In L v B, HCCT 41/2015, Hong Kong’s Court of First Instance granted the Respondent’s application to stay the enforcement of an arbitral award (Award), but also granted the Applicant’s application that such stay be on the condition that the Respondent pay substantial security into Court (HK$41 million, being the amount of the unpaid award plus HK$600,000 as security for the Applicant’s legal costs). This decision usefully sets out the factors considered by the Courts in such security applications and again reinforces the Court’s pro-enforcement stance.
By a loan agreement (Loan Agreement) between the Applicant and Respondent, the Respondent agreed to advance a loan to the Applicant against the Applicant’s transfer of his shares in a Hong Kong listed company as collateral and security for the loan. Pursuant to the Loan Agreement, the Applicant transferred 800 million shares to the Respondent, but the Respondent, in breach of the Loan Agreement, only transferred loans in respect of 200 million transferred shares.
The Applicant commenced arbitration proceedings in the Bahamas for breach of the Loan Agreement and the arbitral tribunal Tribunal found the Respondent liable for breach of contract and breach of fiduciary duties and awarded the sum of US$41.8 million to the Applicant.
In June 2015, the Respondent commenced proceedings in the Bahamian court to challenge and set aside the Award on the grounds of serious irregularity and also appealed on a question of law. In September 2015, the Applicant obtained leave from the Hong Kong court to enforce the Award as a judgment in Hong Kong. In October 2015, the Respondent applied to set aside the Award and stay its enforcement pending determination of its challenge to the Award in the Bahamian court.
The Applicant applied for security of HK$41 million and security for costs of HK$600,000 to be paid by the Respondent pursuant to section 89(5) of the Arbitration Ordinance (Cap. 609) (Ordinance) and O. 73 r. 10A of the Rules of the High Court (Cap. 4A) (RHC).
Applicable Legal Principles
The Court applied the following test for determining the application for security, namely consideration of the following two important factors:
The Court said that the circumstances to which the Court should have regard when deciding whether to adjourn enforcement proceedings on the basis of the existence of proceedings in another jurisdiction are the Court’s primary aim under the Ordinance, namely to:
The case authorities in Hong Kong are clear, the Court said, that “the Court has to be satisfied that the conduct complained of is serious, even egregious before the Court would find that there was an error sufficiently serious as to have undermined due process.” Errors of fact or law are not grounds for challenging an award for any irregularity.
Strength of the argument that Award is invalid
The Court found that the Tribunal had acted within its authority and power in the decisions it had made and that such decisions were case management decisions and it was thus unlikely that the Respondent could successfully challenge the Award. Further, the Court held that the Award had become binding, despite the challenge made in the supervisory court because under the Bahamian Arbitration Act, the right of appeal was subject to the parties’ contrary agreement and under the Loan Agreement they had agreed that the Award would be final, conclusive and binding. Further, the Act clearly stated that an appeal against an award could only be brought with the agreement of all the parties to the arbitral proceedings and the Applicant had not consented to the appeal. Accordingly, the Court held that the Award was not “manifestly invalid”.
Ease or difficulty of enforcement of the Award
The Court said that by analogy with court proceedings, execution and enforcement is not as a general rule delayed or postponed even where there is an appeal against a judgment. The Court rejected the Respondent’s argument that there would be conceptual difficulties if the Hong Kong court should enforce the Award, but the Respondent was successful in its challenge in the Bahamian court because if the Award was ultimately set aside by the Bahamian court, the Bahamian court could order the Applicant to repay the amount recovered under the Award, and such order would be enforced and recognised by the Hong Kong court by principles of international comity, or as a foreign judgment.
In arriving at its decision to order security, the Court also took into account the Respondent’s conduct, namely deploying delaying tactics in resistance and recognition of the Award, including its apparent attempts to reargue matters raised, argued and decided by the Tribunal. The Court noted its wide and discretionary power to order security under Article VI of the New York Convention and RHC O. 73 r. 10A , taking into account “the merits of the proposed challenge to be made, the delay likely to be occasioned, the conduct and bona fide of the parties, the risk of there being inconsistent judgments, whether this can be remedied, and balancing the prejudice to the party entitled to enforcement of a binding award against any possible prejudice to the party resisting enforcement.”
The Court ordered the Respondent to furnish security of HK$41 million, that being the proceeds of sale of the shares in question (HK$70 million) less the amount in the Respondent’s bank account already frozen in Hong Kong and less HK$17 million which the Applicant had received from the Respondent. The Court also ordered that the Respondent pay an additional HK$600,000 as security for the Applicant’s costs.
Bearing in mind that the finality and speedy and efficient enforcement of arbitral awards underpin the principles of the New York Convention and Ordinance, the Court refused to postpone the enforcement of the Award indefinitely and was only prepared to adjourn the application to set aside the Award for 4 months and on the condition that the security was provided within 21 days.
This case illustrates the “enforcement biased” approach of the Hong Kong Courts in dealing with applications for setting aside arbitral awards. The order for giving security for the awarded sum plus costs will frustrate any delaying tactics deployed by an evasive applicant.