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Whilst a company and its directors remain separate legal entities, the winding-up of the business does not always result in a risk-free outcome…read more
Risk is integral to running a business. The recent decision in Sunbroad Holdings Ltd v A80 Paris HK Ltd and Another reaffirms the significance of risk allocation under a commercial lease…read more
Whilst a company and its directors remain separate legal entities, the winding-up of the business does not always result in a risk-free outcome for its board members. In fact, it can often signal the beginning of far more turbulent times for the directors and their professional futures. So, with global insolvencies on a sharp rise, it’s more important than ever for directors to grasp the legal issues they could face, personally and professionally.
Directors can face legal action by way of Disqualification of Directors orders under sections 168D and 168H of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), or CWUMPO. If granted, they would be barred from acting as a director of any company, or be concerned with (or take part in) the promotion, formation or management of a company for up to 15 years.
Is the failure by directors to ensure payment of wages to employees sufficient to attract a disqualification order? This was the question in the decision of the Official Receiver v Samuel Ajmal Victor , where the official receiver applied for a disqualification order against one of the directors. The company in question developed an electronic transaction processing platform and its operating expenses were sustained by shareholders’ fund injections and allotment of shares, including HK$5M by shareholder allotment injection in October 2012. Although the platform had been developed and looked promising, it proved to be too advanced for the market at the time and, by early 2013, the company was unable to generate any revenues.
The director made efforts to seek outside investments and, in May that year, an interested outside investor proposed to acquire the platform for US$500,000. The company had immediate liabilities, including employee wages, which it was unable to meet and, as such, negotiations continued regarding the method of payment and how much of those liabilities would be. Meetings were held with employees to explain the deal which could save the company and ensure payments of salary. The director asked if employees would agree to continue working with delayed payment of wages and, whilst some disagreed and left with their full wages paid, others agreed and stayed, expressing their faith in the platform and the deal, defined with a deferral agreement.
The outsider paid the consideration US$500,000 as an upfront loan, secured by the director’s personal guarantee and charged against the platform, for paying some creditors, employees and operational costs. A term sheet was signed in September 2013, with the outsider acknowledging the creditors with whom to negotiate the repayment schemes with.
However, further negotiations on the deal failed. Staff who agreed to stay, having not been paid between May to September, left upon being informed of the failure. Staff (including the director) applied to the Labour Tribunal claiming outstanding wages, which were granted in terms in default of the company’s appearance. By November 2013, the company went into voluntary liquidation.
The test for disqualification of directors, as stated in CWUMPO, is coined in broad terms: “the Court shall disqualify a person where it is satisfied that (i) he is/has been a director of a company which has become insolvent during/after his directorship, and (ii) his conduct as director of that company makes him “unfit to be concerned in the management of a company”. The CWUMPO, however, does not go on to define unfitness and must be deduced from case law.
The official receiver based its application for disqualification of the director on the failure to ensure due payment of employee wages. It alleged inter alia that the director should have used the HK$5M funds from October 2012 and US$500,000 from the deal to pay wages as a top priority. The official receiver alleged it was no defence that the director was seeking outside investments, and denied the existence and validity of the deferral agreement. Employees’ wages are preferential debts enjoying priority in distribution in liquidation, and non-payment of wages without reasonable excuse is a criminal offence under the Employment Ordinance (Cap. 57), therefore, the official receiver claimed, a breach of such duty itself satisfies “unfitness” and the deferral agreement and deal provide no defence.
After the trial, the court was in favour of the director and found that there was no unfitness. Failure to pay wages by a company does not justify or mandate granting a disqualification against a company director and is only a relevant conduction for consideration. Ordinary commercial misjudgment is not enough. In situations where the director in question had to decide whether to continue operating the company’s business at a loss (or with wages unpaid), the test for unfitness is “whether the director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation”.
The court must consider all circumstances of the case to decide whether such failure to pay was caused by the director’s lack of commercial probity, gross negligence or total incompetence in managing the affairs of the company. The basis and reasonableness for believing in the prospect of paying debts concerned in the future, including the likelihood of finding “white knight” investments and the efforts made by the relevant director, is important. Equally, the nature of the business and the circumstances leading to its demise, and whether relevant creditors (in this case, the employees) were voluntary creditors (i.e. they made an informed decision to agree to deferral of payment) are key considerations. Relevant also is whether the decision to continue operating would have benefited the director to the detriment of general creditors, putting personal interest first.
The court’s nuanced approach to the decision makes one thing very clear: directors of businesses facing financial difficulties must not assume that they can wind up their business with impunity. Instead, they would be well-advised to seek legal advice on the steps ahead, gathering evidence on the circumstances leading to insolvency along the way.
Risk is integral to running a business. The recent decision in Sunbroad Holdings Ltd v A80 Paris HK Ltd and Another reaffirms the significance of risk allocation under a commercial lease, in the context of the unprecedented outbreak of COVID-19 in Hong Kong since 2020.
The dispute arose out of the early termination of the lease of a ground floor store situated in Causeway Bay, in the vicinity of one of the busiest shopping districts in Hong Kong. The landlord of the store commenced two actions to recover rent in arrears over different but consecutive periods from the first defendant, the tenant, and the second, a guarantor of the tenant. The tenant belongs to an established group in the business of retail of beauty and hair products, possessing over 80 physical stores covering key locations in Hong Kong, Singapore and Macau, renting the retail store for selling beauty and hair products.
The landlord and the tenant entered into the lease in August 2019, where the store was let for a fixed term of three years. The lease contained no break clause for the tenant to terminate it. There was also an express term in the lease that the landlord was entitled to elect not to terminate the lease in the event of the tenant’s default.
The outbreak of COVID-19 resulted in the implementation of social distancing measures and, from February 2020, the tenant defaulted on the rent, ceased to operate the store and communicated to the landlord that it could not perform its obligations under the lease in the prevailing circumstances. After rounds of failed negotiations, the landlord commenced HCA 735/2020 on 21 May 2020 for inter alia arrears of rent from 1 February 2020 until 20 May 2020 in a total sum of around HK$1 million. The landlord then applied for summary judgment or alternatively interim payment of 50% of the amount claimed. The master granted the defendants an unconditional leave to defend and ordered the defendants to make an interim payment, though both parties appealed.
In July 2021, the tenant returned the keys to the store, but the landlord stated that it did not accept the tenant’s repudiation and that the lease was still valid and binding. The following month, the landlord commenced HCA 1174/2021, claiming inter alia further arrears of rent from 21 May 2020 until 31 July 2021 in a total sum of around HK$4.5 million, and applied once more for summary judgement in HCA 1174/2021.
In November 2021, some 20 months after the tenant’s exit from the store, the landlord informed the defendants that the lease was terminated as a result of the latter’s ongoing repudiation and abandonment of the store which the landlord accepted.
The appeals in HCA 735/2020 and the summary judgment application in HCA 1174/2021 were heard together, where the court allowed the appeal by the landlord in HCA 735/2020 and granted summary judgment in favour of the landlord in both actions. The central issue is whether the impact of the pandemic constitutes frustration of the lease (the frustration ground) and, as an alternative defence, whether it is reasonable for the landlord to refuse to accept the tenant’s early termination of the lease such that the landlord was not obliged to mitigate its loss upon the tenant’s repudiation (the mitigation ground).
For the frustration ground, the court, applying National Carriers v Panalpina (Northern) Limited, endorsed the trite common law principles on frustration of contracts. It held that frustration takes place only when there supervenes an event which so significantly changes the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated at the time of its execution so that it would be unjust to hold them to the literal sense of the stipulations in the new circumstances. Frustration cannot be lightly invoked to relieve the contracting parties of normal consequences of (imprudent) commercial bargain or commercial risk unless a common purpose could be said to have been frustrated by the most extraordinary circumstances which render the performance of a contract impossible.
The court went on to rule that COVID-19 has not fundamentally or radically changed the nature of the lease (i.e. letting and possession of the store) that exceeded the parties’ reasonable contemplation at the time of entering into it. Putting the tenant’s case to the highest, the impact of the pandemic would at most lead to a reduction of the profitability of the business of the tenant, which does not suffice in frustrating the lease.
In addition, it has been within the tenant’s knowledge at the time of signing the lease that there was no escape clause. The court pointed out that the tenant’s commercial standing should allow the making of a considered decision to choose the store suitable for its purpose and also to commit itself to a fixed-term lease without a break clause.
In the same vein, the court disagreed that force majeure would assist the tenant’s case. The crux of force majeure is whether the premises is unfit for use as a result of destruction or damage for causes beyond the control of the landlord and not attributable to the act or default of the tenant. In other words, unless a certain event renders the performance of the contractual obligations of the parties impossible, a mere lack of commercial viability or profitability is plainly distinguished from force majeure.
Turning to the mitigation ground, the court upheld the position that an action for rent in arrears is one for an agreed sum as a debt, and that the landlord does not have a duty of mitigation. This is subject to the restrictions where the innocent party requires the defaulting party’s cooperation to perform, or the innocent party has no legitimate interest in performing the contract, rather than claiming damages in which the court would decline to grant the remedy of an agreed sum (White & Carter v McGregor).
The court, applying Reichman v Beveridge, observed that instances of a court denying an innocent party’s entitlement to maintain the contract in force and to sue for the contract price are limited. They would be where an election to keep the contract alive would be wholly unreasonable and where damages would be an adequate remedy. The burden of proving that it was wholly unreasonable for a landlord to hold onto the lease is on the defaulting tenant. This heavy burden is not discharged merely by showing that the benefit to the innocent landlord is small compared to the loss to the defaulting tenant.
The court would readily find the commercial parties to have made an informed commercial decision in entering into the lease, and emphasised the cardinal principle that the innocent party is not bound to accept repudiation of a contract, especially when such right is clearly spelt out in the contract itself. On the evidence, it is not wholly unreasonable for the landlord not to terminate the lease given the lukewarm retail market brought about by the pandemic. Should the landlord elect to terminate the lease, there is a likelihood that it has to commit to a potentially lower rent than that under the lease for a substantial term with any replacement tenant. If the court were to accept that the landlord had the duty to accept early termination of the lease, this would have unjustifiably reversed the allocation of the risk in the commercial decision in committing to the lease term and the terms of the lease from the tenant to the landlord.
What can we learn from the circumstances and potential outcomes of these examples? That contracts are all about risk allocation. Hong Kong courts have consistently held parties liable for what had been agreed at the contract stage. So, commercial parties, in the course of contractual negotiation, should make it clear as to who bears the risk in times of unforeseen situations.
In the absence of a break clause for a tenant in a lease, a landlord is generally entitled to affirm the contract and to sue for an agreed sum of arrears of rent in the event of the tenant’s default of rent. Practically, unless the tenant can show that the landlord engaged in conduct such as deliberately turning down an existing replacement tenant who was ready and willing to enter into a lease for at least the remainder of the term of the lease at a comparable level of rent, it appears that argument on the “unreasonableness” on the part of the landlord in affirming the lease in the event of the tenant’s default is rather insurmountable.
Escalation clauses (also known as multi-tiered arbitration clauses) are an increasingly common feature across a multitude of commercial agreements. These well-intentioned clauses often require parties to a contract with a dispute to attempt other methods of resolving their dispute as a condition precedent before resorting to arbitration, such as negotiations, mediations or adjudication. After all, arbitrations are often seen as (and can indeed be) both costly and time-consuming.
However, these clauses have also been a source of problems for parties to a dispute, not only because of issues of enforceability of the clause itself but also because either or both of the parties had neglected to comply with the requirements or conditions set out in the escalation clause before proceeding to arbitration with their dispute. This may lead to challenges to the reference to the arbitral tribunal or even the arbitral award.
It may be tricky to draft an effective escalation clause that mandates a party to first engage in negotiation or mediation as a condition precedent before referring a dispute to arbitration because requirements for a party to engage in negotiation or mediation have traditionally been seen as “agreements to agree” and are thus unenforceable.
This was the case in Tang v Grant Thornton International Ltd, whereby the requirement for the parties to attempt to resolve their dispute by submitting a request for conciliation “of an informal nature” as a condition precedent prior to referring the dispute to arbitration was held to be too “equivocal in terms of the process required and too nebulous in terms of the content of the parties’ respective obligations to be given legal effect as an enforceable condition precedent to arbitration”. The test was whether the condition precedent/obligation imposed was sufficiently clear and certain to be given legal effect. Note that the effect of the ruling was that the arbitral tribunal in question did have jurisdiction to hear the dispute despite failure by the defendant to comply with the condition precedent.
However, in Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd, a condition precedent requiring the parties to “first seek to resolve the dispute…by friendly discussion” was upheld as enforceable because it was neither incomplete nor uncertain. It was in the public interest for such conditions precedent to be enforceable as commercial men expect the courts to enforce obligations they have freely undertaken, and the object of such agreements is to avoid expensive and time-consuming arbitration. The condition precedent was held to have been fulfilled in that particular case and the challenge to the jurisdiction of the arbitral tribunal failed.
It appears that the Hong Kong courts have not expressed a general view on the enforceability of similar conditions precedent in escalation clauses. However, they may have few opportunities to do so because whether such conditions precedent have been complied with are not an issue of jurisdiction (an award of which may be set aside under Art. 34 of the UNCITRAL Model Law/s.81 of the Arbitration Ordinance [Cap. 609]) but rather an issue of admissibility of the dispute to arbitration (which cannot be challenged under that same article). This posåition has been confirmed in the recent Hong Kong Court of Appeal decision C v D affirming the jurisdiction/admissibility distinction under Sierra Leone v SL Mining.
The escalation clause between the parties in C v D required them to attempt in good faith to resolve their dispute by negotiation by written notice prior to referring the dispute to arbitration. However, the respondent to the arbitral claim challenged the jurisdiction of the arbitral tribunal due to the alleged absence of a written request for negotiation by the claimant before a notice of arbitration was issued. The arbitral tribunal made a partial award on jurisdiction in favour of the claimant. The respondent applied to the court to set aside the partial award. The Court of Appeal agreed with the court below and found that issue of whether the claimant had complied with the condition precedent was a question of admissibility of the claim to arbitration and not a question of jurisdiction, and thus not subject to review by the courts. This means arbitral tribunals are likely to have a final say on whether conditions precedent in escalation clauses have been complied with.
Parties should also be careful about inadvertently waiving by their right to challenge compliance with such conditions precedent by their own acts. This was one of the findings in Sierra Leone v SL Mining where the respondent in the arbitration insisted on service of the request for arbitration and was found to have waived compliance with the condition precedent under s.73 of the Arbitration Act 1996 and/or Art. 40 of the ICC Rules.
What can we learn from all of these cases? The enforceability of conditions precedent in escalation clauses depends on the certainty and clarity of those clauses, but it is in the public interest for such conditions precedent to be enforced. Also, the issue of whether such conditions precedent have been met is an issue of admissibility and not jurisdiction. As such, challenges to whether such conditions precedent have been met should be raised and dealt with by the arbitral tribunal and cannot be subject to recourse to the Hong Kong courts. Parties should endeavour to comply with these conditions precedent to avoid unnecessary delay or postponement to having their dispute arbitrated if they cannot be resolved by negotiation, conciliation or mediation. They should also be careful to raise challenges to jurisdiction and admissibility before they have submitted to the arbitral tribunal’s jurisdiction or otherwise waived their right to raise such challenges (under the relevant arbitral rules or as a matter of fact).
In the recent decision of Securities and Futures Commission v DFRF Enterprises LLC & Ors, the court addressed and redressed a Ponzi and Pyramid Scheme by ordering the scheme fraudsters to compensate victims following legal proceedings brought by the Securities and Futures Commission under section 213 of the Securities and Futures Ordinance (Cap. 571) (“SFO”). The background, the decision and some key takeaways will be addressed below.
DFRF, and its founder Daniel Filho, operated a Ponzi and Pyramid scheme between 2014 and 2015. Under the scheme, both DFRF and Daniel Filho (both of whom were never licensed under the SFO) claimed that DFRF would be listed in the US. They induced a number of Hong Kong investors to acquire “membership units” priced at US$1,000 per unit which would allegedly generate monthly returns of up to 15% on the initial subscription fee.
Around May 2015, DFRF released three promotional videos featuring interviews with Daniel Filho on YouTube in Cantonese, Mandarin and English and sent emails to investors claiming that DFRF had been listed in the US and emphasised the rising value of the stock and the need for members to take immediate action to convert their membership units into preferred shares at US$15.06 per share before the deadline. As a result, a number of Hong Kong investors transferred monies to bank accounts held by Heriberto C. Perez Valdes and Sealand Trading (Hong Kong) Limited for the purpose of acquiring membership units and converting the units into preferred shares.
However, the reality was that DFRF have never been listed in the USA. Most of the investors failed to receive any returns on their investments and the monies received from the investors were, in fact, distributed to Daniel Filho personally, and his associates. Consequently, on the 24th August 2016, the Securities and Futures Commission commenced legal proceedings under s213 of the SFO against DFRF, Daniel Filho, Perez Valdes and Sealand, obtaining interim injunction orders to freeze monies in the accounts.
After trial, DHCJ Paul Lam SC was satisfied that there were multiple contraventions of the SFO. They included : –
Furthermore, DHCJ Paul Lam SC found that, by receiving the funds in the accounts from the investors, Perez Valdes and Sealand aided, abetted, assisted, counselled, or procured and/or directly or indirectly been knowingly involved in, and/or a party to, and/or attempted or conspired with others to commit DFRF and Daniel Filho’s contraventions of the SFO. As such, the learned Deputy Judge granted declarations, injunctions and restitutionary orders sought by the Securities and Futures Commission against the defendants pursuant to s213 of the SFO. An order was also made appointing Mr James Wardell and Mr Jackson Ip as administrators to effect the distribution of the funds in the accounts to the investors, and that the fees and disbursements of the administrators shall be paid out of the balances in the accounts.
There are a number of interesting points to take away from this decision. First, the court clarified the fundamental difference between s114(1)(a) and s114(1)(b) of the SFO. While s114(1)(a) covers cases where the person involved actually carried on business in a regulated activity, s114(1)(b) covers cases where the person involved represented or pretended that they were carrying on business in a regulated activity. Hence, a person may be held to have breached s114(1)(b) but not s114(1)(a). However, in reality, it is most probable, if not virtually certain, that a person found guilty of breaching s114(1)(a) would have also contravened s114(1)(b).
Also, and in spite of the fact that the remaining balances in the accounts would not be sufficient to compensate the investors in full, the court agreed that restitution orders should still be granted pursuant to s213(2)(b) of the SFO to distribute the amounts frozen in the accounts to the victims on a pro rata basis.
And finally, whilst the court initially had concerns that the administrators would recover their fees and disbursements from the balances in the accounts with the result that the pool left in the pro rata distribution would reduce, it was eventually persuaded that such an order should be made. In particular, the court noted that the victims’ interest could be safeguarded by imposing a ceiling on the total sum that the administrators may receive and that the maximum total sum to be received by the administrators in this case.
In conclusion, this case demonstrates the court’s continued willingness to serve justice to the victims of Ponzi and Pyramid schemes, making various orders so that the investors provided with compensation to the extent that is reasonably practicable. Similar decision scan can be seen in two previous cases – the Cardell Ltd and Broadspan Securities cases). Furthermore, the court’s approach in allowing the administrators to recover their fees and disbursements from the remaining balances in the accounts is practical and commercially sensible. Put simply, if the administrators are asked to administer the distribution process without any security as to their fees and disbursements, that would disencourage administrators to come forward to handle such a complicated process in the future. The court’s approach in providing security for the administrators whilst also imposing a cap on the fees, thus protecting the investors, provides a reasonable balance between divergent interests and aims.
Norman Nip SC, leading Kelly Shum, acted for the SFC in SFC v DFRF Enterprises LLC & Ors  HKCFI 1288.
The meaning of the word “damage” is notoriously nebulous. So much so that the debate in the last two decades over what it means in the English tort jurisdictional gateway for service-out has resulted in two split decisions of the United Kingdom Supreme Court in Brownlie v Four Seasons Holdings Inc (“Brownlie I”) and Brownlie v FS Cairo (Nile Plaza) LLC (“Brownlie II”). By its recent judgment in Fong Chak Kwan v Ascentic Limited & Ors  HKCFA 12, the Hong Kong Court of Final Appeal (“CFA”) finally had the opportunity to weigh in on this controversial issue in the context of Order 11, rule 1(1)(f) (“Gateway F”) of the Rules of the High Court, Cap. 4A (“RHC”) applicable in this jurisdiction.
In Fong Chak Kwan, the respondent plaintiff is a Hong Kong permanent resident employed by, inter alios, the 2nd Defendant, a United States company (“D2”), to work predominantly in the Mainland. He suffered serious injuries whilst working there, but returned to Hong Kong to receive medical treatment. He obtained leave to serve a writ on D2 in the United States, relying on, inter alia, Gateway F, and interlocutory default judgment was later entered against D2. The Employees Compensation Assistance Fund Board then intervened and applied to set aside the order granting leave to serve D2 as well as the interlocutory judgment.
At first instance, Marlene Ng J held that “the damage… sustained” under Gateway F includes indirect or consequential damage (“wide interpretation”), such as the medical expenditure and the pain, suffering and loss of amenities suffered by the Respondent in Hong Kong. In so doing, the judge preferred the majority view in Brownlie I over the minority view, which is that the phrase is limited to direct damage only (“narrow interpretation”). The Court of Appeal (Cheung and Yuen JJA) upheld the judge’s decision on this issue.
The CFA granted leave to appeal to the board on, inter alia, the Gateway F Issue. As Lord Collins NPJ, writing for the unanimous court, observed, the determination of the “important issue raised in this part of the appeal” “to a large extent hinge[s] on the applicability of… the two decisions of the UK Supreme Court in the Brownlie litigation”.
In dismissing the board’s appeal, Lord Collins endorsed the wide interpretation of the majority in both Brownlie I and Brownlie II. Drawing support from overseas and local authorities, the wide interpretation is founded on the ‘natural and ordinary’ meaning of the word “damage” in the context of the tort gateway as viewed against its purpose, namely “the actionable harm caused by the tortious act, including all the bodily and consequential financial effects which the claimant suffers”. To the extent that such interpretation might encourage forum-shopping or permit claims founded on only a tenuous amount of damage sustained in the jurisdiction, those concerns were met by the “robust enough” or “sufficiently muscular” forum conveniens discretion.
On the other hand, Lord Collins rejected the narrow interpretation which was advanced by the minority in Brownlie I and Brownlie II and adopted by the board in this appeal. His Lordship further held, in reference to the reasoning of Lord Leggatt for the minority in Brownlie II, that there are “three flaws” in the reasoning: First, Order 11, rule 1(1) of the RHC is intended to set out a list of situations in which the legislature considers that there may exist a sufficient, but not necessarily a real (and in some cases even tenuous), link with Hong Kong to justify the courts’ assertion of long-arm jurisdiction. Further, the gateways alone do not confer long-arm jurisdiction, but form only one element of the jurisdictional test for service-out. Thus, before the court will give permission to serve proceedings out of the jurisdiction, not only must a claim pass through one of the gateways, but it must also be shown that Hong Kong is the forum conveniens (which often requires a homeward trend). Finally, it is “well established” that a claim must fall within both the letter and spirit of the rule by virtue of Order 11, rule 4(2) of the RHC (which provides that no leave to serve-out shall be granted “unless it shall be made sufficiently to appear to the Court that the case is a proper one for service-out”) before the court would exercise its discretion to grant leave to serve out of the jurisdiction. This provides the answer to the counter-argument that the wide interpretation might enable a claimant to create a link with the jurisdiction after the event giving rise to the damage had occurred.
Notably, none of the justices in either of the Brownlie decisions had placed any reliance on this “spirit of the rule” principle. This was, in Lord Collins’ view, explicable, as it might have been assumed in the United Kingdom that the line of authorities in support of such principle were inapplicable or obsolete following the replacement of Order 11, rule 4 of the Rules of Supreme Court (in substantially the same terms as Order 11, rule 4 of the RHC) by the requirement in rule 6.37(3) of the Civil Procedure Rules that the court “will not give permission unless satisfied that England and Wales is the proper place in which to bring the claim”, with the result that the court’s discretion in permitting service-out was thought to be concerned only (or mainly) with forum conveniens. However, Lord Collins himself preferred “the contrary view” that the replacement should be interpreted simply as part of the
exercise in the Civil Procedure Rules to use less technical language than the old Rules of Supreme Court, and that it applies equally to the question whether a claim is within the spirit of the relevant head of jurisdiction, irrespective of forum conveniens factors.
There are at least three implications flowing from Lord Collins’ judgment on service-out of cases concerning Gateway F and beyond. First, generally, no distinction between direct and indirect damage needs to be drawn when considering whether Gateway F has been satisfied. Hence, where the plaintiff is able to show a good arguable case that some significant “actionable harm caused by the tortious act” had been sustained by him in the jurisdiction (such as the incurrence of substantial medical expenditure consequent on personal injuries suffered abroad), he would be able to show that “the damage” had been sustained within the jurisdiction.
Secondly, the discretionary forum conveniens factors continue to play an important role in mitigating any excesses that may result from the wide interpretation of Gateway F as part of the court’s overall exercise of discretion in permitting service-out. Such factors may include practical issues relating to trial, as well as the particular gateway(s) invoked.
Thirdly, Lord Collins’ novel contributions lie in his views that the purpose of the jurisdictional gateways is to set out the situations in which there may be a sufficient (but not necessarily a real) link with the jurisdiction to justify the assertion of long-arm jurisdiction, which buttresses the mitigating principle (other than forum conveniens) that a claim must fall within “the spirit” of the gateways invoked before service-out ought to be permitted.
Yet, there remain fogs at the gateways. Lord Collins’ view on the purpose of the jurisdictional gateways, coupled with the reminder that the gateways are but one element of the jurisdictional test for service-out, may have profound implications over not just Gateway F cases, but all cases invoking the courts’ long-arm jurisdiction. The precise nature and extent of such implications, however, can only be clarified in the future.
As for the “spirit of the rule” principle, whilst the clear imperative to prevent abuse of the courts’ long-arm jurisdiction is to be commended, the deployment of the principle as a guard-dog against excesses of the wide interpretation may potentially raise more questions than it answers in practice. For instance, what exactly is the “spirit” of Gateway F? And how does that operate to filter out cases in which there is “only a tenuous amount of damage” sustained in Hong Kong? It also remains for the courts to navigate these uncertainties.
In any event, Lord Collins’ judgment represents a significant development in the way in which we understand and apply the jurisdictional test for service-out (not only in Gateway F cases, as the “spirit of the rule” principle could equally apply to other gateways), moving Hong Kong’s jurisprudence in a similar but arguably narrower direction compared with that of the United Kingdom after Brownlie II.
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