kong because such judgment may be based on that Court’s application of its own law which may not be exactly the same as Hong Kong law, notwithstanding that the foreign Court may have decided on the very same issue that the Hong Kong Court will have to decide. 48.5) Further, in my view, the plaintiff’s new argument falls exactly into the misconception identified by Lord Brandon of Oakbrook in The Sennar (No. 2) (House of Lords)[1985] 1 WLR 490 at 499 when he said :
48.6) The Supreme People’s Court’s decision that Mainland law was the applicable law was a decision on the merits which clearly affected the substantive rights of the parties. 48.7) In any event even according to the case of Desert Sun Loan Corp v Hill [1996] 2 All ER 847 cited by counsel for the plaintiff, Mr. Chan Chi Hung SC and Mr. Jeremy Chan, where the Court recognized the issue estoppel rule (which is defined in terms of a final judgment on the merits) cannot apply when there is no more than ‘an interlocutory decision on a procedural and non substantive issue’, it had also at the same time decided that issue estoppel applies to an interlocutory judgment on procedure when there is an express submission to the procedural or jurisdictional issue to the foreign court. Evans LJ at 858 stated that :
48.8) In the present case, as pointed out earlier, the plaintiff had also expressly accepted before the Supreme People’s Court that the applicable law was Mainland law. In other words there was an express submission by the plaintiff of the procedural or jurisdictional issue to the Supreme People’s Court. Issue etoppel is therefore engaged. 48.9) The case of Baker and others v. Ian McCall International Limited (Toulson J 22/9/99) which followed Desert Sun does not advance the matter further. Likewise for the case of Charles M Willie & Company (Shipping) Ltd v Ocean Laser Shipping Ltd; G Roussos Sons SA and another v Charles M Willie & Company (Shipping) Ltd (The ‘Smaro’) 29 October 1998. (II) If there is no issue estoppel, what is the applicable law? 49.This action involves foreign elements and it is necessary to decide what system of law is to be applied. The Judge having rejected the defence of issue estoppel, went on to hold that the applicable law is Hong Kong law. It is common ground that the applicable principles are the three stage approach stated by Staughton LJ in Macmillan Inc v. Bishopgate Trust (No. 3) [1996] 1 WLR 387 at 391 :
Characterization before the Judge 50.In the Court below there was dispute between the parties on the characterization of issues and the nature of the applicable law. The plaintiff characterized the issue as whether the 1st defendant was under a contractual obligation to transfer the shares in FCL to the plaintiff. The applicable conflict of laws rule to determine this issue is the proper law of the contract. 51.The defendants, on the other hand, emphasised the proprietary nature of the plaintiff’s claim and characterised the issue as whether the plaintiff acquired any title/ownership to 51% of the FCL shares, as a result of which the plaintiff would be entitled to the proceeds of the FCL shares. On that basis the applicable rule is the law where the shares are situated (lex situs) : Macmillian Inc at 399F, 404G-H, Re Harvard Securities (Inliquidation) [1997] 2 BCLC 369 and Tripole Trading Ltd & Others v. Prosperfield Ventures Ltd & Another [2006] 1 HKLRD 200 at [86]. The Judge’s view 52.The Judge accepted the plaintiff’s characterization and proceeded to find that the relevant rule was the proper law of the contract and the relevant system of law was Hong Kong law. Characterization in this Court 53.In this appeal, the defendants argued that there are two characterization issues rather than one in this case, namely,
54.The defendants submitted that the reason why there are two issues is because even if the first issue is resolved in favour of the plaintiff in that the contract is valid, it still needs to show that it is entitled to a beneficial interest in the shares. 55.In my view, it is important to bear in mind,
Intention of the parties/closest and most real connection 56.Rule 180 of Dicey, (11th Ed) page 1161, stated that
57.The Judge referred to In re United Railways of the Havana and Regla Warehouses Ltd [1960] 1 Ch. D. 52 per Jenkins LJ at 91 in ascertaining the relevant factors
My view on applicable law 58.1) I tend to agree with the defendant’s analysis of the issues. However, even if the characterization of issue is based on contract only as found by the Judge, I do not agree with the Judge’s decision that the applicable law of the contract is Hong Kong law. Ascertaining proper law of the contract : the approach 58.2) Although the relevant factors to be considered in this exercise include :
58.3) The test is that the judge, putting himself in the place of the ‘reasonable man’, determines the proper law for the parties. He attempts to ascertain not the (non-existent) ‘intention’ of the parties themselves, but ‘how a just and reasonable person would have regarded the problem’, what intention ‘ordinary, reasonable and sensible businessmen would have been likely to have had if their minds had been directed to the question’, and to the contingencies of which the judge is, but the parties may not have been, aware : Dicey, (11th Ed) page 1191-1192. 58.4) The line between the search for the inferred intention and the search for the system of law with which the contract has its closest and most real connection is a fine one which is frequently blurred. In theory, in the absence of an express choice as the first test, the court should consider as a second test whether there are any other indications of the parties’ intention, and only if there is no such indication to go on to consider the third stage, namely with what system of law the contract has its closest and most real connection. But in practice the same result can be reached by the application of the second or third tests, and frequently the courts move straight from the first stage to the third stage. This is largely because the tests of inferred intention and close connection merged into each other, and because before the objective close connection test became fully established the test of inferred intention was in truth an objective test designed not to elicit actual intention but to impute an intention which had not been formed : Dicey, (11th Ed) page 1162-1163. 58.5) In ascertaining the proper law of contract, the Court does not exercise a discretion but makes a finding of fact from the relevant circumstances about the intention of the parties or the system where the contract has it closest and most real connection. As in any appeal involving any finding of fact, the appellant court will observe the established principle of restraint and will interfere only where there are, for example, misdirections. 58.6) In ascertaining the intention of the parties, their subsequent conduct after the contract was made are not relevant : James Miller & Partners Ltd v. Whitworth Street Estate Ltd [1970] AC 583 at 603 per Lord Reid. The Judge's reasons 58.7) The Judge referred to the following circumstances in deciding that the applicable law is Hong Kong law :
Misdirections 58.8) In my view there are misdirections in the decisions. 58.9) The Judge had correctly identified that the Mainland being the place of performance of the 1st defendant’s obligation to transfer the shares in FCO and FCL to Mr. Ngan’s camp pointed strongly to a Mainland connection. This view is clearly supported by authorities such as Benaim & Co v. L. S. Debono [1924] AC 514, 520; The Assunzione [1954] P 150 and Bank of India v. Gobindram N Sadhwani [1988] 2 HKLR 262, 268. Benjamin’s Sale of Goods 7th Ed, paragraph 25—009 summarised the position :
58.10) As explained by Lord Esher MR in Chatenay v. Brazilian Submarine Telegraph Company (1890) 1 QB 79 at 83, the rationale of this factor is that if a contract is made in one country to be carried out between the parties in another country, either in whole or in part, unless there appears something to the contrary, it is to be concluded that the parties must have intended that it should be carried out according to the law of that other country. Otherwise a very strange state of things would arise, for it is hardly conceivable that persons should enter into a contract to be carried out in a country contrary to the laws of that country. Goode on Commercial Law,page 925 thus stated :
58.11) The Judge, however, then lessened or diluted the importance of this factor by saying that the 1st defendant who was to perform this essential part of the obligation in the Mainland was a resident of Hong Kong. This is wrong for two reasons :
58.12) The relevant presumption is Article 4 of the Rome Convention which Dicey (14th Ed) dealt with in Rule 204(3) :
58.13) Dicey, (14th Ed) observed at paragraph 32—113 that
58.14) This presumption, however, proceeds on the basis that the place of performance of the obligation is also the same as the place of residence of the performer. As explained by Dicey (14th Ed) at paragraph 32—118 :
58.15) However, Article 4(5) also provides that, among other things, this presumption can be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country. This is stated in Rule 204(4) of Dicey (14th Ed) which provides that,
58.16) It is clear that one situation where this presumption is to be discarded is where the place of performance differs from the place of business or place of residence of the party whose performance is characteristic of the contract. Hence Dicey, (14th Ed) at paragraph 32—127 stated that,
58.17) Footnote 23 to the first passage of paragraph 32—127, stated that :-
58.18) When the Judge said that instead of relying on the presumption, he could draw inference from the facts which underlines the presumption, he must have attached importance to such facts. In my view, before he was able to do so the Judge also ought to have recognized the situation where the presumption is to be disregarded. Such a recognition is particularly important in this case because the place of business or residence of the 1st defendant which was Hong Kong, was different from the place of performance of the characteristic obligation i.e. the transfer of the FCL shares which was to be performed in the Mainland. This difference will cause the presumption to be replaced. What the Judge had done was to draw inference from facts, which, in the absence of the presumption, do not lay claim to the proper law of the contract. In so doing he must have attached wrong or undue weight to the place of residence of the 1st defendant i.e. Hong Kong. This is because, as said earlier, where the parties to the contract had their place of business in the same country this can be regarded as a strong factor, the same cannot be said when they reside in different places. In such a situation, under common law,the law of a country, where all, or a significant portion, of the obligations imposed by the contract, are to be performed has a claim to be the proper law. In the present case such law is the Mainland law. The strength of this connection is not answered by the plaintiff’s contention that there are also authorities which attached importance to the place of residence of the parties. 58.19) The Judge’s reference to the correspondence being issued from Hong Kong infringes the rule that conduct subsequent to the entering of the contract cannot be taken into account. 58.20) The place of performance of the agreement was the transfer of shares of a Mainland company; the shares were ‘state assets’ belonging to the window company of a Mainland provincial government; the transfer of which would require approval of the Mainland authority; Mr. Ngan was aware of such circumstances; and the parties expressly agreed to engage Mainland lawyers to handle the transfer. They all pointed towards Mainland law to be the proper law of the contract which should not be lessened by the other factors referred to by the Judge. 58.21) The signing of the contract in Hong Kong, while being a factor to be taken into account, does not support the finding that Hong Kong law is the proper law. It is indeed fortuitous that the agreements were signed in Hong Kongas submitted by Mr. Benjamin Yu S.C. (who appeared with Mr. Paul Shieh S.C. and Mr. Law Man Chung as counsel for the defendants). 58.22) The Judge also referred to the background of the case where internal correspondence of the 1st defendant to the Fujian government (Report dated 5 June 1997) showed that the 1st defendant desired to relocate part of the operation of FCL in the Mainland to Macau in order to avoid problems over intellectual property rights with FRIMS. The report stated that :-
58.23) The Judge held that :-
58.24) In my view the Judge had not properly recognized that the subject matter of the contract was the sale of the shares and not the operation of FCL. The 1st defendant’s desire to resort to judicial systems outside the Mainland was to address the dispute with FRIMS and not an indication of its or the parties’ wish to distance themselves from the Mainland in respect of the present transaction. Title to the shares 58.25) Further the plaintiff is not merely seeking damages under contract but is also asserting a proprietary claim to the shares as well. This is reflected in the order made by the Judge where he held 51% of the shares in FCL belonged beneficially to the plaintiff. It has not been seriously disputed that the issue of beneficial interest in shares is determined by the law where the shares are situated (lex situs). This is reaffirmed by the Court of Final Appeal in Tripole Trading Ltd & Ohters v. Prosperfield Ventures Ltd & Another [2006] 1 HKLRD 200 at paragraph 86. The FCL shares are situated in the Mainland. In the circumstances under this limb the applicable law is also Mainland law. Mainland law applies 58.26) To conclude on this part, the proper law under both characterization is Mainland law rather than Hong Kong law. (III) Consequence if proper law is Mainland law 59.Because of the Judge’s decision that the proper law of the contract was Hong Kong law, he dealt with the consequence arising therefrom only in the context of Hong Kong law. As a result this Court is handicapped in addressing fully the consequence in the context of Mainland law because of the absence of findings on this issue. Contract invalidand the result 60.If Mainland law was the proper law of the contract, then the expert evidence clearly showed that the contract was invalid. The contract was invalid by reason of FCL not having obtained approval to dispose of its shares. Under Mainland law, the innocent party is entitled to two remedies :
Restitution 61.In respect of restitution the defendants have indicated both in the Court below and in this Court that they are prepared to make restitution. In this Court, the defendants openly stated that it will return HK$20 million being the amount paid by the plaintiff to the 1st defendant with interest and will forego the return of FCO shares and dividends declared or paid by FCO. The plaintiff has not responded to the open offer. If this offer is accepted, then there will be a judgment on such terms for the plaintiff. If not, the issue of restitution must be remitted to the Court of First Instance for determination under Mainland Law. Compensation 62.The Judge, on the basis that the proper law was Hong Kong law, found that under the Mainland statutory provisions the obligation to procure the necessary approval for transfer of the FCL shares was on FCL and not the 1st defendant. However, he went on to hold that the 1st defendant was at fault (again on the basis of Hong Kong law) in not causing FCL to obtain approval. He decided this issuein the plaintiff’s favour and held that the 1st defendant was liable to pay compensation to the plaintiff in the amount of US$30 million. Basis of decision 63.The Judge found the 1st defendant was at fault because there was an implied term of the contract that since ‘the 1st defendant is the sole shareholder who had control and management of FCL, it goes without saying that the 1st defendant will procure the approval’. The Judge further held that :
64.Proceeding on that basis the Judge held that, under Hong Kong law, the 1st defendant was in breach of the contract. He went on to hold that :-
65.It should be noted that the parties in the Court below had not argued the case of implied term at all. The Judge took up this issue himself. Since the Judge made this award under Hong Kong law which I find to be wrong, this award would have to be set aside. In any event the plaintiff in the Court below elected to proceed by way of proprietary remedies instead of damages. Is the plaintiff entitled to compensation under Mainland law? 66.In this Court, the plaintiff, by way of an amendment to the respondent’s notice, argued that the Judge ought to have held also that the plaintiff is entitled to compensation under Mainland law as well. Specifically the plaintiff argued that the fault of the 1st defendant lay in disposing of the FCL shares to JDS thereby preventing approval for the transfer of the FCL shares to the plaintiff. 67.This Court allowed this issue to be argued because as pointed out in the Ruling of this Court dated 8 July 2010 both parties had argued this issue before the Judge on the basis that under Mainland law, the plaintiff was entitled to compensation although the Judge made no decision on this issue specifically under Mainland law. Absence of finding of fault 68.In my view, this Court is not in a position to make a determination on this topic. First, because the Judge had not made a finding on this issue under Mainland law. Second, to deal with this issue will require the Court to examine not only the reports of the Mainland law experts but also their oral evidence concerning the responsibility of the 1st defendant which controlled FCL. Third, there are fundamental factual issues to be resolved first, for example, who were actually in control of the 1st defendant; did the parties form a committee to deal with the transfer; would the authority approve of the transfer since it had already approved the FCO transfer? This Court is not in a position at this stage to address this issue properly. Should compensation be remitted? 69.However, even if, for the purpose of argument, under Mainland law the 1st defendant was at fault, I still do not see the need to remit the issue of compensation to the Court below for determination. The only compensation which the plaintiff has sought to recover is based on constructive trust, namely, the disgorgement of profit received by the 1st defendant on the disposal of FCK shares. As will appear in the following discussion I have found that the plaintiff is not entitled to such profit. This being the case, it is futile to remit the issue of compensation to the court below. Constructive trust 70.As pointed out at the beginning of the judgment, the Judge granted equitable relief to the plaintiff. This was done on the basis that Hong Kong law is the applicable law. The plaintiff had accepted that it is not its case that if the Mainland law was the applicable law and the agreement was invalid under such law, a constructive trust can still arise. But it also contends in this Court that it is entitled in any event to equitable remedies such as taking of account and tracing by reason of the 1st defendant being a constructive trustee. Although the applicable law is Mainland law, the trust arises not under Mainland law but by virtue of the remedies available under Hong Kong law by reference to the principles stated in the line of cases represented by Kuwait Oil Tanker Co SAK and another v. Al Bader and others(‘KOT’) [2000] 2 All ER (Comm) 271. Defendants to disgorge benefit? 71.1) The starting point of this discussion is Dicey’s (14th Ed) Rule 230
71.2) At paragraph 34—049 Dicey, (14th Ed)further stated that :-
KOT and Arab Monetary Fund 71.3) Nourse LJ in KOT referred to the judgment of Chadwick J in Arab Monetary Fund v. Hashim (No. 9) (15 June 1994, unreported)
71.4) Nourse LJ then held that,
71.5) In order to properly understand the decision in KOT that the nature of duties of restitution imposed by Kuwaiti law is to be regarded as fiduciary duties by English court, one must refer to the evidence that was adduced in that case. This can be found at paragraph 191 of the judgment
Applying KOT to the present case 71.6) In the present case, the plaintiff, in order to succeed on this topic, must demonstrate that the Mainland law (which is the proper law of the contract or the proper law of the obligation) requires the defendants to disgorge the benefit it received from the disposal of the FCL shares. 71.7) Although Mr. Bai (the defendant’s expert) in his report of 7 July 2005 stated that under Mainland law the plaintiff and the 1st defendant did not have any trust legal relationship, Professor Wang (the plaintiff’s expert) in his report dated 12 January 2006 stated that Mr. Bai’s statement could easily have caused confusion in Hong Kong which applied the common law; the legal term ‘trust’ has a great difference in the different context of Mainland law and common law; although under Mainland law, the act of infringing the property given by another person is not directly labeled as breach of the duty of trust, the carrying out of such an act is nonetheless required to assume civil liability, for example, to assume the responsibility of compensation. 71.8) There is no finding by the Judge on this issue raised in the expert evidence. However, there are further hurdles for the plaintiff to overcome. Institutional and Remedial Constructive Trust 71.9) Snell’s Equity, 31st Ed, paragraph 24—09 discussed the difference between institutional constructive trust and remedial constructive trust :
71.10) The defendants argued that the trusteeship arising from existence of a specifically enforceable contract is an institutional trust as distinguished from a remedial constructive trust. The existence of such a trust must be founded on a valid and enforceable contract – which is absent here. They argued that as a result, remedial constructive trust is not available to the plaintiff as a matter of law. 71.11) While I tend to accept the defendant’s submission on this point, in my view, in the absence of argument of how the difference of these two concepts may impact on KOT, I am not prepared to hold on this ground alone that the plaintiff’s claim for equitable remedy is precluded. Requirement of specific performance 71.12) However, a more fundamental problem on the availability of equitable remedy under the KOT approach is the absence of a specifically enforceable contract. These two topics must be viewed together since they are an integral part of the equitable remedy. 72.In this Court it is submitted by the defendants that if the applicable law on the plaintiff’s proprietary claim could only subsist if it were Hong Kong law, the Judge erred in holding that the plaintiff had acquired a beneficial interest in the FCL shares. It did not acquire such an interest because specific performance of the First Laser Agreement (insofar as the transfer of the FCL shares are concerned) could not have been decreed due to the lack of required approval under the statutory provisions of the Mainland. The defendants relied on Howard v. Miller [1915] AC 318 and Okachi (Hong Kong) Co. Ltd. v. Nominee (Holding) Ltd [2007] 1 HKLRD 55. 73.The requirement of specific performance to constitute the trust is well established. In Okachithe position is summarised as follows :
The plaintiff’s position : equity in personam 74.The plaintiff’s case on constructive trust is by reason of the 1st defendant being the vendor of the FCL shares. The plaintiff’s beneficial interest arose from the agreement. The plaintiff took the points that,
75.The plaintiff relied on the following cases :
My view 76.1) It is inevitable that one must pay regard to the important requirement that the validity or enforceability (to use a neutral term) of the contract depends on a fulfilment of a condition, namely, approval being given by the relevant authority. The non fulfilment of this condition will render the contract “of no effect”, invalid or unenforceable and specific performance will not be decreed. 76.2) As apparent from the cases, even when Courts exercised the equity jurisdiction in personam, it does not mean they would ignore the fact where the equitable relationship no longer existed. The statements by Luxmoore J in In re The Anchor Line that ‘a valid equitable security according to English law’ and Judge Baker that ‘the order will not be made if the carrying out of it is illegal or impossible according to the lex situs’ in Webb underlined the requirement of a relationship which gives rise to equity. 76.3) Where the equity has been destroyed, the claimant is no longer able to invoke the personam jurisdiction which is based on that equity. Peter Gibson LJ observed in Lightning,
76.4) In the present case, since the contract was “of no effect”, invalid or unenforceable because the condition has not been fulfilled, this means that the equity has been destroyed or does not exist between the parties and as a result Hong Kong Court could not give relief to it. 76.5) Insofar as the plaintiff relied on cases based on a trusteeship or lien arising from payment of the purchase price (In Whitbread and Chattey) it is important to distinguish them from a trusteeship which arises from the existence of a specifically enforceable contract between vendor and purchaser. Megarry and Wade on The Law of Real Property 7th Ed at 15—054 stated that :-
76.6) In respect of the trust from a specifically enforceable contract, the authorities clearly established that it must be unconditional. As Nourse LJ observed in J Sainsbury Plc. v. O’Connor (Inspector of Taxes) [1991] 1 WLR 963 at 979
76.7) In fact the principle that the conditionality of a contract precludes specific performance is expressly recognized after J Sainbury plc in cases such as Michaels and Chattey. Lewin on Trust 18th Ed at paragraph 10—05 accepted this principle :
76.8) Michaels recognized (as in Lewin) that there is a distinction between a true condition precedent which it is not within a contracting party’s power to bring about, even though he may undertake to use his best endeavours to bring it about, and a promissory condition which the party does have power to fulfil or to cause to be fulfilled. However this will not assist the plaintiff in the present case because even if, for the purpose of argument, the 1st defendant controlled FCL and could have applied for approval on its behalf, the ultimate decision whether to grant approval or not did not rest with the 1st defendant but with the relevant approving authority. The argument that the 1st defendant controls FCL will not assist the plaintiff. 76.9) The difficulty is not answered by the contention that the 1st defendant had by reason of the disposal of the FCL shares to JDS prevented the condition being fulfilled because the fact remains that at the time of the disposal upon which the plaintiff’s right was crystallised, there was no approval given by the relevant authority : the plaintiff did not have a specifically enforceable contract then. This would preclude the plaintiff from seeking the equitable relief. 76.10) In my view, the defendants have sufficiently established the problem of specific performance even without relying on the argument that Mr. Bai (the defendants’ expert) had further said that approval would not be given for the agreement because it was inconsistent with the FCO agreement for which it had given approval. 76.11) In the course of arguments Mr. Yu, SC, had referred to academic work on the topic that title to land is not governed by the lex situs : Dicey (14th Ed) Paragraph 29—064; The Common Law Choice of Law Rules for Resulting and Constructive Trust by Chong (2005) 54 ICLQ 855; Yeo, Choice of Law for Equitable Doctrines; Birks and Rose, Restitution and Equity (Chapter 8 on Resulting Trusts in the Conflicts of Law by Stevens). No opinion is expressed on these works. 76.12) The compensation sought by the plaintiff is based on the availability of equitable remedy to the plaintiff. Mr. Chan, apart from a reference to the expert’s view on interest arising from a subject matter, was unable to advance any other alternative basis of compensation if the disgorgement of profit is not available to the plaintiff. Certainly if there is another basis it has not been properly formulated at the conclusion of the appeal. This being the case it is not necessary to remit the issue of disgorgement of profit to the court below. (IV) Estoppel by Convention 77.This Court also allowed the plaintiff to amend its respondent’s notice to address the issue of estoppel by convention even if Mainland law is the proper law of the contract. This issue was specifically raised below. The Judge did not make a specific decision on whether estoppel by convention was available to the plaintiff, although he did address one specific defence, namely, public policy, to the issue of estoppel by convention. This specific defence was also relied upon by the defendant as a defence to the plaintiff’s claim on breach of contract. 78.Whether the evidence supports a case of estoppel by convention is not something that can be fully dealt with by this Court. I will discuss this topic on the assumption that there is sufficient evidence to raise estoppel by convention. Procedural or substantial? 79.The plaintiff argued that even if the proper law of the contract is Mainland law, nonetheless, because it is also relying on estoppel by convention in support of its claim, Hong Kong law which is the applicable law for this issue applies. The plaintiff relied on two bases to advance this argument. First, estoppel by convention is to be classified as ‘procedural’ in nature, so that the law of the forum (lex fori) i.e. Hong Kong law, rather than law of the cause (lex causae) i.e. Mainland law, is the applicable law. Second, even if estoppel by convention is a substantive issue, by applying the approach of Staughton LJ in The Amazonia [1990] 1 Lloyd’s Rep 236, the proper law of ‘estoppel by convention’ is Hong Kong law. 80.The starting point of the inquiry is Rule 17 of Dicey which states that all matters of procedure are governed by the domestic law of the country to which the court wherein any legal proceedings are taken belongs (lex fori). 81.The plaintiff then relied on the statement in cases that estoppel by convention is a matter of evidence in order to bring this topic into the ‘procedural’ fold. In National Westminster Bank v. Somer International Ltd [2002] QB 1286, Potter LJ having referred to cases such as Low v. Bouverie [1891] 3 Ch 82 and London Joint Stock Bank Ltd v. Macmillan [1918] AC 777 was of the view that in the light of the state of the authorities, it was not open to the English Court at least to depart from the traditional classification of estoppel by representation as a rule of evidence. 82.The debate of whether estoppel by convention is a matter of evidence or substance in these cases was not considered in the context of conflict of laws. But even under the traditional classification, it is clear that the Court is not constrained by the view that this concept is simply a matter of evidence only. This is made abundantly clear by the Court of Final Appeal in Unruh v. Seeberger (2007) 10 HKCFAR 31 where Ribeiro PJ at paragraph 154 stated that,
83.My understanding of this analysis is that this concept is not merely a matter of evidence but rather a matter of substance which is in line with the view of Lord Wright in Canada and Dominion Sugar Co Ltd v. Canadian National (West Indies) Steamships Ltd [1947] AC 46 at 56 that,
and that of Lord Denning MR in Moorgate Mercantile Co Ltd v. Twitchings [1976] QB 225 at 241 that,
84.In the context of conflict of laws, I would adopt the majority view of the Australian High Court in John Pfeiffer Pty Ltd v. Rogerson (2000) 203 CLR 503 at 543 that,
85.The Australian approach also finds favour in England in Harding v. Wealands [2005] 1 WLR 1539 in the majority judgments of Arden LJ and Sir William Aldous. Although Waller LJ in his minority judgment stated that Pfeiffer was considered in the ‘federal’ context of Australia and not in the international context and the High Court of Australia in Regie National des Usines Renault SA v Zhang (2002) 210 CLR 491, at paragraph 76 stated that ‘We would reserve for further consideration, as the occasion arises, whether that that position should be applied in cases of foreign tort’, this does not lessen in any way the force of the Pfeiffer approach. 86.Based on the analysis in Unruh, I am of the firm view that estoppel by convention is a matter of substance. Further it clearly affects the existence, extent or enforceability of the rights or duties of the parties and it is not simply directed to governing or regulating the mode or conduct of court proceedings. 87.Professor T M Yeo of Singapore in ‘Choice of Law for Equitable Doctrines’ at paragraph 4.104 was also of the view that estoppel by convention is also substantive in nature.
88.Dicey in addressing specifically the classification of estoppel in conflict of laws (paragraph 7—031) stated that this is an undecided issue :
89.On the other hand, Johnston in ‘The Conflict of Laws in Hong Kong’ at paragraph 2.010 was of the view that estoppel by convention is a matter of substance :
Proper law for estoppel by convention? 90.If estoppel by convention is a substantive issue, the difficult question that arises is whether the proper law for this issue is to be governed by the proper law of the contract from which the estoppel by convention arises or whether it is to be governed by another set of law. In The Amazonia, the proper law of the contract was Australian law. Questions arose as to whether there was, first, an ad hoc contract between the parties and, second, an estoppel by convention on the appointment of an arbitrator both of which would be governed by English law. In respect of the issue of estoppel, Staughton LJ at 247 stated that,
91.Mr. Yu, SC referred to Johnston at paragraph 2.010 that the applicable law of estoppel of convention ought to be governed by the law of the main issue to which it relates :
92.Briggs in The Conflict of Laws (2nd Ed, Page 167) (not cited by the parties) seemed to suggest that different proper laws may apply to different parts of the contract but at the same time he recognized that the original contract would be and remain a source of obligations governed by its original proper law unless and until this proper law recognized the validity and effectiveness of a change.
93.The case cited by Briggs in support of the common law position is The Amar [1981] 1 All ER 498 where Megaw LJ at 505 stated that,
94.It is not possible for me to give a detailed analysis of this topic in view of the paucity of authorities. Assuming Staughton LJ did put forward the idea of the proper law of estoppel by convention, I would not adopt his approach which is not binding on this Court as his approach had not been fully analyzed.
95.This is precisely the difficulties that the plaintiff faces in this case : the parties having agreed Mainland law to be the proper law of the contract (as I have so found), the plaintiff is required to adduce evidence that nonetheless they also intended and Mainland law also permits such proper law may be changed by subsequent events. This evidence must be specifically put forward at the trial and it is not permissible for the plaintiff to say that the issue of communings should be remitted to the Court below without first identifying the necessary evidence on the preconditions. For the reasons I have given, I rule that the plaintiff is not entitled to avail itself of the Hong Kong law concept of estoppel by convention. (V) Consequence if proper law is Hong Kong law 96.As my decision is that Mainland law and not Hong Kong law is the proper law of the contract and the plaintiff is not entitled to avail itself of the Hong Kong law concept of estoppel by convention, I will refrain from expressing any view on the question of loss and damages if the proper law is Hong Kong law (other than the non-availability of equitable remedy which, although discussed under the KOT approach under Mainland law, applies equally to the situation where Hong Kong law is the applicable law). Conclusion 97.The appeal is accordingly allowed. The judgment below is set aside. The issue of restitution under Mainland law as discussed above will be remitted to To J for determination. The plaintiff’s respondent notice (as amended) is dismissed. Costs 98.The plaintiff is entitled to costs of the appeal and those occasioned by the respondent’s notice (as amended) and also the costs below on a provisional basis. Hon Yeung JA : 99.I agree. Hon Yuen JA : 100.I agree with the judgment of Cheung JA.
Mr. Chan Chi Hung, SC & Mr. Jeremy Chan, instructed by Messrs Mayer Brown JSM, for the Plaintiff Mr. Benjamin Yu, SC, Mr. Paul Shieh, SC & Mr. Law Man Chung, instructed by Messrs Paul, Hastings, Janofsky & Walker, for the 1st and 2nd Defendants (I) Please refer to FAMV25/2011 for the relevant appeal(s) to the Court of Final Appeal. (II) Please refer to FACV6/2011 for the relevant appeal(s) to the Court of Final Appeal. |
Cases cited in this judgment
Further hearings and rulings under CACV 126/2008