Defeating the Jurisdictional “Trojan Horse”

Introduction

In the recently reported judgment of Haller AG & Anor v Vestey International Group Limited & Ors [2023] 1 HKLRD 39, DLA Piper acted for the 2^nd Defendant to successfully set aside service of proceedings out of the jurisdiction on appeal. Importantly, in this case, the Court of Appeal explained that in an application under Order 11 rule 1(1)(c) of the Rules of the High Court (Cap. 4A) (RHC), the plaintiff must show that there is a real and live issue between the plaintiff and the anchor defendant which the plaintiff may reasonably ask the Court to try. When making the assessment, the Court must examine the plaintiff’s claim against the anchor defendant in isolation, on the assumption that the foreign defendant is not joined.

Factual Background

Our client, the 2^nd Defendant in the action, is a company incorporated in Mainland China. The 1^st and 2^nd Plaintiffs are German-incorporated companies, that purchased four consignments of frozen bluefin tuna in late 2013 and early 2014 from a third party. Through a common contact, the 2^nd Defendant purchased these tuna cargoes from the Plaintiffs pursuant to signed order confirmations. The 2nd Defendant also accepted four bills of exchange drawn by the Plaintiffs, payable at the Bank of China (Head office) in Beijing.

There was a dispute as to the precise structure of the transaction.

The 2^nd Defendant contended that the transaction was part of a larger composite transaction involving a sub-sale of the tuna cargoes to the 1^st Defendant, a company incorporated in Hong Kong. Therefore, when the 2^nd Defendant entered into each order confirmation with the Plaintiffs, it also entered into a sales contract for the back-to-back sale of the tuna cargoes to the 1^st Defendant at a higher price. In addition, the Plaintiffs, the 1^st Defendant and the 2^nd Defendant entered into Tripartite Agreements, which provided that the 2^nd Defendant does not have to pay the Plaintiffs for the tuna cargoes unless and until the 1^st Defendant has paid the 2^nd Defendant in respect of the sub-sale.

On the other hand, the Plaintiffs contended that the transaction was a simple sale and purchase between the Plaintiffs (as seller) and the 2^nd Defendant (as buyer). The Plaintiffs alleged that they had never signed the Tripartite Agreements and did not know of the sub-sale of the tuna cargoes by the 2^nd Defendant or the involvement of the 1^st Defendant at the time.

The tuna cargoes apparently arrived in Hong Kong in late 2013 and early 2014, and delivery was taken from the carriers. The Plaintiffs did not receive payment from the 2^nd Defendant, nor did the 2^nd Defendant receive payment from the 1^st Defendant. The 2^nd Defendant did not take delivery of the cargoes and did not know to whom they were released to. The ^2nd Defendant also contended that by virtue of the Tripartite Agreements, it was not obliged to pay because it had itself not been paid by the 1^st Defendant.

The Plaintiffs denied having entered into any Tripartite Agreement and allege that their signatures on these agreements were forged.

 

Procedural Background

In December 2018, the Plaintiffs issued a writ in the High Court of Hong Kong against the 1^st and 2^nd Defendants, as well as the Bank of China as the 3rd Defendant. The Plaintiffs claimed for, among other things, the following reliefs:

• A declaration that the Tripartite Agreements are false and/or fraudulent and null and void against the 1^st Defendant and that the 2^nd Defendant be bound by this declaration.
• An order that the 2^nd Defendant is liable under the order confirmations and/or the bills of exchange to pay the Plaintiffs the full sums due.
• Damages to be assessed.

The Plaintiffs served the writ on the 1^st Defendant and the Bank of China in Hong Kong in September 2019. In October 2019, they applied ex parte for leave to issue a concurrent writ and to serve it on the 2^nd Defendant out of the jurisdiction, relying on the “necessary or proper party” gateway in Order 11 rule 1(1)(c) of RHC. Leave was granted by the Court and the writ was eventually served on the 2^nd Defendant in Mainland China in July 2020.

In October 2020, the Plaintiffs discontinued their claim against the Bank of China.

In December 2020, the Plaintiffs filed a Statement of Claim, which included a claim for relief against the 2^nd Defendant for sums due under the bills of exchange and the price of the cargoes under the order confirmations, alternatively damages for breach of the order confirmations. There was no claim pleaded against the 1^st Defendant at all.

In January 2021, the 2^nd Defendant applied to, among other things, set aside service of the writ out of the jurisdiction and to stay the action on the ground of forum non conveniens (Jurisdiction Challenge).

In February 2021, the Plaintiffs amended their Statement of Claim to plead that they had no prior knowledge of the 1^st Defendant and did not enter into the Tripartite Agreements with the Defendants. The Plaintiffs also added a claim for a declaration against the 1^st and 2^nd Defendants that the Tripartite Agreements do not exist and that the documents are forgeries.

At all times, the 1^st Defendant took no step in the action and did not file any acknowledgement of service.

 

The Court of Appeal Explained the Requirements for the Jurisdictional Gateway under Order 11 Rule 1(c) of the RHC

In November 2022, the Court of Appeal allowed the 2^nd Defendant’s appeal on the following grounds:

• For the purpose of Order 11 rule 1(1)(c) of the RHC, there is no real and live issue to be tried between the Plaintiffs and the 1^st Defendant which the Plaintiffs may reasonably ask the court to try.
• The judge erred in holding that Hong Kong is the more appropriate forum for the trial of the action.

The Court of Appeal explained that when considering an application under Order 11 Rule 1(1)(c) of the RHC, the Court must be satisfied that the Plaintiff has shown a good, arguable case that:

• the claim against the anchor defendant (i.e. the 1^st Defendant) involves a real issue between the plaintiff and the anchor defendant;
• that issue is a real issue which the plaintiff may reasonably ask the court to try; and
• the foreign defendant is a necessary or proper party to the plaintiff’s claim against the anchor defendant.

In the first stage of the analysis, the Court must consider whether there is a real issue between the plaintiff and the anchor defendant and whether that issue is one that the plaintiff may reasonably ask the court to try. It is only when there is such a real issue that one asks, at the second stage, whether the foreign defendant is a necessary or proper party to the claim against the anchor defendant.

The Court of Appeal accepted the 2^nd Defendant’s argument that in assessing whether there is a real and live issue between the plaintiff and the anchor defendant, the Court must examine the plaintiff’s claim against the anchor defendant in isolation, on the assumption that the foreign defendant is not joined. When conducting the above analysis, the Court should consider whether the case falls both within the letter of Order 11 rule 1(1)(c) of the RHC and its true spirit. This is important because this jurisdictional gateway is not founded on any territorial connection between the claim and Hong Kong as a jurisdiction, and the gateway permits a foreign defendant with no connection to Hong Kong to be sued in Hong Kong against its will simply on the basis of a claim between the plaintiff and the anchor defendant. The Court should prevent a spurious claim against the anchor defendant being used as a device for bringing in a foreign defendant (what the Court termed as a “Trojan Horse”).

 

Application of the Law to the Facts

As mentioned above, the 1^st Defendant never filed any acknowledgement of service and never took any action in the proceedings. Furthermore, based on the evidence available before the Court of Appeal, the 1^st Defendant was incorporated via a company secretarial firm in Hong Kong. The “director” appearing on the annual return of the 1^st Defendant also confirmed by affirmation that he had never seen and did not execute the Tripartite Agreements, had never agreed to be a director of the 1^st Defendant, and had never heard of the 1^st Defendant before the Plaintiffs brought it to his attention after this dispute had arisen. The “director” also said that his passport, details of which appeared on the annual return, had expired at the time when he was supposedly appointed as a “director” of the 1^st Defendant. He believed that his identity had been stolen and used for fraudulent purposes.

In these circumstances, it is clear the 1^st Defendant did not (and very likely will not) assert any claim or right against the Plaintiffs whether on the basis of the Tripartite Agreements or otherwise. The 1^st Defendant never propounded the Tripartite Agreements or relied on them in any way. The Plaintiffs do not claim any rights against the 1^st Defendant which depend on the existence or otherwise of the Tripartite Agreements. If the 2^nd Defendant is not joined in this action, the Plaintiffs have no reason at all to pursue the 1^st Defendant.

It was clear the Plaintiffs’ intention was to recover the price of the tuna cargoes, the amounts under the bills of exchange or damages for breach of contract against the 2^nd Defendant. The Plaintiffs’ claims have no connection with the Tripartite Agreements but for the fact that they are raised by the 2^nd Defendant as a defence. If the Plaintiffs in their reply contend the Tripartite Agreements were forgeries, the veracity of the Tripartite Agreements would be contested and determined, whether or not a relief for declaration of validity was sought against the 1^st and/or 2^nd Defendants.

Even though the Plaintiffs seek a declaration that the Tripartite Agreements are null and void, their real interest was in seeking that declaration against the 2^nd Defendant, so as to ensure the 2^nd Defendant cannot rely on the documents by way of defence. In contrast, it is difficult to see what interest the Plaintiffs have in obtaining a declaration against the 1^st Defendant, and what interest the 1^st Defendant can have in opposing it, especially when the 1^st Defendant appears to be incorporated and/or controlled by persons perpetrating a fraud.

In these circumstances, the Court of Appeal rejected that there was a real and live issue between the Plaintiffs and the 1^st Defendant which the Hong Kong Court was reasonably asked to try. Accordingly, the appeal was allowed and service of the Amended Writ was set aside. It also followed that the Hong Kong Court was not a proper and convenient forum to try the dispute.

 

Key Takeaways

When relying on the “necessary or proper party” jurisdictional gateway, one should scrutinize the facts of the case carefully and consider whether there is a real and live issue between the plaintiff and anchor defendant only. This should be considered in isolation without involving the joinder of the intended foreign defendant.

The Court will investigate the actual transaction and dealings between the parties to identify the real interest of the respective parties in the action brought before the Court. Whether there is a real and live issue has to be looked at not technically, but realistically and practically, so that the situation falls “within the letter and true spirit” of the jurisdictional gateway. This is to ensure that a foreign defendant with no connection to Hong Kong would not be brought into the jurisdiction of the Hong Kong Court against its will via a “Trojan Horse”.

If there is a real and live issue between the plaintiff and anchor defendant which the Hong Kong Court may reasonably be asked to try, the Court will further consider whether the foreign defendant is a necessary or proper party to that dispute.

As a plaintiff, it is crucial to identify and commence action in the correct forum so as to avoid expending unnecessary time and costs, especially in view of limitation periods and time bars in pursuing claims in different jurisdictions.