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An Explanation of the Lawsuit against Fonterra in Hong Kong

January 26, 2011

The story of how a judicial deadened in the mainland courts compelled a group of plaintiffs to seek redress in a Hong Kong court, in an innovative—albeit unsuccessful—lawsuit.

This case, a lawsuit filed at the Hong Kong Small Claims Tribunal for compensation for victims of the tainted milk powder scandal, was an act of desperation. Up to the day the case was concluded, only five cases brought against the Sanlu Group or its shareholders was successfully filed in mainland China; the other cases were not accepted or heard. Of the cases that were accepted, only one has gone to trial as of now, and no judgment has been issued. In a situation where judicial remedies were exhausted because of the inaction of the mainland Chinese courts, the only option was to prosecute the claim in the Hong Kong Small Claims Tribunal, which has jurisdiction over Fonterra, one of the Sanlu Group’s stockholders.

On April 8, 2010, we assisted four families who had fallen victim to the tainted Sanlu milk powder in filing a claim against Fonterra Brands (China) in the Hong Kong Small Claims Tribunal. The reasons behind the claim are as follows:

  1. The defendant had an obligation to control the harmful actions of others and should be responsible for their actions.
  2. After the food safety incident occurred, the defendant did not meet its responsibilities of due diligence and care.
  3. The defendant should also be directly liable for related losses sustained by the victims based on practical fairness and justice.
  4. The company should investigate if the directors, senior officers, and shareholders engaged in other illegal or inappropriate conduct and hold them personally liable.

On May 27, 2010, the Hong Kong Small Claims Tribunal conducted a hearing and rejected the claims on grounds that Hong Kong was not considered “an appropriate forum” for the claims and the claimants did not have any cause of action under Hong Kong law. The claimants applied for a review on the following grounds:

  1. The claimants had exhausted all courses for judicial relief in mainland China, and the mainland courts have failed to act by not exerting jurisdiction over the defendants.
  2. Given the illegal and inappropriate acts by the Sanlu Group (a company the defendant had invested in ), the claimant(s) believe that the court should overlook the principle of legal independence of a corporate entity as per Salomon v. Salomon & Co Ltd [1897] AC 221 and order its shareholder, i.e., the defendant, to bear the necessary civil liability.
  3. Finally, the defendant clearly was aware of the possibility of harm due to tainted milk powder, yet, in violation of its duty of care, it did not adopt objective measures that a reasonable person would have adopted to prevent the possibility of harm and danger.

We also presented the testimony of seven witnesses, who testified mainly that other victims’ families had taken legal action against Sanlu Group and its investors (including Fonterra) in mainland Chinese courts. On August 6, 2010, the Hong Kong Small Claims Tribunal held a review hearing and again rejected the claim on grounds that Hong Kong was “not the appropriate court” for hearing the claim. In consideration of the applicable laws, the possibility of successful appeal, and the litigation costs, we decided to abandon the idea of an appeal in Hong Kong.

This case involves the judicial systems of both Hong Kong and China, and one can see the immense differences between these two systems in their approach to and manner of handling cases.

First, there is man-made interference with judicial independence in the courts in mainland China. When the melamine victims (including the four claimants in this case) sought judicial relief in mainland courts, they were often given various reasons for the cases not being accepted—e.g., “this is a special incident, and we cannot accept this because we have not yet been informed by our superiors”; “the presiding judge is not here, so we cannot accept the case”; and “we are unfamiliar with the circumstances.” Though Shen Deyong (沈德咏), vice president of the Supreme People’s Court, said on March 2, 2009, “the courts have already prepared for this; compensation suits can be accepted at any time according to the law.” No victims were able to file their case in their local courts, as had previously been the case. Furthermore, in the few cases that were accepted by the courts, the victims’ families had to go to the courts many times to request that the cases be accepted. Among the cases accepted by the courts, as of now only one has gone to trial, though a verdict has yet to be announced. (When a request was made to the court by the plaintiff to add other companies, including Fonterra, to the defendant list, no answer was received from the court.) Getting mainland courts to accept civil claims involving Sanlu has been extremely difficult. When cases were accepted, tremendous efforts were made by the claimants, but there were no trials; and when there were trials, there were no verdicts. We have yet to hear of civil claims against Sanlu, other than the aforementioned, being accepted by mainland courts, or of any news of judgments pronounced in civil claims against Sanlu.

One can see from the Sanlu civil claims case that when a sudden, widespread, sensitive  incident hits China, the higher courts or relevant bodies institute a nonpublic “judicial policy” to place themselves above the law, so that the wishes of senior officials or the “national interest” heralded by certain leaders can be placed before the interests of the victims. Due to the special nature of such cases, courts across mainland China all seem to make a conscious, organized effort to refuse to accept the cases for hearing or to drag out proceedings for myriad unlawful reasons. The judicial independence of Chinese courts is crudely trampled on yet again. For courts to accept and try a case, they must receive the notice of their superiors (e.g., superior courts, Party Committees for Political and Legislative Affairs, and government officials); only once the Supreme People’s Court has spoken can the courts continue, as opposed to their naturally and independently determining whether to accept a case or conduct a hearing in accordance with the law.

In filing a claim against the Sanlu shareholder Fonterra Brands (China) LLC in the Hong Kong Small Claims Tribunal due to the judicial inaction of mainland Chinese courts, we tried to pierce the corporate veil and tear apart the principle of independence of corporations from their shareholders, and to investigate the shareholders and penalize the individuals accountable, in order to fight for a fair and just decision.

However, the Hong Kong judge believed that “the torts, parties, and related injuries in this case are undoubtedly closely related with the mainland and do not have significant relation to Hong Kong.” Further, the judge stated that “Hong Kong is not the right and suitable forum; nor is it the closest and truly connected forum for this claim”; that “mainland China is undoubtedly a more appropriate forum”; and that Hong Kong’s courts are “inappropriate to try this case.” The judge additionally held that “even if the three trustees appointed by the defendant knew of the situation [that Sanlu was adding melamine to its milk], and it can be believed that the defendant also knew of the situation, there is no evidence that proves that the defendant had any responsibility toward the consumers.” The court also stated that “the defendant is only a shareholder, and it was not involved with the manufacturing and selling of the poisoned milk products and did not undertake any responsibility toward the consumers of Sanlu products; therefore, it did not have any duty requiring it to protect the interests of the claimants from certain acts.” The Hong Kong court did not think piercing the corporate veil was applicable on the grounds that Fonterra and its three appointed directors had not committed tortious acts and had not consented to assume any duty (including duty of care) to the claimants.

We regret the Hong Kong Small Claims Tribunal’s decision, but we respect it. At least the court was able to give us a place to file our claim—a place where our dispute was earnestly and fairly handled. Although the Hong Kong judiciary has pointed out repeatedly that it does not consider Hong Kong an appropriate forum for the claims, Hong Kong is the only forum that affiliated itself with this case and accepted it for trial. The inaction of various mainland Chinese courts directly results in victims being unable to fairly and reasonably fight for their rights and interests. Though the suit in Hong Kong was unsuccessful, Hong Kong gave us a platform and opportunity to bring the case.

Editor's Note

1. The Salomon case is the seminal case under British law that delineated the independent legal status of a corporate entity. ^

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