Kfe Hong Kong Co., Ltd v. Extract Group Ltd

HCA 457/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 457 OF 2010

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BETWEEN

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Before : Deputy High Court Judge Au-Yeung in Chambers

Date of Hearing : 9 December 2010

Date of Handing Down Decision : 20 January 2010

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DECISION

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1.The defendant applies for stay of proceedings on the ground of forum non conveniens.

BACKGROUND

2.In or about 2008, one Karce International Holdings Co. Ltd. (“Karce”) started negotiation with the plaintiff for the disposal of its printed circuit board sector (“the disposal target”).    The disposal target consisted of shares in a PRC company and its holding company.  A deal was struck between Karce and the plaintiff whereby the total consideration payable by the plaintiff for acquiring the disposal target was US$4 million.  The total consideration was divided into 2 parts: (i) acquisition of the disposal target for a consideration of US$3 million by way of a sale and purchase agreement; and (ii) consultancy service for procurement of an upgraded sewage license for output of up to 800 tons per day (“the License”) to be granted to the PRC company for a fee of US$1 million.  Karce nominated the defendant as consultant who eventually entered into the consultancy agreement in question (“the Consultancy Agreement”) with the plaintiff. 

3.By the Consultancy Agreement, the plaintiff appointed the defendant as consultant to provide one-off sewage upgrade licensing services in the PRC. If the defendant was not able to assist the plaintiff to get the License by 30 September 2009, the defendant had to return the whole of the consultancy fee of US$1,000,000 on or before 31 October 2009. 

4.The plaintiff duly paid the US$1 million to the defendant but the latter did not obtain the License.  The defendant claimed that performance was frustrated by an unforeseen change of policy of the Dongguan Provincial Government beyond its control.  The defendant informed the plaintiff accordingly but the plaintiff allegedly insisted that the defendant should try to obtain the License.  The defendant’s application was rejected by the Mainland authority.  To overcome the impasse, the defendant designed an alternative recycling system for the plaintiff that had the same effect or production level but without the need to obtain the License.  In short, the defendant contended that it had performed the agreement, had done extra things for the plaintiff for which it was entitled to quantum meruit and the plaintiff was not entitled to repayment of the consultancy fee.

5.The plaintiff claimed that under the sale and purchase agreement, if there were any “unforeseen circumstances”, then it would not be entitled to have, amongst others, the cash portion of the purchase price (US$3 million) refunded.  On the contrary, such “unforeseen circumstances” were not provided for in the Consultancy Agreement.  The intention of the parties, so the plaintiff says, was that no matter what the defendant would have done pursuant to the Consultancy Agreement, so long as the defendant was unable to assist the plaintiff to get the License, there was an absolute obligation on the defendant to return the whole of the consultancy fee of US$1 million.   The alternative recycling system was not what it contracted for.  It was not relevant to nor an alternative under the Consultancy Agreement.   The plaintiff thus denied the claim for quantum meruit.

6.The defendant disagreed and claimed that the Consultancy Agreement was ancillary to and was to be construed in accordance with the sale and purchase agreement.

7.Although the plaintiff disputed by way of affirmation evidence whether or not there was a defence to its claim, I am satisfied for present purposes that there are triable issues.

THE APPLICATION

8.The amended summons was issued under the inherent jurisdiction of the High Court for:

“A declaration that in the circumstances of the case, the Court should not exercise any jurisdiction it may have, or an order staying the proceedings herein on the ground of forum non conveniens and/or on the ground that considering the best interests and convenience of the parties to the proceedings and the witnesses in the proceedings, the proceedings should be conducted in another court, namely, the courts in the Guangdong Province (which is located in Dongguan City and known as “東莞市第二人民法院”, and in English transliteration “The No. 2 People’s Court of Dongguan”), the People’s Republic of China.”

9.This amended summons was defective in that post-Civil Justice Reform, the application should have been taken out under Order 12, rule 8.  As it stands, the amended summons made no reference to this rule.

10.The amended summons also made no reference to which limb under Order 12, rule 8(1) or (2A) the defendant was proceeding except to ask for a stay. Specifically, there was no application for setting aside service of writ out of jurisdiction on the defendant.  The written submissions from both sides were therefore permeated with the principles flowing from the case of Spiliada Maritime Corporation v. Cansulex Ltd. [1987] 1 AC 460 as if the burden of proof in this application was on the defendant.  It was only during oral submission that Mr Remedios leading Mr Chan for the defendant raised the distinction of jurisdiction founded as of right and not as of right and suggested that the burden of proof was on the plaintiff to show that Hong Kong was the appropriate forum for the trial of this case.

THE LAW ON FORUM CONVENIENS OR FORUM NON CONVENIENS

11.Where jurisdiction is not founded as of right, the burden is on the plaintiff to show that Hong Kong is the appropriate forum.

12.Noble Power Investments Ltd v. Nissei Stomach Tokyo Co. Ltd. [2008] 5 HKLRD 631 concerned plaintiffs who were BVI companies and a defendant company incorporated in Japan.  Leave was obtained out of jurisdiction to serve the defendant. In an application to set aside service under Order 11, the learned Recorder weighed up the connecting factors and held that Japan was the more appropriate forum to determine the case.   The Court of Appeal overturned his approach.  In allowing the appeal of the plaintiffs, Mr. Justice Ma CJHC (as he then was) had this to say,

“21. Questions of jurisdiction and forum (that is, the appropriate forum to hear the dispute) are relevant in the exercise of the court’s discretion in this regard and, in most cases, this is perhaps the most important factor to be considered by the court when deciding whether or not to grant leave to serve out of the jurisdiction.

22. In this context, the following points should be emphasized:

(1) Where a plaintiff institutes proceedings in Hong Kong as of right, the defendant may challenge the jurisdiction of the Hong Kong courts to hear the claim in the sense that it may be argued that there is an alternative forum which ought, in preference to Hong Kong, to deal with the claim. This usually arises where the defendant relies on the existence of a foreign jurisdiction clause or on the principle of forum non conveniens. Such a challenge is based on the inherent jurisdiction of the court to stay an action in Hong Kong where the interests of justice so dictate. When the Rules of the High Court are revised consequent on the Civil Justice Reform in Hong Kong, such applications will be made under O.12 r.8. The burden is on the applying party (the defendant) to demonstrate that a stay should be granted.

(2) Where, however, a plaintiff institutes proceedings in Hong Kong not as of right (and the present case is one since leave to serve out of the jurisdiction was required), the approach of the court to questions of forum is quite different. Although this point will often only be raised by a defendant who seeks to set aside any order granting leave to serve out, the burden will not be on the defendant to demonstrate that there is an alternative forum which ought to entertain the action. Rather, the legal burden is all along on the plaintiff to show, in seeking to persuade the court to grant an order to serve out, that Hong Kong is clearly the appropriate forum for the trial of the action. As Lord Goff of Chieveley put it in a well-known passage in Spiliada Maritime Corporation v. Cansulex Ltd. [1987] AC 460, at p.481E:

The effect is, not merely that the burden of proof rests on the plaintiff to persuade the court that England 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, quite simply, the obverse of that applicable where a stay is sought of proceedings started in this country as of right.

(3) The reason for this difference in approach is that unlike the situation wherein the plaintiff sues the defendant in Hong Kong as of right, in an O.11 situation (where the plaintiff requires leave), the defendant is by definition a foreigner who ‘owes no allegiance’ to Hong Kong (in that he is not automatically subject to the court’s jurisdiction here). The court must accordingly in this latter situation be careful not to subject that defendant to what may be an “exorbitant” jurisdiction (for example, the inconvenience or annoyance of litigating in Hong Kong rather than in his own country): see Spiliada Maritime Corporation v. Cansulex Ltd. at p.481 B-D.”

13.The test on forum conveniens has been summarized in the Hong Kong Civil Procedure 2011,

“The question of which is the appropriate court, or “forum conveniens”, is a matter to be considered by the court in exercising its discretion under [Order 11]. The test is whether the interests of all the parties and of justice are best served by proceedings here or abroad. … Decisions on forum non conveniens applications are helpful in resolving O.11, r.4(2) and O.12, r.8 issues, provided that it is remembered that the question, and burden of proof, in such cases is the opposite to that in applications under O.11.”

[at para 11/1/10]

14.The decision in Spiliada Maritime Corporation v. Cansulex Ltd. [1987] 1 AC 460, adopted in the Hong Kong Court of Appeal’s decision of The Adhiguna Harapan [1987] 1 HKLR 904, 907, sets the well-known three-stage tests.  They have been summarized by Mr. Justice Cheung JA in Pei Zheng Middle School & others v. China Pui Ching Education Foundation Ltd & others, CACV 262 of 2005, para 12.

“1. The single question to be decided is whether there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action i.e. in which the action may be tried more suitably for the interests of all the parties and the ends of justice?

2. In order to answer this question, the applicant for the stay has to establish that first, Hong Kong is not the natural or appropriate forum (‘appropriate’ in this context means the forum has the most real and substantial connection with the action) and second, there is another available forum which is clearly or distinctly more appropriate than Hong Kong. Failure by the applicant to establish these two matters at this stage is fatal.

3. If the applicant is able to establish both of these two matters, then the plaintiff in the Hong Kong proceedings has to show that he will be deprived of a legitimate personal or juridical advantages if the action is tried in a forum other than Hong Kong.

4. If the plaintiff is able to establish this, the court will have to balance the advantages of the alternative forum with the disadvantages that the plaintiff may suffer.  Deprivation of one or more personal advantages will not necessarily be fatal to the applicant for the stay if he is able to establish to the court’s satisfaction that substantial justice will be done in the available appropriate forum.” 

STAGE I – SUITABLITY OF HONG KONG AS THE FORUM AND AVAILABILITY OF ANOTHER FORUM

15.The burden of proof under Stage 1 is on the plaintiff.  At the ex-parte stage when the plaintiff sought leave to serve the writ out of jurisdiction, the grounds advanced to support the assertion that Hong Kong was the forum conveniens were:

(i)   That the Consultancy Agreement was signed in Hong Kong.

(ii)   That the choice of law under the Consultancy Agreement was Hong Kong law.

(iii)   The management fee was paid to the defendant in Hong Kong.

(iv)   That most of the documentary evidence and major witnesses would be available in Hong Kong.  Two of the plaintiff’s witnesses are permanent residents in Hong Kong; the other one is a frequent traveller to Hong Kong.  All books and accounts recording the negotiation and performance of the Consultancy Agreement were kept by the plaintiff in Hong Kong.  The potential witness of the defendant appeared to have a permanent residence in Hong Kong.

16.Save for the issue of witnesses, these grounds advanced by the plaintiff were not disputed in the present application.  I have, however, reminded myself that a choice of law is not to be equated to a choice of forum: Macsteel Commercial Holdings (Pty) Ltd & anor v. Thermasteel V (Canada) Inc & anor [1996] CLC 1403; Chris Sawyer v. Atari Interactive Inc. [2005] EWHC (Ch); Novus Aviation Limited v. Onur Air Tasimacilik AS [2009] 1 Lloyds Rep. 576. 

17.The approach in deciding on the appropriateness of a forum is not just an exercise in loading up with factors which point to any particular jurisdiction in abstract.  The court is required to focus on the appropriateness of a forum from the point of view of the trial of the action.  The court is to identify a forum with which the action has the most real and substantial connection.  See New Link Consultants Ltd v. Air China & others [2005] 2 HKC 260, at para. 67, per Deputy Judge Poon as he then was.

18.In the present case, since the validity of the Consultancy Agreement and receipt of the US$1 million are not disputed, the burden of proof is going to rest on the defendant at the trial.  Doing my best on the evidence without a pleaded defence, the issues are:

(A)   Whether on a true construction of the Consultancy Agreement and/or the sale and purchase agreement, the defendant can rely on “impossibility of performance” or “frustration” to avoid repayment of the US$1 million?

(B)   Whether the Consultancy Agreement was impossible to perform;

(C)   Whether the Consultancy Agreement was frustrated;

(D)   Whether the defendant had incurred expenses for the performance of the Consultancy Agreement prior to the discharge of the same on the ground of frustration (s.16(2) Law Amendment and Reform (Consolidation) Ordinance); and

(E)   Whether the plaintiff had obtained a valuable benefit before the time of discharge by reason of the defendant’s performance of the Consultancy Agreement which it ought to pay for as the court considers just (s.16(3) LARCO).

(F)   Amount to be repaid by the defendant, if at all.

19.Issue (A) turns on construction of the Consultancy Agreement and (subject to the parol evidence rule) examination of circumstances surrounding the entry into the sale and purchase agreement and Consultancy Agreement. There was no dispute that the Consultancy Agreement was negotiated and concluded in Hong Kong and so was the payment thereunder.  The witnesses who could give evidence in respect of this issue were either Hong Kong residents (although one witness for the defendant was said to be stationed in Dongguan) or frequent travellers to Hong Kong.  On this issue, in my view, with the choice of law clause, Hong Kong is clearly and distinctly the appropriate forum.

20.Issues (B) to (F) involve mixed questions of fact and law.  In pointing to the alternative forum in Dongguan, the defendant identified the following connecting factors:

(a)   The defendant is a BVI company and has no business or any connection to Hong Kong except for a correspondence address and bank account. 

(b)   Performance of the Consultancy Agreement was to be in Mainland China.  The alleged change in policy took place there and so did the alleged breach.  

(c)   All of the defendant’s witnesses, including the head of the Dongguan Sub-Bureau of the relevant Environmental Protection Bureau and experts, are in Mainland China. 

(d)   Possible site visits by the Court.

(e)   Although the Consultancy Agreement provided for Hong Kong law to be the governing law, there was no suggestion by the plaintiff that the court in the Guangdong Province would not permit evidence of Hong Kong laws to be adduced at the trial. 

21.In my view, factor (a) is neutral.

22.Factor (b) on performance is in favour of the defendant. 

23.Under factor (c), there may be 3 potential categories of witnesses: (i) witnesses as to facts; (ii) government official; and (iii) expert witness. 

24.With regard to witnesses as to facts, it is now accepted that given the proximity of Hong Kong and Mainland China and the relative ease of crossing the boundary, “logistical” issue today counts for little: Hong Kong Civil Procedure 2011, para. 11/1/10AC(ii) and 11/1/10DA.    This is not disputed by Mr Remedios.

25.The identified factual witnesses Mr. Tong and Mr. Lau for the defendant are both Hong Kong residents, albeit the latter is said to be stationed in Dongguan most of the time.  There should be no difficulty in their coming to Hong Kong to give evidence.

26.With regard to the need to call the government official, the defendant’s affirmant claimed that based on his lengthy period of experience in dealing with local government officials in PRC, the extent of implementation of certain government policies in PRC very much varied with the individual government officials in respect of each municipality.  Thus, the meaning and effect of a change in environmental policy in a particular area in PRC was not a matter which a competent expert or lawyer would be in the position to explain to the court. It is pertinent to have the same government official or Chief of Bureau to provide evidence as to the meaning and effect of the change of policy as well as the precise message he/she had conveyed to the applicant.  Further, as the plaintiff seemed to dispute what the Chief of Bureau had said to the parties’ representatives, it was all the more important that evidence from the relevant Chief of Bureau in Dongguan should be adduced in this case.

27.I am unable to see why it is necessary to prove the reason for a change in policy, as opposed to proving the fact of such change as conveyed by the official to the defendant.  The decision dated 19 November 2009 refusing to grant the License was under the hand of the government official and at a meeting with the official had taken place with the parties’ representatives. The parties’ representatives could give evidence on it and the Hong Kong court is used to resolving disputes of fact.  Further, as submitted by Mr Chan SC for the plaintiff, the meaning and effect of the change in policy should be an objective matter which a competent expert (especially PRC lawyers) could give evidence to the Hong Kong court.  In Pei Zheng Middle School & others v. China Pui Ching Education Foundation Ltd & others, CACV 262 of 2005, para 20, Mr. Justice Cheung JA says,

“But hearing factual and legal issues with a Mainland element are matters that the Hong Kong courts regularly deal with in adjudication. More so after the resumption of sovereignty in 1997. One is only stating the obvious to say that Hong Kong has a highly competent and efficient legal system which enables it to handle these matters without difficulties. An example that comes readily to mind is the case of Guangdong Foodstuffs Import & Export (Group) Corp & another v. Tung Fook Chinese Wine (1982) Co. Ltd. & another [1999] 3 HKLRD 545 in which two Mainland municipal trading entities were staking claims in our courts to the goodwill of a trade name. Substantial factual issues concerning the policy of the planned economy and the effect of the open door economic policy were canvassed in that case.”

28.Even if the government official is to be called, the defendant has not considered the possibility of using video link for the purpose of taking evidence.

29.With regard to expert witnesses, this factor weighs little.  It is up to the defendant to engage an expert who is willing to come to Hong Kong if the trial is to be held here.  As Mr Chan SC submits, evidence can be given via video link for any reluctant traveller.  There is no reason to believe (and none has been put forward) that appropriate experts, if needed, are Mainland based and would refuse to take the 1.5 hour journey from Dongguan to Hong Kong.

30.Factor (d) has not been shown to be relevant.  I am unable to see why a site visit is necessary for this case.  If there is anything on the site which is essential for the court to know, this can be presented through photos, witness statements or even the expert report. 

31.Factor (e) is a neutral matter.  The Dongguan court may be willing to apply Hong Kong law and vice versa.   However the more pertinent question is whether the Dongguan court has jurisdiction in this case in which the agreement was negotiated and concluded in Hong Kong, between a Hong Kong company and a BVI company where the choice of law is Hong Kong law, with performance in the Mainland. To this, the defendant’s evidence provided no answer.

32.Considering all factors, I am satisfied that the plaintiff has discharged its burden of proving that Hong Kong is clearly and distinctly the more appropriate forum and the defendant has not rebutted this.

STAGE II – DEPRIVATION OF PERSONAL OR JURIDICAL ADVANTAGE

33.A Mainland judgment in the present action is not enforceable in the Hong Kong for lack of a choice of Mainland court agreement: section 5(2)(b) of the Mainland Judgments (Reciprocal Enforcement) Ordinance.

34.The plaintiff also says that it will be deprived of the juridical advantage of levying enforcement on the only known asset of the defendant in Hong Kong (a bank account) if the trial were to take place in the Mainland.

35.To these matters, the defendant simply had no answer.  The plaintiff has shown that litigating in the alternative forum may deprive it of a juridical advantage.

STAGE III – BALANCING OF ADVANTAGE

36.Considering all matters under Stages I and II, the balance clearly lies in favour of having the trial of this action in Hong Kong.

CONCLUSION

37.The plaintiff has shown that Hong Kong is clearly and distinctly the most appropriate forum to litigate the issues both in the ex-parte stage and under this summons.   The interests of all the parties and of justice are best served by proceedings conducted here.  The amended summons is therefore dismissed.  I make an order nisi that costs of this application be to the plaintiff.

38.There shall be summary assessment of costs on the papers on 11 February 2011 at 9:30 am.  No attendance is required. The plaintiff shall file and serve its statement of costs by 2 February 2011.  The defendant shall file and serve its grounds in opposition by 10 February 2011.

Mr. Anthony Chan, SC leading Mr. Danny Ng, instructed by Messrs. Joseph S.C. Chan & Co, for the Plaintiff

Mr. Leo Remedios and Mr. Frederick Chan, instructed by Messrs. C.L. Chow & Macksion Chan, for the Defendant