In the ever increasing commercial intercourses between Hong Kong and Mainland China, many of the related agreements are governed by Hong Kong law instead of the PRC law, despite that quite a lot of such agreements are largely performed in Mainland China. The reasons for this may be that the contracting parties (or one of them) are Hong Kong residents or companies, or that they choose to apply Hong Kong law because they have greater confidence in Hong Kong’s legal system. However, does this mean that the parties can disregard PRC law where they deliberately choose Hong Kong law as the governing law where the obligations under the agreement are to be primarily performed in the Mainland?
In the recent case of Ryder Industries Ltd v Chan Shui Woo ( HKEC 2683, FACV 12 and 13 of 2015), the Hong Kong Court of Final Appeal provided an authoritative answer to this question and affirmed the well-established common law principle of international comity that although the relevant contract may provide for the application of Hong Kong law, Hong Kong courts may still refuse to enforce the contract the performance of which may result in breach of PRC law, and that this principle not only applies to different countries but also to different jurisdictions (such as the Hong Kong SAR and Mainland China). In this case the plaintiff and the defendant signed a joint venture agreement to carry out certain processing business in mainland China. The joint venture agreement was governed by Hong Kong law, and when the plaintiff claimed against the defendant for certain processing payments due under the joint venture agreement, the defendant raised the defence that performance of the agreement was in breach of PRC’s related import and export tariff regulations. The five judges in the CFA however unanimously held that although performance of a contractual obligation in breach of PRC law was a defence known to Hong Kong law, the breach in the instant case was minor and technical in nature (instead of being “iniquitous” in the words of the judge) and was therefore not a valid reason for the defendant to not carry out its contractual obligation.
The legal principles in this case are by no means novel and make the author recall a case (Shenzhen Development Bank v. New Century International (Holdings) Ltd. and China Everbright Holdings Ltd. HCA 2976/2001) he handled for a giant Chinese SOE before. In that case, Shenzhen Development Bank (“SDB”) granted a loan to New Century International (Holdings) Ltd., a Hong Kong company which was guarantee by China Everbright Holdings Ltd., which was also incorporated in Hong Kong. The relevant loan agreement and guarantee were governed by Hong Kong law. The purpose of the loan was to repay an old loan owed by New Century to SDB. When New Century defaulted in repayment, SDB sued China Everbright in Hong Kong. China Everbright’s defences were mainly two-folded: 1. Mainland China was the place of performance of the contract and therefore PRC was relevant and using a new loan to repay an old loan was illegal under PRC law; 2. the plaintiff’s grant of the new loan to a foreign entity without approval of the relevant government authorities was also in breach of PRC law. The Hong Kong court however held that while the Hong Kong court had to consider whether performance of the loan agreement would contravene PRC law under the common law principle of international comity abovementioned, China Everbright was not able to produce a definitive PRC legal opinion to corroborate its legal propositions in 1 and 2 above, and judgment was therefore entered against them.
From these two cases, it seems it is by no means easy to invoke this common law principle to eschew a contractual obligation. However, where the relevant agreement is to be performed largely in Mainland China (albeit it is governed by Hong Kong law), it is always prudent to consult a PRC lawyer to rule out any possible pretext of breach of PRC law that may be used by the counter-party to evade his contractual obligations.