Rich Village Ltd v. Grand Pride Holdings Ltd and Another

CACV 224/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 224 OF 2012

(ON APPEAL FROM HCA 867/2012)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.On 3 January 2013, we dismissed the defendants’ appeal with costs. These are our reasons.

The facts

2.Very briefly, the 1^st defendant is a BVI company.  The 2^nd defendant, a Mainland resident, is a shareholder and director of the 1^st defendant.  He is said to be the person controlling the 1^st defendant.  Rich City Development Limited (“Rich City”) is a Hong Kong company with a paid up capital of HK$1.  It is a mere holding company, its only assets being the shareholdings in two Mainland companies which are engaged in real estate development in the Mainland.  It carries on no other business of its own.  The shares of Rich City were held by the plaintiff, another BVI company.

3.On 29 April 2011, the plaintiff and the 1^st defendant entered into a share transfer agreement in Chinese whereby the plaintiff agreed to transfer to the latter its shares in Rich City for RMB500 million.  The plaintiff says that at the time of the agreement, Rich City was worth about RMB1.3 billion, comprising the substantial real estate projects in the Mainland owned by the two Mainland companies, the shares of which were held by Rich City.

4.It is the plaintiff’s case that the agreement was in truth a loan agreement.  There were express provisions in the agreement for the buyback of the Rich City shares by the plaintiff after one year for RMB500 million plus interest at the annual rate of 22%.  The plaintiff says that the agreement constituted an unlawful money lending transaction.

5.The plaintiff also alleges that it was induced into making the agreement by fraudulent misrepresentations made by or on behalf of the defendants.  Moreover, when the plaintiff tried to buy back the shares, in breach of the agreement the defendants refused to return the shares to the plaintiff.

6.All these allegations are strongly denied by the defendants.  They claim that the agreement has set out all the terms agreed between the parties.  They argue that they are prepared to return the shares to the plaintiff but the plaintiff has failed to follow the relevant provisions in the agreement for the buyback and pay the stipulated price.

7.The plaintiff successfully obtained an ex parte injunction against the defendants restraining them from disposing of the shares of Rich City.  It also obtained leave to serve the writ out of jurisdiction on the two defendants.

8.The defendants applied to discharge the injunction and to set aside leave for service out of jurisdiction.

The judgment below

9.These applications, together with the plaintiff’s application to continue the ex parte injunction, all came before Mr Recorder Anthony Chan SC (as Anthony Chan J then was) for hearing on 9 August 2012.  By his decision handed down on 27 August 2012, the Recorder dismissed the defendants’ application to set aside leave for service out of jurisdiction, continued the injunction (subject to fortification) until trial or further order, and ordered a speedy trial of the action.

10.Amongst other things, the Recorder held that clause 13.2 of the agreement is a non‑exclusive jurisdiction clause and after considering all relevant factors, he came to the conclusion that leave to serve the writ out of jurisdiction should not be set aside.

11.Clause 13 reads :

“13.1 本協議適用中國香港特別行政區的法律。

13.2 本協議未盡事宜，雙方協商解決，協商不成則向合同簽訂地法院起訴。”

12.The Recorder construed the opening phrase of clause 13.2 (“本協議未盡事宜”) as meaning “matters not covered in the Agreement”.  He then held that according to their ordinary and natural meaning, the operative words of clause 13.2 (“協商不成則向合同簽訂地法院起訴”) were assertive instead of permissive in nature, thereby suggesting that it is an exclusive jurisdiction clause.  However, he considered that to construe the clause as an exclusive jurisdiction clause would produce an unreasonable result.  This was because “an order by the Ningbo court [the designated court with jurisdiction] for the return of the shares in Rich City to [the plaintiff] cannot be enforced in Hong Kong” (paragraph 36 of the judgment).  The Recorder went on to consider the legal effect of clause 13.2 as a non‑exclusive jurisdiction clause.  After weighing all relevant factors, he came to the conclusion that the present action should be allowed to be proceeded with in Hong Kong.

The appeal

13.With the leave of the Recorder, the defendants appealed from the decision of 27 August 2012.  The appeal raised a single issue, namely, whether clause 13.2 is merely a non‑exclusive jurisdiction clause as construed by the Recorder or whether it is actually an exclusive jurisdiction clause as contended by the defendants.

A question of interpretation

14.The interpretation of clause 13.2 is a matter of law.  I will start with the actual wording of clause 13.2.  The opening phrase of clause 13.2 is tolerably clear in meaning.  In my view, it means “for any matters not (clearly) provided for in this agreement”.  The clause goes on to provide for resolving these unprovided for matters by negotiation (“協商”), and if they cannot be so resolved, then (“則”) by litigation in the specified forum.

15.Clause 13.2 does not say whether the two specified methods of resolving disputes (that is, negotiation and litigation in the specified forum) are mandatory or merely permissive ones.  As a matter of Chinese usage, it can mean either.  If it bears the former assertive meaning, it will prima facie be an exclusive jurisdiction clause in relation to matters covered by it.  If it bears the latter permissive meaning, it will mean a non‑exclusive jurisdiction clause.

16.In my view, the ordinary and natural meaning of clause 13.2 is not free from ambiguity.  Its true meaning has to be discovered by looking at the agreement as a whole in the light of the relevant factual matrix.  In this regard, there are several important matters to bear in mind.

Three important matters

17.First, an exclusive jurisdiction clause is, by definition, an important clause.  The parties are, by agreement, to be restricted to litigation in the specified forum only.  For such an important clause to be found in a serious and important commercial contract involving RMB500 million (or more), one would expect the exclusive jurisdiction clause to be expressed in clear terms, particularly when the agreement was drafted by lawyers.  After all, it is easy to use words such as “應”, “須” or the like (should, shall, must etc) to clearly specify the obligation to make use of the two designated methods to resolve the relevant disputes.  But those words are conspicuous by their absence in clause 13.2.  Contrast that with other clauses in the agreement where the word “應” (should) is used regularly to express a mandatory obligation.  For instance, it is used in clause 2.4 to refer to the timetable for confirming the transfer price of the shares; in clause 8 regarding the buyback of the shares; and in clause 9 regarding breach of contract.  In these examples, the subject matters are self‑evidently important ones and the draftsman of the agreement has had no difficulty in using the word “應” to express the relevant mandatory obligations.

18.Secondly, the opening phrase of clause 13.2 also gives rise to problems insofar as one wants to construe it as an exclusive jurisdiction clause.  As mentioned, it means “for matters not (clearly) provided for in this agreement”. It therefore defines and delimits the scope of application of clause 13.2, that is, it is restricted to disputes arising from matters not provided for or clearly provided for in the agreement.  A natural question then is: what about disputes arising from matters already provided for in the agreement?  It should be noted that there are many things specifically provided for in the agreement.  Disputes can of course still arise in relation to them if one party or another refuses or fails to comply with any of them.  Does clause 13.2 cover such disputes and if not, where can the parties sue? Mr Johnny Mok SC (leading Ms Teresa Wu), for the defendants, specifically disavowed any intention to argue that there is an implied exclusive jurisdiction clause in the agreement to cover disputes arising from matters already provided for in the agreement.

19.In my view, if one were to construe clause 13.2, which, as explained, only applies to disputes arising from matters not (clearly) provided for in the agreement, as an exclusive jurisdiction clause, one would end up with a lacuna in relation to those disputes arising out of matters already provided for in the agreement.  To construe clause 13.2 as an non‑exclusive jurisdiction clause would not eliminate the lacuna entirely.  It would, however, reduce the difference between the two types of dispute under consideration: in relation to those provided for in the agreement, there is no jurisdiction clause at all; in relation to those not provided for in the agreement, they are covered by a non‑exclusive jurisdiction clause.

20.Thirdly and even more importantly, the nature of the agreement and the subject matter of the agreement must be firmly borne in mind.  The agreement is either a transfer of shares agreement or, as the plaintiff now contends, a loan agreement disguised as a share transfer agreement.  Either way, the transfer of the subject shares and the buyback of those shares in accordance with the provisions set out in the agreement are obviously extremely important matters to the parties and they have been covered elaborately by the provisions in the agreement.  The importance of the plaintiff’s due performance of the agreement to transfer the shares to the 1^st defendant cannot be over‑emphasized. This has been clearly provided for in the agreement.  But unlike many other transfer of shares agreements, this particular agreement contains a mandatory buyback provision which makes it obligatory for the plaintiff to buy back the shares at a specified price, at a specific time and in a particular way.  All this is provided for in great detail in clause 8 of the agreement.

21.Clause 9 of the agreement goes on to make provisions for various situations of breach.  In particular, the refusal or failure to transfer the shares, and the refusal or failure to buy back those shares, are specifically provided for respectively. In both cases, the party in default will have to pay to the innocent party a sum of money by way of compensation.  But on top of that, the innocent party will still retain the option to compel the party in default to transfer, or, as the case be, buy back the shares.

22.The importance attached by the parties to the transfer of the shares and the buyback of those shares is therefore made most plain.

23.It is against that background that one must ask whether the parties really intended (viewed objectively) to have an exclusive jurisdiction clause whereby they can only sue and be sued in the Ningbo court.  In my view, the answer is “no”.  The most natural and convenient forum for an action to enforce obligations for the transfer or buyback of the Rich City shares must be Hong Kong, these being shares of a Hong Kong company. Moreover, there is no dispute that a judgment by the Ningbo court for the transfer or return of the shares cannot be directly enforced in Hong Kong.

24.Mr Mok argued that such a judgment may still be recognized and enforced in Hong Kong under common law.  That may be so (leaving aside all arguments relating to whether such a judgment would be a “final and conclusive” one in the eyes of the local courts).  But it is beside the point.  The question here is whether viewed objectively, the parties intended that they can only go to the Ningbo court for relief for the transfer or return of the shares when it is obviously much more convenient (putting it at the lowest) to sue in Hong Kong.

25.Mr Mok also argued that one should not be obsessed with disputes relating to the transfer or return of the shares.  There could be other disputes arising between the parties which could be satisfactorily and conveniently dealt with by the Ningbo court, given the parties’ connections with the Mainland.  A monetary claim is one such example.  I do not disagree with that. But it does not detract from my point that for self‑evidently important matters such as the transfer and return of the shares, it is unlikely, viewed objectively, that the parties would have wanted to make the Ningbo court the exclusive forum for resolving their disputes in relation to them.

Conclusion

26.All things considered, clause 13.2 is not an exclusive jurisdiction clause.  That accordingly disposed of the entire appeal, there being no challenge against the judge’s refusal to exercise his discretion to set aside leave for service out of jurisdiction on the basis that clause 13.2 is only a non‑exclusive jurisdiction clause.

Disposal

27.The appeal was accordingly dismissed and we also gave the costs of the appeal, together with a certificate for two counsel, to the plaintiff.

Hon Kwan JA:

28.I agree with the Reasons for Judgment of the Chief Judge.

Mr Neville Sarony SC and Mr Conrad Wan, instructed by Tang, Wong & Cheung, for the plaintiff

Mr Johnny Mok SC and Ms Teresa Wu, instructed by King & Wood Mallesons, for the defendants