Hong Kong Court Clarifies Test for Security Pending Set Aside Application

The Hong Kong Court of First Instance has confirmed the test under s. 89(5) Arbitration Ordinance for granting security for the award, pending an application to set aside the award at the seat. The court held that same test applies where an applications to set aside a CFI order granting leave to enforce the awards is pending under O. 73, r. 10A Rules of the High Court. In applying the test, Mimmie Chan J reiterated the CFI's well-established stance in support of arbitration, namely that the Court's "primary aim" under the Arbitration Ordinance is to "facilitate the arbitral process" and "to treat the arbitral award as final."

Dana Shipping and Trading SA v Sino Channel Asia Ltd [2016] HKEC 599. Click here for a copy of the judgment.

The Facts

Dana commenced arbitration against Sino in London for Sino's failure to perform obligations under a contract of affreightment (the "Contract"). The tribunal issued an award in Dana's favour. On 16 November 2015, the CFI granted Dana leave to enforce the award in Hong Kong under the Arbitration Ordinance. On 27 November 2015, Sino applied to set aside that enforcement order on grounds that Sino had not had proper notice of the appointment of the arbitrator nor of the arbitration proceedings.

On 8 January 2016, Dana applied for payment of the award amount as security under both the Ordinance and the Rules of the High Court. In the same month, Sino applied to the English Courts to set aside the award. Sino's application to set aside the Hong Kong enforcement order was to be heard on 16 March 2016; no date has been fixed for the hearing of Sino's set aside application in London. Sino argued that both Dana's application for security and its own application to set aside the CFI enforcement order should be adjourned, pending the outcome of the set aside proceedings in London.

Chan J applied the test adopted by the English Courts in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd's Rep 208 to determinations on security payable by award debtors under both s. 89 (5) of the Arbitration Ordinance and O. 73, r. 10A of the Rules of the High Court.

The two limbs of the Soleh Boneh test were, (a) whether on a brief consideration by the Court, Sino's argument that the award was invalid was a strong one; and (b) whether a delay in enforcement would render the award more difficult to enforce due to, for example, improvident trading or the dissipation of assets by Sino.

Case for Arguing that the Award was Invalid

Under the first limb, the main issue was whether Mr. Cai of Beijing XCity ("BX") had authority on Sino's behalf to accept notice of the arbitration and the appointment of the arbitrator.  In concluding that he did, the Court considered evidence that BX had entered into the Contract in Sino's name, and that BX had actual authority to enter into and execute various other contracts on Sino's behalf. Service and notification of the arbitration on the agent BX (and Cai) was therefore good service and notification on the principal, Sino. In addition, Sino's set aside application in the English Courts was made six months out of time, without any justification for the delay.  Accordingly, Dana had a good case for arguing that the English courts were unlikely to grant leave and Sino's case for arguing the award was invalid (much less 'manifestly invalid') was not strong.

Difficulty of Enforcing the Award

As for the second limb, the Court was offered no evidence of Sino's creditworthiness to demonstrate that there would be no difficulty in enforcing the award. To the contrary, the Court considered Sino's "misleading" conduct in engaging BX to enter into contracts with third parties who had little knowledge of Sino's financial worth and its dilatory tactics in belatedly applying to the English Courts to set aside the award, and determined that there were real risks that the award would not be satisfied.

Chan J noted that the mere existence of challenge proceedings outside Hong Kong does not require the Hong Kong courts to refuse enforcement and adjourn its own proceedings pending the outcome of the foreign proceedings. She pointed to the broad discretion of the Hong Kong court, under both s. 89(5) of the Arbitration Ordinance and O. 73 of the Rules of the High Court, to order security for the award "if it sees fit".

Accordingly, the Court adjourned Sino's application to set aside the CFI order for a period of three months, on condition that it provides security amounting to 60% of the award amount within 21 days. Failure to pay will result in dismissal of the Hong Kong set aside application and entitle Dana to enter judgment in terms of the award.

Chan J ordered Sino to pay costs on the indemnity basis, as is usual in unsuccessful set aside applications before the Hong Kong courts.



Herbert Smith Freehills, Registered Foreign Lawyer, Professional Support Lawyer

Herbert Smith Freehills, Partner