Hyundai Engineering & Construction Co., Ltd v. Ubaf (Hong Kong) Ltd
Read the full judgment text of HCA 175/2012 on BabelCite. This High Court CFI judgment was delivered on 24 October 2012.
1. There are two applications before me: (i) the plaintiff’s application for summary judgment in the sum of US$5,552,787.75 together with interest; and (ii) the defendant’s application for stay of proceedings pending the determination of a claim in the Intermediate People’s Court of Luoyang City, Henan Province, the Mainland (“the Mainland Court”) , or alternatively stay of proceedings in favour of the Mainland Court on the ground that it is the more appropriate forum for the determination of th
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HCA 175/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 175 OF 2012 _____________
__________________________ JUDGMENT __________________________ 1.There are two applications before me: (i) the plaintiff’s application for summary judgment in the sum of US$5,552,787.75 together with interest; and (ii) the defendant’s application for stay of proceedings pending the determination of a claim in the Intermediate People’s Court of Luoyang City, Henan Province, the Mainland (“the Mainland Court”) , or alternatively stay of proceedings in favour of the Mainland Court on the ground that it is the more appropriate forum for the determination of this dispute. BACKGROUND 2.The plaintiff is an engineering and construction company based in South Korea whilst the defendant carries on business as a bank in Hong Kong. 3.On 2 November 2010, the plaintiff and one Hyojong Industrial Co Ltd (“Hyojong”) entered into a contract whereby Hyojong agreed to supply steel tubular piles to the plaintiff for a construction project in Kuwait (“the Contract”). 4.On 24 November 2010, a sub-contract was entered into between Hyojong and one Luoyang Aviation Construction Co Ltd (“Qatar Luoyang”), which is a Qatari company, for the provision of raw materials for the Contract (“the Sub-Contract”). 5.In December 2010, Qatar Luoyang assigned its rights and obligations under the Sub-Contract to one Luoyang Aviation Engineering Construction Co Ltd (“Mainland Luoyang”) which is a Mainland company. 6.Under the terms of the Contract, the plaintiff had to provide 10% of the total contract price to Hyojong as an advance payment against the provision of, inter alia, an advance payment guarantee. 7.On 31 December 2010, at the request of the Henan Branch of Bank of China (“BOC Henan”), the defendant issued an advance payment bank guarantee (“the APG”) and a performance bank guarantee (“the Performance Guarantee”) in favour of the plaintiff pursuant to the terms of the Contract. In consideration of the defendant issuing the APG and the Performance Guarantee, BOC Henan issued 2 back-to-back guarantees (“the Back-to-Back Guarantees”) in favour of the defendant. 8.The said 4 guarantees were governed by the same law, ie the Uniform Rules for Demand Guarantees, ICC Publication No 758 (“the Uniform Rules”). 9.The APG contains an express and irrevocable undertaking on the part of the defendant to pay an amount not exceeding US$5,980,833.40 upon receipt by the defendant of a first demand in writing stating the following information: (i) the reference number and date of the guarantee under which the claim is made; (ii) the amount which is claimed; and (iii) the supplier (ie Hyojong) and the sub-supplier (ie Qatar Luoyang) as a consortium is in breach of its obligation under the Contract. 10.As Hyojong had failed to deliver the piles to the plaintiff in accordance with the terms of the Contract, the plaintiff issued a few demands to the defendant in December 2011 for the payment of the sum of US$5,552,787.75 under the APG. There is no dispute that at least one of the demands was made in accordance with the terms of the APG. However, the defendant refused to make the payment on the ground that there was evidence of fraud in relation to the underlying contract (ie the Contract). 11.It appears that the real reason why the defendant refused to make payment is because of an injunction granted by the Mainland Court on 5 December 2011 (“the Injunction”). The Injunction was granted upon the application of: (i) CAMA (Luoyang) Door Windows & Curtainwall Co Ltd (“CAMA”), which is the mother company of Mainland Luoyang and Qatar Luoyang; and (ii) Mainland Luoyang, against : (i) Hyojong; (ii) the plaintiff; and (iii) BOC Henan, restraining BOC Henan from making payment under the Back-to-Back Guarantees. There was also a ruling made on the same day by the Mainland Court that deposit or property with corresponding value of RMB 85 million be frozen. 12.On 20 December 2011, CAMA and Mainland Luoyang issued a “民事起訴書” (“the Civil Complaint”), which contains the particulars of the allegations against all the defendants in the Mainland proceedings including the plaintiff. 13.On 2 February 2012, the plaintiff brought the present proceedings against the defendant based on the failure on the part of the latter to honour its payment obligation under the APG. On 9 March 2012, the plaintiff applied for summary judgment against the defendant. 14.On 14 March 2012, the defendant issued the stay of proceedings summons. Since the stay application would require the court to examine the nature of the plaintiff’s claim, I would first consider the plaintiff’s application for summary judgment. THE SUMMARY JUDGMENT APPLICATION (i) The legal principles 15.Both parties agree with the following legal principles which are applicable in the context of the plaintiff’s claim under the APG:
16.I agree with Mr Pao, counsel for the plaintiff, that these legal principles are a reflection of the modern commercial reality in which such bonds are consistently provided for and confidently relied upon by their holders in the course of international business. The purpose of an unconditional performance bond is to give the utmost commercial certainty to its holder. That is why international corporations, especially in the construction context, insist upon the provision of such bonds to ensure performance by their contractors, as security against the retention of advance payments and as a source of funds for completion of the project if necessary. In such circumstances, the courts are always cautious in intervening in cases which involve unconditional performance bonds. To do otherwise may undermine the certainty and reliability of these bonds, which are their essential and defining characteristics. 17.Mr Man, counsel for the defendant, does not dispute the aforesaid legal principles and that the plaintiff had issued a proper demand for payment which complied with the requirements of the APG. However, since fraud is recognised as a possible defence to a claim on performance bond and there is evidence of fraud in relation to the underlying contract, Mr Man submits that it is not appropriate for the court to grant summary judgment here. 18.The application therefore turns on a narrow issue: has the defendant discharged the burden of establishing a triable issue as to fraud? 19.The legal principles on summary judgment are well-established. The burden is on the defendant to condescend upon particulars and to demonstrate that there is an arguable defence to the claim. Mere assertion of a defence, which is not supported by evidence, is insufficient. 20.In the context of a summary judgment application on a performance bond where the fraud exception is relied upon to resist payment, there is a dispute between the parties here as to whether a “heightened” test should be applied. In this regard, Mr Pao relies on Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800 and Enka Insaat Ve Sanayi AS v Banca Popolare Dell’ Alto Adige SPA [2009] EWHC 2410 (Comm) and argues that: (i) the “real prospect” test simpliciter (as provided for in CPR 24 in England, as compared to the “arguable defence” test in O 14 of the RHC) is a relatively low test and such a low test is not appropriate as between a bank and a beneficiary of a letter of credit or a performance bond; and (ii) in the case that the bank is going to rely on the fraud exception to resist a claim on a performance bond, particularly cogent evidence is required to establish the fraud exception. Obviously, the rationale for such “heightened” test is to preserve the autonomy of the banking relationship, the integrity of the instrument issued by the bank, and the certainty and finality in the relationship between the bank and the beneficiary. 21.Obviously, the test for resisting a summary judgment application in Hong Kong (ie the “arguable defence” test) is different from that in England after the implementation of the CPR (ie the “reasonable prospect of success” test). Nevertheless, the cases of Solo and Enka show that there are special considerations for a summary judgment application based on a performance bond, and that the court should always scrutinise the defendant’s allegation to see whether there is sufficient evidence to support the allegation of fraud. I agree with Mr Pao that such approach should be no different from cases of dishonoured cheques or promissory notes where the defendants are seeking to rely on fraud as a defence. 22.Having considered the evidence of the present case, I take the view that the defence of fraud here is just a mere allegation without sufficient proof, and it does not make a difference whether the court would adopt a “heightened” test or the “arguable defence” simpliciter test in dealing with the application. (ii) The demand under the APG 23.On the facts of the present case, it is beyond argument that a proper demand for payment of US5,552,787.75 was made by the plaintiff on 19 December 2011 which complied with the requirements of the APG. It is unnecessary for the plaintiff to prove an underlying breach of the Contract by Hyojong in order for it to make a valid claim on the APG. The only requirement imposed on it under Article 15(a) of the Uniform Rules is to specify in a statement indicating in what respect there has been a breach of obligations in the underlying relationship. 24.That requirement has been fully complied with. The demand for payment dated 19 December 2011 states that Hyojong has failed to meet the contractual delivery schedule as provided for in the Contract. It also refers to the fact that the advance payment of US$ 5.98 million has not been returned. The question then has to be asked is whether there is evidence to suggest that the plaintiff could not have honestly believed in the validity of this demand. (iii) The allegation of fraud 25.In support of the fraud allegation, the defendant is mainly relying on the allegations contained in Part 5 of the Civil Complaint and the documents referred to therein. The English translation of said Part 5 reads as follows:
26.I have read the above passages a number of times, and yet I am not quite able to understand the allegation of fraud against the plaintiff. I start with the basics. First, the plaintiff purchased the tubular piles from Hyojong, and Qatar Luoyang supplied the raw materials to Hyojong for the production of the piles. The plaintiff was not a party to the Sub-Contract between Hyojong and Qatar Luoyang or Mainland Luoyang, and so the plaintiff owed no contractual obligation to ensure that Qatar Luoyang or Mainland Luoyang was paid. It was a matter between Hyojong and the two Luoyangs. Second, the evidence supports the facts that the plaintiff had made the advance payment to Hyojong but the latter had not supplied the piles to the plaintiff in accordance with the delivery schedule in the Contract. Third, the delay in delivery was apparently caused by the payment dispute between Hyojong and the two Luoyangs. Fourth, in view of the delay in delivery, the plaintiff wrote to Mainland Luoyang on 9 October 2011 asking the latter to supply the raw materials to Hyojong without delay. One Mr T H Kim of the plaintiff (“Mr Kim”) mentioned the proposal of paying part of the purchase price directly to Mainland Luoyang subject to Hyojong’s agreement. Fifthly, Mainland Luoyang apparently supplied the raw materials to Hyojong but it had not been paid. Mainland Luoyang therefore alleges that there was a conspiracy between the plaintiff and Hyojong. (iv) Merits of the defence 27.In my judgment, fraud on the part of the plaintiff is no more than a mere allegation by Mainland Luoyang. In support of the alleged conspiracy, Mainland Luoyang is relying heavily on the email written by Mr Kim of the plaintiff to one Mr Li Gang of Mainland Luoyang dated 9 October 2011, which reads as follows:
28.Later in the email dated 28 November 2011, Mr Kim claimed that such arrangement was not possible because the plaintiff’s head-office had already made an agreement with Hyojong in respect of the second batch of goods. Mr Man submits that this could not be the case because the Letter of Intent relating to the second batch of goods was dated much later on 9 December 2011. This suggests fraud on the part of the plaintiff. 29.I cannot accept such argument. In the email dated 9 October 2011, Mr Kim only mentioned the possibility of paying part of the purchase price directly to Mainland Luoyang but subject to the approval of Hyojong. This was a very important provisio because the plaintiff was contractually bound to pay the purchase price to Hyojong and not to the two Luoyangs. From the correspondence, it is clear that there was no final arrangement between the parties and Mainland Luoyang should have obtained the consensus and confirmation of all the parties relating to the payment arrangement before releasing the raw materials to Hyojong. It does not make very much business sense that Mainland Luoyang just relied on the words of intent on the part of the plaintiff in releasing the raw materials to Hyojong. 30.One must also bear in mind that the plaintiff had been put in a very difficult position by reason of the delay in the delivery of the piles by Hyojong. In such circumstances, there is simply no evidence to suggest that the plaintiff had been acting fraudulently in expressing the intention relating to the payment arrangement in the email dated 9 October 2011. 31.Further, Mainland Luoyang seems to suggest that the payment arrangements between the parties had left Mainland Luoyang with no adequate protection. According to the allegations in the Civil Complaint, there was simply no incentive on the part of Hyojong to comply with the terms of the Sub-Contract in paying Mainland Luoyang, and that would leave Mainland Luoyang in a very vulnerable position. However, there was no obligation for the plaintiff to take care of the business interest of the two Luoyangs. In complex commercial transactions like the present one, corporations like the two Luoyangs should have looked after their own business interest. Further, since Mainland Luoyang had asked BOC Henan to provide the Back-to-Back Guarantees, Mainland Luoyang had assumed the liability of Hyojong under the Contract. At this stage, I do not understand as to why Mainland Luoyang had agreed to assume such liability, but one would imagine that Mainland Luoyang should have taken adequate measures to protect its own business interest. If Mainland Luoyang had not done so, it had only itself to blame. One thing that Mainland Luoyang cannot do is to shift the blame to an unrelated party like the plaintiff by making a wide allegation of fraud without concrete evidence of proof. I therefore agree with the observation of Mr Pao that the whole exercise in the Mainland proceedings is a dubious attempt to protect the self interest of the two Luoyangs which would arise from BOC Henan discharging its obligations under the Back-to-Back Guarantees. It may just be a desperate effort to protect “stated-owned assets”, which is exactly the phrase used in the Civil Complaint, resulting from the lack of commercial prudence on the part of the two Luoyangs in protecting their own interest. 32.Furthermore, evidence of the present case suggests that Hyojong, Qatar Luoyang and Mainland Luoyang shared common management and were related companies. It was one Mr Yousef Bin Ahmed Al Kuwari (“Mr Al Kuwari”) who signed the Contract on behalf of Hyojong in the capacity of “President/Chief executive Officer”. According to the Commercial Registration Certificate attached to the Sub-Contract, both Mr Al Kuwari and Mr Li Gang were the managers of Qatar Luoyang, and it is stated in the Civil Complaint that the same Mr Li Gang is the “legal representative” of the plaintiffs in the Mainland proceedings. In such circumstances, there is reason to believe that Hyojong and the two Luoyangs are related companies, and it would be quite fanciful to suggest that the plaintiff, being an unrelated Korean multinational company, had conspired with Hyojong to defraud the two Luoyangs. If the defendant is seriously making an allegation of fraud to deny the claim under the APG which is a performance bond, more cogent evidence has to be adduced to substantiate such defence. 33.The defendant is also relying on the Injunction granted by the Mainland Court. However, since there is no reason given by the Mainland Court for its decision, I do not know the factual and legal basis as to why the Mainland Court has granted the Injunction against the relevant defendants. As I have mentioned above, the materials contained in the Civil Complaint hardly support an allegation or inference of fraud, and I do not know whether the Mainland laws on the issues of fraud and performance bond are the same as those in Hong Kong. Hence in my judgment, the defendant has simply failed to discharge the burden of establishing a meritorious defence in the present case. 34.Neither am I satisfied that there is some other reason for the case to go to trial. What Mr Man is asking the court to do is to adopt a “wait-and-see” attitude and to wait for the outcome of the Mainland proceedings. However, without sufficient evidence to support the fraud allegation, the court would be quite irresponsible in acting on such flimsy allegation and to deny the plaintiff’s claim under the APG which is an unconditional performance bond. I therefore grant summary judgment in favour of the plaintiff. THE STAY OF PROCEEDINGS APPLICATION 35.I also have no difficulty in dismissing the defendant’s stay application. 36.The APG is governed by the Uniform Rules. Since the APG was issued by the defendant in Hong Kong, the governing law is Hong Kong law (see: Article 34(a) of the Uniform Rules”) and there is an exclusive jurisdiction clause in favour of the Hong Kong courts in relation to any dispute between the plaintiff and the defendant relating to the APG (see: Article 35(a) of the Uniform Rules). Given such circumstances, the defendant has simply failed to demonstrate that the Mainland Court is clearly and distinctly the more appropriate forum to adjudicate the plaintiff’s claim. The remaining question is, therefore, whether the court should stay the present proceedings pending the concurrent foreign proceedings between the aforesaid parties in the Mainland Court. 37.There is no serious dispute about the following legal principles which apply where a litigant seeks a stay of proceedings pending concurrent foreign proceedings:
38.Applying the legal principles mentioned above, there are a lot of reasons as to why the Hong Kong court should not grant a stay application. Firstly, the plaintiff has instituted the present proceedings as of right in Hong Kong. Unless there are very good reasons to the contrary, the plaintiff should not be deprived of the right to continue the proceedings here. There is also an exclusive jurisdiction clause in the APG in favour of the Hong Kong courts. Proceedings cannot be brought outside the chosen jurisdiction under the exclusive jurisdiction clause unless there is an exceptional reason for doing so, and it would be “most unusual” for a Hong Kong court to stay proceedings brought in Hong Kong pursuant to a Hong Kong exclusive jurisdiction clause (see: UBS AG v HSH Nordbank [2009] 2 Lloyd’s Rep 272 at §100, per Lord Collins of Mapesbury; Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631 at §37, per Ma CJHC (as he then was)). 39.Secondly, the plaintiff’s claim on the APG is a simple claim which can be resolved in a speedy manner. On the other hand, since the plaintiff has very little control over the proceedings in the Mainland Court, the duration of the stay in the Hong Kong proceedings would be entirely uncertain. If a stay were to be granted, there is no assurance that the Mainland proceedings would be prosecuted with due expedition or at all. Instead, since the plaintiffs in the Mainland proceedings have already obtained an order to stop payments on the Back-to-Back Guarantees, there is no incentive to prosecute the claim in a speedy manner. As the Hong Kong court has no control over the conduct of the case by the plaintiffs in the Mainland proceedings, it may result in grave injustice to the plaintiff here if the court were to stay the Hong Kong proceedings. 40.The defendant has also adduced no evidence as to the current progress of the Mainland proceedings, and this court has no way to assess the likely duration of the intended stay in favour of the Mainland Court. In Ho Siu Pui, supra, Kwan J accepted that this is a valid consideration against a stay application. Further, the fact that the Mainland Court has not dealt with the jurisdictional challenge lodged by the plaintiff seems to suggest that there was very little progress in the Mainland proceedings. 41.Thirdly, the issue in the Hong Kong proceedings is a narrow and self-contained one between two parties: whether the defendant is liable to pay the plaintiff under the APG. On the other hand, the Mainland proceedings involve much wider allegations against a variety of parties. The Mainland proceedings have been instituted by CAMA and Mainland Luoyang, neither of whom are parties here. There are five defendants in the Mainland proceedings, three of which are not parties to the present proceedings. 42.Apart from no identity of parties, the issues may not be the same in the two sets of proceedings. The refusal of BOC Henan to pay the defendant on the Back-to-Back Guarantees is not a valid reason for the latter to refuse to pay the plaintiff under the APG, since Article 5 of the Uniform Rules provides that the two instruments are separate and independent. Hence, to the extent that the Mainland proceedings are relevant to the Back-to-Back Guarantees and the ability of BOC Henan to effect payment thereon, this has no relevance to this case. 43.Since the issues and the parties in the two sets of proceedings are not the same, there is no reason to stop the plaintiff from pursuing the claim in Hong Kong pending the wide-ranging disputes between multiple non-parties in the Mainland proceedings, which will inevitably be time-consuming and governed by Mainland law. Coupled with the fact that there is insufficient evidence to support the allegation of fraud, the circumstances of the present case are quite different from those in Donohue v Armco Inc & Ors [2002] 1 All ER 749 relied on by Mr Man. Hence, I refuse the defendant’s stay application. Order 44.I therefore grant summary judgment in favour of the plaintiff in the sum of US5,552,787,75 and dismiss the defendant’s stay application. 45.I also making the following order nisi relating to the issues of interest and costs:
46.The order nisi shall be made absolute 14 days after the date of the handing down of this Judgment.
Mr Jin Pao, instructed by Chong & Partners, for the plaintiff Mr Bernard Man, instructed by Stephenson Harwood, for the defendant | ||||||||||||||||||||||
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