Hong Kong Court Confirms Power To Order Security For Costs In Applications To Set Aside Arbitral Awards.

SA & Others -v- BH & GC [2024] HKCFI 1357

Introduction

In this case, the Court confirmed its jurisdiction to order security for costs against the plaintiffs (award debtors) who applied to set aside an arbitral award under Order 23 of the Rules of the High Court, Cap. 4A (RHC). In making this decision, the Court made it clear that its jurisdiction under Order 23 is not ousted by the more specific provisions under Order 73.

Before Ps’ challenge in this case, the Court has in many other occasions ordered security for costs to be provided by a party which applied to set aside an award, without debate as to the legal basis raised by either party.

The Background Facts

The Plaintiffs (Ps) and the 1st Defendant (D1) were parties to a shareholders’ agreement (SHA) and to a joint venture project (JV Project). 

The JV Project was to develop an internet communication satellite and to launch it into orbit over Equatorial Africa. Conflicts arose out of the JV Project and the dispute was referred to arbitration in Hong Kong (Arbitration) pursuant to an arbitration clause in the SHA. The tribunal ruled that Ps breached the SHA and granted an interim award in favour of Ds (Award). 

Ds did not apply to enforce the Award in Hong Kong pursuant to section 84 of the Arbitration Ordinance, Cap. 609. Against this background, Ps sought an “active remedy” and proactively applied to set aside the Award (Set Aside Application) on the following grounds:

1. The subject of the Arbitration involved sensitive technology which raised NSL concerns, and therefore was not arbitrable (NSL Argument) under the Law of the People’s Republic of China on Safeguarding National Security in Hong Kong SAR (NSL).
2. The arbitral procedure was not agreed by the parties.
3. Ps did not have reasonable opportunities to present their case on NSL-related legal issues.
4. The Award was in any event against the public policy.    

The Set Aside Application prompted D1 to apply for security for costs against Ps under Order 23. Ps opposed D1’s application on the following grounds:

1. Order 73, being the specific provision to govern arbitral proceedings, ousted the application of Order 23, being a general provision to govern all High Court proceedings. 
2. Order 73 was not invoked in this specific matter.
3. Security was unnecessary because Ps had a 13.25% shareholding in the joint venture company (i.e. in D2) which Ps undertook not to deal in.

The Court Decision

Jurisdiction of the Court to order security in set-aside applications

The issue is whether the Court has jurisdiction to order security for D1’s costs in these proceedings initiated by Ps to set aside the Award. Ps’ arguments focused on the interplay between Order 23 and Order 73:

1. Order 23 empowers the Court to order a plaintiff to give security for his opponent’s costs. 
2. Order 73, rule 10A (when read in conjunction with other provisions under Order 73) provides in effect that, if an award creditor obtained an order to enforce the award, and in response, the award debtor applies to set aside the order to enforce, the Court may impose, inter alia, security as a condition of the application to set aside.

Ps sought to argue that:

1. The more specific rules prevail over general rules, i.e. lex specialis derogate legi generali. Order 73 governs specifically arbitral proceedings, and Order 23 applies generally to all High Court proceedings. Hence, the application of Order 23 is ousted by Order 73 in the context of setting aside an arbitration award.
2. The Court’s power to impose security pursuant to Order 73, rule 10A was not invoked here. D1 did not apply to enforce the Award in Hong Kong. Hence, Ps’ Set Aside Application was not to set aside an order to enforce, but to set aside the Award direct.
3. In this context, therefore, the Court has no jurisdiction at all in ordering security against Ps.

The Court rejected Ps’ arguments, and held that:

1. Pursuant to Order 1, rule 2(1), the entire RHC (thus including Order 23) shall have effect on all proceedings in the High Court, and the Set Aside Application does not fall within a stipulated exception.
2. Order 73 does not contain any conflicting provision.
3. Order 73, rule 10A was not introduced to prevent the operation of Order 23. Instead, it was to fill a loophole. When an award debtor applies to set aside an enforcement order obtained by the award creditor (as a plaintiff in the application for the enforcement order), the award debtor will remain the defendant. In this “passive remedy” scenario, Order 23 which only empowers the Court to order a plaintiff to give security for costs does not apply.
4. Hence, Order 73 and Order 23 simply go hand in hand and the Court retains a wide discretion in this regard.

Whether security is appropriate under Order 23

Order 23, rule 1 states that the Court may order security against a plaintiff upon considering all circumstances, which include but are not limited to: – 

1. whether the plaintiff is ordinarily resident out of Hong Kong;
2. whether the plaintiff has assets in Hong Kong;
3. the merits of the plaintiff’s case;
4. any delay in the application for security; and
5. any other factor making it unjust to order security.

In the present case where Ps seek an “active remedy” of setting aside the Award and D1 sought security for costs, the Court endorsed the guidelines set out in Soleh Boneh International Ltd -v- Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208 (Soleh Guidelines), as confirmed in 中國機床銷售與技術服務有限公司 -v- 國晟機電設備有限公司 (Nationsync Electrical and Machinery Equip Corp Limited) [2024] HKCFI 958.

Under the Soleh Guidelines, the Court should consider two factors:

1. The validity of the arbitral award, as perceived on a brief consideration by the court. If the award is manifestly invalid, there should be an adjournment and no order for security. If it is manifestly valid, there should either be an order for immediate enforcement, or else an order for substantial security. In between, there will be various degrees of plausibility in the argument for invalidity and the court must be guided by its preliminary conclusion on the point.
2. The ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, e.g. by movement of assets or by improvident trading, if enforcement is delayed. If that is likely to occur, the case for security is stronger. If, on the other hand, there are and always will be insufficient assets within the jurisdiction, the case for security must necessarily be weakened. 

In this case, the Court considered it just to order security against Ps based on the following grounds:

1. Ps were ordinarily resident outside Hong Kong. Ps argued that they had shares in D2, which was valued at about US$20M, and claimed that they were “real and readily available” to Ds. An undertaking was offered not to dispose of or dimmish such shares until further order of the Court. However, the Court ruled that these shares were not assets within Hong Kong which were readily realisable or transferable as D2 was a private company incorporated in the Cayman Islands. Indeed, transfer of D2’s shares by any shareholder was contractually restricted under the SHA in any event. Moreover, D2 had been put into liquidation and was subject to a winding up order.
2. Ps did not have “a high degree of probability of success”. Applying the Soleh Guidelines, on a brief consideration of the merits, the award was “manifestly valid”. No evidence supported the NSL Argument. Also, the failure to draw the tribunal’s attention to the NSL Argument at the earliest stage of the Arbitration rendered this argument very suspicious. In any event, delay in making such an argument may also constitute waiver, estoppel, or breach of a party’s duty of good faith, preventing Ps from raising the NSL Argument now.
3. As to other factors, the conduct of Ps in the Arbitration was described by the tribunal as “dishonest and egregious”. Ps had also failed to comply with the costs orders made in the US and in the Cayman Islands.

Accordingly, it was “reasonably clear” that Ps would not cooperate with Ds if any costs order were made against them and that D1 would have difficulties in recovering its costs if no security was ordered. The Court found it necessary and just to order security against Ps for D1’s costs in these proceedings.

On a “broad brush approach”, the Court ordered HK$2M of security to be paid by Ps within 21 days of the decision, covering 2 days’ substantive hearing of the Set Aside Application, with the proceedings being stayed pending payment of security or provision of a bank guarantee.

Comment

This case gives practical guidance to lawyers who handle enforcement and set-aside application in relation to arbitral awards. It is abundantly clear that the Court’s discretionary power to grant security is unfettered and does not depend on whether the set-aside application arises in an “active remedy” or “passive remedy” scenario. That is, whether the award creditor has applied for an order to enforce an arbitral award or not, the Court does have power either under Order 23 or Order 73 to order security for costs against a party who seeks to set aside the award (or an order to enforce an award). Consistent with Hong Kong’s pro arbitration approach, it is also plain that the Court will do so if the award is not manifestly invalid.

In light of the above, when advising an award debtor as to whether it should contest the validity and/or the enforceability of an award, solicitors should scrutinise the prospect by reference to the Soleh Guidelines. One should also note that the Court also looks at the special features of individual cases to determine whether it is necessary and just to order security, such as the conduct of an award debtor in the arbitration, remarks made by the tribunal in the award and any delay in raising important issues. 

Relevantly, solicitors should also advise and recommend the clients to raise all material issues at an early stage of an arbitration, instead of holding back arguments or submissions in an attempt to ambush the opponent in a potential appeal or set-aside application. In the present case, the delay on the part of Ps to raise the NSL Argument rendered the argument incredulous to the Court, or even estopped.

The Court did not go into the substance of the NSL Argument, but only dismissed the Set Aside Application on the basis of delay and on the lack of evidence. It therefore remains to be seen what the Court’s approach to national security issues in an arbitration context will be.

As to assets within the jurisdiction, they need to be “real and readily available”. The Court generally does not consider shares in an offshore company, which are subject to contractual restrictions or a winding up order, to meet such threshold.

This article first appeared in the September 2024 issue of Hong Kong Lawyer, the official monthly publication of The Law Society of Hong Kong.