SA AND OTHERS v. BH AND ANOTHER

HCCT 69/2023

[2024] HKCFI 1357

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 69 OF 2023

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D E C I S I O N

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Background

1.  This is an application made by the 1^st Defendant in this action, seeking security from the Plaintiffs and a stay of these proceedings until the provision of security. The application is made under Order 23 RHC, and the inherent jurisdiction of the Court. The Plaintiffs oppose the application on the ground that the Court has no jurisdiction or power to order security, when section 7 of Schedule 2 to the Arbitration Ordinance (“Ordinance”) does not apply to the arbitration, and the Court has no other power under the Ordinance to order security.

2.  The 1^st Plaintiff is a company incorporated in the Netherlands, and the 2^nd and 3^rd Plaintiffs are individuals resident in California, USA. The Plaintiffs and the 1^st Defendant are parties to a shareholders agreement (“SHA”) and partners in a joint venture, holding shares in the 2^nd Defendant which is a company incorporated in the Cayman Islands. The 1^st Defendant is also a company incorporated in the British Virgin Islands.

3.  The dispute between the parties to the SHA was referred to arbitration in Hong Kong (“Arbitration”), pursuant to an arbitration clause contained in the SHA. The 1^st Defendant was Claimant, and the Plaintiffs and the 2^nd Defendant were Respondents in the Arbitration. By an interim award dated 21 June 2023 (“Award”), the tribunal allowed the 1^st Defendant’s claims that the Plaintiffs were in breach of the SHA, and further allowed the claims for damages made by the Claimant (1^st Defendant herein) and the 4^th Respondent (2^nd Defendant herein).

4.  On 10 October 2023, the Plaintiffs commenced these proceedings to set aside the Award, on various grounds including that the subject matter of the Arbitration was on national security within the scope of the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong SAR (“NSL”) and the Interpretation by the National People’s Congress Standing Committee (“Interpretation”) promulgated on 30 December 2022, and is not capable of being settled by arbitration in Hong Kong; that the arbitral procedure was not in accordance with the parties’ agreement; that the Plaintiffs were not given the reasonable opportunity to present their case on legal issues relating to national security; and that the Award was in conflict with the public policy of Hong Kong. This prompted the 1^st Defendant to apply for security for costs, which application is opposed by the Plaintiffs, on the ground that the Court has no power to order security in this case and further, that the Plaintiffs have assets in the form of a 13.25% shareholding in the 2^nd Defendant, and that they undertake not to deal in these shares, such that security is not necessary.

Jurisdiction

5.  I do not accept the Plaintiffs’ submission, that this Court has no jurisdiction to order security to be furnished by them under Order 23 RHC.

6.  On behalf of the Plaintiffs, Counsel highlighted the principle and object of the Ordinance as stated in section 3 of the Ordinance, and in particular placed reliance on section 3(2)(b), that the Court shall interfere in the arbitration of a dispute only as expressly provided for in the Ordinance. Counsel submitted that under the Ordinance, the Court only has the express power to order a party to give security for the costs of an application to challenge an award on the ground of serious irregularity, or for an appeal to the Court on a question of law – where such remedies are available to a party because Schedule 2 of the Ordinance (“Schedule”) applies. In no other case does the Court have power or jurisdiction to order security against a party, and on the Plaintiffs’ case, to do so would amount to the Court’s impermissible interference in the arbitration.

7.  The Plaintiffs pointed out that the Defendants in this case have not yet applied to the Court for leave to enforce the Award pursuant to section 84 of the Ordinance. The Plaintiffs therefore do not have to apply to set aside any order of the Court granting leave to enforce the Award, as provided for under Order 73 rules 10(6) and 10A RHC. Hence, on the Plaintiffs’ case, the Court’s power under Order 73 rule 10A to impose terms as to security is not invoked, as that rule is expressed to apply “where a debtor has applied to set aside an order made under rule 10(4)” (namely an order granting leave to enforce the award under section 84(1) of the Ordinance).

8.  There can be no dispute that the Schedule does not apply to the Arbitration, such that appealing on a question of law is not an avenue open to the parties in this case. The power of the Court to order security which is provided for in section 7(4) and (5) of the Schedule does not apply.

9.  The issue in dispute is whether the Court has jurisdiction to order security for the 1^st Defendant’s costs in these proceedings initiated by the Plaintiffs to set aside the Award.

10.  At the forefront, it has to be recognized that it is the Plaintiffs who are challenging the Award and seeking the “interference” by the Court. As Counsel for the 1^st Defendant highlighted, the Plaintiffs are the “real attackers”.

11.  When the Plaintiffs initiate the Court’s permitted “interference” by way of an order to set aside the Award (the exclusive recourse against an award as provided for in the Ordinance), their proceedings before the Court are then subject to the procedural rules governing the action before the Court.

12.  It is correct to say that this is the first occasion of a party challenging the jurisdiction of the Court to order security for costs from a party seeking to set aside an award made in an arbitration which was held in Hong Kong, as opposed to security being sought in a case against a party which opposes enforcement of a Hong Kong award when the other party has obtained leave to enforce the award here. Before the Plaintiffs’ challenge in this case, the Court has in many other cases, and without disputes raised by any party, ordered security to be furnished both in circumstances when a party opposes enforcement and applies to set aside an order made by the Court for leave to enforce an arbitral award, and in circumstances when a party seeks active remedy and applies to set aside an arbitral award. In considering whether to order such security, the Court has also without disputes being raised by any party, applied the principles set out in Soleh Boneh v Government of Uganda [1993] 2 Lloyd’s Rep 208.

Does s 86(4) of Ordinance apply?

13.  Section 86 of the Ordinance states that enforcement of an award may be refused if the person against whom it is invoked proves one or more of the grounds set out. In a case where a party seeks to oppose enforcement of an award in Hong Kong, one of the grounds which may be invoked under section 86 is that the award has not yet become binding or has been set aside or suspended by a competent authority (section 86(1)(f)). In such a case, if an application for the setting aside or suspension of the award has been made to a competent authority of another jurisdiction, the Court before which enforcement is sought (ie the Hong Kong court) may, if it thinks fit, adjourn the enforcement proceedings, and may order the person against whom enforcement is invoked to give security (under section 86(4) of the Ordinance). The Plaintiffs in this case emphasize the fact that (although there is an application to set aside the award, made to the Hong Kong Court as the supervisory court) there is no application or necessity to adjourn the proceedings for enforcement, and contend that there is nothing to trigger the exercise of the Court’s power to order security.

14.  Counsel for the 1^st Defendant in this case does not rely on section 86 being applicable to the present case, and so the proper construction of section 86 shall be left to another day.

Does O73 exclusively apply to the proceedings?

15.  Order 1 rule 2(1) Rules of the High Court (“RHC”) states that the rules shall have effect “in relation to all proceedings in the High Court”. Order 1 rule 2(2) goes on to state that the RHC shall not have effect in relation to the proceedings specified: namely, bankruptcy proceedings, proceedings relating to the winding up of companies, proceedings relating to remedies for unfair prejudice to members’ interests, non-contentious or common form probate proceedings, proceedings in the Court when acting as a Prize Court, matrimonial proceedings, adoption proceedings and proceedings under the Domestic and Cohabitation Relationships Violence Ordinance. The rest of Order 1 rule 2 goes on to state that the RHC shall not have effect in relation to any criminal proceedings and election proceedings.

16.  Arbitration proceedings are not stated in Order 1 rule 2, as proceedings in relation to which the RHC do not have effect.

17.  Order 73 RHC sets out various rules of procedure in relation to applications, requests or appeals to the Court under the Ordinance. These rules provide for the manner of initiation of applications made under the Ordinance, the hearing of such proceedings, the manner of making applications for interim measures or orders (with express reference to Order 29 RHC being applicable, with necessary modifications), the time limits for various applications made under the Ordinance including the manner in which they should be made, and (by rule 10A) the terms as to giving security or otherwise which may be imposed by the Court for an application made, specifically, under Order 73 rule 10(6).

18.  As RHC have not been stated in rule 1 2(a) to have no effect in proceedings relating to arbitration, they apply unless Order 73 makes specific provision for a situation, which provision is inconsistent with the general provisions of the RHC. Examples are the use of an originating summons in Form 10 for an application made under the Ordinance (as specifically provided for in Order 73 rule 1), such that Order 6 does not apply; and leave for service out of the jurisdiction of the originating summons which is governed by Order 73 rule 7, instead of Order 11 rule 2.

19.  As Counsel for the Plaintiffs argued, the more specific rules prevail over general rules (lex specialis derogate legi generali) as a matter of interpretation. However, I cannot agree that Order 73 rule 10A has excluded and must take precedence over Order 23, or that Order 73 has excluded the application and operation of other rules of the High Court. In my judgment, RHC apply to proceedings relating to arbitrations, unless Order 73 makes specific provision which is different to the general rules in which event the specific provisions in Order 73 apply.

20.  In support of her argument, Counsel for the Plaintiffs contended that there is no reason for Order 73 to contain a provision under rule 10A, for security to be ordered in proceedings relating to arbitration, if Order 23 is applicable in any event.

21.  Order 73 rule 10A was introduced to cure the defect identified by the Court in JJ Agro Industries (P) Ltd (a firm) v Texuna International Ltd [1994] 1 HKLRD 89, and to empower the Court to order payment into court and to impose other terms, in circumstances where a party (as a respondent) opposes enforcement of an award and seeks to set aside an order granting leave to an applicant to enforce the award, had not applied to the supervisory court to set aside the award, and an adjournment was considered necessary by the Court. The editors of the HK Civil Procedure commented at paragraph 73/10A that the rule was to put the Court on the same footing as the powers vested in it by the other relevant sections of the Ordinance. Rule 10A also deals with the anomaly or distinction made by the Court in T K Bulk Handling GMBH v Meridian Success International Limited HCMP 4765/1998, 30 November 1998, that there is no jurisdiction of the court to order security under Order 23 RHC against the plaintiff/creditor under an arbitral award, as the Court did not consider that the debtor is in truth a “defendant” in any action or proceedings before the Court. In the light of Order 5 rule 1, which states that civil proceedings in the Court of First Instance may be begun by writ or originating summons, I cannot agree with the observation made by the learned judge in TK Bulk that there was no “action or proceedings” simply because the application for leave to enforce an award was made by ex parte affidavit, and these observations cannot apply to these proceedings.

22.  The reason for the need to have the power expressly provided for in Order 73 rule 10A is because a debtor applying to set aside an enforcement order made on the application of the creditor who had initiated the proceedings would be a “defendant”, and security against a plaintiff under Order 23 cannot apply. It is because the situation of the parties in an application under rule 10(6) does not fall within Order 23, that rule 10A was enacted to confer the power on the Court to order security against the debtor defendant seeking to challenge the award. Rule 10A does not exclude the operation of Order 23 altogether, in circumstances when it can apply to a proper “plaintiff” in the proceedings. In a case where the debtor takes the initiative of commencing proceedings to set aside the award, such debtor would be the plaintiff and its counterparty, the creditor, is the “defendant” which will be entitled under Order 23 to seek security against the plaintiff. Far from restricting the powers of the Court, rule 10A confers the additional jurisdiction and power, where none had been provided before under the RHC.

23.  In a recent case of 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, handed down on 3 April 2024, Deputy High Court Judge Jonathan Wong dismissed the arguments made for the defendant debtor in the proceedings that the grant of security under the principles set out in Soleh Boneh v Government of Uganda [1993] 2 Lloyd’s Rep 208 are not applicable, and had been wrongly adopted, in cases where a party does not adopt the “active remedy” option of seeking the setting aside of an arbitral award, but instead opposes enforcement when the creditor seeks leave to enforce a Mainland award in Hong Kong. Although the defendant in the case did not assert that the Court lacked jurisdiction to order security, the Soleh guidelines or tests in the consideration of ordering security (which have been applied in applications made under Order 73 rule 10A) were challenged as being wrong in principle.

24.  In his judgment, the learned Deputy Judge pointed out that he was bound by the decision of the Court of Appeal in Wisdom Glory Investment Ltd v ADWO Media Holdings Limited [2022] HKCA 685, in which the Court of Appeal did apply the Soleh guidelines in considering an application for security which was made under Order 73 rule 10A. In Wisdom Glory, security had been ordered by the court at first instance against the debtor which had taken the initiative to apply to the Hong Kong Court to set aside a Hong Kong award, and no leave to enforce the award had been made before the setting aside application. These are the same as the facts of the present case. The Court of Appeal in Wisdom Glory did not consider that the court had no jurisdiction to order security at all, and instead affirmed that the Soleh guidelines and tests were applicable to the application for security made under rule 10A.

25.  I agree with the learned Deputy Judge, that there is no point or justification in making a distinction between challenges to the enforceability of an award which are determined locally, ie by the Hong Kong Court as the supervisory court of the Arbitration, and challenges made to a foreign court for setting aside, in the context of whether consideration should be given to ordering security to cater for the consequent delay in the enforcement of the award. When the Hong Kong Court is the supervisory court of the entire Arbitration and the process leading up to the Award, there is more reason for the Court to exercise control and to avoid or minimize the effect of the delay in the resolution of a challenge to the award. I would also add that in ordering security against the debtor which is making the challenge and resisting enforcement of the award, the Court is not imposing or creating a more onerous condition on a creditor seeking to enforce an award pursuant to the New York Convention, compared to the conditions facing a creditor seeking to enforce a domestic award. As emphasized in the earlier part of this judgment, it is the debtor in this case which is seeking the Court’s interference in the arbitration and the enforcement of the award, by actively launching its attack against the award. The Plaintiffs in this case are properly and for all purposes in name and by deed the “plaintiff” in proceedings instituted by the Originating Summons, to which Order 23 may apply.

Security appropriate under O23?

26.  I have found that Order 23 has not been excluded by any express statutory provision of the Ordinance or Order 73 itself.

27.  There have been many cases in which the Court has, in exercise of its powers under Order 23 RHC, ordered security for costs to be provided by a party which either applies to set aside an award, or opposes enforcement of an arbitral award by seeking to set aside enforcement orders made by the court (X v Jemmy Chien [2019] HKCFI 2172, Firm “H” v “W” [2021] HKCFI 68 being examples).

28.  Order 23 rule 1 provides that where it appears, on the application of “a defendant to an action or other proceedings in the Court of First Instance”, that the plaintiff is ordinarily resident out of the jurisdiction, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceedings as the Court thinks fit.

29.  In deciding whether to order security for costs against a party, the Court takes into consideration all the circumstances of the case. These include (but are not restricted to) the fact that the plaintiff against which security is sought is ordinarily resident out of the jurisdiction, whether it has assets within the jurisdiction against which any order for costs may be enforced, the merits of the plaintiff’s case, any delay in the application for security, and any other factor which may make it unjust to order security.

30.  In the present case, there is no dispute that the Plaintiffs are ordinarily resident outside Hong Kong. They argued however that they have assets, comprising their shareholding in the 2^nd Defendant, which is valued at approximately US $20 million, and they claim that these shares are “real and readily available” to the Defendants. The 3^rd Plaintiff has offered an undertaking not to dispose of or diminish the value of the shares until the final conclusion of these proceedings or further order of the Court.

31.  The 2^nd Defendant is a private company, incorporated in the Cayman Islands. The Plaintiffs’ shareholding in the 2^nd Defendant does not constitute assets within the jurisdiction of Hong Kong which are readily realizable or transferable. Transfers of the 2^nd Defendant’s shares are in fact restricted under the Agreement. Moreover, the 1^st Defendant has pointed out that the 2^nd Defendant has been put into liquidation and a winding up order was made against it on 8 February 2024.

32.  The 1^st Defendant also pointed out that the Plaintiffs’ reference to the 2^nd Defendant’s alleged net assets as at 31 December 2018 is misleading, because the tribunal found that the 2^nd Defendant had no identifiable assets. The tribunal further found in the Arbitration that by virtue of the Plaintiffs’ breach, the 2^nd Defendant has sustained substantial loss and damage.

33.  As for the merits of the Plaintiffs’ claim in these proceedings, the main thrust of their case is that the subject matter of the Arbitration is not arbitrable. Even on a brief consideration of the strength of the Plaintiffs’ argument, I cannot agree that the Plaintiffs have “a high degree of probability of success” as Counsel contended.

34.  The Plaintiffs’ case is that neither the Court nor any other institution in Hong Kong has the power to interfere with the duties and functions of the Committee for Safeguarding National Security of the HKSAR (“Committee”) to decide on questions as to whether the national security interests of Hong Kong or the Mainland are involved. The Arbitration dealt with a commercial dispute over a joint venture project to develop a communication satellite, and to launch the satellite into the orbit over Equatorial Africa, with the intention to provide broadcast Internet services to that part of the African continent. The Plaintiffs claim that the dispute falls within the scope of “national security”, as it touches upon the “safety of the activities, assets and other interests of the Country’s outer space” as defined in Article 32 of the PRC National Security Law. According to the skeleton submissions of Counsel for the Plaintiffs, the Plaintiffs (as Respondents in the Arbitration) had alleged that the Defendants were acting under the control of a PRC State-owned enterprise which in turn has ties with one of the largest military aviation manufacturers on the Mainland, and that the Defendants had obtained restricted US satellite technology in violation of US export control laws. The Plaintiffs have highlighted the fact that in the Award, the tribunal itself described the core issue of the Arbitration as whether the commercial satellite project which was the subject matter of the dispute infringed US export control laws and regulations.

35.  The Plaintiffs’ complaint appears to be that the tribunal had failed to consider or to give the Plaintiffs the opportunity to properly present their case on national security interests, and whether the subject matter of the Arbitration fell within the scope of national security, as a result of the enactment of the NSL and the Interpretation.

36.  The 1^st Defendant’s answer to this was simply that the Plaintiffs had never made any allegation to the tribunal, that the subject matter of the Arbitration was not arbitrable as a result of the enactment of the NSL and the Interpretation. The NSL was promulgated on 30 December 2022. The hearing of the Arbitration only commenced in January and February 2023. A claim that the subject matter of the dispute is not capable of settlement by arbitration should have been made at the earliest stage of the submission to arbitration, and certainly by the time of the hearing of the Arbitration in January and February 2023, after the promulgation of the NSL in December 2022. Failure to do so, and failure to draw such an important issue to the attention of the tribunal, not only renders the claim now made incredulous, but may well constitute waiver, estoppel, or breach of a party’s duty of good faith, to prevent it from raising the point now.

37.  Although the breach of US export control laws was raised by the Respondents in the Arbitration (ie the Plaintiffs herein), I have not been referred to any evidence that they had raised national security, or the arbitrability issue, before the tribunal, whether in the pleadings, the evidence or in the course of the hearing before the tribunal in 2023.

38.  At this preliminary stage, it suffices to say that even on a brief consideration of the strength of the Plaintiffs’ argument, the Award is not manifestly invalid (using the term in Soleh), and the probability of success of the setting aside application cannot be regarded as of a “high degree”.

39.  The 1^st Defendant has referred to the conduct of the Plaintiffs, which was described by the tribunal as “dishonest and egregious”. The tribunal had referred to the claim, made by the Respondents in the Arbitration, of infringement of the PRC Prohibition to be “specious”. In the Award, the tribunal found that there was no evidence of PRC control of the 2^nd Defendant, and no export, re-export or transfer of any satellite or related item to any entity acting for and on behalf of a PRC entity.

40.  The 1^st Defendant also relied on the fact that the Plaintiffs had failed to comply with costs orders made by the Courts in the US and in the Cayman Islands. On their part, the Plaintiffs claimed that some of these costs orders were not made against the Plaintiffs directly, but were directed at parties controlled by the Plaintiffs. The Plaintiffs argued that although there are no existing arrangements between Hong Kong and the United States for reciprocal enforcement, the United States operate a common law system, the 2^nd and 3^rd Plaintiffs are residents of the United States, and their assets can be ascertained and enforced there.

41.  On the entirety of the available evidence, it suffices to say that from the history of the proceedings between the parties, it seems to be reasonably clear that the Plaintiffs would not be cooperating with the Defendants if any costs orders should be made against them for enforcement, and that the 1^st Defendant would in reality have difficulties in recovering its costs, even if orders should be made in its favor.

Conclusion and disposition

42.  Having considered the Plaintiffs’ lack of presence and lack of assets in Hong Kong, the merits of their case for setting aside the Award, their conduct as found by the tribunal, and the status of the 2^nd Defendant, I consider that it would be necessary and just to order security to be furnished by the Plaintiffs for the 1^st Defendant’s costs.

43.  On a broad brush approach, the reasonable amount of costs up to the 2 days’ substantive hearing of the setting aside application would be HK$2 million. These proceedings are stayed until payment into court of the said amount, or provision of a bank guarantee acceptable to the 1^st Defendant, is made within 21 days of the handing down of this Decision.

44.  The costs of the summons for security are to be paid by the Plaintiffs to the 1^st Defendant, with Certificate for Counsel, on indemnity basis.