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Note: Shanghai Pudong Development Co. (Issuer) opened three freely negotiable commercial LCs at the request of Jiangyin Haigang International Logistics Co. Ltd. and Daluo Energy Resources & Materials Co. Ltd (Applicant/Buyers) in favor of C-Star Shipping Co. Ltd. and Kam Fung International Investment Ltd. (Beneficiary/Sellers) in connection with a transaction for the sale of goods. Beneficiary/Sellers presented documents, including a bill of exchange, to China Construction Bank (Negotiating Bank). The bills of exchange were drawn in favor of Negotiating Bank which purchased them“ on the strength of the [Issuer’s] acceptance of the bills.” Negotiating Bank then discounted them.

When Negotiating Bank demanded payment on the accepted bills of exchange, Issuer refused, claiming that it had been enjoined from doing so by the People’s Higher Court in Jiangsu in the People’s Republic of China at the request of the Applicant/Buyers. The injunction was a result of a trial in the PRC where the Applicant/Buyers alleged fraud in the underlying transaction. When PRC trial court found that there was fraud, but that the Negotiating Bank had acted in good faith, Applicant/Buyers appealed to the Chinese appellate court, claiming the Negotiating Bank had knowledge of the fraud.

Negotiating Bank then sued Issuer for reimbursement in Hong Kong. Issuer moved to stay the Hong Kong proceedings under the doctrine of forum non conveniens, since there was already litigation on this issue in the PRC. The PRC appeal was still pending at the time of this motion.

Issuer expressed concern that there could be contradictory rulings. The Hong Kong Court of First Instance of the High Court, Mimmie Chan, J., ordered that the Hong Kong proceedings be stayed. On appeal, the Hong Kong Court of Appeal, Cheung, J., affirmed. Issuer then sought leave to appeal to the Court of Final Appeal, which was denied by the Appellate Judge.

The Hong Kong trial judge ruled that Hong Kong was not the appropriate forum on account of the advanced stage of the proceedings in the PRC, the difficulty of compelling witnesses to travel to Hong Kong, and the ability to obtain all of the documentary evidence.

The appellate judge noted that the trial judge took the following factors into account in issuing the stay, namely, the existence of the Jiangsu proceedings in an appellate stage that involved the same issues as the Hong Kong litigation. The appellate judge described these factors as “strong factors in favour of a stay of the Hong Kong Proceedings.”

The Appellate Judge reviewed the process by which a stay based on forum forum non conveniens is based, namely: 1) whether there is a more convenient forum to resolve the dispute, 2) that the current jurisdiction is not the proper forum for the proceedings, and 3) that the plaintiff (Nominating Bank) will be deprived some “legitimate personal or judicial advantage if the action is tried in the forum.” If these three elements are met the court’s proper function then balances those concerns against the disadvantages of staying the proceedings.

The Appellate Judge noted that the stay process was “unusual” in that “there is no claim or counterclaim between plaintiff and the defendant in the Jiangsu province as they are both third parties to the claims brought by the purchasers: the defendant was joined on the initiative of the purchasers, while the plaintiff was joined as a third party by the Intermediate Court.” The Appellate Judge noted that if the allegations of fraud by the Negotiating Bank was resolved by the Mainland Court “will have an impact on the Hong Kong proceedings because, as the Judge observed in this case, the defendant had in these proceedings sought to rely on the claims made and evidence adduced by the purchasers in the Jiangsu proceedings as to the plaintiff’s involvement in the fraud alleged by the purchasers and also to the plaintiff’s alleged knowledge of the fictitious transactions.”

The Appellate Court stated “The analysis has to be made on the bases of factors that were presented before the Judge. Fraud in respect to Letters of Credit had been alleged and this clearly impacted on the question of payment by the defendant to the plaintiff. This being the case, the Judge was clearly entitled to regard this as a relevant factor in deciding which is the appropriate forum bearing in mind the advanced stage of the proceedings in the Mainland.”

The Appellate court rejected Negotiating Bank arguments that the Mainland Court could not provide the remedies sought to the Negotiating Bank, a third party in the Mainland Proceedings, on the basis that remedy could be sought by bringing an independent claim against the Defendant/Fraudster in the Mainland Courts.

The Appellate Judge then addressed the Issuer’s claim that it would be difficult to compel witnesses to travel to Hong Kong for trial, as well as the Negotiating Bank’s counter-argument that the Issuer had failed to identify witnesses that would be problematic to call. The Appellate Judge noted that the fact that witnesses would have to be identified at an early stage did not alter the judgement below.

The Appellate Judge finally addressed that this appeal was “against the exercise of discretion of the [trial] Judge” which should only be overturned when “the discretion has been wrongfully exercised,” which was not the case here.

[ARB/ZTS]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.