Bankhaus Wolbern & Co (AG & Co KG) & Anor v China Construction Bank Corporation, Zhejiang Branch

On 11 September 2007, the Zhejiang Branch of China Construction Bank Corporation, (“CCB”) executed a refund guarantee in the sum of US$10, 125,000 in favour of the 2 ^nd Claimant (“Vision 93”), a special purpose vehicle incorporated for the purpose of entering into a ship building contract. The guarantee was issued at the request of Zhejiang Zhenghe Shipbuilding Co Ltd (“the Builder”). On 28 March 2006 a shipbuilding contract (“the Contract”) for the construction and sale of a 27,000 DWT bulk carrier made between the Builder and Peace Ocean Shipping SA (“Peace Ocean”) was concluded which, on about 28 ^th March 2006, was novated to Vision 93 who thereby took the place of Peace Ocean as buyer. The Contract provided for disputes to be resolved by arbitration in England.

An advance payment of US$10,125,000 was paid under the Contract by Vision 93 on 13 September 2007 and by the Guarantee, CCB contracted to pay that sum to Vision 93 if the Builder became obliged to refund the advance payment. The guarantee provided that: (i) the guaranteed sum would be paid following a written demand confirming that the Contract had been cancelled and the Builder had failed to refund the advance payment; (ii) CCB’s obligation to pay the guaranteed sum was not to be affected by any breach of or default under the Contract; (iii) any payment under the contract was to be made without set-off or counterclaim; (iv) payment could be deferred pending the resolution by arbitration of any dispute between the Buyer and the Builder leading to an award in favour of the Buyer; (v) Vision 93 had the right to assign the guarrantee to the 1 ^st Claimant (“Bankhaus”); (vi) any assignment of the guarantee was subject to CCB’s prior written consent; (vii) the guarantee was governed by English law and CCB submitted to the non-exclusive jurisdiction of the courts of England in respect of any legal action or proceedings in connection with the guarantee.

On 6 September 2007 Vision 93 assigned the guarantee to Bankhaus in anticipation of its issuance, which occurred 5 days later.

CCB issued the guarantee pursuant to a contract made on 11 September 2007 with the Builder (“the issuance contract”) which provided that CCB were to be entitled to make payment under the guarantee without the Builder’s consent and regardless of any disputes arising from the underlying shipbuilding contract provided CCB reviewed the demand documents and were satisfied that they were in order.

Under the Contract, the Builder was obliged to deliver the completed vessel by 31 ^st January 2009, but it did not do so. On 5 ^th February 2009, Vision 93 cancelled the Contract and demanded repayment of the deposit. The Builder refused to refund the deposit and Vision 93 commenced an arbitration against the Builder in London for recovery of the deposit. By a Final Award dated 4 ^th April 2011, the Tribunal awarded Vision 93 the sum of US$10,125,000 plus interest of US$2,155,372.10 but the Builder has failed to honour this award.

Meanwhile, on 4 May 2009, the Builder brought proceedings against Vision 93 and First Class Ship Invest GmbH in the Qingdao Maritime Court of the RPC alleging failures to make payments under 6 shipbuilding contracts. It appears that Vision 93 was sued on the basis that it was to be identified as being part and parcel of First Class Ship Invest GmbH. On 12 April 2011, the Qingdao Maritime Court handed down judgement on the Builder’s claim and ordered both defendants to pay damages in the sum of US$10,000,000. On the previous day (11 April 2011), the Qingdao Maritime Court issued a Notice of Enforcement ordering CCB to suspend payment of the guaranteed sum to Vision 93 and stipulating if it so requested CCB could pay US$10,125,000 into court by means of an escrow account. On the same day, the Qingdao Maritime Court issued a Civil Order (“the Preservation Order”) granting the Builder’s application for property preservation and freezing the guaranteed sum which at CCB’s option could be paid into court by way of escrow.

Vision 93 have appealed the decision of the Qingdao Maritime Court but the judgement therein has not yet been given.

Under Articles 102 and 103.3 of the Civil Procedure Code of the RPC a person who refuses to carry out an order of the People’s Court and/or refuses to withhold income after receiving notice of assistance is liable to be fined or detained; and by Article 313 of the Criminal Law of the RPC a person who refuses to execute an order of the People’s court (including a notice of enforcement assistance) is liable to be imprisoned for up to 3 years.

In a notice dated 9 December 2011, the Qingdao Maritime Court informed CCB that the period of attachment following the grant of the Preservation Order was two years. From this it would seem to follow that unless the Preservation Order is extended in the meantime, it will lapse on 12 April 2013. Recently, the Claimants have offered not to enforce any judgement obtained in their favour until after 11 April 2013.

The Claimants made demands under the guarantee on 18 April and 19 May 2011 to which CCB responded by stating that it intended to perform its obligations but in light of the orders issued by the Qingdao Maritime Court the money would have to be paid into court. The Claimants made a further demand on 19 May 2011, at which time they gave notice of the assignment to Bankhaus.

On 11 October 2011 the Claimants made an ex parte paper application for permission to serve on CCB in the RPC a Claim Form and Particulars of Claim claiming US$10,125,000 under the guarantee. The application was supported by a witness statement made by Mr Lewis of Field, Fisher Waterhouse and was made on the basis that the guarantee was governed by English law (CPR 6 PD 3.1(6)(c)) and contained a non-exclusive jurisdiction clause in favour of England (CPR6 PD 3.1 (6) (d)). On 17 October 2011, the permission sought was granted by order of Hamblen J.

CCB now applies to have Hamblen J’s order set aside or the proceedings stayed on the ground that China rather than England is the appropriate forum. In the alternative, CCB applies for a case management stay for a year during which time it is hoped the Preservation Order will lapse or be discharged. CCB also asserts that the Claimants were guilty of material non-disclosure when making their application to Hamblen J and further failed properly to effect service in the RPC.

In Deutsche Bank AG v Highland Crusader Partners LP [2010] 1 WLR 1023 (CA) Toulson LJ held at para.50:

It was doubtless in the light of these observations and others to like effect in earlier and later authorities (Footnote: ¹) that Ms Selvaratnam QC for CCB submitted that when the guarantee was executed it had not been foreseeable that CCB might be made the subject of a Preservation Order, and in the circumstances prevailing both when Hamblen J made his order and now it would be wholly unjust for this court to exercise jurisdiction over the claim because a judgement in favour of the Claimants could expose CCB to a fine and/or its senior managers to imprisonment. Accordingly, argued Ms Selvaratnam, the only appropriate forum was China where, so long as the Preservation Order remained in place, CCB would not be obliged to act in breach of the order. In support of this submission, Ms Selvaratnam relied on evidence to the effect that none of the individuals within CCB who had been involved in the issuance of the guarantee had any reason to think at that time that CCB might be prevented from honouring the guarantee by order of a Chinese Court.

As Mr Goldstone QC for the Claimants correctly submitted, the question is not whether the possibility of a Preservation Order was subjectively foreseen at the time the guarantee was executed, but whether such an occurrence was foreseeable. In my view, it was foreseeable for the following reasons: (1) the general law under which the Preservation Order was made was in place well before the guarantee was given; (2) the plain purpose and intent of a Preservation Order is to assist Claimants in recovering against defendants by a freezing of their assets; (3) it was obvious from the very terms of both the guarantee and the issuance contract that Vision 93 was a party to a shipbuilding contract under which claims might be made against it by the Builder; and (4) it was equally obvious that the right to payment under the guarantee was plainly an asset vested in Vision 93 that was susceptible to being made the subject of a Preservation Order.

Ms Selvaratnam submitted that if there are strong reasons in justice for a stay on forum non conveniens grounds it is not essential to show that those reasons were not foreseeable at the time a non-exclusive jurisdiction clause is agreed. Mr Goldstone disputed this proposition and argued that grounds that were foreseeable could never be sufficiently strong reasons to justify a stay where there is a non-exclusive jurisdiction clause in favour of England. On balance, I think that Ms Selvaratnam probably has the better of this particular argument, but it is unnecessary to resolve this question because I am firmly of the view that justice does not require a stay of these proceedings on jurisdictional grounds. I say this for the following reasons: (1) in light of the non-exclusive jurisdiction clause CCB cannot assert that the process of litigating in England rather than in China is unjustly inconvenient; (2) the guarantee is governed by English law and an English court is much the better forum for the determination of the parties’ rights and obligations under the guarantee, including the question whether the Preservation Order renders CCB’s obligations unenforceable on foreign illegality or public policy grounds; (3) there is a distinction between the giving of a judgement and the enforcement of a judgement through the process of execution; (4) it follows that a judgement in favour of the Claimants would not of itself result in CCB facing criminal sanctions in the RPC: for this situation to arise, CCB would have to pay the Claimants out on the judgement; (5) if the court gives judgement in favour of the Claimants this would be a judgement for a sum of money and would not be in the form of a compulsory order breach of which would be a contempt of court; (6) whilst the Preservation Order is in force it is inconceivable that the Claimants would be able to enforce a judgement in their favour in the RPC; (7) it seems very doubtful that execution of a judgement by a third party debt order or charging order in London where CCB has a branch would render CCB liable to criminal and financial sanctions under Chinese law; (8) in any event, following a judgement in favour of the Claimants, if the Preservation Order is in force it would be open to CCB to apply for a stay of execution either generally or within the RPC.

I conclude therefore that CCB has failed to establish sufficient reasons for the setting aside of Hamblen J’s order or for the grant of a stay on jurisdictional grounds. It follows that it is unnecessary to deal with Mr Goldstone’s argument that jurisdiction is unchallengeably established under Article 23 of the Jurisdiction and Judgments Regulation (Footnote: ²) , and I decline to do so.

The court has an inherent power to stay proceedings as an exercise of case management but will do so only where there are strong reasons for taking this course and the benefits which are likely to result clearly outweigh any disadvantage to the party resisting a stay; see Reichhold Norway ASA v Goldman Sachs International [2000] 1 WLR 173.

Ms Selvaratnam submitted that there were strong grounds for a case management stay of about a year to avoid the possibility of CCB facing criminal sanctions for breaching the Preservation Order and to allow for resolution of the problems posed by the Preservation Order. The disadvantage to the Claimants would be a delay in obtaining payment but this was readily compensable by the award of interest. In short, her submissions under this part of CCB’s application in favour were effectively the same as those she made in seeking to persuade the court that justice required a stay on forum non conveniens grounds. In addition, she argued that the court should not refuse a stay on the basis of the Claimants’ offer not to enforce any judgment before 12 April 2013.

I am unpersuaded by Ms Selvaratnam’s submissions. My reasons are those I have already given for rejecting the contention that the interests of justice require a stay on forum non conveniens grounds. In my judgement, the continuation of the proceedings will not inevitably lead to CCB being in breach of the Preservation Order and the court should get on with determining the rights and obligations of the parties under the guarantee, including any question of the enforceability of CCB’s obligations raised by the Preservation Order. As I have already said, it is inconceivable that the Claimants would be able to execute on the judgement in China whilst the Preservation Order is in force and it is very unlikely that execution outside China would trigger criminal sanctions against CCB. Further, if judgement is given against CCB at a time when the Preservation Order is still in force, CCB can apply for a stay of execution.

Ms Selvaratnam contends that Mr Lewis failed to draw to the attention of the court the following matters in his witness statement served in support of the ex parte application for permission to serve out.

In my judgement Mr Lewis is not to be criticised for failing to inform the court as to the criminal sanctions under Chinese law for breaching a Preservation Order since there is no evidence that he was aware of these provisions. Further, whilst it would have been better if Mr Lewis had obtained and exhibited a copy of the Preservation Order; acknowledged the possibility that CCB might have a defence based on illegality or public policy under the law of the place of performance; and refrained from making the bald assertion that the Preservation Order did not prevent payment to Bankhaus, these omissions do not in my opinion justify a setting aside of Hamblen J’s order. What Mr Lewis did disclose was the existence of the Preservation Order so that Hamblen J would have been well aware of the conflict between that order of the Chinese court and the obligation under the guarantee sought to be enforced. Mr Lewis also disclosed the date of the assignment and the date of the guarantee.

Turning to the question of defective service, Ms Selvaratnam justifiably complains that the witness statement of Mr Lewis used to obtain the ex parte order of the Hamblen J and the exhibits thereto were not served on CCB in China under the Hague Convention. CPR 23.9 (2) clearly states that the evidence relied upon by a claimant on a without notice application must be served on the claimant. A copy of this evidence was served on CCB’s London solicitors following a request for it, but this was only on 27 June 2012 and no translation was served as required by the Hague Convention.

In my judgement this failure to serve evidence in accordance with the rules together with the fact that Mr Lewis ought to have obtained and exhibited a copy of the Preservation Order, acknowledged the possibility that CCB might have a defence based on illegality or public policy under the law of the place of performance, and refrained from making the bald assertion that the Preservation Order did not prevent payment to Bankhaus, should be marked by an appropriate costs order, the details of which should be determined when the whole question of the costs of this application is dealt with.

In the result, for the reasons I have given, CCB’s applications to set aside Hamblen J’s order and/or for a stay on jurisdictional or case management grounds are refused.