Hong Kong – Court Refuses To Stay Enforcement Of Award Pending Outcome Of 2nd Arbitration.
In CF v SHK [2024] HKCFI 1493, the Hong Kong Court dismissed an application to stay enforcement of a RMB1 billion arbitral award, pending determination of a second arbitration. The court held that to stay enforcement of a judgment originating from an arbitral award, in circumstances when the debtor seeks to rely on the claims made in a second pending arbitration as an equitable set-off, there must be very special circumstances to justify such and that the court should not otherwise prevent a judgment creditor from enjoying the fruits of the judgment.
The dispute
Under a Share Purchase Agreement, (SPA), CF agreed to sell and SHK agreed to purchase, CF’s 80% shareholding in CF China. CF, CF China and SHK then entered into a Shareholders Agreement (SHA), under which CF acquired an initial put option (Option), to require SHK to purchase its remaining 20% shares in CF China at an initial put price (IPP). S Listco signed a Guarantee, whereby it guaranteed SHK’s obligations in relation to the payment of the IPP. Subsequently, CF exercised the Option, calling for SHK to purchase its 20% shares in CF China at the IPP of RMB 1.2 billion, but SHK failed to make payment by the deadline. CF and SHK entered into a Settlement Agreement under which SHK agreed to pay CF the IPP by instalments, and specifically covenanted to make such payment “without any withholding, set-off, counterclaim, retention or deduction” (Anti-Set-Off Clause). S Listco executed a Guarantee extending the coverage of its obligations under the Guarantee to include SHK’s obligations under the Settlement Agreement.
Arbitration proceedings
As a result of SHK’s default in paying an instalment due under the Settlement Agreement, CF commenced arbitration proceedings against SHK and S Listco and by an arbitral award, SHK and S Listco were ordered to pay CF RMB 1 billion (Award). CF obtained the court’s leave to enforce the Award as a judgment of the court (Enforcement Order).
Application to stay Enforcement Order
SHK and S Listco applied for a stay of execution/enforcement of the Enforcement Order until final determination of separate arbitration proceedings which by then had been commenced by SHK and S Listco in Hong Kong against CF and its parent company (2nd Arbitration).On behalf of SHK and S Listco, it was contended that SHK’s claims in the 2nd Arbitration that the SPA had been induced by CF’s misrepresentations, constituted an equitable set-off, which could be asserted against CF in respect of the sum said to be due to it under the Award. SHK and S Listco claimed that it would be just for the court to order a stay of execution of the Enforcement Order, pending final resolution of the claims made against CF in the 2nd Arbitration.
The core issue to be determined by the court turned on whether special circumstances existed to justify a stay of the enforcement proceedings and depriving CF of the benefits of the Award and judgment entered in its favour.
Applicable legal principles
The court referred to the legal principles governing the court’s exercise of its power and discretion to stay enforcement of a judgment originating from an arbitral award, in circumstances when the debtor seeks to rely on the claims made in a second pending arbitration as an equitable set-off, namely:
- 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 circumstances” to justify a stay of enforcement.
- In deciding whether special circumstances exist, the nature of the claims, extent of the identity between the claim in the judgment and unresolved cross-claim, strength and size of the cross-claim, likely delay before the cross-claim can be adjudicated, and extent of prejudice that may be suffered by the judgment creditor and judgment debtor respectively, are all matters to be taken into consideration.
- Generally, the starting point is that a judgment creditor is entitled to enforce the judgment he has secured against the judgment debtor. The discretion of the court in granting stay of execution / enforcement should thus only be exercised in exceptional circumstances, where an injustice would otherwise be caused, to prevent abuse, to preserve the dignity of the court or to facilitate the administration of justice. The court should not otherwise prevent a judgment creditor from enjoying the fruits of the judgment.
Existence of Anti-Set-Off Clause
By virtue of the Anti-Set-Off Clause in the Settlement Agreement, SHK had agreed to pay CF the IPP in instalments, and specifically covenanted to make such payment “without any withholding, set-off, counterclaim, retention or deduction”. The court said that the submissions made on CF’s behalf that (i) this clause unequivocally excluded any form of set-off, legal or equitable and nullified any right of set-off; and (ii) the terms of the parties’ agreement must be paramount and take precedence over the court’s discretion to grant a stay, meaning that cross-claims had been excluded by the parties’ express agreement, were convincing and supported by the authorities.
The court said that the Anti-Set-off Clause clearly and plainly, on its face, provided for payment of the IPP without any withholding, set-off, counterclaim, retention or deduction. The expressed intention of the parties was obvious, the court said, and 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 SHK was bound by the Anti-Set-Off Clause. SHK could not be permitted, the court said, to delay enforcement of the Award and judgment until its claims in the 2nd Arbitration had been determined, and for such claims in its favour to be used as a set-off or deduction against the sum found due in the arbitration. This was precisely what the tribunal had found in the Award, after analysing the evidence.
Was the Anti-Set-Off Clause valid?
The court said that it was pertinent to consider the issues put before the tribunal in the arbitration and findings made in the Award. It said it was clear from the Award and framing of agreed list of issues, that the arbitrator did (and had to) deal with SHK and S Listco’s defence as to their entitlement to assert a set-off against CF’s claim. It said that although the tribunal may not have jurisdiction to deal with or grant any relief to them by virtue of their counterclaim, which were claims made under or relating to the SPA (which the arbitrator found contained a separate arbitration clause, which conflicted with the those in the Settlement Agreement and Guarantee), he did have jurisdiction to decide CF’s claims in the arbitration and SHK and S Listco’s defence to those claims, as to whether they had any right of set-off at all. Pertinently, the court said, the arbitrator recorded in the Award that the parties had agreed that the tribunal “can and should decide” the important issue of set-off.
It was clear, the court said, that the arbitrator did make a final decision, that the Anti-Set-off Clause satisfied the requirement of reasonableness under s.4 of the Misrepresentation Ordinance, and that SHK and S Listco were contractually precluded from raising any defence of set-off in the arbitration and that their defence accordingly failed.
The court made it clear that it was not concerned with the correctness of the arbitrator’s findings on facts or on law, and there was indeed no challenge to the arbitrator’s Award.
Progress of 2nd Arbitration
The court referred to the fact that the 2nd Arbitration was still at an early stage and that the claims made by SHK in it were not expected to be resolved for at least another two years after the issue of the Award. On CF’s case, significant delay would be caused if a stay was granted, and it would be unjust for CF, which had a final and binding judgment for a substantial amount, to have to wait for the resolution of the 2nd Arbitration. The court said that significant delay is recognized in the authorities to be a matter which militates against a stay.
Further, neither SHK nor CF had sought to argue that the merits of their respective claim and defence in the 2nd Arbitration were so strong as to justify or resist a stay of enforcement. At most, the court said, it could only be said that SHK had an arguable claim in the 2nd Arbitration.
Court’s ruling
The court concluded that there would be no injustice if a stay was refused and there was no basis for SHK and S Listco to claim that there was any prejudice by reason only of the fact that any award which may be obtained in the 2nd Arbitration had to be enforced against CF outside Hong Kong. SHK had agreed to arbitrate in Hong Kong, well knowing that CF may not have assets here and had no duty to bring assets into Hong Kong.
Having reviewed all the circumstances of this case, the balance of injustice was in favour of refusing a stay of execution of the Enforcement Order, the court said.
Comments
This judgment helpfully sets out the principles governing the grant of a stay of execution of judgment. The court has no difficulty in rejecting an argument that the judgment creditor has no assets in Hong Kong. An arbitral award is directly enforceable in other jurisdictions pursuant to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards which has over 170 member states and in Mainland China pursuant to the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and Hong Kong SAR made between the Hong Kong Government and the Supreme People’s Court of PRC.
For further information, please contact:
Joseph Chung, Partner, Deacons
joseph.chung@deacons.com
