Enforcement of Arbitral Awards in Hong Kong vs Overseas State Sanctions
Could a paying party under an arbitral award resist enforcement of the award based on Hong Kong public policy due to an alleged “real risk” of prosecution under overseas sanctions ?
This existential question was recently considered in A Company v. The Bank [2026] HKCFI 3169, in which the Court of First Instance of Hong Kong (“HK Court”) disallowed the bank’s resistance to enforcement of an English arbitral award based on an alleged real risk of prosecution under Canadian sanctions legislation.
Background
On 29 December 2021, a Russian company (the “Company”) contracted with certain companies (the “H Companies”) (“Contract”), under which the latter was to provide engineering services, supply goods, and execute works at the Company’s metallurgical plant in Russia. The H Companies obtained bank guarantees from a Canadian bank (“Bank”) (“Guarantees”) where Bank undertook to pay the Company if the H Companies failed to properly fulfill their obligations under the Contract and to refund advance payments made under and in accordance with the Contract’s terms. In October 2022, the Company terminated the Contract when the H Companies refused to refund the advance payments made under the Contract, and demanded the Bank to make payment under the Guarantees.
In September 2023, the Company commenced arbitration under the rules of the London Court of International Arbitration (“LCIA”) against the Bank for payment under the Guarantees. The Bank claimed that payment to the Company would constitute a criminal offence and be contrary to the Canadian sanctions regime. By an amended arbitral award on 12 August 2025 (“Award”), the Bank was ordered to pay the Company the total sum of about EUR 30 million under the Guarantees together with interest.
On 31 October 2025, the Award against the Bank was registered as a judgment of the HK Court (“Enforcement Order”). On 5 December 2025, the Bank applied to the Court seeking a stay of the Enforcement Order and setting aside of it on the ground that it would be contrary to public policy to enforce the Award in Hong Kong.
Bank’s Arguments
The Bank argued that, unless a relevant Canadian authority (“GAC”) permit is granted, making the payment under the Award would “expose the [Bank] and any of its staff in Canada or Canadian persons outside Canada involved in facilitating the payment to the risk of prosecution for serious criminal offences in Canada”. The Bank relied on a GAC letter dated 20 March 2026 (“Letter”) which denied its application for a permit to transfer funds pursuant to the Award.
Company’s Contentions
On the other hand, the Company contended that (inter alia) : (a) the issue of illegality under Canadian law had already been determined by the Tribunal and that illegality had not been established, and (b) any potential risk of prosecution under Canadian law did not support a stay and/or refusal of the Enforcement Order as a matter of public policy. The Company further argued that the threshold for establishing a risk of prosecution must be even more stringent for a final Award because of “compelling public interest in the speedy enforcement of final awards” (compared to an interlocutory order, eg. disclosure).
Judgment Based on Applicable Two Limbs
1st Limb: No Real Risk of Prosecution to Set Aside Enforcement Order
Firstly, the Court held that, applying the relevant legal principles, the Bank had failed to discharge the burden of proving a real risk of prosecution and that enforcing the Award is contrary to public policy of Hong Kong for the following reasons :-
(a) The Court accepted that “even in the context of interlocutory orders, any risk of prosecution under foreign law does not automatically entitle a party to refuse compliance” and that a “court can order a party to do something that is, or may be contrary to a foreign criminal law”.
(b) The Bank did not show that there was a real risk of actual prosecution, should the Award be recognised and enforced, because (among others) :-
(i) Based on Canadian law expert evidence and the effect of the relevant Canadian sanctions law, the Tribunal concluded that the payment was not caught by the sanctions regime, and that there was no illegality;
(ii) The Letter was not a finding by a Canadian court but “a pronouncement of Canada’s current ministerial policy opinion” on the illegality of the payment;
(iii) Other channels for the Bank to pay the Award without contravening the Canadian sanctions (e.g. garnishee proceedings) were relevant but not addressed by the Bank;
(iv) The Bank’s bona fide efforts to comply with the sanctions regime reflected the low practical risk of prosecution in this case (as recognised by its expert); and
(v) The Court could not review the Award (eg. its interpretation of the sanctions).
In summary, the Court held that no real risk of prosecution was established by the Bank.
2nd Limb: Balancing Exercise (Even If Real Risk of Prosecution Is Shown)
Secondly, the Court in the alternative considered the Bank’s application to set aside the Enforcement Order on the ground of public policy by way of the balancing exercise. Based on the weight of the risk of prosecution (for breach of Canadian sanctions) and the importance of the relief sought by the order, the Court declined the application having regard to the following considerations :-
(a) Hong Kong’s duty under the New York Convention to recognise and uphold arbitration agreements and to enforce arbitral awards, and its public policy “to maintain Hong Kong as an arbitration-friendly and pro-enforcement venue”.
(b) The public policy ground for setting aside is narrowly construed : it can apply only if enforcement of the award would be contrary to fundamental conceptions of morality and justice (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, “shock the conscience” of the court or violate the forum’s most basic notions of morality and justice (A v R [2009] 3 HKLRD 389).
(c) Citing the Singapore International Commercial Court’s decision in DNZ v DOZ [2026] SGHC (I), the Court concluded that, “it should not be contrary to public policy for this Court to uphold an award merely because the [Bank] would face contradictory obligations arising from commitments it had entered into …”.
(d) Hong Kong public policy should not be dictated by the foreign policy of a foreign state nor by foreign affairs (Articles 13 and 19 of the Basic Law).
Takeaways
The judgment offers important guidance for financial institutions and businesses on navigating complex sanctions regimes and upgrading internal compliance systems regarding payment and other obligations under cross-border contracts. The decision reinforces Hong Kong Judiciary’s overall pro-arbitration stance. The public policy ground under the Arbitration Ordinance (Cap. 609) is narrowly construed, and the paying party bears the burden of satisfying the relevant “shock the conscience” test to resist enforcement of an arbitral award.
