Hong Kong – Soleh Guidelines Continue To Apply In RHC O.73, r.10A Applications.
Where an arbitral award creditor obtains an order for enforcement of the award in Hong Kong (Enforcement Order) and the award debtor applies to set aside the Enforcement Order, the award creditor may apply under the Rules of High Court (RHC) Order 73, rule 10A for an order that the award debtor provide security for the claim before proceeding with the setting aside application. In the recent judgment 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 [2024] HKCFI 958, the court confirmed that the Soleh Guidelines continue to apply in Hong Kong in such applications under RHC Order 73, rule 10A.
Background
The Plaintiff (P) and Defendant (D) were respectively claimant and respondent in a CIETAC arbitration, in which the arbitral tribunal made a Final Award in P’s favour for around RMB232 million plus interest. That sum was the total of service fees prepaid by P to D under Service Agreements between them (Prepaid Sum). The Hong Kong court granted P leave to enforce the Final Award in Hong Kong (Enforcement Order). D applied to set aside the Enforcement Order under s.95 of the Arbitration Ordinance (AO) and P now applied under RHC Order 73, rule 10A for an order that D provide security for the claim (of around RMB233 million (i.e. the Final Award amount and accrued interest) and security for costs (of around HK$1.8 million).
RHC Order 73, rule 10A
RHC Order 73, rule 10A provides that where a debtor has applied to set aside an Enforcement Order, the court may as it thinks fit, either of its own motion or on the creditor’s application, impose such terms as to giving security or otherwise as a condition of the further conduct of the application.
The court said that ever since RHC Order 73, rule 10A came into effect, the courts have consistently and uniformly applied the Soleh Guidelines set out in Soleh Boneh v Government of Uganda [1993] 2 Lloyd’s Rep 208 to an application for security made pursuant to it. However, D’s counsel argued that the Guidelines did not apply in this case. Therefore, a preliminary matter to be decided by the court was whether the Guidelines applied.
The Soleh Guidelines
Under the Soleh Guidelines, the court must consider:
(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 variousdegrees 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.
Active remedy and passive remedy scenarios
D’s counsel argued that the Soleh Guidelines only apply in an “active remedy scenario”, namely where the award debtor takes the initiative and applies to set aside the award in the supervisory court and s.89(5) of the Arbitration Ordinance (AO)has been triggered. S.89(5) provides that “If an application for setting aside or suspending a Convention award has been made to a competent authority as mentioned in subsection (2)(f), the court before which enforcement of the award is sought – (a) may, if it thinks fit, adjourn the proceedings for the enforcement of the award; and (b) may, on the application of the party seeking to enforce the award, order the person against whom the enforcement is invoked to give security.”
D’s counsel argued that the Soleh Guidelines do not apply in a “passive remedy” scenario, as here, where the award debtor waits until enforcement is sought and then challenges the award, because as a matter of principle, the common law does not recognize any general right for an application for security for judgment, as opposed to security for costs. In the passive remedy scenario, D’s counsel argued, the court should only exercise its discretion to order security where the challenge appears to be flimsy or otherwise lacks substance.
Do the Soleh Guidelines apply in a passive remedy scenario?
The court acknowledged that the present application was concerned with a passive remedy scenario, where no adjournment was sought pending the resolution of an application in the supervisory court. However, the court held that RHC Order 73, rule 10A is drafted broadly to cover all arbitrations and that the court would therefore continue to apply the Soleh Guidelines in a passive remedy scenario.
Validity of arbitral award
Here, D sought to set aside the Enforcement Order under s.95 of the AO on the grounds that it would be contrary to public policy for the final award to be enforced, as the arbitral tribunal had retrospectively applied a Mainland Civil Code to contracts predating its effective date (Retrospectivity Ground) and the award was obtained in a manner whereby P’s legal representatives were acting in conflict of interest with D (Conflict of Interest Ground).
The court said that it appeared that neither the Retrospectivity Ground nor Conflict of Interest Ground could be characterized as strong. Between the two ends of manifest validity and manifest invalidity, it found that the Final Award was placed decidedly closer to the side of manifest validity, which itself provided a sufficient reason for ordering security.
Ease or difficulty of enforcement
The court said that even if that was not the case, the second factor in the Soleh Guidelines, namely ease or difficulty of enforcement, also provided additional justification for ordering security, as an investigative report commissioned by P identified that D had no known fixed assets in Hong Kong. Although, it could not be disputed that by reason of the Prepaid Sum, D had substantial deposits in its bank accounts in Hong Kong, the court said that D’s refusal to provide P with information on what had become of the Prepaid Sum was plainly a basis to infer or show difficulty in enforcement. Further, the court said, the size of the award is a relevant consideration and that where there is a very large award, delay without security is inherently likely to prejudice the award creditor and certainly risks doing so, which is a factor which would incline the court towards providing some security.
Accordingly, the court concluded that enforcement of the award would be rendered more difficult, by movement of assets when, as here, enforcement was delayed.
Security for the claim
The court proceeded on the basis that D, in opting for the passive remedy, was not a factor which should be viewed adversely against it. However, an important factor in the present case was that any security ordered could be met or ought to be met by the Prepaid Sum. D did not make a counterclaim in the arbitral proceedings, and the only basis upon which it could keep the Prepaid Sum was if the Service Agreements were still “alive” (but were found to have been terminated in the Final Award). The present situation was unlike the usual cases, the court said, where a party resisting enforcement is driven to “dip into” its own resources to put up security for an award in damages and there was no suggestion that D’s s.95 application would be stifled if it was ordered to pay security for the claim.
The court decided that the appropriate amount of security to be paid by D was RMB150 million. It said that although that was somewhat less than the amount asked for, the court rarely makes an order for full security.
Security for costs
As regards security for costs, liability to provide such was not disputed and only quantum was in issue. On a broad-brush basis, the court decided that HK$900,000 was an appropriate amount.
Court’s order
Accordingly, D was ordered, within 14 days, to make payment for security into court (or provide such security in a manner to P’s satisfaction of (a) RMB150,000,000, being security for P’s claim under the Final Award; and (b) HK$900,000, being security for costs of these proceedings, including the costs of opposing the s.95 application, failing which the s.95 application be dismissed with costs be paid to P on an indemnity basis, and P be entitled to take enforcement proceedings pursuant to the Enforcement Order.
Comments
It takes time for the court to dispose of an application to enforce an arbitral award, if the defendant contests it. As can be seen from this judgment, the leave to enforce the award was granted on 27 July 2023 and the judgment was only handed down on 3 April 2024. Some similar applications may take even longer in our experience. Some defendants, who have no good ground for challenging the award, contest the enforcement application only for the purpose of delaying payment. In such case, an order for security for the claim can be very useful in frustrating the delaying tactics of unscrupulous defendants.
For further information, please contact:
Joseph Chung, Partner, Deacons
joseph.chung@deacons.com
