Application of forum non conveniens in Mainland-Hong Kong cross-border disputes

Practical Law UK Articles w-007-9484 (Approx. 11 pages)

Application of forum non conveniens in Mainland-Hong Kong cross-border disputes

by Xuemei Wang and Yi Li, Grandall Law Firm and Practical Law China

Background

In recent years, due to Hong Kong's advantages such as convenient financial services and preferential tax policies, as well as the growing economic and trade exchanges between the Mainland and Hong Kong, increasing numbers of Chinese businesspeople have set up companies in Hong Kong and even obtained Hong Kong residency. These persons often conduct business operations using Mainland companies that are actually controlled by Hong Kong parents, with the Hong Kong parents or their actual controllers providing cross-border security.

Under this kind of arrangement, in the event of a dispute, if the Mainland subsidiary has no enforceable assets, the counterparty would attempt to file a lawsuit in Hong Kong against the Hong Kong parent or the actual controller. The parent or controller may, in turn, apply to stay the proceedings in the Hong Kong court using the principle of forum non conveniens, arguing that a Mainland court is a more appropriate forum to hear the dispute.

The High Court in recent years has heard cross-border commercial litigation cases involving the principle of forum non conveniens in jurisdictional conflict procedures. One particular case, High Hope Zhongding Corporation v 厦门墩峰进出口有限公司 and others (HCA 2485/2015) had its motion decided in January 2017. In High Hope, a Mainland corporate plaintiff (the Plaintiff) sued five defendants in a contract dispute. The two Hong Kong defendants applied to stay the proceedings on the ground of forum non conveniens, arguing that that the Nanjing Intermediate People's Court was the more suitable court. The court dismissed the defendants' application and the case continued to be heard in the High Court.

High Hope case

The dispute in High Hope involved two import agency contracts entered into by the Plaintiff and the first defendant (a Mainland company), the terms of which included a prepaid deposit, delivery deadline and the promise to pay a supplementary deposit by the first defendant if the price of the goods were to fall. The parties agreed that the two agreements were governed by Chinese law and that any party to the dispute may bring a lawsuit to the people's court where the first defendant was located.

After the Plaintiff imported the contracted goods to the relevant Mainland port, the first defendant refused to pick up the goods because the price of the goods had fallen. At the Plaintiff's urging, the second and the third defendants (a Mainland company and a BVI company respectively) each provided a debt guarantee (for more information on providing guarantees in China, see Practice notes, Guarantees (China): overview and Cross-border guarantees: China). However, the price of goods continued to fall and the first defendant still refused to pick up the goods.

After the Plaintiff filed a suit in the Nanjing Intermediate People's Court, the Plaintiff and all the five defendants signed a "repayment agreement" to confirm the debt amount and the repayment period. The repayment agreement also included debt guarantees by the fourth and the fifth defendants (a Hong Kong company and a Hong Kong resident respectively), and the agreement did not specify the governing law or jurisdiction.

After the first defendant defaulted again, the Plaintiff filed a second lawsuit in the same Nanjing court. However, the Plaintiff discovered that the relevant Mainland business and assets of the defendants had been transferred to Hong Kong and the actual controller of the assets (that is, the fifth defendant) had also moved to reside in Hong Kong. Therefore, the Mainland court's controlling measures against the guarantors (orders for preservation of assets and prohibiting the Hong Kong resident defendant from leaving the Mainland) had lost their effectiveness.

In the face of a deadlock in the continuing Mainland litigation, the Plaintiff sued the two Hong Kong guarantors (that is, the fourth and the fifth defendants) in Hong Kong. These two Hong Kong defendants applied to stay the Hong Kong litigation on the ground of forum non conveniens, arguing that the Nanjing Intermediate People's Court was the more appropriate forum to hear the case.

For general information on litigation in Hong Kong, see Country Q&A, Litigation and enforcement in Hong Kong: overview.

Adoption of forum non conveniens in Hong Kong

The principle of forum non conveniens in Hong Kong was first derived from the basic rules set out in the UK case Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460. In 1987, the Hong Kong Court of Appeal applied the principle for the first time in The Adhiguna Meranti [1987] 2 HKC 126, establishing a three-stage test for Hong Kong courts to apply in deciding whether to stay proceedings under forum non conveniens. This three-stage test has been followed by Hong Kong courts to date.

The three stages of the test are as follows:

The defendant must first prove that the Hong Kong court is not suitable for the trial of the case, and that another court is a natural and appropriate forum for litigation.
Where the defendant succeeds in proving the first point, the plaintiff must then establish that if the case was heard in another court, the plaintiff will be deprived of their legitimate personal or juridical advantages.
Where the plaintiff can prove the second point, then the court must balance the advantages of having the trial in another court against the disadvantages to be suffered by the plaintiff, and must decide whether substantial justice will be done if the case is allowed to proceed in another court.

Considerations of Hong Kong courts in applying the forum non conveniens principle

The application of the forum non conveniens principle in the Hong Kong courts depends on the discretion of the judge in a particular case. This is the case no matter which of the three stages of the test is being considered, and with the various factors described as follows playing a different role in each case.

Governing law

Governing law is a factor that is commonly raised when a defendant applies to invoke forum non conveniens. In the context of High Hope, the defendants argued that the case should apply Chinese law, and therefore that it would be more convenient to hear the case in a Mainland court. The Plaintiff argued that:

Under Article 41 of the Law of the People's Republic of China on Application of Laws to Foreign-Related Civil Relations 2010 (中华人民共和国涉外民事关系法律适用法) (2010 Foreign Relations Law), the law applied to the guarantee liabilities should be the law of the place of residence of the guarantors, and therefore that the case against the two Hong Kong guarantors should apply Hong Kong law.
Furthermore, even if Chinese law were applied, Hong Kong courts in general have sufficient capacity to deal with any legal or factual issues involving Mainland factors, as Hong Kong is an international metropolis long accustomed to dealing with foreign elements involved in legal and factual issues, and in view of the growing trade between Hong Kong and the Mainland.
At the same time, Hong Kong judges also are able to understand and make rulings on Chinese law based on the Chinese legal opinions issued by the Chinese legal experts appointed by both parties.

Based on these factors, the Plaintiff concluded that the applicable law in this case was not an important factor in whether the Hong Kong court should stay the proceedings.

Together with its final ruling on the issue, the trial judge in High Hope accepted the Plaintiff's point of view in rejecting the defendants' application for forum non conveniens, for the following reasons:

The applicable law provision agreed on in the previous two import agency contracts could not automatically become the applicable law of the subsequent repayment agreement and guarantees (High Hope, at paragraph 45).
Under Article 41 of the 2010 Foreign Relations Law, where the parties have not chosen the governing law, then the law of the habitual residence of a party whose performance of the obligations is most characteristic of the contract, or other laws which are closely related to the contract, should be applied. In High Hope, the two Hong Kong guarantors were the parties whose performance of the obligations was the most characteristic of the security contract, and therefore the repayment guarantees should apply the law of Hong Kong (High Hope, at paragraph 46).
Most importantly, even if Chinese law were the applicable law, the courts of Hong Kong are accustomed to dealing with foreign legal issues, and therefore foreign legal elements are not the decisive factor in the staying of proceedings. In particular, this factor was very light in this case because the defendants failed to state the essence of the dispute between the two sides, so the court did not know whether there was a need to decide the legal dispute (High Hope, at paragraph 47).

For more information on China-related governing law clauses, see Standard clause, Governing law: China and Practice note, Choice of governing law in China-related contracts.

For general information on governing law clauses in commercial agreements, see Practice note, Governing law and jurisdiction clauses: Governing law.

Jurisdiction clause

Exclusive jurisdiction and non-exclusive jurisdiction clauses have a significant difference in determining whether a court is the appropriate forum for a lawsuit. If a contract clearly stipulates that the court of a particular location has jurisdiction over disputes arising from the contract, then the burden of proof is on the plaintiff to give a strong reason why the agreed court is not suitable for trial. Otherwise, the court will generally believe that the agreed court is the only appropriate forum for the trial of disputes over the contract.

If the jurisdiction clause in the contract is a non-exclusive jurisdiction clause and the plaintiff is not litigating in a court specified in that clause, then this is only one of the reasons for the defendant's application for forum non conveniens. Its impact on whether the Hong Kong court will decide to stay the proceedings is therefore not as large as that of an exclusive jurisdiction clause. The defendant will still need to give other reasons for why Hong Kong is an inconvenient forum to hear the case.

In High Hope, the jurisdiction clause only appeared in the first two import agency contracts, and not in the subsequent repayment agreement and guarantees, which reassigned the rights and obligations of both parties. The defendants argued that the original jurisdiction clause, which stated that either party may file a lawsuit in the court where the first defendant was located in the event of a dispute, should also be applied to the repayment agreement. Therefore, this case should be heard in that court instead of in Hong Kong.

In response, the Plaintiff argued that:

The defendants' presumption should not be recognised because, in the absence of a prescribed jurisdiction under the repayment agreement, it cannot be presumed that the jurisdiction provisions of the original two agreements also apply to it.
Even if the jurisdiction provision were to apply, the jurisdiction was non-exclusive, and therefore the Plaintiff may file a lawsuit in the court where the first defendant was located, or in other courts. Since this case did not involve an exclusive jurisdiction provision, the burden of proof was still on the defendants to state other reasons why Hong Kong was forum non conveniens.

Together with its final ruling on the issue, the trial judge in High Hope essentially accepted the Plaintiff's view and cited the case of Noble Power Investments Ltd and another v Nissei Stomach Tokyo Co Ltd (HCA 285/2007), noted by plaintiff's counsel in its supplementary submission. The judge found that the defendants' counsel did not challenge the following principles stated in that case:

The existence of a non-exclusive jurisdiction clause is only one of the factors to be weighed.
The applicant for a stay of proceedings still has the burden of proving that Hong Kong is forum non conveniens.

(High Hope, at paragraph 48.)

The judge further held that it was not possible to conclude that the parties to the agreement were still under the jurisdiction of Mainland courts, as the repayment agreement had added other, non-Mainland parties and did not specify a jurisdiction clause. The defendants therefore had to persuade the court that Hong Kong was forum non conveniens, and that without knowing the substance of the dispute, the court was unable to address this key issue. Therefore, the non-exclusive jurisdiction clause did not assist the stay application in this case (High Hope, at paragraph 49).

For more information on clauses for exclusive and non-exclusive jurisdiction of Mainland courts, see Standard clause, Jurisdiction: China.

For general information on jurisdiction clauses in commercial agreements, see Practice note, Governing law and jurisdiction clauses: Jurisdiction.

Location of witnesses or evidence

The location of witnesses or evidence is also a reason frequently raised by a defendant in applying for forum non conveniens. It will normally be considered more appropriate to hear the case in the court where a witness is located or in a court that can compel the witness to appear, unless there are other overriding factors. For example, New Link Consultants Ltd v Air China and others (HCA515/2001) involved 22 witnesses, 20 of whom lived in the Mainland. The trial judge in that case held that, while the witnesses could be arranged to testify in Hong Kong, and could also testify through other technical means such as video, this would cause many difficulties, so it would be more appropriate for the court where the witnesses were located to hear the case.

In High Hope, one witness was in Hong Kong. While other witnesses were in the Mainland, they were free to travel to and from Hong Kong with no evidence of any difficulty. Similarly, the mere fact that evidentiary documents were kept in another location could not be used as a reason to find another court to be more appropriate, unless the defendants could prove that there was a risk that the evidence could not be delivered to Hong Kong.

Together with its ruling on the application, the trial judge held that this factor was meaningless because the defendants did not:

Inform the court about the nature of the dispute.
Provide any convincing explanation for the difficulties for the relevant witnesses or evidence to come to Hong Kong.

(High Hope, at paragraph 50.)

Parallel litigation

Parallel litigation or pending litigation is also a factor commonly raised in a defendant's application for forum non conveniens. In the event of concurrent lawsuits in a Hong Kong court and another court with the same cause of action and between the same parties, the defendant may request the Hong Kong court to stay the proceedings brought by the plaintiff in Hong Kong on the basis of parallel actions.

However, the mere fact of parallel litigation or pending litigation does not automatically lead to the suspension of a case in a Hong Kong court. For example, in Nan Tung Bank Ltd, Zhuhai v Wangfoong Transportation Ltd (HCCL 176/1997), the plaintiff sued the defendant in a Hong Kong court and the defendant sued the plaintiff and another defendant in a Mainland court, and the defendant applied to stay the proceedings in Hong Kong under forum non conveniens on the basis of the pending litigation in the Mainland. The Hong Kong court held that the pending action itself is not an important factor in the consideration of the principle of forum non conveniens, unless the concurrent proceedings bring particular difficulties to the parties.

In High Hope, although there were five defendants in the writ of summons at the time of commencing the lawsuit, the Plaintiff's counsel strategically only gave effective service to the two Hong Kong defendants, and also withdrew the stalemated case in the Mainland. This strategy caused parallel litigation to no longer be a factor in High Hope.

Deprivation of plaintiff's legitimate personal or juridical advantages

In an application for forum non conveniens, if hearing the case in the court that the defendant argues is more appropriate would deprive the plaintiff of legitimate personal or juridical advantages, then the plaintiff would need to focus on proving the second stage of the test, that is, that they will be deprived of their personal or juridical advantages.

Deprivation of personal advantages

In High Hope, the Plaintiff argued that there was a chain of facts which showed that if the case were heard in the Mainland, then this would inevitably deprive the Plaintiff of their personal advantages, namely:

The two Mainland defendants had moved from their original registered addresses to unknown locations.
The legal representative of the first defendant (originally the Hong Kong resident defendant) suddenly changed.
The bank accounts of the first defendant had only RMB364.93 on deposit.
The Hong Kong resident defendant had mortgaged their Mainland properties, and owned a very large amount of assets in Hong Kong.
The Hong Kong resident defendant was a director of the Hong Kong corporate defendant. His wife and father were in Hong Kong, and the wife was a director of other companies in Hong Kong.
The operations of the Hong Kong corporate defendant were going well.

The trial judge fully accepted the Plaintiff's view that the belief that the defendants had a large amount of assets in Hong Kong has not been strongly refuted by the defendants. In this case, the Hong Kong litigation would give the defendants significant pressure from a commercial perspective, which would be conducive to a more convenient solution to the dispute, whether through out-of-court settlement or more effective enforcement measures (High Hope, at paragraph 55).

Deprivation of juridical advantages

In High Hope, the Chinese legal opinion of the Plaintiff's counsel specifically indicated that the Mainland has neither legal provisions for the bankruptcy liquidation of foreign companies (as the third and fourth defendants were a BVI company and a Hong Kong company, respectively) nor a personal bankruptcy system (as the fifth defendant was a Hong Kong resident). Therefore, even if the Plaintiff were to successfully obtain a final judgment in the Mainland, they would not be able to apply for bankruptcy or liquidation there to enforce the judgment against the three foreign defendants.

The judge fully adopted the Plaintiff's position, ruling that Chinese law was handicapped in assisting the Plaintiff to enforce any Mainland judgment through bankruptcy or liquidation proceedings (High Hope, at paragraph 54).

Substantive defence

In the Mainland courts, applications objecting to jurisdiction do not normally involve a substantive dispute. In contrast, the defendant applying for forum non conveniens in Hong Kong must first prepare a substantive defence against the plaintiff's claim. The plaintiff also needs to pay attention to whether the defendant has done this.

In High Hope, the judge had requested the defendants' counsel to clarify the specific dispute between the parties, which defendants' counsel did not do in its explanations. In addition, other cases cited by Plaintiff's counsel and noted by the trial judge in the award also illustrate the importance of a defendant's substantive defence in forum non conveniens applications.

In Botanic Ltd v China National United Oil Corporation (HCA 1852/2005), the judge held that forum non conveniens applications do not just raise factors to point to a particular court, but rather to fully consider the complex nature of the dispute from factual circumstances and to focus on the suitability of the jurisdiction from the perspective of the case concerned. The burden of proof is on the defendant, and it is a very heavy burden.
In Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch (HCCL 307/1998), the judge held that the defendant never attempted to justify its case, and that in fact there was no arguable defence even though the plaintiff had not yet applied for an immediate judgment. Therefore, the motion to stay the case could not be supported.
In Chow Fu Hsien v K Vision International Investment (HK) Ltd (HCA 2884/2004), the judge ruled that the applicant for a stay must identify its defence with sufficient detail to confirm that there is a real dispute between the parties. If there is no real defence, then the application for forum non conveniens will fail.
In the more recent Xu Ziming v Ruifeng Petroleum Chemical Holdings Ltd (HCA 450/2013), the judge similarly dismissed the defendant's application for a stay only because the defendant failed to state the nature of the dispute. The judge reasoned that loading up on factors which might point to the Mainland courts as the appropriate forum is meaningless when the defendant has failed to state the nature of the dispute. In these circumstances, the court cannot judge the appropriateness of the forum from the point of view of the case.

At this stage in the High Hope case, the trial judge fully accepted the view of Plaintiff's counsel that:

In the absence of the clear substance of the dispute, it is difficult for the court to know how the defendants' "connection" factors would affect the trial.
The defendants' substantive defence was essential for the application to stay the proceedings.

(High Hope, at paragraph 36.)

Therefore, if the defendant in a Hong Kong lawsuit has no strong defence and cannot explain the nature of the controversy between the parties, the chances of getting the court's support in applying for forum non conveniens to stay the trial are very low (making the application solely as a delaying tactic is another matter).

Substantial justice

Whether substantial justice can ultimately be achieved is an important factor to be weighed by the judge in an application for forum non conveniens. In High Hope, the Plaintiff had taken the following measures in the Mainland against the defendants:

Filing suit twice in the Mainland court.
Applying for an order for preservation of assets.
Applying for an order prohibiting the Hong Kong resident defendant from leaving the Mainland to avoid the court proceedings.

However, these measures had no effect, with the Hong Kong resident defendant even traveling to Hong Kong to sign litigation documents while subject to the prohibition order. From this, it could be seen that the ineffective judicial measures against that defendant in the Mainland made it possible to achieve substantial justice only through litigation in Hong Kong.

On this point, the trial judge fully accepted the Plaintiff's argument for the second stage of the forum non conveniens test (High Hope, at paragraph 56). Furthermore, because the defendants had failed to prove in the first stage that the Hong Kong court was not suitable to try the case and that the Mainland court was more appropriate (High Hope, at paragraph 37), the judge did not need to weigh the third stage and directly ruled to dismiss the defendants' application (High Hope, at paragraphs 57-58).

Acceptance and application of forum non conveniens under Chinese law

In contrast to Hong Kong, the status of the principle of forum non conveniens in the Mainland is much less established. While it exists in theory, its application is very strict and the process for its application is unclear.

2005 Maritime Trial Minutes

Provisions on the application of forum non conveniens in Mainland courts were first seen in Article 1(11) of the Supreme People's Court's (SPC) Minutes of the Second National Working Conference on the Trial of Foreign-Related Commercial and Maritime Cases 2005 (第二次全国涉外商事海事审判工作会议纪要) (2005 Maritime Trial Minutes). Article 1(11) states that if a Mainland court in the course of a commercial dispute case finds that there is an inconvenient jurisdiction in the case, then it may dismiss the lawsuit on the ground of forum non conveniens. Because the 2005 Maritime Trial Minutes are not a judicial interpretation and therefore are not legally binding (see Practice note, Understanding Chinese legislation), they cannot be directly used as a basis for judgment. As a consequence, there were many ambiguities and inconsistencies in the application of forum non conveniens by Mainland courts.

2015 SPC Civil Procedure Law Interpretations

After years of continuous efforts by the academic community and the judiciary, the SPC implemented the 2015 SPC Civil Procedure Law Interpretations in February 2015. Article 532 of the interpretations provides that in a foreign-related civil case, the people's court may decide to dismiss the plaintiff's case and inform them to file a lawsuit in a more convenient foreign court, where all of the following circumstances are met:

The defendant raises the request that the case should be governed by a more convenient foreign court, or raises objections to jurisdiction.
There is no agreement between the parties to choose the jurisdiction of a Mainland court.
The case does not fall under the exclusive jurisdiction of any Mainland court.
The case does not involve the national interests of China or the interests of its citizens, legal persons or other organisations.
The main facts disputed in the case did not take place in China, and the case is not governed by Chinese law, therefore posing significant difficulties for a Mainland court in ascertaining facts and applying laws during the trial.
A foreign court has jurisdiction over the case, and it is more convenient for the foreign court to hear the case.

Article 532 is generally consistent with Article 1(11) of the 2005 Maritime Trial Minutes. Since Article 532 requires that all six conditions be met at the same time, currently the application of forum non conveniens in the Mainland is still subject to these strict limitations.

Experiences that Mainland courts can borrow from Hong Kong courts

Drawing on the experience of Hong Kong, the application of the principle of forum non conveniens in the Mainland should improve with the development of judicial practice. Issues to be clarified in future legislation may include:

When to raise the stay application. According to Article 127 of the Civil Procedure Law of the People's Republic of China 2012 (中华人民共和国民事诉讼法), objections of the parties to the jurisdiction of the case should be raised during submission of the pleadings. An application for forum non conveniens is equivalent to an objection to jurisdiction. Therefore, it is reasonable for the defendant to submit the request as an objection during the filing of the pleadings, and this also is in line with existing regulations.
How to split the burden of proof of the parties. The 2015 SPC Civil Procedure Law Interpretations do not mention the burden of proof, which is not conducive to the specific application of the forum non conveniens principle. The Mainland courts could draw from the experience of the Hong Kong courts and adopt a similar three-stage test (see Adoption of forum non conveniens in Hong Kong) by:
- requiring the defendant to first prove that the court is not suitable for the trial, and that another court is more suitable;
- transferring the burden of proof to the plaintiff to reply to the defendant's evidence; and
- requiring the judge to render a decision based on the evidence and statements of both sides.
What the common considerations in the application of forum non conveniens are. The provisions of Article 532 of the 2015 SPC Civil Procedure Law Interpretations on the requirements of "convenient" and "inconvenient" are stated in general terms and need to be further clarified. Drawing again from the experience of Hong Kong, the following factors could be referred to:
- the degree of difficulty in identifying and understanding the application of the governing law;
- whether there is a clear and exclusive jurisdiction clause;
- the degree of difficulty in obtaining evidence and the required time and costs of obtaining the evidence;
- whether there is parallel or pending litigation; and
- the degree of difficulty in the service of the litigation documents.

Although specific factors will vary widely due to the differences among cases, listing the relevant factors would help guide Mainland judges to more clearly apply the principle of forum non conveniens, and to provide a reference for parties considering whether to make an application to stay proceedings on those grounds.

Application of forum non conveniens in Mainland-Hong Kong cross-border disputes | Practical Law