Hong Kong arbitration: Court stays enforcement of award on condition of substantial security

In L v B (HCCT 41/2015), the Hong Kong Court of First Instance (“Court”) has recently granted a stay of proceedings relating to enforcement of a foreign arbitration award in Hong Kong. The stay was conditioned upon the Respondent making payment into court of substantial security of HK$41 million and security for costs of HK$600,000.

Brief facts

In October 2012, the parties had submitted to arbitration in the Bahamas their dispute over the Respondent’s alleged breach of its obligations under a Non-Recourse Loan Agreement dated 18 July 2011. The Tribunal’s award (“Award”) was published in 2015 awarding the Applicant approximately US$41.8 million with interest and costs. The Respondent commenced proceedings in the Bahamian court on 22 June 2015 to challenge the Award on the ground of serious irregularity and to appeal on a question of law arising out of the Award.

At the same time, the Applicant obtained leave from the Court to enforce the Award in Hong Kong (“Order”). The Respondent applied to set aside the Order on the ground that the Award is not yet binding on the parties due to its challenge of the Award at the seat of arbitration and also to stay the Hong Kong enforcement proceedings pending the outcome of the Bahamian court proceedings. The Applicant applied for security as well as security for costs pursuant to s 89(5) of the Arbitration Ordinance and Order 73 rule 10A of the Rules of High Court.

Judgment

In determining the application for security, the Court applied the following legal principles:

1. strength of the argument that the award is invalid – if the award is manifestly invalid, there should be an adjournment and no order for security, whereas if it is manifestly valid, there should either be an order for immediate enforcement or else an order for substantial security; and
2. ease or difficulty of enforcement of the award – consideration of whether enforcement of the award will be rendered more difficult if enforcement is delayed.

As to the application to adjourn or stay enforcement proceedings on the basis of ongoing proceedings to challenge the award in another jurisdiction, the Court cited previous case law that the conduct complained of must be serious, even egregious, before the court would find that there was an error sufficiently serious to have undermined due process.

In the present case, the Court was not satisfied that the Respondent’s challenge of the Award was a strong case. The Court commented that the Respondent’s complaints as to irregularity appeared to simply be case management decisions within the Tribunal’s authority and power to make. Further, references to the Respondent’s submissions in the Arbitration also tended to contradict the Respondent’s case of serious irregularity.

The Court also held that the Respondent’s challenge of the Award did not automatically mean the Award had not become binding upon the parties. The Court cited previous case authority that an arbitral award is not binding only if it is open to appeal on the merits before a judge or an appeal arbitral tribunal. As the Respondent’s challenge to the Award was on the grounds of irregularities and not the merits, it does not render the Award invalid or not binding. The Court further commented that it had not been established to the Court’s satisfaction that the Respondent has the right to appeal the award under the arbitration law of the Bahamas and that such leave will be granted.

Another point raised by the Respondent in support of its application to stay the proceedings was the possibility of having inconsistent judgments where the Court enforces the Award but the Bahamian court allows the Respondent’s challenge of the Award. The Court did not share the same concern, saying if the Award is ultimately set aside in the Bahamas, the Bahamian court can order the Applicant to repay any amount it has recovered from the Respondent under the Award.

The Court emphasized that finality and speedy and efficient enforcement of arbitration awards underpin the principles of the New York Convention and the Arbitration Ordinance, thus enforcement of the Award should not be indefinitely postponed (at the time of judgment it was not yet known when the Respondent’s challenge would be heard by the Bahamian court).

In conclusion, the Court granted a 4-month stay of the enforcement proceedings on condition that the Respondent pays into court the requested security within 21 days. The Applicant’s costs of the application for security were granted on indemnity basis.

Comment

The judgment is in line with previous Hong Kong cases where the court required security in return for staying proceedings to enforce arbitral awards. This judgment maintains the Hong Kong courts’ pro arbitration stance and shows judges’ commitment to enforcing arbitration agreements voluntarily entered into by the parties and to treat the resulting arbitral award as final and binding.  As usual, costs were ordered on an indemnity basis.