CACV 106/2008 & CACV 197/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NOS. 106 AND 197 OF 2008
(ON APPEAL FROM HCCT NO. 54 OF 2007)
||IN THE MATTER of Sections 2GG and 40B of the Arbitration Ordinance (Cap. 341)
||IN THE MATTER of the Arbitration Award dated 27 October 2006 awarded by China International Economic and Trade Arbitration Commission
||厦門新景地集團有限公司 formerly known as
||ETON PROPERTIES LIMITED
||ETON PROPERTIES (HOLDINGS) LIMITED
Before: Hon Rogers VP, Le Pichon and Hartmann JJA in Court
Date of Hearing: 22 May 2009
Date of Judgment: 22 May 2009
Date of Handing Down Reasons for Judgment: 11 June 2009
REASONS FOR JUDGMENT
Hon Rogers VP:
1. I agree with the judgment of Le Pichon JA.
Hon Le Pichon JA:
2. These were appeals by Eton Properties Ltd and Eton Properties (Holdings) Ltd (“the appellants”) from orders of Reyes J of 31 March 2008 and 24 June 2008 (respectively “the March order” and “the June order”). On 31 October 2007, A Cheung J made an ex parte order under sections 2GG and 40B of the Arbitration Ordinance in terms of an arbitration award of 27 October 2006 made by CIETAC (“the award”), thereby enabling the respondent to the appeals (“the applicant”) to enforce the award. By the June order, Reyes J refused the appellants’ application to set aside the ex parte order, having earlier (in March) refused the appellants’ application for leave to adduce evidence on PRC law, that refusal being the subject matter of CACV 106 of 2008. At the conclusion of the hearing, the appeals were dismissed with reasons to be handed down which we now do.
3. The applicant is a PRC company. The appellants are Hong Kong companies. The first appellant (“Eton”) is wholly-owned subsidiary of the second appellant (“Holdings”). They are companies with the Eton group of companies (“the Eton group”).
4. Until November 2005, the appellants were the sole shareholders of Legend Properties (Hong Kong) Co Ltd (“Hong Kong Legend”), each holding one share of that company in trust for Eton Properties International (No. 3) Limited (“International”). Hong Kong Legend had a wholly owned subsidiary called Legend Properties (Xiamen) Co Ltd (“Xiamen Legend”), a PRC company which is the owner of land in Xiamen (“the land”).
5. The applicant and the appellants were parties to an agreement of 4 July 2003. The agreement contained an arbitration clause. The arbitral tribunal described the agreement in these terms:
“The subject matter of the Agreement is the contractual right to buy and sell the shares in Hong Kong Legend that has an indirect effective control over the [land]. The amount of RMB 120 million is the consideration for the Applicant to obtain the contractual right to acquire all shares in Hong Kong Legend for HK$2, and also the consideration for the [appellants] to obtain the contractual right to sell all the shares in Hong Kong Legend for HK$2
…the true intent of the parties is to progressively transfer the right to develop, operate and make earnings from the [land] and, after all the terms and conditions provided in the Agreement are met, to sign the legal instrument on transfer of shares in the target company and to handle the specific procedures. In other words, the main rights and obligations of the parties in the Agreement in this case do not involve how to transfer the shares in Hong Kong Legend in detail but involve how to perform certain specific obligations to cause the said transfer of shares to be effected ultimately.”
6. The appellants never delivered the land to the applicant. Instead, on 14 November 2003, they sought to return the initial deposit on the basis that performance of the agreement would be contrary to PRC law. The applicant did not accept the purported termination and returned the deposit.
7. In March 2005, the Eton group decided to establish a holding company. In May 2005, three months prior to the commencement of the arbitration proceedings, legal advice was obtained on the restructuring of the Eton group.
8. On 8 August 2005, the applicant commenced arbitration proceedings in Beijing before CIETAC, seeking specific performance of the agreement. The appellants maintained their position that the agreement was contrary to PRC law and, in any event, performance had become impossible because, meanwhile, the appellants had commenced construction work which remained in progress at the time the arbitration was heard.
9. The Eton group proceeded with the restructuring notwithstanding the arbitration. In November 2005, Hong Kong Legend issued 9998 new shares to Holdings. Then in April 2006, one share originally held by Eton in trust for International was transferred to Eton Properties Group Limited (“EPGL”) and the one share originally held by Holdings was agreed to be held by Holdings on trust for EPGL.
10. The restructuring of the Eton group which had the effect of diluting and transferring the appellants’ shares in Hong Kong Legend to EPGL, their parent company, was implemented during the course of the arbitration. Yet this transfer and dilution were not made known at the time to the applicant or to the tribunal. No explanation for this state of affairs has been forthcoming.
11. The award published on 27 October 2006 ordered that
(1) the appellants pay RMB 1,275,000 to the applicant (representing interest on the initial deposit up to 1 June 2005);
(2) the appellants “shall continue to perform the Agreement”; and
(3) the appellants reimburse the applicant its arbitration fees of RMB 101,875.
The tribunal rejected the appellants’ argument of impossibility of performance, stating:
“…The Arbitral Tribunal considers that an agreement shall be binding upon the parties thereto once the agreement is executed. Even though any change in circumstances makes it difficult to perform the agreement during its performance, the parties shall exert reasonable efforts in good faith to perform the Agreement completely and fully other than purely emphasize external causes. In this case, as stated by the [appellants], the Agreement is a framework agreement, whose performance may be difficult due to various uncertainties. This needs close cooperation between the parties and reasonable efforts to seek alternative approaches to meet the purpose of the Agreement. The [appellants’] allegations cannot constitute justifiable reasons for impossibility to perform the Agreement and discontinuing performance of the Agreement without consent of the Applicant.”
12. In March 2007, the applicant sought to enforce the award in Xiamen but its application was unsuccessful because the appellants and their assets were not within Xiamen.
13. At about the same time, the appellants sought to set aside the award in an application to the Second Intermediate People’s Court in Beijing but subsequently withdrew its application.
14. As mentioned above, the applicant obtained the ex parte order in October 2007. The appellants’ application to set it aside gave rise to the orders under appeal.
15. The parties were notified on 6 May 2008 that the appeals were fixed to be heard on 23 December 2008 before two judges of this court. On 9 October 2008, the appellants took out a...