XCHRX GLENCORE INTERNATIONAL AG v. TIANJIN BUARONG MINERAL PRODUCTS CO. LTD.

1998, No.CT24

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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D E C I S I O N

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Security for costs

1. The Plaintiffs apply for security for costs against the Defendants who had commenced arbitration proceedings in Hong Kong against the Plaintiffs.

Governing ordinance

2. Under s.2GB of the Arbitration (Amendment) Ordinance ("the Ordinance") which came into operation on 27th June 1997, the power to order security for costs is vested in the Arbitral Tribunal. Section 18 of the Ordinance provides that :-

"18. Transitional provisions

(1) A provision of this Ordinance applies to and in relation to an agreement entered into before or after the commencement of the provision. However, such a provision does not apply to or in relation to an arbitration commenced before the commencement of the provision and in that case the provisions of the principal Ordinance that were in force immediately before that commencement continue to apply to and in relation to the arbitration in so far as it has not been completed.

(2) In this section 'commenced', in relation to an arbitration, means commenced within the meaning of section 31(1) of the principal Ordinance."

3. The principal Ordinance is the Arbitration Ordinance. The arbitration was commenced prior to 21st June 1997 : the parties agreed that the arbitration was commenced on 14th August 1996. By virtue of s.18, the position is governed by s.14(6)(a) of the Arbitration Ordinance, which provides that the Court shall have, for the purpose of and in relation to a reference, the same power of making orders in respect of security for costs as it has for the purpose of and in relation to an action or matter in Court.

4. Mr Lai, the solicitor for the Defendants, argued that notwithstanding s.18, the position is governed by s.2GB(3) of the Amendment Ordinance which provides that an Arbitral Tribunal must not make an order requiring a claimant to provide security for costs only on the ground that the claimant is a natural person who is ordinarily resident outside Hong Kong or is a body corporate, that is incorporated, or an association that is formed, under law of a place outside Hong Kong or whose central management in control is exercised outside Hong Kong.

5. I disagree with this submission. Section 18 is clear. The Arbitration Ordinance applies to and in relation to an arbitration commoned before 21st June 1997 in so far as it was and has not been completed. The arbitration in this case fulfils these requirements. The application for security for costs must be a step in the arbitration and is governed by s.14 of the Arbitration Ordinance.

Discretion

6. The Defendants are a corporation incorporated with limited liability in Tianjian, China. The authorised capital of the Defendants is RMB300,000. The power to order security for costs is founded under O.23, r.1 and s.357 of the Companies Ordinance. Under O.23, r.1, although there is no longer any inflexible rule that security for costs must be ordered where the Plaintiff is a foreign plaintiff, the usual practice is to exercise the discretion in ordering security for costs : Aeronave S.P.A. v. Westland Charters Ltd. [1971] 1 WLR 1445. The position is the same where security is applied for in relation to arbitration proceedings : Hudson Strumpffabrik GmbH v. Bentley Engineering Co. Ltd. [1962] 2 QB 587. The rationale for ordering security is that a defendant should be protected against the risk of being unable to enforce an order for costs : Okotcha v. Voest Alpine Intertrading GmbH [1993] BCLC 474, 479a.

Merits

7. In Wong Kwok Mei Sanrita and Others v. Eversonic Inc. [1992] 2 HKC 62, the Court of Appeal held that the merits of the Plaintiff's claim may be taken into account in exercising the discretion. The facts relating to the present dispute are briefly this. The parties have entered into a contract for the sale and delivery of 40,000 metric tons of coke. The Defendants alleged that the Plaintiffs has failed to carry out a pre-loading inspection in accordance with the agreement between the parties and to take delivery of the goods in accordance with the contract. The Defendants accepted the repudiation of the agreement by the Plaintiffs and claimed damages arising out from the breach.

8. The points of Defence pleaded that :

"4. Wrongly and in breach of contract the Claimants (i.e. the Defendants in this application) failed to make available at the loadport cargo of the contractual quantity and quality so that 10,000 mt of metallurgical coke only was supplied by the factory supplier stipulated in the Sale Agreement (in respect of which no admissions are made as to the quality and specification).

5. ... there was serious sizing problems with the cargo as well as problems with the conditions of the cargo given that the goods had been watered and were therefore covered in ice.

6. It is also averred that at no time did the Respondent resile from its primary position namely that there was a named supplier in the Sale Agreement and it was a condition of the said agreement that cargo was to be made available by the named supplier.

As a result of the Claimant's breach of the Sale Agreement and the failure to supply cargo of the contractual quantity and quality, the Respondent was obliged to locate alternative cargo to supply to its customer in order to comply with the terms of the Respondent's sub-sale contract. In so doing the Respondent has suffered loss and damage further particulars of which will be provided upon discovery."

9. Mr Lai referred to be correspondence between the parties exhibited to his affidavit. The affidavit was produced to court at the time of the hearing. Mr Kat, Counsel for the Plaintiffs, raised no objection to his submission and I granted leave to Mr Lai to refer to the affidavit. However, it must not taken that this practice is to be condoned. In this case while there is no order imposing any time limit for filing evidence, this should be done in adequate time before the hearing so that the judge can read the material beforehand.

10. The Points of Defence may well be described as an obscure piece of work. It has not been pleaded that the Plaintiffs had rejected the goods. However, one cannot conduct a mini trial on affidavits and I just cannot say, on the evidence before me, the Defendants have a high probability of success in the arbitration to the extent that the discretion should be exercised against the granting of an order for security

Other matters.

11. There is no evidence that the Defendants have any assets in Hong Kong. The problem of enforcing a Hong Kong arbitration award in China is a real one. Whereas before 1st July 1997, a Hong Kong award can be registered in China and enforced as a foreign judgment, the current position is that the award is treated as a domestic arbitration award and it may be refused registration under the People's Republic of China's domestic arbitration provisions : Morgan on The Arbitration Ordinance of Hong Kong : a Commentary, p.388 - 391 and p.9 of the 1997 Supplement.

Security ordered

12. In my view, the discretion under O.23, r.1 should be exercised in favour of ordering security for cost. Having done so, it is not necessary for me to consider the alternative application under the Companies Ordinance.

Quantum

13. The Plaintiffs are seeking security in the sum of $1.3 million for a ten-day arbitration. While these may be the fees that commercial lawyers charge on a solicitor and client basis, the comment I wish to make is that at this level of fees, Hong Kong will soon lose its competitive edge and price itself out as a centre for litigation or arbitration. On a party-and-party basis, the appropriate amount for costs is $800,000. This amount is to be paid in two stages. The first stage is for $100,000 which is to be paid within six weeks. This sum will include costs that may incur for work up to and including the exchange of witness statements on facts. The second stage is for the sum of $700,000 which is to be paid within six weeks from the day of the exchange of witness statements. This amount will be in respect of costs in relation to the costs up to the conclusion of the arbitration hearing.

14. The parties have indicated that they would agree on the form of the security. The arbitration is to be stayed pending the security being furnished. In default of the security being furnished on the dates specified, the arbitration is to be dismissed unless further orders from the Court regarding the extension of time.

15. I shall order cost nisi of the application to the Plaintiffs. The parties are required to submit a draft order for my approval.