The Hong Kong Court of First Instance has dismissed an application by award debtors to stay enforcement of a RMB 1 billion (approximately US$ 140 million) HKIAC award arising out of a put option dispute (CF v. SHK & S Listco [2024] HKCFI 1493).
The court rejected the argument of the award debtors that it would be just to stay enforcement of the award because cross-claims for misrepresentation which they were pursuing against the award creditor in a separate arbitration would exceed the award debt.
A central factor in the court’s decision was an “anti-set-off” clause which had been upheld as valid by the arbitrator (a decision with which the court could not interfere) and which therefore precluded the award debtors from asserting a right of set-off before the court.
Background
The dispute arose out of a transaction for the sale by CF (the award creditor) to SHK (the first award debtor) of its shareholding in “CF China”. CF and SHK first concluded an SPA for the sale by CF to SHK of 80% of the shares. CF, CF China and SHK subsequently concluded a shareholders agreement containing a put option whereby CF could require SHK to purchase the remaining shares at an initial put price of RMB 1.2 billion (approximately US$170 million). S Listco (the second award debtor) guaranteed the obligations of SHK under the shareholders agreement in a separate guarantee.
A dispute arose when CF exercised the put option. CF and SHK concluded a settlement agreement whereby SHK agreed to pay the initial purchase price “without any withholding, set-off, counterclaim, retention or deduction” (the anti-set-off clause). S Listco executed a supplemental guarantee extending its obligations under the guarantee to include SHK’s obligations under the settlement agreement.
After SHK failed to pay the fifth instalment due under the settlement agreement, CF commenced arbitration against SHK and S Listco under the settlement agreement and the guarantee as extended by the supplemental guarantee. SHK and S Listco alleged that CF had made misrepresentations in relation to certain inter-company loans before the SPA was concluded, denied the validity and enforceability of the supplemental guarantee on the basis of mistake, and counterclaimed for damages and declaratory relief under the SPA and the guarantee.
The arbitrator issued an award in favour of CF which ordered SHK and S Listco to pay the remaining initial purchase price of RMB 1 billion (approximately US$140 million) plus interest and costs, without any withholding, set-off, counterclaim, retention or deduction.
The arbitrator rejected the counterclaims made by SHK and S Listco on the basis that he did not have jurisdiction to determine either (i) SHK’s counterclaim made on the basis of the SPA (which contained an arbitration agreement which conflicted with that in the settlement agreement, the guarantee and the supplemental guarantee) or (ii) S Listco’s request for relief, which extended beyond the guarantee.
CF obtained leave from the Court of First Instance for the award to be enforced. There was no application by CF and S Listco to set aside either the award or the enforcement order.
SHK commenced separate arbitration proceedings in Hong Kong against CF and its parent company, alleging misrepresentations in relation to the financial status of CF China and the inter-company loans, which were said to result in loss and damage exceeding RMB 1 billion.
SHK and S Listco applied to the court for execution and/or enforcement of the enforcement order to be stayed pending the determination of the second arbitration. They argued that SHK and S Listco could assert an equitable set-off in respect of their reasonably arguable claims of misrepresentation in the second arbitration, and that, taking a “holistic” view of the various agreements made between the parties, it would therefore be fair and just to stay enforcement.
Legal principles
The court explained that the discretion to stay enforcement of a judgment originating from an award in circumstances where the award debtor seeks to rely on claims made in a second pending arbitration as an equitable set-off should be exercised as follows:
- The starting point (as set out in S v. G [2021] 3 HKC 272 and confirmed by the Court of Appeal in S v. G [2022] HKCA 383) is generally that the judgment creditor is entitled to enforce the judgment it has obtained against the debtor.
- The award creditor should not be deprived of the benefits of the judgment unless there is abuse or manifest injustice, and there must be “very special” or “exceptional” circumstances to justify a stay of enforcement (as observed by the Court of Appeal in Credit Lyonnais v. SK Global Hong Kong Ltd [2003] 4 HKC 104).
- All the relevant circumstances will be considered, including the nature of the claims, the extent of the identity between the claim in the judgment and the unresolved cross-claim, the strength and size of the cross-claim, the likely delay before the cross-claim can be adjudicated (significant delay was recognised in Israel Sorin Shohat v. Balram Chainrai [2017] 6 HKC 174 to be a matter which militates against a stay), and the balance of prejudice to the award creditor and the award debtor.
Decision
Mimmie Chan J held that the balance of injustice was in favour of refusing a stay of enforcement. The court’s reasoning was based on three broad factors summarised below.
Existence and prima facie effect of the anti-set-off clause
- Submissions made by CF that the anti-set-off clause unequivocally excluded any form of legal or equitable set-off, and that the terms of the parties’ agreement must be paramount and take precedence over the court’s discretion to grant a stay, were “convincing and supported by the authorities” (including the decisions of the English Court of Appeal in Tubeworkers Ltd v. Tilbury (1985) 4 Con LR 13 and Society of Lloyd’s v. Leigh [1997] CLC 1398, and the decision of the Singapore Court of Appeal in Koh Lin Yee v. Terrestrial [2015] 2 SLR 497).
- On its face, the anti-set-off clause clearly and plainly provided for payment without any set-off. There was no reason why SHK should be permitted to depart from what it had expressly agreed, and it could not be unjust to find that it was bound by the clause. This was what the tribunal had found in the award.
Validity of the anti-set-off clause
- SHK and S Listco had failed to establish (as claimed) that: (i) because the arbitrator had ruled expressly that he did not have jurisdiction to deal with the counterclaim, any ruling by him on the misrepresentation claim, including the validity or effectiveness of the anti-set-off clause, was merely obiter, and he had therefore not made a binding decision on the effect of the anti-set-off clause, such that no issue estoppel arose to prevent them arguing before the court that the provision was void; and (ii) the anti-set-off clause had no legal effect by virtue of section 4 of the Misrepresentation Ordinance (which imposes a requirement of reasonableness on contractual terms excluding liability for misrepresentation).
- The agreed list of issues put to the tribunal by the parties had framed the misrepresentation issue separately from the question of whether SHK and S Listco were entitled to set-off any damages for misrepresentation against their liability for the initial purchase price.
- The arbitrator recorded in the award that the parties had agreed that he “can and should decide” the issue of set-off, and referred to the transcript for the first day of the hearing in which the parties’ consensus was apparently stated.
- Notwithstanding the arbitrator’s finding that he had no jurisdiction to determine the misrepresentation counterclaim under the SPA, it was therefore clear that he had to, and did, deal with the defence of SHK and S Listco that they were entitled to assert a set-off against CF’s claim.
- It was clear that the arbitrator had dealt with the entitlement of SHK and S Listco to set-off in the award, and had made a final decision that the anti-set-off clause met the requirement of reasonableness under the Misrepresentation Ordinance, such that they were precluded from raising any set-off in the arbitration.
- The correctness of the arbitrator’s findings on facts and law were not relevant to the court’s decision (and indeed there was no challenge to the award).
Delay, merits and location of assets
- The second arbitration was “still in its early stage” (the notice of arbitration having been filed only shortly before the application for the stay of enforcement), and was expected to take at least another two years after the issuance of the existing award.
- On the merits, at most it could only be said that SHK had an arguable claim in the second arbitration.
- Prejudice to SHK and S Listco would not arise simply because any award obtained in the second arbitration would have to be enforced against CF outside Hong Kong. SHK had agreed to arbitrate in Hong Kong, well knowing that CF might not have assets there and had no duty to bring assets into Hong Kong.
Comment
The decision is a useful reminder of the high threshold for stays of enforcement of arbitral awards as well as the potentially significant impact of anti-set-off clauses, particularly in multi-contract scenarios where there may be claims, counterclaims and cross-claims under a number of different agreements.
The case also illustrates the “long tail” of pandemic-related issues in arbitrations and related court proceedings, with one of the issues in the underlying arbitration having been whether SHK’s obligation to pay the put price should be amended and varied in light of the impact of Covid-19.
