MELVIN WAXMAN AND ANOTHER v. LI FEI YU AND ANOTHER

HCA 1972/2012

[2021] HKCFI 3174

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1972 OF 2012

________________________

BETWEEN

	MELVIN WAXMAN	1st Plaintiff
	LARRY WAXMAN	2nd Plaintiff
	and
	LI FEI YU	1st Defendant
	SOLUT (HONG KONG) COMPANY LIMITED	2nd Defendant

________________________

Before:  Hon K Yeung J in Chambers

Date of Hearing:  15 October 2021

Date of Ruling:  15 October 2021

________________________

RULING

________________________

1.  This is the 3^rd Pre-trial Review of the trial due to commence on 1 November 2021.

2.  Mr Richard Khaw SC leading Ms Bonnie Cheng and Mr Martin Ho appeared for Ds.  Mr Lai Chun Ho appeared for Ps.

3.  During the 2^nd Pre-trial Review, Mr Khaw on Ds’ behalf flagged up two issues: (1) the application by Ds for a case management stay of the trial, and (2) if the trial is to proceed, the proper scope of Ps’ pleaded case.

4.  The application for a case management stay was heard on 5 October 2021.  For the reasons set out in my Decision handed down on 7 October 2021 (the “7/10 Decision”)[1], I dismissed the application.  I refer to the 7/10 Decision.

5.  It now becomes necessary to consider parties’ dispute in respect of the proper scope of Ps’ pleaded case. 

6.  Mr Khaw submits that what Mr Lai has stated in a number of submissions which he has recently filed show that Ps are seeking to fundamentally shift the basis of their case from trust as pleaded to one based on contract.  Mr Khaw relies heavily on the deletion of §§(1)  and (2)  of the Prayer when Ps amended their Statement of Claim in February 2013.  The original §§(1)  and (2)  of the Prayer sought respectively an order by way of specific performance of the Shareholders’ Agreement and damages in lieu of or in addition to specific performance.  Mr Khaw submits that Ps’ pleaded case after amendment is based on trust, and nothing else.  He submits further that Ps should not be permitted to shift the basis of their case, otherwise Ds would suffer irreparable prejudice (in terms of being deprived of the chance to plead any limitation defence and to adduce expert evidence on the concept of specific performance under Mainland law).  He invites this Court to adjudicate on the matter at this stage.

7.  I have considered Ps’ Amended Statement of Claim (“ASOC”)  carefully. I have also considered parties’ submissions, both written and oral.  I do not agree that Ps’ pleaded case is based on trust only:

(a)  At §8 of the ASOC, Ps plead the Shareholders’ Agreement and its alleged terms;

(b)  Ps then plead at §8A the 5 Documents which I have explained in the 7/10 Decision;

(c)  At §§9 to 9C of the ASOC, Ps plead their case based on trust.  It is important to note that that basis is pleaded on a further or alternative basis, that “Further or alternatively, by reason of the matters pleaded in paragraphs 8 and 8A above, each of the WDI Beneficial Shareholder and [D2] …”;

(d)  At §§12 to 15A, which are under the heading of “Performance of the Shareholders’ Agreement”, various matters averred to have done in pursuance of the Shareholders’ Agreement are pleaded;

(e)  Then follows the section of the ASOC which bears the heading “Breach of Shareholders’ Agreement and Breach of Trust by the 1^st and 2^nd Defendants”. Relevantly:

(i)  §16, which pleads Ds’ alleged breaches, starts off by averring that:

“ In breach of the Shareholders’ Agreement, the trust pleaded in paragraphs 9 to 9C above and the July Resolution …”

(ii)  At §17, Ps aver further breach by Ds of their duties as trustees;

(iii)  §19 avers that Ps were and are still ready and willing to act in accordance with the Shareholders’ Agreement;

(f)  In my view, Ps have pleaded in the ASOC a claim based both on breach of the Shareholders’ Agreement and on trust, on a “further or alternative basis”;

(g)  The amendment of the Statement of Claim is in my view consistent with the above.  Whilst §(1)  of the original Prayer has been deleted, §§(4)  and (5)  have been added.  The wordings of the original §(1)  and the new §(4)  are materially the same, save the omission of the reference to specific performance of the Shareholders’ Agreement.  Mr Khaw accepted in the course of the hearing that those new paragraphs are wide enough to cover the relief sought based on contract, but relied on the structure of the Prayer and the deletion of the claim for damages to support his stance.  In this regard, I accept Mr Lai’s submissions that the new §§4 and 5 of the Prayer are not stated to be consequential upon §§1 to 3.  The deletion of the reference to specific performance in the original §1 has the effect of making the new §§4 and 5 wide enough to cover Ps’ claim based on contract and trust.  Most importantly, given what have been pleaded in the main body of the ASOC as discussed above, there is in my view no reasonable basis to suggest that Ps have abandoned their contractual claim, as discussed in the case of The Commonwealth of Australia v Verwayen (1990)  170 C.L.R. 394 at page 482.  Nor is this in my view a case which involves the laying of any trap by ambiguous pleadings, as discouraged by Yuen JA in Choi Yuk Ying v Ng Ngok Chuen[2019] HKCA 171 at §62.1.  I accept Mr Lai’s submissions that the new §§(4)  and (5)  of the Prayer in the ASOC are broadly framed to include the contract claim and the trust claim, whereas the new §§(1)  to (3), and (6)  to (7)  are specific to the trust claim;

(h)  Mr Lai has in his written submissions referred to various matters pleaded in the subsequent pleadings, which are consistent with the above.  In particular, I note §10.3 of Ps’ Consolidated and Re-Amended Reply to the Consolidated and Re-Amended Defence of the 1^st and 2^nd Defendants and Defence to Counterclaim of the 1^st Defendant, where Ps plead that:

“ Further and alternatively, even if no such Trusts have arisen from the Shareholders’ Agreement, it is averred that [D1] has a contractual duty under the Shareholders’ Agreement to adjust or distribute or procure the adjustment or distribution of the equity in WDI Technology and the other companies within the WDI Group to the WDI Beneficial Shareholders in accordance to the Agreed Shareholding after the completion of the setup of the Haicang Factory.”

(i)  At §3 of his written submissions, Mr Khaw submits that the need for this Court’s adjudication of the present dispute arises from §20(1)  of Mr Lai’s written opening filed on 31 March 2020 (for the trial vacated as a result of the pandemic);

(j)  §20 of Mr Lai’s said written opening has to be read as a whole. There, Mr Lai is describing Ps’ case, which he sets out in two sub-paragraphs. At §20(1), he sets out Ps’ case based on contract.  At §20(2), he goes on immediately to submit that “The Shareholders’ Agreement also gives rise to an express trust in which [Ds] hold their shareholdings in the companies within the WDI Group in favour of the WDI Beneficial Shareholders according to the Agreed Shareholding: see the [ASOC] […§§9-9C]”;

(k)  In my view, what Mr Lai has submitted at §20 of his written opening are consistent with my discussion of Ps’ pleaded case as discussed above;

(l)  The above also means that as the specific performability of the Shareholders’ Agreement is prerequisite to Ps’ claim based on trust, the elements of any claim by Ps for specific performance have been pleaded.

8.  For the above reasons, I rule that Ps’ pleaded case is not confined to their trust claim.  I do not accept Mr Khaw’s submissions in that regard.

Costs

9.  I order that Ps shall have the costs of this application (which for record has taken about 1.5 hours).  I do not accept Mr Lai’s application for enhanced costs.  For the same reasons I gave in the 7/10 Decision, I order that those costs are to be taxed on a party-and-party basis if not agreed in one go upon the conclusion of the trial.

	(Keith Yeung)
	Judge of the Court of First Instance High Court

Mr Lai Chun Ho, instructed by Oldham, Li & Nie, for the 1^st and 2^nd Plaintiffs

Mr Richard Khaw SC, leading Ms Bonnie Cheng and Mr Martin Ho, instructed by Lo Lau Lawyers, for the 1^st and 2^nd Defendants

HCA 1972/2012

[2021] HKCFI 3018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1972 OF 2012

______________

BETWEEN
	MELVIN WAXMAN	1st Plaintiff
	LARRY WAXMAN	2nd Plaintiff
and
	LI FEI YU	1st Defendant
	SOLUT (HONG KONG) COMPANY LIMITED	2nd Defendant

______________

Before:  Hon K Yeung J in Chambers

Date of Hearing:  5 October 2021

Date of Decision: 7 October 2021

____________________

DECISION

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1.  This is the substantive hearing of the summons dated 26 July 2021 (the “Stay Summons”)taken out by the 1^st and 2^nd defendants (“D1”, “D2”, and collectively “Ds”) for:

(a)  a stay of these proceedings pending the appeal by the 1^st and 2^nd plaintiffs (“P1”, “P2”, and collectively “Ps”) against the judgment pronounced by the Xiamen Intermediate People’s Court (the “Xiamen Court”) dated 27 January 2021 (the “Xiamen Judgment”, and the related proceedings “Xiamen Proceedings”); and

(b)  an order that the scheduled trial dates of the present trial (ie from 1 to 16 November 2021) be vacated.

2.  Mr Richard Khaw SC leading Ms Bonnie Cheng and Mr Martin Ho appeared for Ds.  Mr Lai Chun Ho appeared for Ps.

Parties’ respective stances

3.  The stay which Ds are seeking is in the nature of a case management stay.

4.  Mr Khaw submits that the issues involved in the Xiamen Proceedings overlap substantially with those in the present action.  D1 is the plaintiff in the Xiamen Proceedings. Ps have taken part in those proceedings and have lost. They are appealing against the Xiamen Judgment.  Ds submit that Ps must be regarded as having elected to resolve the underlying disputes in the Xiamen Court and submitted to its jurisdiction.  Ds say further that pending Ps’ own appeal to the Xiamen Higher People’s Court, it would be wrong in principle, and an abuse of process, for Ps to be allowed a second bite of the cherry and to insist upon asking the Hong Kong Court to adjudicate on the same issues, in the hope of achieving a different result.

5.  Mr Lai opposes the application.  He submits that the Xiamen Proceedings and the present action concern different subject matters and issues.  The Xiamen Proceedings could not have given rise to any issue estoppel. There is hence no basis for any case management stay to be imposed.  In any event, there are also other strong discretionary factors against the application.

The background facts

6.  The parties have been before the Court.  In 2013, D2 made an application for stay of proceedings on the basis of forum non conveniens.  That application was refused by Anthony To J by his decision handed down on 19 July 2013[1]. D2’s appeal was dismissed by the Court of Appeal on 20 April 2016[2]. I respectfully refer to those decisions for the background facts of the case.

7.  Relevantly, and according to Ps’ Amended Statement of Claim, Ps are suing on an agreement which is pleaded to be “partly written and partly oral” (the “Shareholders’ Agreement”). The terms of that agreement are pleaded in §8 of the Amended Statement of Claim.  In gist, and again relevantly, Ps’ case is that pursuant to the Shareholders’ Agreement, Xiamen WDI Plumbing Industrial Co Ltd (“WDI Plumbing”) would establish a sino‑foreign equity joint venture in the Mainland (the “JV Company”).  The JV Company turned out to be Xiamen WDI Technology Company Limited (“WDI Technology”).  The equity of WDI Technology, and all the equity and dividend of a series of companies mutually recognised as the WDI Group would however be held by D2 and WDI Plumbing as nominees of P1, P2, D1 and Mr Ben Yu (“WDI Beneficial Owners”) in the respective percentages of not below 30%, 10%, 42% and 18%.  There are other terms which relate inter alia to capital injection, which I will not repeat here.

8.  Ps plead further that the Shareholders’ Agreement was “reflected in or evidenced by” 5 documents (the “5 Documents”), which have been identified at §8A of the Amended Statement of Claim as:

(a)  The minutes of the WDI Group’s board of directors’ meeting held on 5 August 2002 (the “5 August 2002 Minutes”);

(b)  An undated “Letter of net equity of shareholders confirmation 股東權益證明書” (the“Confirmation Letter”);

(c)  An undated “Loan Agreement 借款協議” made in about December 2004 signed by D1, Ps and Mr Ben Yu;

(d)  An undated document entitled “The affiliates of WDI Group — WDI集團下屬全資及控股公司”; and

(e)  An Evaluation Report dated 26 May 2007 prepared by Pan‑China (Xiamen) Consulting Corporation (廈門天健諮詢有限公司) on, inter alia, the valuation of the WDI Group.

9.  Ps plead that Ds have been in breach of the Shareholders’ Agreement, and have been acting in breach of trust.

10.  Ps seek inter alia a number of declarations to the effect that D1 and D2 have been holding the equity in a number of specific companies on trust for the WDI Beneficial Owners in accordance with the percentages of shareholding as agreed.   

The applicable principles on case management stay

11.  I have recently considered the principles applicable to case management stay in China Shanshui Cement Group Ltd v Tianrui (International) Holding Co Ltd[2020] HKCFI 3043at §§74-77.  I will not repeat them.  I will for the present purpose:

(a)  emphasize the observation of Bryan J in MAD Atelier International BVv Manés [2020] 3 WLR 631, that a case management stay should only be granted in “rare and compelling circumstances”, and that a stay “will not, at least in general, be appropriate if the other proceedings will not bind the parties to the action stayed or finally resolve all the issues in the case to be stayed, or the parties are not the same” (emphasis added); and

(b)  reiterate that where a plaintiff commences proceedings as of right, he should not be deprived of the right to continue those proceedings in the absence of “very good reasons to the contrary”.

My decision

12.  I have considered both the written and oral submissions made to me by counsel.  I have also considered the authorities cited to me. 

13.  I have decided to refuse the application.

14.  In the light of my decision, and given the fact that the trial is going to take place before this Court soon, I do not find it appropriate to express any view on the matters beyond those which are absolutely necessary for the disposition of the application.  In the end, I have decided to give only the following concise reasons explaining why I have, in the exercise of my discretion, decided to refuse the application.

(a)  As pleaded in the Amended Statement of Claim, the focus of Ps’ claim is the existence and terms of the Shareholders’ Agreement;

(b)  I have been taken through D1’s claim form filed for the purpose of the Xiamen Proceedings, Ps’ defence and counterclaim, and the Xiamen Judgment.  I have in particular considered Mr Khaw’s submissions[3] on the effects of the Xiamen Judgment.  I note that the foci of the Xiamen Judgment are the 5 August 2002 Minutes, the Confirmation Letter, and whether the WDI Group was an actual entity recognised by law.  The Xiamen Court ruled inter alia that the 5 August 2002 Minutes had not taken effect or had no effect;

(c)  The effects of the Xiamen Judgment however have to be considered in the light of the way which D1 framed his case.  He asked the Xiamen Court to confirm and declare that the agreements in or which take the form[4] of the 5 August 2002 Minutes and the Confirmation Letter had not taken effect.  Ps’ counterclaim before the Xiamen Court was accordingly similarly framed;

(d)  However, in the present case, the Shareholders’ Agreement is pleaded to be “partly written and partly oral”;

(e)  The Shareholders’ Agreement is not pleaded to be contained in the 5 Documents, but only “reflected in or evidenced by” them;

(f)  The Further and Better Particulars provided by Ps on 5 June 2017 are of similar effects;

(g)  I accept Mr Lai’s submissions that the respective subject matters and issues before the Xiamen Court and this Court are different;

(h)  The validity of the 5 August 2002 Minutes and the Confirmation Letter, or whether they had taken effect, do not in my view necessarily decide finally the existence or otherwise of the Shareholders’ Agreement — see MAD Atelier International BV;

(i)  In my view, there is considerable force in Mr Lai’s submission[5] that the 5 August 2002 Minutes and the Confirmation Letter can, despite the Xiamen Judgment, still evidence a separate oral agreement that is valid under Hong Kong law;

(j)  I note Mr Khaw’s submissions.  He is careful in submitting only that there is a substantial overlap between the issues before the Xiamen Court and those before this Court, without suggesting that they are identical. He relies further to what he submits to be the findings of the Xiamen Court that any agreement in the 5 August 2002 Minutes had been superseded by subsequent events, and that Ps had not been able to prove the requisite existence of the share structure as at 31 December 2002.  However, even those findings, assuming that they are, in my view have to be considered in the light of the different subject matters before the Xiamen Court and this Court;

(k)  In my view, whilst there is some overlap between the issues before the Xiamen Court and this Court, the degree of overlap is not sufficient for this Court to exercise its discretion in favour of a case management stay;

(l)  Mr Khaw further refers to Ps’ participation in the Xiamen Proceedings, which amounts in his submission to the submission by Ps to the jurisdiction of the Xiamen Court.  However, given the difference in the subject matters as discussed above, Ps’ participation in the Xiamen Proceedings is in my view not sufficient to constitute any “rare and compelling circumstances” to ground a case management stay.  I add in this regard that Ps commenced the present action in Hong Kong as of right, and they should not be deprived of the right to continue those proceedings in the absence of very good reasons to the contrary, which I do not see any;

(m)  In exercising my discretion, I have also considered the following factors which are in my view against the grant of any case management stay:

(i)   the fact that the time for the completion of the appellant process before the Xiamen Higher People’s Court is not certain;

(ii)  the age of P1 (being 87), such that Ps may be prejudiced if ultimately the trial will have to be resumed;

(iii) the delay in the taking out of the Stay Summons, the Xiamen Court having been handed down on 27 January 2021 but the Stay Summons not being filed till 27 July 2021; and

(iv) the fact that any stay will necessitate the vacation of a 12‑day trial set down a long time ago of a case commenced in 2012.

Disposition

15.  For the above reasons, I refuse the application.

Costs

16.  I make a costs order nisi that Ps shall have the costs of and occasioned by the Stay Summons, with certificate for counsel, to be taxed if not agreed.  I consider at this stage that taxation may be preferred to summary assessment because of the imminent trial dates, that parties may best focus their attention on the further preparation of the trial, and that it may be more appropriate for the relevant costs to be taxed in one go upon the conclusion of the trial. 

	(Keith Yeung)
	Judge of the Court of First Instance
	High Court

Mr Lai Chun Ho, instructed by Oldham, Li & Nie, for the 1^st and 2^nd Plaintiffs

Mr Richard Khaw SC, leading Ms Bonnie Cheng and Mr Martin Ho, instructed by Lo Lau Lawyers, for the 1^st and 2^nd Defendants

HCA 1972/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1972 OF 2012

____________

BETWEEN

	MELVIN WAXMAN	1st Plaintiff
	LARRY WAXMAN	2nd Plaintiff
	And
	LI FEI YU	1st Defendant
	SOLUT (HONG KONG) COMPANY LIMITED	2nd Defendant

____________

Before: Hon To J in Chambers (Open to Public)

Date of Hearing: 23 August 2013

Date of Decision: 11 September 2013

_______________

D E C I S I O N

_______________

 

Introduction

1.  This is the hearing of the Plaintiffs’ application to vary my costs order nisi made on 19 July 2013 when dismissing the 2^nd Defendant’s application to stay the action on the ground of forum non convenience.  

2.  The Plaintiffs filed an affirmation made by their solicitor exhibiting a draft affirmation of the 1^st Plaintiff in support of the application.  The 2^nd Defendant filed an affirmation of Bai Ping in response to the matters set out in the 1^st Plaintiff’s draft affirmation.  Mr Shieh, counsel for the 2^nd Defendant, objects to the Plaintiffs’ affirmation as it sought to introduce further evidence without the leave of the court.  Had the issue of costs been immediately dealt with at the time of delivery of the decision, arguments would have proceeded on the basis of such materials as were before the court.  I agree with Mr Shieh and give no consideration to the two affirmations.

The applicable legal principles – an introduction

3.  It is trite that the issue of costs is a matter of discretion for the court.  Subject to certain well established legal principles, the court has wide discretion in costs, particularly in respect of costs of interlocutory proceedings.  Counsel dispute about what these principles are and how they are to be applied in the present case.  Mr Shieh supports the costs order nisi as one which is well within the court’s discretion to make.  On the other hand, Mr Kam, counsel for the Plaintiffs, argues that there is a general rule that costs follow the event and the burden is on the unsuccessful party to justify a departure from that general rule.  He relies on a line of authorities, starting from the English authority of Cooper v Whittingham (1880) 15 Ch D 501 in 1880 to the Hong Kong Court of Final Appeal authority in Regent National Enterprises Ltd v Goldlion Properties Ltd FACV 10/2008 delivered in September 2009.   

4.  With no disrespect to counsel, I think they have quite failed to appreciate that since the Civil Justice Reform (“CJR”) in 2008 there is a distinction between costs in interlocutory proceedings and costs in other proceedings and a change in the court’s approach to costs in interlocutory proceedings.  To my understanding, this change in approach has not been really argued before the courts.  In my view, the authorities cited by Mr Kam have to be understood against the backdrop of the CJR in 2008.

The courts’ approach pre-CJR

5.  The High Court’s jurisdiction in costs is basically derived from section 52A(1) of the High Court Ordinance, which provides that costs of and incidental to proceedings in the Court of First Instance shall be the discretion of the court, and the court shall have full power to determine by whom and to what extent the costs are to be paid.  The section confers a wide discretion on the court but such discretion must be exercised judicially.  The practice is described in Hong Kong Civil Procedure 2013, Vol 1 at paragraph 62/2/6 as follows:

“Wide though the discretion is, it is a judicial discretion, and must be exercised on fixed principles, that is according to rules of reason and justice, not according to private opinion (Sharpe v Wakefield [1891] AC 173); or even benevolence (Kierson v Joseph L Thompson & Sons Ltd [1913] 1 KB 229, 231), and the exercise of discretion even by a judge sitting alone must be justifiable (Ritter v Godfrey [1920] 2 KB 47).”

These principles remain good law post-CJR and are applicable to costs in interlocutory proceedings as well as other proceedings alike. 

6.  Order 62 spells out the detailed rules.  Rule 2 is about the scope of application of the Order.  Rule 3 provides for entitlement to costs.  Rule 3(2) is pertinent for the purpose of the present discussion. The pre-CJR version of rule 3(2) was as follows:

“(2) If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any proceedings, the Court shall, subject to this Order, order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.” (My emphasis underlined.)

There are two points to be noted.  First, under the former rule 3(2), there was no distinction between costs in interlocutory proceedings and other proceedings.  Second, this rule required the court to exercise its discretion, if such discretion was to be exercised, by ordering costs to follow the event except under special circumstances.  Thus, the former rule 3(2) did prescribe a general rule that costs to follow the event except under special circumstances.  This general rule applied across the board to interlocutory proceedings as well as all other proceedings.  It also formed the basis of the costs orders awarded in pre-CJR cases. 

7.  The above rule is probably the general rule referred to by Mr Kam.  However, all the authorities quoted by Mr Kam were pre-CJR cases.  Cooper v Whittingham was decided in 1880.  The Court of Final Appeal Judgment in Regent National Enterprises Ltd v Goldlion Properties Ltd was delivered in 2009 but in respect of an action which commenced in 2006.  Tai Yip Dyeing Factory Ltd v Kong Hoi Sang HCA 2917/2004 was decided in 2007.  The costs orders in these cases were not in respect of costs in interlocutory proceedings.  United Phosphorus Ltd v China Merchants Shipping & Enterprises Co Ltd CACV 244/1998 was delivered in 2000.  It was an appeal against an interlocutory decision relating to forum non conveniens issue.  The costs order concerned was in respect of the costs of the appeal and whatever costs order made in the court below was a decision pre-CJR.  Similarly, Wynn Las Vegas, LLC v Lam Kwok Hung HCA 2161/2007, OTC International AG v Perfect Recovery Ltd HCCL 11/2007 and GFI Group Private Limited and Daniel Christopher John Prince HCA 170/2008 were interlocutory decisions delivered in 2008 but the actions were commenced pre-CJR. 

8.  In those cases, the court ordered costs to follow the event, simpliciter.  However, only a few of them were about costs in interlocutory proceedings.  And in any event, all those cases were pre-CJR cases.  If indeed there is a distinction between the court’s approach to costs in interlocutory proceedings and costs in other proceedings post-CJR, those authorities do not support Mr Kam’s contention that the general rule of costs following the event except in special circumstances is also applicable to costs in interlocutory proceedings post-CJR.

9.  I now turn to my decision in Botanic Ltd v China National United Oil Corporation, which was delivered in August 2008. The action was commenced in 2005 and was therefore a pre-CJR case to which the general rule of costs following the event would have applied.  As in the present case, the defendant was unsuccessful in their application to stay the proceedings in a forum non conveniens challenge.  I departed from the general rule in view of the nature of the issues in dispute and ordered the successful plaintiff to be awarded costs of the application only if it is successful in the action.  I did not elaborate as it was an order nisi and I preferred to leave it to the parties to argue the matter fully should either of them wish to vary the order.  But the reason must be obvious to the parties.  The agreement in dispute was international in nature in that it was made between two parties domiciled in different jurisdictions for services to be rendered in a third jurisdiction.  There were numerous issues relating to PRC law raised in that case which, in my view, was probably applicable to the agreement.  The hearing took four days and the decision ran up to 61 pages.   It was a case in which the factors in favour of the Hong Kong forum and Beijing forum were finely balanced.  While holding that the defendant failed to show that Hong Kong was not only not the natural or appropriate forum for the trial and that there was another forum which was clearly or distinctly more appropriate, I could not help entertaining some lingering doubts if Hong Kong court could apply PRC law as surely as the court in Beijing and if I had not erred in my interpretation or understanding of the issues relating to PRC law argued before me.  I thought justice would be better served if the successful plaintiff should only have the costs if it would ultimately succeed in the action.  Hence, I departed from the general rule under the former rule 3(2).

10.  While not actually challenging the correctness of the exercise of my discretion in Botanic Limited, Mr Kam quoted OTC International AG v Perfect Recovery Ltd in which Stone J differentiated between the issue of where the trial was to take place and the merit of the parties’ case at trial.  Stone J obviously took an issue-based approach and totally ignored merit and the possible outcome at trial when deciding the successful party’s entitlement to costs in the interlocutory proceedings.  Such an approach is not at all uncommon.  Costs are in the discretion of the trial judge.  That discretion has to be exercised depending on the facts of the particular case and where justice as perceived by the trial judge lies.  The approach adopted by Stone J and the costs order he made were within the very wide scope which reasonable disagreement is possible.  For reasons as given in my preceding paragraph, the same is true of my decision in Botanic Limited.

The courts’ approach post-CJR

11.  Following the CJR, the rules in Order 62 including rule 3 were substantially amended. Specifically, in respect of rule 3, the phrase, “other than interlocutory proceedings” was inserted into rule 3(2) and a new rule 3(2A) specifically directed at costs of and incidental to interlocutory proceedings was introduced.  The new rule 3(2) and rule (2A) read as follows:

“(2) If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any proceedings (other than interlocutory proceedings), the Court shall, subject to this Order, order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.

(2A)  If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any interlocutory proceedings, it may, subject to this Order, order the costs to follow the event or make such other order as it sees fit.” 

(My emphasis underlined.)

The amendment to rule 3(2) and the introduction of rule 3(2A) specifically applicable to costs in interlocutory proceedings makes it clear that the legislative intent was to distinguish between costs in interlocutory proceedings and costs in other proceedings. Under the new rule 3(2), the general rule of costs to follow the event is preserved for costs in proceedings other interlocutory proceedings.  But a different approach is provided under the new rule 3(2A) for costs in interlocutory proceedings.  Under this new rule, the court may order costs to follow the event or make such other order as it sees fit.  The court is no longer required to apply the general rule of costs following the event except in special circumstances, though that principle remains as one of the options. The court may make such other order as it sees fit.  Rule 3(2A) gives the court even wider discretion than that under rule 3(2) in respect of costs in other proceedings. 

12.  In Recommendation 122, the Working Party on Civil Justice Reform recommended:

“The principle that the costs should normally ‘follow the event’ should continue to apply to the costs of the action as a whole. However, in relation to interlocutory applications, that principle should be an option (which would often in practice be adopted) but should not be the prescribed ‘usual order.’ Costs orders aimed at deterring unreasonable interlocutory conduct after commencement of the proceedings should be given at least equal prominence in practice, with the court being directed to have regard to the underlying objectives mentioned in relation to Recommendation 2. These powers should not apply to pre-action conduct.”

The learned authors of Hong Kong Civil Procedure 2013 Vol 1 opined at paragraph 62/3/3B that the principle that costs normally follow the event is no longer the prescribed usual order but is instead just an option.    I agree entirely with that opinion.  In my view, Recommendation 122 supports my interpretation of the new rule 3(2) and 3(2A) above and the court’s approach to the issue of costs in interlocutory proceedings.

13.  Apart from rule 3(2A), rule 5 empowers the court to take into account special matters in exercising its discretion of costs. This rule is of general application and applies to costs in interlocutory proceedings as well as to other proceedings.   This rule provides:

“5(1) The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account-

…

(e) the conduct of all the parties;

…

(2) For the purpose of paragraph (1)(e), the conduct of the parties includes –

(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d)     conduct before, as well as during, the proceedings.”   

14.  There is a wide spectrum of interlocutory proceedings.  It is impossible to make any meaningful list of all the circumstances which are relevant for considering what is the appropriate type of costs orders in each factual situation.  Generally, the ultimate merit of the claim or defence are not relevant, but the lack of merit or a real risk of such lack of merit is.  If at the end, a claim is bound or is likely bound to fail, the opponent should not be burdened with unnecessary interlocutory proceedings and all the costs that those proceedings will incur.  If a party pursues interlocutory proceedings for the purpose of delaying the evitable or for the purpose of seeking an impossible claim, he should be deprived of his costs even if he succeeds in the interlocutory proceedings.  Hence, an order that a successful party shall have his costs only if he succeeds in the action, or bear his own costs or even pay the opponent’s costs are possible options under the new rule 3(2A), depending on the court’s perception of where justice lies.

15.  As for how the new rule 3(2A) operates in practice, I have not been referred to any decision in which this rule has been argued.  I am not aware of any either.  In view of the prominence given to the CJR, I assume that where the court ordered costs to follow the event in interlocutory proceedings, it must be a conscious decision of the court to adopt the general rule as the one which it thought best served the interest of justice in the circumstances of the case before it than ignorance of the new options available or a mis-application of the general rule which no longer exists.  As observed by the Working Party on Civil Justice Reform, costs to follow the event would often be the case, though it is no longer the prescribed rule.  I now turn to examine some of the recent decisions.  I shall not refer to the usual costs orders made in respect of ordinary interlocutory applications such as applications to amend pleadings, etc.  In respect of those matters, justice obviously requires that costs to follow the event or that costs be awarded against the party who sought the indulgence of the court.

16.  In Jotron As and Stanley Chang t/a Hong Kong Instech Trading Co HCA 378/2010, 20 May 2011, Sakhrani J dismissed the plaintiff’s application to strike out the defendant’s counterclaim as an abuse of process and alternatively to stay the counterclaim on ground of forum non conveniens with costs to the defendant.  Costs followed the event.  No reason was given for the costs order.  There was some degree of overlap between the two applications. The forum non conveniens arguments were purely legal arguments on a trite legal principle.  In the circumstances, it was open to Sakhrani J to adopt the issue-based approach.  The costs order could well be justified as one which the court saw fit in the circumstances.

17.  In Mendlowitz & Associates Inc and Winner International Group Ltd and Another HCA 574/2009, 14 May 2010, the plaintiff commenced action in Hong Kong and obtained a Mareva injunction against the defendants.  After having commenced action in Canada, it sought to stay the Hong Kong action, discharge the injunction and later sought leave discontinue the Hong Kong action.  Au J granted the applications.  He awarded costs of the injunction to the plaintiff but awarded the costs of the stay application and costs of the action other than the costs of the injunction to the defendant.  So, the costs of the interlocutory injunction followed the event.  The defendants sought leave from Au J to appeal against that order, contending that they should be awarded those costs as the respondents’ costs in the cause.  In rejecting that argument, Au J quoted Auld LJ’s dictum in  Bushbury Land Rover Ltd v Bushbury Ltd [1997] FSR 709, and said in paragraph 29:

“29. … Auld LJ said as follows at 712:

“In my judgment, that argument [that the normal costs order for interlocutory injunction should be the respondent’s costs in the cause unless there was anything to justify a departure] … ignores the clear distinction between entitlement to interlocutory relief and final judgment which underlines Lord Diplock’s identification in American Cyanamid Co v Ethicon Ltd [1975] AC 396 of the criteria on which the court should exercise its discretion whether to grant the former.  The fact that a plaintiff may succeed ultimately does not demonstrate that he should have been granted interlocutory relief when the merits of the matter were still unresolved and the court was balancing convenience.  Final judgment provides no hindsight, tipping the earlier balance one way or the other.”

See also:  Hong Kong Civil Procedure 2010, para 29/1/44.

30.    There is thus nothing wrong in principle for this Court, in the exercise of its discretion, to look at the merits of the application for the Injunction on its own to decide what proper costs order should be made in all the circumstances, without “linking” it to what may happen at the end of trial or to the action itself.”

While Au J ordered costs to follow the event, he did not do so, at least expressly, by applying the general rule under the former Order 62 rule 3(2) which was inapplicable post-CJR or under any other general rule as submitted by Mr Kam, but under the new rule 3(2A) by looking at the merits of the interlocutory application.  In fact, it has always been accepted, whether before or after CJR, that where the respondent consents to the interlocutory injunction for the purpose of holding the ring, the proper order would be costs in the cause, but where the injunction was ordered after a contested hearing, costs to follow that event is the appropriate or usual order. In my view, this approach best serves the interest of the justice in an interlocutory injunction application and such costs orders are the type of orders which the court would see fit to make, depending on the factual circumstances of the particular case.  As for Au J’s order staying the action, against which there was no appeal, it must have been made on the ground that the court saw fit to do so as that was the end of the action and there would no longer be any trial.  It was not, in my view, made pursuant to the general rule contended by Mr Kam.

18.  In 深圳市量子景順投資管理有限公司And Huang Binghuang and another HCA 1093/2009, 9 February 2011, Master Marlene Ng allowed the defendant’s application to set aside a judgment and ordered that the costs of and occasioned by the application be the defendant’s costs in the cause.  The reason she gave was that the application was made to enable the defendant to raise a defence and counterclaim but there was the possibility that defence may eventually turn out to be unmeritorious.  This costs order must have been made as an exercise of the discretion under the new rule 3(2A) as being what the court saw fit.  

19.  Summing up on the post-CJR position, I think the court has much wider discretion as to costs in interlocutory proceedings. Unlike other proceedings, the general rule of costs following the events do not apply.  The court is entitled to take into account all the circumstances of the case, including those set out in rule 5, to make such order as it thinks fit. In the exercise of its discretion, the court may take the issue-based approach or may take into account merit of the parties’ case or the possible outcome of the action.  The circumstances of interlocutory proceedings are so numerous that it is impossible to make any general rule.  Costs to follow the event and costs be to the successful party’s costs in the cause are obvious options.

20.  As for the onus of proof, I think it is the same post-CJR as it was pre-CJR.  It must be the successful party’s burden to satisfy the court as to the type of costs order it is entitled.  To begin with, the successful party is assisted by the general rule of costs to follow the event.  By the mere fact of being successful, the successful party has discharged the evidential burden of showing it is entitled to costs.  Thus, effectively, the evidential burden is on the unsuccessful party to adduce sufficient evidence or argument that some other or lesser order is appropriate, such as no order as to costs, costs be to the successful party’s costs in the cause or costs to the unsuccessful party.  In the absence of evidence or convincing argument to the contrary, the successful party would also have discharged the legal burden.   Costs to follow the event would be the appropriate order to make.   If the unsuccessful party is able to discharge that evidential burden, it will be the legal burden of the successful party to show that he is entitled to the costs order which he seeks.  In reality, having heard the interlocutory application, it would be quite obvious to the court what costs order would best serve the justice between the parties without relying on the burden of proof.

The appropriate costs order in the present case

21.  When making the said costs order nisi in the present case, I said in paragraph 62 of the decision:

“62. In view of the nature of the issues in dispute, this is a case in which it is appropriate that the Plaintiffs should be awarded their costs of this application only if they are successful in the action. I therefore make a costs order nisi that the costs of the 2^nd Defendant’s application be to the Plaintiffs’ costs in the cause with certificate for two counsel.”

I did not elaborate as I preferred to leave it to the parties to argue the matter fully should either of them wish to vary the order.  The order only represented a provisional view of what I thought fit in the circumstances.  Basically, I took a similar view as I did in Botanic Limited.  There are a number of issues raised in this case, including PRC law.  The defendant failed to show that Hong Kong was not only not the natural or appropriate forum for the trial and that there was another forum which was clearly or distinctly more appropriate.

22.  Mr Shieh supports the costs order nisi. He argues that the factors in favour of the Hong Kong forum and the Xiamen forum are finely balanced and what ultimately tilted the balance in favour of the Hong Kong forum was my finding that the proper law of the alleged Shareholders Agreement was Hong Kong law.  He further argues that this could only be a provisional view at the interlocutory stage and it would be entirely open to the trial court to find that PRC law is the proper law, in which event the plaintiffs will fail.

23.  With respect, I do not entirely agree.  On further thought, I think I was wrong to have put the present case on the same basis as Botanic Limited.  While I have found factors in favour of both jurisdictions, they are not finely balanced.  First, the plaintiffs founded this action as of right against the 2^nd Defendant.  Second, I have found that the governing law of the shareholders’ agreement in dispute is Hong Kong law and that the difficulties and problems arising from a beneficial interest under a system of law which does not recognise that interest do not exist.  These are strong factors in favour of the Hong Kong forum.  Mr Shieh has not referred me to any other complex legal issues which may arise if the trial is to take place in Hong Kong but which may not arise if the trial is to take place in Xiamen.  The factors in favour of the two forum are not finely balanced. 

24.  One of my considerations in Botanic Limited is the PRC law element.  Many of the disputes in that case have to be resolved on PRC law.  In the present case, if Hong Kong law is the governing law of the agreement, the significance of PRC law element is very much reduced.  Unlike Botanic Limited, the remaining PRC law issues are few and not complicated.  The concern that the Hong Kong court may not be able to interpret and apply PRC law as surely as the Xiamen court do not exist.   The present case is distinguishable from Botanic Limited.

25.  Mr Shieh argues that my finding of Hong Kong law as the governing law of the agreement is only a provisional one and it is entirely open to the trial court to take a different view.  That is true.  But having heard arguments on this issue, I do not think that possibility real.

26.  Looking at the matter afresh, this is a case in which the 2^nd Defendant sought to challenge jurisdiction of this court in an action which the plaintiffs founded as of right and the action is in respect of breach of a shareholders agreement, the governing law of which is Hong Kong law.  There is nothing to suggest a lack of merit or a real risk of such lack of merit.  Under such circumstances, merit of the parties’ case is not an important consideration.  An issue-based approach is appropriate.  The question is whether it was reasonable for the 2^nd Defendant to have challenged the jurisdiction of this court.

27.  On the face, the answer must be an emphatic “no”. The 2^nd Defendant has failed to convince me otherwise.  It can be argued that the subject matter is in Xiamen and there are elements of PRC law involved such that it was reasonable for the 2^nd Defendant to have challenged the jurisdiction of this court.  Given the fact that the plaintiffs founded this action as of right in Hong Kong and that the claim is in respect of the breach of a shareholders’ agreement, the governing law of which is Hong Kong law, it was, in my view, unreasonable to have challenged the jurisdiction of this court.  The 2^nd Defendant raised this jurisdictional issue and lost.  Consistent with the spirit of the CJR, such unreasonable interlocutory conduct should be deterred.  It is therefore appropriate to order the 2^nd Defendant to bear the costs of these proceedings. 

Conclusion

28.  Accordingly, I review my costs order nisi and replace it with an order that the 2^nd Defendant shall pay the Plaintiffs’ costs of the application, including the costs of this hearing, such costs are to be taxed if not agreed.

	( Anthony To )
	Judge of the Court of First Instance
	High Court

Mr Hugh Kam, instructed by Oldham, Li & Nie, for the Plaintiffs

Mr Paul Shieh SC, instructed by Skadden, Arps, Slate, Meagher & Flom, for the 2^nd Defendant

HCA 1972/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1972 OF 2012

____________

BETWEEN

	MELVIN WAXMAN	1st Plaintiff
	LARRY WAXMAN	2nd Plaintiff
	and
	LI FEI YU	1st Defendant
	SOLUT (HONG KONG) COMPANY LIMITED	2nd Defendant

____________

Before: Hon To J in Chambers (Open to Public)

Date of Hearing: 3 June 2013

Date of Decision: 19 July 2013

_______________

D E C I S I O N

_______________

 

INTRODUCTION

1.  This is the hearing of the 2^nd Defendant’s application for stay of proceedings pursuant to Order 12, rule 8 of the Rules of the High Court and the inherent jurisdiction of the court on the ground of forum non conveniens.

2.  The Plaintiffs filed an indorsement of claim on 22 October 2012 and subsequently a statement of claim on 6 November 2012.  On 7 December 2012, the 2^nd Defendant filed the present summons with supporting affirmations applying to have the proceedings stayed.  In its supporting affirmations, the 2^nd Defendant identified certain deficiencies in the manner in which the Plaintiffs had put their claim.  On 14 February 2013, the Plaintiffs filed an amended statement of claim.

3.  The originating process has been duly served on the 2^nd Defendant within the jurisdiction.  However, it has not been served out of the jurisdiction on the 1^st Defendant who is a resident in Xiamen of the People’s Republic of China (“the PRC”).

Dramatis personae

4.  The 1^st Plaintiff (“Melvin”) is a United States national.  He has been in the plumbing business for over fifty years.  He is a director and shareholder of Waxman’s Industries Inc and a group of companies referred to as the Waxman Group with its Asian base in Hong Kong.

5.  The 2^nd Plaintiff (“Larry”) is Melvin’s son and a member of the Waxman Group.  He assists Melvin in his plumbing business.

6.  The 1^st Defendant (“Frank”) is a PRC national, resident in Xiamen.  He owns and controls a group of companies referred to as the Swell International Group.  He is also responsible for the day‑to‑day management of WDI Group (see below).

7.  The 2^nd Defendant, Solut (Hong Kong) Company Limited (“Solut”), is a company incorporated in Hong Kong and wholly owned by Frank.

8.  Yu Yuebin (“Ben”) is Frank’s brother‑in‑law.

9.  WDI Group is a collection of companies owned by Melvin, Larry, Frank and Ben, (collectively referred to as the “WDI Beneficial Shareholders”) and comprises of:

(1) WDI International (HK) Ltd (“WDI International HK”);

(2) WDI International Inc (“WDI International US”);

(3) Voreto (Xiamen) Plumbing Technology Company Limited (“Voreto”);

(4) WDI (Xiamen) Precision Mould & Plastics Company Limited (“WDI Precision”);

(5) Xiamen DaChun Industries Inc (“DaChun”);

(6) Xiamen WDI Plumbing Industrial Company Limited (“WDI Plumbing”); and

(7) WDI Xiamen Technology Company Limited (“WDI Technology”).

Except for WDI International HK and WDI International US which were incorporated in Hong Kong and the United States respectively, the other five companies were incorporated in the PRC.

The Plaintiffs’ pleaded case

10.  The Plaintiffs’ pleaded case is as follows.  Melvin came to know Frank at a conference in 1989.  Together they established WDI Plumbing in Xiamen, which is held by Melvin and DaChun in equal shares.  DaChun is a PRC company owned by Frank and Ben.  The business of WDI Plumbing flourished.  Five other companies were formed between 1995 and 2002 to engage in other aspects of the plumbing business.  Since reaching the age of 65 in 1999, Melvin began to leave the day‑to‑day management of their business to Frank.

11.  By July 2002, the manufacturing facilities WDI Plumbing were about to reach full capacity.  Frank proposed to set up a Sino‑foreign equity joint venture to take advantage of the more favourable land prices and tax incentives available to such joint ventures to acquire a piece of land in Xiamen’s Haicang Xinyang Industrial Zone for building a new factory for WDI Group.  On the basis of Frank’s proposal, Melvin, Larry, Frank (on behalf of himself and Solut) and Ben entered into an oral agreement on 5 August 2002 (the “Shareholders’ Agreement”) on, inter alia, the following terms:

(1) Frank would inject US$1.5 million into WDI Plumbing through Solut, the shareholders’ percentage structure would be adjusted on 31 December 2002 to include Frank’s new capital injection, and Melvin’s and Larry’s combined equity percentage shall not fall below 40%  while Ben’s shall not fall below 18%;

(2) WDI Plumbing would establish a new Sino‑foreign joint venture (subsequently known as WDI Technology) with Solut holding the majority of its equity and WDI Plumbing holding the rest;

(3) WDI Technology would purchase and hold the land and factory to be built thereon using the capital injection from Frank and loans from the WDI Beneficial Shareholders;

(4) WDI Plumbing, WDI Technology and the five other companies mentioned above would henceforth be regarded as the “WDI Group”;

(5) The equity of the companies within WDI Group would be beneficially owned by Melvin, Larry, Frank and Ben as to 30%, 10%, 42% and 18% respectively (the “Agreed Shareholding”); and

(6) On completion of the new factory, the equity in WDI Technology would be transferred to the WDI Beneficial Shareholders in accordance with the above Agreed Shareholding and the same would apply to the other six companies in WDI Group.

In summary, the scheme was that the four WDI Beneficial Shareholders would pool their investments in the six existing companies together to form WDI Group; with their pooled resources, new capital of US$1.5 million from Frank and loans of US$1 million from the four WDI Beneficial Shareholders, the group would set up WDI Technology as a new member of the group to purchase land and build a factory for the group; and the interest of the WDI Beneficial Shareholders in each of the companies in WDI Group would be redistributed in accordance with the Agreed Shareholding.

12.  The Shareholders’ Agreement is evidenced by at least five documents:

(1) minutes of WDI board of directors meeting dated 5 August 2002 (the “2002 Board Minutes”);

(2) a letter of net equity of shareholders confirmation dated 30 November 2004 (the “Equity Confirmation Letter”);

(3) a loan agreement between WDI Group and the WDI Beneficial Shareholders;

(4) the affiliates of WDI Group; and

(5) an evaluation report of WDI Group and Swell International Group dated 26 May 2007 (the “Evaluation Report”).

13.  Pursuant to the Shareholders’ Agreement, Solut and WDI Plumbing entered into a Sino‑foreign joint venture agreement to set up WDI Technology (the “Joint Venture Agreement”).  The four WDI  Beneficial Shareholders and WDI Plumbing together injected US$8,000,000 into WDI Technology.  The factory was completed at the end of 2004.  Initially, the shareholding percentage of WDI Plumbing and Solut in WDI Technology was 18% and 82% respectively, but was changed to 39.98% and 60.02% respectively in November 2008.

14.  The Plaintiffs allege that in breach of the Shareholders’ Agreement and in breach of trust, Frank failed to transfer the equity of the companies in WDI Group, including WDI Technology, in accordance with the Agreed Shareholding.  By 2011, it was clear that Frank was attempting to assert greater ownership over the companies in WDI Group than his entitlement under the Shareholders’ Agreement.  On 13 July 2011, Melvin convened a meeting of the board of directors of WDI Technology and secured a resolution directing, inter alia, (1) Solut to transfer its 60.02% equity in WDI Technology to WDI International HK; and (2) WDI International HK and WDI Plumbing to transfer their shares to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding. Despite that, Frank refused to effect the transfer.

15.  The Plaintiffs’ cause of action is based on breach of the Shareholders’ Agreement and breach of trust.  They seek:

(1) a declaration that Frank holds his equity in DaChun on trust for the WDI Beneficial Shareholders in accordance with the Agreed Shareholding;

(2) a declaration that Solut holds all its equity in WDI Technology on trust for the WDI Beneficial Shareholders in accordance with the Agreed Shareholding;

(3) a declaration that each of the WDI Beneficial Shareholders holds the shares or equity in all the companies in WDI Group as trustees of the WDI Beneficial Shareholders in accordance with the Agreed Shareholding;

(4) an order that the Defendants transfer all the equity held in DaChun, and WDI Technology to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding;

(5) an order that the Defendants procure the equity in WDI Plumbing be transferred to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding;

(6) an order that the Defendants account as trustees of the WDI Beneficial Shareholders for the profits of the companies within WDI Group and pay the Plaintiffs all sums found due; and

(7) an order that the Defendants provide unrestricted access to the Plaintiffs in respect of all documents relating to the companies within WDI Group which are in their custody, possession or power.

The defence

16.  No defence has yet been filed by the Defendants.  In support of its application for stay, Solut filed four affirmations made by WDI Technology’s in‑house counsel, Ms Bai Ping, and its PRC law expert, Mr Ye Yong.  Ms Chan, counsel for the Plaintiffs, argues that despite the four affirmations, Solut has not been able to put forward a credible, let alone arguable, defence with sufficient particularity.  The Plaintiff’s cause of action is Frank’s breach of the Shareholders’ Agreement and breach of trust.  As can be gleaned from the affirmations filed by Solut, on the fact, Solut denied the existence of the Shareholders’ Agreement and hence any breach of express trust of the equity in WDI Technology. On the law, Solut asserted that there is no concept of beneficial interest in shares or equity of a company under PRC law.  Bai also referred to Ye’s expert opinion that under article 266 of the Civil Procedure Law of the People’s Republic of China (“Civil Procedure Law”), PRC courts have exclusive jurisdiction over disputes arising from the performance of Sino-foreign joint venture contracts.

The applicable legal principles

17.  The law applicable to an application for stay in favour of an alternative jurisdiction has been very well settled since the decision of the House of Lords in Spiliada Maritime Corporation and Cansulex Ltd [1986] 3 WLR 972. Spiliada was applied by the Court of Appeal in Hong Kong in Adhiguna Meranti [1987] HKLR 904.  In that case, Hunter JA set out a three stage approach at 907F‑908B for determining the appropriate forum:

“(I) Is it shown that Hong Kong is not only not the natural or appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong (Spiliada, p. 986H). The evidential burden is here upon the applicant. The emphasis is upon ‘appropriate’ rather than ‘convenient’ because this is not simply a matter of practical convenience. The purpose is to identify the forum “with which the action has the most real and substantial connection” per Lord Keith in the Abidin Daver [1984] AC 398. The principal factors are enumerated at p. 987D. Failure by the applicant at this stage is normally fatal.

(II) If the answer to (I) is yes, will a trial at this other forum deprive the plaintiff of any “legitimate personal or juridical advantages”? (Spiliada, pp. 987F, 991‑3).  The evidential burden here lies upon the plaintiff (Spiliada, pp 986A and 987G).

(III) If the answer to (II) is yes, a court has to balance the advantages of (I) against the disadvantages of (II): Abidin Daverper Lord Brandon at p 419. Deprivation of one or more personal or juridical advantages will not necessarily be fatal to the applicant provided that the court is satisfied that notwithstanding such loss “substantial justice will be done in the available appropriate forum” (Spiliada, at p. 991H).  The court must try to be objective (Spiliada, at p. 991F).  Proof of this, which can fairly be called the ultimate burden of persuasion, rests upon the applicant for the stay.  By these means he establishes that on balance the other forum is more suitable “for the interests of all the parties and the ends of justice”. This may be another way of saying that the plaintiffs’ choice of forum has been shown to be so inappropriate as to deserve the pejorative description of “forum‑shopping” and to be restrained accordingly, cp Lord Reid in The Atlantic Star [1974] AC 436.”

In addition, where appropriate, proper regard has to be paid to the fact that jurisdiction has been founded in Hong Kong as of right: Spiliada, p.987D.  As with the exercise of any discretion, the court will take into account all circumstances of the case including the conduct of the parties and decide whether it would be in the interest of justice to stay the action.  The court will not make any finding of fact which is in dispute: see Wo Fung Paper Making Factory Ltd And Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346.

18.  Counsel have no disagreement with the above principles.  In addition, Ms Chan refers to Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch [2000] 1 HKC 805 and submits that if an applicant for stay fails to identify any arguable defence, the court should not consider the application further but should dismiss it.  That was a case in which jurisdiction in Hong Kong has been established as of right by reason of service upon the defendant’s branch here. Stone J held that even though there was no Order 14 application before him, the fact that the defendant was unable to identify for the court’s consideration any particular case on the merits is sufficient to dismiss the defendant’s application for stay of proceedings on the basis of forum non conveniens.  I agree with that approach.  It is just another way of saying that without identifying its defence for the court’s consideration, the defendant was unable to point to any other forum being clearly or distinctly more appropriate than the Hong Kong forum.

NO ARGUABLE  DEFENCE

19.  Relying on Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch, Ms Chan submits that the application for stay should be dismissed for want of an arguable defence.  It would be convenient to deal with this argument first before turning to the parties’ arguments based on the more familiar conventional principles of forum non conveniens.

20.  Ms Chan refers to the fact that Bai is only an employee of WDI Technology and not a shareholder or director of Solut.  She argues that even assuming that Bai had worked for Frank for seven years, ie since 2004 as alleged, it does not detract from the fact that she has no personal knowledge of the Shareholders’ Agreement made in August 2002 and the matters relating thereto and there is no evidence that she was privy to or involved in any of the dealings pertaining to the Shareholders’ Agreement.  Frank is the only person from the Defendants’ side who has personal knowledge of the matters relating to the dispute, but Solut chose, without giving any explanation, not to cause him to file any evidence whether to refute the Plaintiff’s case or to support Bai’s bare assertions.  Hence, Ms Chan submits that Bai’s bald denial of the existence of the Shareholders’ Agreement and breach of trust cannot be accepted in view of Frank’s unexplained failure to file any evidence, Bai’s lack of personal knowledge of the matters relating to the dispute and the evidence from the contemporaneous documents supporting the existence of the Shareholders’ Agreement which Solut failed to address.  Hence, Ms Chan argues that the court should dismiss the application without further consideration.

21.  I think the present case is distinguishable from Bayer Polymers Co Ltd.  In that case the defendant, who was not able to even identify a defence, sought to argue for a stay on the basis of forum non conveniens.  Hence, Stone J held that the application had to be dismissed as there was nothing for trial either in Hong Kong or elsewhere.  In the present case, through its employee and through counsel, a defence consisting of a denial and based on PRC law has been identified.  In the absence of evidence from Frank, I agree with Ms Chan that the defence looks suspect.  However, it is permissible for an affirmant to give hearsay evidence provided that the source of the evidence has been identified.  There is no proper application to strike out the defence or for summary judgment. Though without such applications, the court will, in an appropriate case, dismiss an application for stay in default of an arguable defence, such jurisdiction will only be exercised in very clear cases.  In any application for stay, where a defence has been identified, usually the court will not consider the merit or credibility of that defence and will not lightly dismiss the application for want of a credible defence, without at least alerting the defendant that it is an issue for which proper evidence has to be filed.  I would accept the defence at its face value.  This is not an appropriate case to dismiss the application for stay based on the lack of an arguable defence or evidence in support of an identified defence.

STAGE 1:  ARE THE XIAMEN COURTS CLEARLY OR DISTINCTLY MORE APPROPRIATE THAN THE HONG KONG COURTS

22.  There is no dispute that Hong Kong courts have jurisdiction over this action, jurisdiction having been established as of right.  In Stage I, the burden is on the applicant, ie Solut, to show that the Xiamen courts are clearly or distinctly more appropriate than the Hong Kong courts for the trial of this action.  The emphasis is on appropriateness rather than convenience.  The court is required to focus on the appropriateness of a forum from point of view of the trial of the action, ie which is the forum in which the case may be tried more suitably for the interests of all the parties and the ends of justice.  This involves identifying the forum with which the action has the most real and substantial connection: per Lord Keith in TheAbidin Daver [1984] AC 398.  The court must first look for connecting factors which include not only factors affecting convenience or expenses, such as availability of witnesses, but also other factors, such as the law governing the relevant transactions, and the places where the parties respectively reside or carry on business: per Lord Goff of Chieveley in Spiliada at 987.  The approach is not just to load up factors which point to any particular forum, but to take a broad overall view of the factual circumstances bearing in mind the nature of the controversy in dispute and focus on the question of appropriateness from point of view of trial of the action.  These factors are examined below.

The Shareholders’ Agreement and the Joint Venture Agreement

23.  It must be borne in mind from the outset that on the Plaintiffs’ case there are two agreements in issue: the Shareholders’ Agreement and the Joint Venture Agreement.  The four WDI Beneficial Shareholders entered into the Shareholders’ Agreement to pool their investments in the six existing companies together to form WDI Group and to set up WDI Technology as a new member of the group.  For that purpose, WDI Plumbing would enter into the Joint Venture Agreement with Solut to take advantage of the tax benefit and land concession available to Sino‑foreign joint ventures to purchase land and build a factory for the group. Thus this Shareholders’ Agreement is the principal agreement and the Joint Venture Agreement is the subsidiary agreement to implement the Shareholders’ Agreement.  The parties to the two agreements are different.  The parties to the Shareholders’ Agreement are the four WDI Beneficial Shareholders, while the parties to the Joint Venture Agreement are WDI Plumbing and Solut.  Solut is the corporate vehicle to implement both agreements.  But if the corporate veils of the various companies are lifted, it can be seen that the parties to the two agreements are the same two Americans citizens and two PRC mainlanders.

The parties’ connection with Hong Kong or the PRC

24.  Ms Chan argues that although the Plaintiffs are American citizens, they have strong connection with Hong Kong.  For over twenty years, Melvin has spent about 35% of his time in Hong Kong and for the past eight years, he has rented an apartment on Kennedy Road.  His business, ie the Waxman Group, has its Asian base in Hong Kong.  Larry used to hold a Hong Kong work visa and identity card.  On the other hand, Frank is a PRC citizen who has conducted business in Hong Kong and owns at least five Hong Kong companies other than Solut.  Ms Chan further argues that as it was Frank who suggested using Solut to hold the shares in WDI Technology, that is a factor in favour of the Hong Kong forum.

25.  On the facts of this case, the parties to the Shareholders’ Agreement are the four WDI Beneficial Shareholders, ie the two Americans and two PRC mainlanders.  The parties to the Joint Venture Agreement are a Hong Kong company and a PRC company.  That agreement, being a subsidiary agreement to implement the Shareholders’ Agreement, carries little weight on the issue of the parties’ connection with Hong Kong or the PRC.  On balance, on the facts of the present case, the weight to be given to the parties’ connection with Hong Kong and the PRC just cancel out one another. 

The subject matter of the action

26.  Mr Shieh, counsel for the 2^nd Defendant, argues that the subject matter of the action, being shares in WDI Technology, are located in the PRC.  On the other hand, Ms Chan argues that the subject matter of the Shareholders’ Agreement concerns not just the shareholdings in WDI Technology, but another six companies within WDI Group, including WDI International HK and WDI International US which are incorporated in Hong Kong and United States respectively.  WDI International HK is a major entity within the group which has employed a permanent local staff and engaged local secretarial and auditing firms for over a decade.  However, as pointed out by Mr Shieh, no remedy is sought against WDI International HK and WDI International US which are already held in accordance with the Agreed Shareholding insofar as the Plaintiffs are concerned, while WDI Precision and Voreto are joint venture companies between WDI International HK and other PRC partners.  Thus, the remedies are sought only against DaChun, WDI Plumbing and WDI Technology, which are all companies incorporated in the PRC.  This points to a PRC connection.  Though remedy is also sought against Solut indirectly in respect of its shareholding in WDI Technology, Solut is just Frank’s investment vehicle.  The fact remains that in substance the remedies are sought against the shareholding in companies incorporated in the PRC.  On balance, from point of view of the subject matter of the Shareholders’ Agreement, the dispute has a closer connection with the PRC than Hong Kong.

The language and terminology used in the Shareholders’ Agreement

27.  The Plaintiffs rely on the use of the English language in the documents evidencing the Shareholders’ Agreement.  Those documents were either bilingual or in English.  However, the mere fact that a contract is in English does not necessarily mean that its governing law is Hong Kong law as opposed to the law of a country which uses some other language.  The WDI Beneficial Shareholders are Americans and PRC mainlanders.  As a matter of practicality, the documents have to be written in either or both of these languages.  As explained by Bai, the bilingual documents were for the benefit of the Plaintiffs and insofar as documents are in Chinese they are in simplified Chinese pointing to a closer connection with the PRC than Hong Kong. In the circumstances, the use of English or simplified Chinese in some of the documents evidencing the Shareholders’ Agreement is just neutral.

28.  The Plaintiffs also rely on the use of the word “equity” in the documents evidencing the Shareholders’ Agreement as referring to a common law concept and therefore a pointer that the governing law of the Shareholders’ Agreement is Hong Kong law.  For example, paragraph 3 of the 2002 Board Minutes stated:

“All the assets and business of WDI Plumbing and WDI Technology will be combined together and all the shareholders equity and dividend will be calculated with the equity structure of December 31, 2002 and start with January 01, 2003. The legal company documents is just for getting the favourable land price and any preferential tax policies, if any.”

(Emphasis by the Plaintiff in italics.)

The phrase “net equity of WDI Group” and “net equity of shareholders” were also used in the Equity Confirmation Letter.

29.  Mr Shieh argues that the Plaintiffs are misreading the meaning of the word “equity” in its proper context and adopting a somewhat patronizing and insular view as to the level of sophistication of the WDI Beneficial Shareholders.  I agree.  The word “equity” has a variety of meanings depending on the context in which it is used.  Apart from the technical meaning under the law of equity, in its ordinary and common usage, the word means a right, the issued share capital of a company, a shareholders’ interest in a company or ordinary shares.  Indeed, the word has been liberally used by business communities in the PRC, United States and Hong Kong alike to mean something other than the rules of equity under common law, such as shares, share capital or net worth.  It is used in article 266 of the Civil Procedure Law where the context is clear that it means shares or share capital and not the rules of equity.  A monetary figure was also quoted for the “net equity of WDI Group” which suggests that the term means net worth.  There is no doubt that the Plaintiffs’ case is that the Shareholders’ Agreement involved concepts of beneficial ownership, but as pointed out by Mr Shieh, the term “beneficial ownership” or “beneficial interest” were not used in the documents.  It is only the legal consequence of such a beneficial interest which the Plaintiffs are contending for.  In my view, the word “equity” in the context in which it was used in the documents simply meant shares or net worth.  It is not indicative of a connection with any particular system of law or forum.

30.  The Plaintiffs also rely on the use of the US currency in the documents evidencing the Shareholders’ Agreement as an indicator of the connection with Hong Kong law.  As the US currency is an international currency, I agree with Mr Shieh that no inference whatever could be reasonably drawn from the use of that currency in the Shareholders’ Agreement.

Complexity of the legal issues in dispute

31.  Based on Bai’s and Ye’s expert opinion, Mr Shieh identified four legal issues on which expert evidence on PRC law will be required.  These issues include:

(1) whether there are PRC legal principles that may have some semblance to, but which may not be exactly equivalent to, the equitable doctrine of “beneficial” ownership under common law, which is entirely foreign to PRC law;

(2) the PRC legal principles applicable to companies with a degree of common ownership, given the Plaintiffs’ claim that they are two of the “beneficial” owners of a group of primarily PRC companies in WDI Group;

(3) the enforceability of the contractual term in the Shareholders’ Agreement in respect of redistribution of shareholding of WDI Technology; and

(4) the validity of a trust purportedly created by an instrument which is partly oral and partly in writing under PRC law.

Mr Shieh argues that given the complexity of the legal issues involved, if the trial is to take place in Hong Kong, the parties will have to spend a large amount of time and resources on adducing expert evidence as to PRC law and a substantial amount of court’s time would be spent on hearing, considering and evaluating principles of PRC law.  These difficulties, time and expenses would be saved if the dispute is resolved in the PRC courts which will be able to apply the PRC law more surely than the Hong Kong courts.  He therefore argues that these factors point to a closer connection between the Shareholders’ Agreement and PRC law.

32.  I think Mr Shieh has correctly summarised the four issues identified by Bai and Ye and based on those issues he argues in favour of PRC law as the governing law of the Shareholders’ Agreement. However, on a closer reading of Bai’s and Ye’s affirmations, I think that argument is flawed. It is clear from paragraph 42 of Bai’s affirmation dated 6 December 2012 that she identified the issues on the assumption that “the closest system of laws that is applicable to all the relevant circumstances is that of the PRC”. Similarly, in paragraph 31 of Ye’s affirmation dated 6 December 2012, he also identified the issues on the assumption that the governing law is PRC law.  It is therefore putting the cart before the horse to argue that those four issues point to a closer connection with PRC law, which is therefore the applicable or governing law of the Shareholders’ Agreement.  Quite to the contrary, it is precisely because of the trust arrangement and the parties’ intention under the Shareholders’ Agreement that the Plaintiffs argue that the Shareholders’ Agreement has a closer connection with Hong Kong law.

33.  This is a case in which jurisdiction has been established as of right.  The issues would have to be framed in accordance with the case as pleaded by the Plaintiffs.  I therefore accept Ms Chan’s submission that the issues in dispute are only factual ones such as whether the parties entered into the Shareholders’ Agreement and the terms of that agreement.  This is supported by the Plaintiff’s expert, Mr Lin’s, opinion that “the dispute in the present case is one which concerns the existence of a personal agreement reached between the two Plaintiffs and the 1^st Defendant and the company under his control”, namely Solut.  (I would have thought the Shareholders’ Agreement was reached among the four WDI Beneficial Shareholders only and not with Solut which was just an investment vehicle of Frank; but that is besides the point.)  I think, by “personal agreement”, Lin meant an ordinary agreement other than a Sino-foreign joint venture agreement as opposed to a Sino-foreign joint venture agreement.  Thus, even approaching the dispute from point of view of PRC law, it is a dispute as to the existence of an ordinary agreement.  The issues are to be determined by the pleading.  The complexity or otherwise of the legal issues raised by the pleading does not determine the governing law of the agreement on which those issues are raised.  Of course, in identifying which forum is clearly or distinctly the more appropriate forum, complexity of the legal issues certainly has an important bearing: see paragraph 51.

Exclusive jurisdiction of the PRC courts over the Joint Venture Agreement

34.  Solut relies on the exclusive jurisdiction of the PRC courts over the Joint Venture Agreement as a connecting factor in favour of the Xiamen forum.  Article 266 of the Civil Procedure Law provides:

“ Actions instituted for disputes arising from the performance of contracts for Chinese‑foreign equity joint ventures, Chinese‑foreign contractual joint ventures or Chinese‑foreign cooperative exploration and exploitation of natural resources in the People’s Republic of China shall be under the jurisdiction of the people’s courts of the People’s Republic of China.”

It is the common opinion of the parties’ PRC law experts that “exclusive jurisdiction” means that a judgment obtained in a foreign court in a case within the exclusive jurisdiction the PRC courts will not be enforced by the PRC courts.  They also agree that if a claim falls within the ambit of this article, then PRC courts will have “exclusive jurisdiction”.  The question is whether disputes over the Shareholders’ Agreement are disputes arising from the performance of contracts for Chinese-foreign equity joint venture.

35.  Mr Shieh seeks to bring the present dispute arising from the Shareholders’ Agreement within the ambit of article 266. He argues that as the Shareholders’ Agreement is primarily concerned with the formation and shareholding structure of WDI Technology, disputes arising from that agreement clearly fall within “disputes arising from the performance of contracts for Chinese‑foreign equity joint ventures”, including disputes concerning the existence and validity of the Shareholders’ Agreement.  Hence, he submits that pursuant to article 266 PRC courts have indisputable exclusive jurisdiction over the present case.  This, Mr Shieh argues, points to the PRC forum as the forum with which this action has its most real and substantial connection.

36.  With respect, I think Mr Shieh has quite overlooked the significance which I have referred to at the very outset that there are two agreements between different parties.  The principal agreement is the Shareholders’ Agreement among the four WDI Beneficial Shareholders.  The subsidiary agreement is the Joint Venture Agreement between Solut and WDI Plumbing, which is to implement the Shareholders’ Agreement.  Disputes arising from the Joint Venture Agreement clearly fall within the ambit of article 266. But, there is no dispute between Solut and WDI Plumbing.  The dispute here is one among the four WDI Beneficial Shareholders arising from the Shareholders Agreement, though the remedy sought requires a redistribution of the shares in WDI Technology, a Sino-foreign joint venture.  By arguing that the dispute arising from the Shareholders’ Agreement is a dispute arising from the performance of the Joint Venture Agreement, Mr Shieh is blurring the significance that the two agreements were entered into by different parties.  If the corporate veils of Solute and WDI Plumbing are lifted, it would be clear that the two agreements were made between the four WDI Beneficial Shareholders.  However, the principle of corporate personality is deeply entrenched under both Hong Kong law and possibly PRC law.  In respect of PRC law, article 3 of the Company Law of the People’s Republic of China (adopted by the 5^th Session of the Standing Committee of the 8^th National People’s Congress on 29 December 1993) (“Company Law of the PRC”) provides that all limited liability companies and companies limited by shares are enterprise legal persons.  There is no reason to disrespect the individual corporate identities of WDI Plumbing and Solut.  Thus, on the face, the dispute over the Shareholders’ Agreement is a dispute involving redistribution or transfer of shares in WDI Technology but not performance of the Joint Venture Agreement.  Hence, the PRC courts do not have exclusive jurisdiction over the present dispute.

37.  The above conclusion is supported by《最高人民法院關於德寶(遠東)有限公司與天鋒國際有限公司出資糾紛上訴一案合作協議效力問題的復函2004年7月27日 [2004] 民四他字第26號》, a judicial interpretation given by the Supreme People’s Court (“Judicial Interpretation”) quoted by Mr Lin, the Plaintiffs’ PRC law expert.  Under the legal system of the PRC, a judicial interpretation issued by the Supreme People’s Court has the force of law.  That Judicial Interpretation was given in a case in which two Hong Kong companies signed an agreement for one of them to transfer 49% of its shareholding in a Sino-foreign joint venture to the other.  Then a dispute arose and one of the issues was the jurisdiction of PRC courts.  The issue in that case was the implementation of the agreement between the two Hong Kong companies.  The Supreme People’s Court was of the opinion that since that agreement would be performed in the PRC, PRC courts should have jurisdiction over the dispute according to article 243 of the 1991 Civil Procedure Law, which is the equivalent of article 265 of the current Civil Procedure Law.  The Supreme People’s Court made no mention of the exclusive jurisdiction under article 266. Hence, Lin argued that had the Supreme People’s Court considered that the dispute over shareholding was a dispute about the performance of a Sino‑foreign joint venture agreement, it would certainly have exercised its exclusive jurisdiction under article 266 instead.  Therefore, Lin opined that the dispute in the present case is not a dispute arising from performance of a Sino‑foreign joint venture agreement but one arising from a personal Shareholders’ Agreement reached between the Plaintiffs and the Defendants which both Hong Kong and Xiamen courts have jurisdiction.

38.  Mr Shieh seeks to distinguish the present case from the one before the Supreme People’s Court on the basis that that case concerned a private transfer agreement between two Hong Kong companies of shares in a Sino‑foreign joint venture whereas the present case concerns a redistribution of shareholding among existing shareholders under the Shareholders’ Agreement. With respect, that is a distinction without difference.  In the present case, the Shareholders’ Agreement is an agreement behind the Joint Venture Agreement. More importantly, the parties to the Shareholders’ Agreement and the Joint Venture Agreement are different.  Thus, the Shareholders’ Agreement is no different from the private transfer agreement in that case.  The dispute in that case was not about performance of a Sino‑foreign joint venture agreement but about the private transfer agreement.  That must be the inarticulate major premise why the Supreme People’s Court found it inappropriate to invoke its exclusive jurisdiction under the equivalent of the current article 266, but relied on the equivalent of article 265 of the current Civil Procedure Law.  I think the present case is on all fours with the one before the Supreme People’s Court.  By virtue of article 265 of the Civil Procedure Law and by reason of the subject matter of the Shareholders’ Agreement, the Supreme People’s Court also have jurisdiction over the present action, but that jurisdiction is not exclusive.

The place of performance of the Shareholders’ Agreement

39.  The place of performance of the Shareholders’ Agreement coincides with the location of its subject matter, ie Xiamen.  The major remedies sought under the Shareholders’ Agreement require the parties to take steps to transfer the shares of the companies in WDI Group to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding and to give an account of the profits of the seven companies in WDI Group.  This requires the transfer of the shares in three PRC companies, namely, DaChun, WDI Plumbing and WDI Technology and the giving an account of the profits of five PRC companies and two Hong Kong companies.  The major place of intended performance of the Shareholders’ Agreement must be the PRC.  This factor points to a closer connection with the PRC.

Remedies sought

40.  As mentioned above, the major remedy sought requires the parties to transfer the shares in WDI Technology, WDI Plumbing and DaChun to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding. Assuming that Frank’s and Ben’s interests in DaChun were subsumed in WDI Plumbing just as were Melvin’s and Larry’s capital contribution, it would still be necessary to redistribute the shareholdings in WDI Plumbing and WDI Technology which are Sino-foreign joint ventures.  Those companies are located in Xiamen.  Even accepting that the present dispute arose from the Shareholders’ Agreement and is not a dispute arising from the performance of a Sino-foreign joint venture so that the PRC courts do not have exclusive jurisdiction, the redistribution can only be effected in accordance with the law of the place where those companies are located, ie Xiamen.

41.  It is Ye’s opinion that under PRC law, a shareholder has to be someone who has injected capital into the company and obtained a capital contribution certificate, whose name is recorded in the company’s articles and registered with the local Administration of Industry and Commerce.  He further opined that any agreement between shareholders in respect of the shareholding and equity percentages of the company contrary to the actual capital contribution is not in accordance with the Company Law of the PRC and is unenforceable.  He seemingly suggested that the transfer could not be effected for want of actual capital contribution from the Plaintiffs.  His opinion is not contested by Lin.

42.  Despite that, I am somewhat perplexed by Ye’s opinion which is apparently inconsistent with articles 143 to 150 of the Company Law of the PRC which prescribe a scheme of transfer of shares in limited liability companies.  Under articles 19 to 36, there is a capital contribution requirement by the original shareholders in establishing a limited liability company.  But there is no such requirement under articles 143 to 150 in respect of transfer of shares after the company has been established, though there are requirements that the transfer must be carried out through a legally established stock exchange (article 144) and by means of endorsement or other means as stipulated by law or by administrative regulations (article 145).

43.  In the case quoted in the Judicial Interpretation, the Supreme People’s Court held that the agreement between the two Hong Kong companies regarding the transfer by one of the party’s shareholding in a Sino‑foreign joint venture to the other was a shareholding transfer agreement which was void and unenforceable for want of compliance with necessary governmental endorsement procedures.  The Supreme People’s Court held:

“關於合作協議書所反映法律關係的性質,同意你院審判委員會的第二種意見。湖北德寶實業有限公司的原始資本構成中不含香港天鋒國際有限公司的投資,兩當事人的簽約行為發生在合作企業合同訂立之後且約定轉讓香港德寶(遠東)有限公司的股權,故依法應認定合作協議書屬股權轉讓法律關係,認定隱名投資法律關係沒有事實和法律依據。該合作協議書未履行法定的報批手續,依法應認定無效。”

(Translation:

“In respect of the nature of the legal relationship as reflected in the cooperation agreement, [we] agree with the opinion given by the Judicial Committee of your Court. The investment made by Hong Kong Tian Feng International Company Limited（香港天鋒國際有限公司） did not constitute the original capital of Hubei De Bao Business Corporation Limited（湖北德寳實業有限公司）. The signing of the agreement by the two parties took place after the business cooperation contract had been entered into, and it was agreed that the shareholding of Hong Kong De Bao (Far East) Company Limited　（香港德寳（遠東）有限公司）[in Hubei De Bao Business Corporation Limited] be transferred [to Hong Kong Tian Feng International Company Limited]. It is therefore held that, in law, the legal relationship under the cooperation agreement is one of transfer of shareholding, and that there is no factual and legal basis in support of the legal relationship of nominee investment. The said cooperation agreement is void because the endorsement procedures prescribed by law had not been carried out.)

It is not entirely clear whether such want of compliance with procedure could be remedied.  While referring to the fact that the transferee company was not an original contributory to the share capital of the Sino‑foreign joint venture, the Supreme People’s Court did not actually rule that the transfer was void for want of capital contribution.  The ratio decidendi was that the shareholding transfer agreement was void and unenforceable for want of compliance with necessary governmental endorsement procedures.   In the circumstances, I could give no weight to Ye’s opinion about the need for capital contribution in a transfer from the original shareholder to a transferee.  This particular aspect of PRC law has no bearing as a connecting factor.

44.  More important is that people enter into contract with the intention that it will be performed to the letter.  The contract, therefore, has an affinity to the law which supports its existence rather than the law which calls for its abortion.  Thus, if it is accepted that the Shareholders’ Agreement is void under PRC law for want of capital contribution, this must be a factor which points to a closer connection with Hong Kong law than PRC law.

The governing law of the Shareholders’ Agreement

45.  Where there is no express or implied agreement as to the governing law of the contract, the system of law with which the contract has the closest and most real connection will count: see S Megga Telecommunications Ltd v Etowaru Co Ltd [1995] 2 HKC 761 at 767D‑E, per Bokhary JA, as he then was; and The Conflict of Laws in Hong Kong (2^nd edition) at paragraph 5.007.  The court will consider all circumstances of the agreement, including the location of the subject matter of the contract, the place of intended performance, the place of making or negotiating the agreement, the adoption of particular legal terminology, language of the agreement and related transactions: see The Conflict of Laws in Hong Kong (2^nd edition) at paragraph 5.010.

46.  The Plaintiffs’ case is that the Shareholders’ Agreement is partly in writing and partly oral and there is no express or implied agreement as to the governing law.  Ms Chan submits that the governing law must be Hong Kong law, as the most crucial part of the Shareholders’ Agreement involves the concept of beneficial ownership, with various individuals holding their shares on trust for the WDI Beneficial Shareholders according to the Agreed Shareholding.  She also relies on the use of the word “equity” in the minutes dated 5 August 2002.  Furthermore, it is Bai’s and Ye’s opinion that under PRC law, there is no concept of beneficial ownership over property.  Hence, Ms Chan argues it would be absurd for the parties to have intended their agreement to be governed by a system of law which does not have the concept which is at the very heart of the Agreement.

47.  On the other hand, Mr Shieh argues that the Joint Venture Agreement provides the most crucial indication as to the governing law of the Shareholders’ Agreement.  He relies on the following dicta of Hooper J in Dow MBF Ltd v Detrick Ltd [1988] 1 HKLR 344 at 350:

“ There are a number of authorities where the courts have drawn the inference that related contracts are intended to be governed by the same system of law. In The Njegos it was held that the inference was that sensible businessmen must have intended that a bill of lading should be read with the English interpretation attaching to a charterparty and that the proper law of the contract was English law on that basis and on the basis of business efficacy. Similarly in the case of re United Railways of the Havana and Regla Warehouses Ltd [1960] 1 Ch 52 at 94, Jenkins LJ in the Court of Appeal noted that one agreement (a lease) was recited in another agreement and that both documents were essential parts of the same transaction and held that in those circumstances they would each have the same proper law.”

The Joint Venture Agreement governs the obligations of WDI Technology’s shareholders before and after the setting up of WDI Technology, including the funding obligations of the parties, which would determine or substantially affect the shareholding in WDI Technology.  Clause 41 of the Joint Venture Agreement provides that the formation, effect, interpretation, performance and resolution of disputes of the joint venture agreement are to be governed by PRC law.  Hence, Mr Shieh argues that similarly, on the Plaintiffs’ case, the Shareholders’ Agreement deals with the incorporation of WDI Technology, including its shareholding proportion and if the Shareholders’ Agreement existed, it would form part and parcel of the Joint Venture Agreement or otherwise supplement or vary the same.  Therefore, he submits that the Shareholders’ Agreement, being a related agreement, should also be governed by PRC law.

48.  With respect, Mr Shieh has overlooked the significance that the Shareholders’ Agreement is the principal agreement while the Joint Venture Agreement is the subsidiary agreement to implement the Shareholders’ Agreement with Solut as the parties’ investment vehicle to carry out the two agreements.  Were the two agreements free standing independent agreements as in the case referred to in the Judicial Interpretation, I would have agreed with Mr Shieh.  However, where the two agreements are related with one being the principal agreement and the other being a subsidiary agreement, the inference which would be more readily drawn is that the governing law of the subsidiary agreement should follow that of the principal agreement.  However, on the facts of the present case, because of the PRC statutory regime in Sino-foreign joint ventures, the governing law of the subsidiary Joint Venture Agreement had to be PRC law.  As for the governing law of the principal Shareholders’ Agreement, it has never been the parties’ case that it is United States law.  The parties to the Shareholders’ Agreement are two American citizens and the two PRC mainlanders.  There could only be two systems of law to choose from: the PRC law being the law of the place of performance of the Joint Venture Agreement and Hong Kong law being the law of the place where the majority equity partner to the joint venture is located.  To give effect to the parties’ intention under the Shareholders’ Agreement and their intention as expressed in paragraph 3 the Board Minute, the Shareholders’ Agreement had to adopt a system of law which recognizes beneficial interest in shareholding.  Under circumstances such as these, it is not unusual, and indeed it is reasonable, for the principal agreement to be governed by one system of law to give effect to the intention of the parties and for the subsidiary agreement to be governed by another system of law required by the regime in the place of performance of the subsidiary agreement.

49.  Of all the pointers argued by counsel and discussed above, only the subject matter of the Shareholders’ Agreement and the place of performance of the Shareholders’ Agreement are in favour of a connection with PRC law.  As the Shareholders’ Agreement is concerned with the beneficial interest in the shareholding of WDI Technology, a concept which is not recognised by the PRC law, it must have a closer connection with Hong Kong law which supports its existence rather than PRC law which calls for its abortion. The other pointers are neutral or do not carry much weight.  Stepping aside to take a detached view of the facts of the case as pleaded by the Plaintiffs, at least for the present purpose, the irresistible inference is that the Shareholders’ Agreement has the closest and most real connection with Hong Kong law which recognizes such beneficial interest under the Shareholders’ Agreement.  Hong Kong law is therefore the governing law of the Shareholders’ Agreement.

Whether Xiamen court is clearly or distinctly the more appropriate forum

50.  I have considered the various connecting factors for the purpose of determining the governing law of the Shareholders’ Agreement.  Those factors are also relevant for determining the ultimate issue of whether Xiamen courts are clearly or distinctly the more appropriate forum for the trial of this action.  The subject matter of the Shareholders’ Agreement and the place of performance of that agreement point to Xiamen courts as the forum with which the action has the most real and substantial connection, while the governing law of the Shareholders’ Agreement is in favour of the Hong Kong forum.  I have rejected Solut’s argument that a judgment given by a Hong Kong court will not be enforced by PRC court as being in violation of its exclusive jurisdiction over Sino‑foreign joint ventures.  The other factors which have to be considered from point of view of appropriateness of the forum are: complexity of the legal issues involved, availability of witnesses and enforcement of judgment.

51.  The law governing the relevant transaction is an important factor in determining whether or not the forum is one with which the action has the most real and substantial connection. Here, complexity of the legal issues involved has a bearing on the question as to which forum is clearly or distinctly more appropriate.   If the governing law is foreign law, if the legal issues under that system of law are complex and if the legal systems between the home and foreign forum are very different, the general principle that a court applies its own law more reliably than does a foreign court will help to identify the more appropriate forum: Dicey, Morris & Collins (15^th ed) at paragraph 12‑034.  This is because plainly no court applying another system of law can perform that function as surely as the home court: see Xinjiang Xingmei Oil Pipeline Co Ltd v China Petroleum & Chemical Corp unreported, HCCL 6/2004, 2 February 2005.  As the governing law of the Shareholders’ Agreement is Hong Kong law, the difficulties and problems arising from a beneficial interest under a system of law which does not recognise that interest as envisaged by Bai and Ye do not exist.  Mr Shieh has not referred me to any other complex legal issues which may arise if the trial is to take place in Hong Kong.

52.  There might be problems arising from enforcement of a judgment by a Hong Kong court requiring Frank to transfer his equity in DaChun and requiring Solut to transfer its equity in WDI Technology to the Plaintiffs.  Likewise the Plaintiffs may have to transfer 10% of their equity in WDI Plumbing to Frank and Ben.  Ye suggested that the Shareholders’ Agreement might be void and unenforceable for want of capital contribution. Insofar as that requirement is concerned, in view of the Judicial Interpretation and for reasons as already explained, I could give little weight to Ye’s opinion.  As for the requirement for endorsement or compliance with other governmental regulations are concerned, it is not entirely clear whether such non-compliance could not be remedied.  If it could not, it is a factor to be weighed against the Hong Kong forum.  But, there is no evidence to the extent that such non-compliance could not be remedied.

53.  Furthermore, as submitted by Ms Chan, if the Plaintiffs succeed in their claim, Solut and Frank would be obliged to procure the transfer of, inter alia, such of Solut’s 60% equity in WDI Technology to the Plaintiffs and Ben in accordance with the Agreed Shareholding.  Neither Frank nor Solut has said that they would not comply with any order to be made by the Hong Kong court to that effect.  If they would comply, there would be no need for enforcement action to be taken in Xiamen.  I have rejected Solut’s argument that PRC court has exclusive jurisdiction over this dispute.  No satisfactory expert evidence on other difficulties or impossibility of enforcement has been advanced by Solut.  I can only assume that none exists.  In any event, insofar as Solut is concerned, it is a Hong Kong company situated in Hong Kong.  Various enforcement tools are available against Solut and through it against Frank.

54.  On the location of the parties, Solut was incorporated and located in Hong Kong.  Frank is resident in the PRC.  The Plaintiffs are resident in the United States and have no particular Hong Kong connection, though Melvin has a Hong Kong address.  Though it is argued that Solut is merely a corporate vehicle used by Frank, it is a party against whom remedies are sought and the legal owner of the equity in WDI Technology.  It could be compelled to comply with an order of the court.  From point of view of appropriateness of the Hong Kong forum, location of the parties is a factor in favour of the Hong Kong forum.

55.  None of the potential witnesses are ordinarily resident in Hong Kong.  Melvin has rented a flat in Hong Kong.  Frank, Ben and their witnesses are resident in Xiamen which is conveniently near to Hong Kong.  There is nothing to suggest that any of them could not attend trial in Hong Kong.  From the Defendants’ point of view, it may be convenient if the trial is to take place in Xiamen.  Where the trial is to be conducted makes no difference to the Plaintiffs as they had to travel to either of the forum anyway.  Given the convenience of travel in this day and age, location of the witnesses carries little weight.

56.  The starting point in this type of inquiry is that the Plaintiffs founded this action as of right against the applicant, ie the 2^nd Defendant which is a company located in Hong Kong. This is a relevant factor to refuse to grant a stay: Spiliada, Pei Zheng Middle School and China Pui Ching Education Foundation Ltd CACV 262/2005, 21 February 2006; Nan Tung Bank Ltd, Zhu Hai v Wangfoong Transportation Ltd [1999] 2 HKC 606 and Yap Lup Man v Good First Investment Ltd [1998] 1 HKC 726.  Even assuming that Xiamen courts are in as good a position to apply Hong Kong law in the trial of this action as Hong Kong courts and given its benefit of being able to enforce its own judgment in Xiamen, for reasons stated above there is nothing to suggest that the Xiamen forum is clearly or distinctly more appropriate than the Hong Kong forum.  In conclusion, Solut has failed to discharge its burden of proving that Hong Kong is not only not the natural or appropriate forum for the trial, but that Xiamen is clearly or distinctly the more appropriate forum than Hong Kong.  Its failure at this stage is fatal.

STAGE II AND STAGE III

57.  In view of my conclusion in respect of Stage I, it is unnecessary for me to consider Stage II and Stage III.  It will only be a futile exercise to assume on the contrary that the Xiamen forum is more appropriate when I have found it is not and then to balance the advantages and disadvantages, as the answer must turn out to be the same.  I shall, nevertheless, make a few observations very briefly.

58.  If the action is to be tried in Xiamen, the Plaintiffs will be deprived of the advantage of being able to invoke the concept of beneficial ownership under Hong Kong law, which according to the PRC law experts of both parties do not exist under PRC law.  According to Solut’s PRC experts, presuming this contention is correct, the Plaintiffs’ claim would inevitably fail if the action is tried in Xiamen.

59.  Furthermore, Solut’s PRC experts assert that under PRC law, shares may not be transferred to a transferee who has not actually contributed capital to the joint venture company.  This is clearly not the position under Hong Kong law.  While I have doubts about the validity of such a proposition, there is a risk that it is correct.  If that is the case, the Shareholders’ Agreement would be ruled to be void and unenforceable.

60.  I am therefore satisfied that the Plaintiffs will be deprived of important legitimate personal or juridical advantages, if the action is tried in Xiamen.  The Plaintiffs will suffer fatal disadvantages, such that no balancing exercise under Stage III is required.  The answer is obvious.

CONCLUSION

61.  In conclusion, I am not satisfied that the 2^nd Defendant has discharged the burden of showing that the Xiamen forum is clearly or distinctly more appropriate than the Hong Kong forum.  The 2^nd Defendant’s application for staying the action in favour of the Xiamen forum is therefore dismissed.

62.  In view of the nature of the issues in dispute, this is a case in which it is appropriate that the Plaintiffs should be awarded their costs of this application only if they are successful in the action.  I therefore make a costs order nisi that the costs of the 2^nd Defendant’s application be to the Plaintiffs’ costs in the cause with certificate for two counsel.

( Anthony To ) Judge of the Court of First Instance High Court

Ms Linda Chan, SC and Mr Hugh Kam, instructed by Oldham, Li & Nie, for the Plaintiffs

Mr Paul Shieh, SC and Mr Jenkin Suen, instructed by Skadden, Arps, Slate, Meagher & Flom, for the 2^nd Defendant