HK Court Rejects Security For Costs Application Pending Set Aside Hearing

In X v Jemmy Chien [2019] HKCFI 2172, the Hong Kong High Court dealt with an application to set aside an arbitration award on the grounds that (i) there was no valid arbitration agreement between the parties; and (ii) the Awards are in conflict with the public policy of Hong Kong, and a further application to set aside an award on interest and costs. This judgment (5th September 2019) dealt only with an application for security pending the substantive hearing (which has been heard but judgment not yet delivered).

The arbitration concerned a dispute between the Defendant as Claimant, and the Plaintiff as Respondent, arising under a Service Agreement whereby the Claimant agreed to provide product, marketing and promotion services in exchange for a commission of 5% on the payment received from customers and buyers of the Products sold by the Respondent. The Claimant succeeded, obtaining an award in its favour for payment of various sums.

Challenge to Jurisdiction

The tribunal considered the Respondent’s challenge to its jurisdiction which was brought on the basis that there was no valid arbitration agreement between the Respondent and Claimant as the Defendant was not the true party to the Service Agreement. The Respondent argued that the Claimant had signed the same as agent for his principal, Mr Philip Chen, who was the true party to the Service Agreement. The Respondent claimed that the Defendant was made a party to the Service Agreement, to conceal the fact of Chen’s interest under the Service Agreement, as Chen had a conflict of interest by virtue of his capacity as the Vice President of a company (3rd party) which acted as an intermediary that ordered products from the Group and resold them to its customers, and the performance of the Service Agreement by Chen himself would be prejudicial to the interests of the 3rd Party and in conflict with Chen’s duties to the 3rd Party. These claims of the Plaintiff were denied by the Defendant, who maintained that he was the true party to the Service Agreement.

The application to set aside the arbitration award on the two grounds referred to above was met with an application to dismiss the Plaintiff’s application to set aside, for leave to enforce the Awards, and further seeks security under O73 r 10A RHC as a condition for the further conduct of the Plaintiff’s setting aside application, and for security for the costs of the proceedings on the basis that the Plaintiff is a company resident abroad.

Security for Costs

Following the test in Soleh Boneh International Ltd. and another v Government of the Republic of Uganda and National Housing Corporation [1993] 2 L1 Rep 208, the court considered the following two factors in determining whether to order security as a condition for the further conduct of the set aside application.

  • The strength of the argument that the award is invalid. Where the award is manifestly invalid, the party seeking to set it aside should not be ordered to give security. On the other hand, if the award is manifestly valid, there should be an order for substantial security.
  • The ease or difficulty of enforcement of the award (whether delay will render enforcement of the award more difficult). Where delay is likely to make enforcement more difficult, then the case for security for costs is stronger. Where the party seeking to set aside the award has insufficient assets within the jurisdiction, the case for security for costs will be weaker because enforcement of the award will not be rendered more difficult by delay.

Strength of the argument that the award is invalid

The court was not convinced by the applicant’s argument that the arbitration agreement was invalid. At [20], the Court stated:

“…on a preliminary review of the Award and the evidence to which the arbitrator had referred, and on my reading of the Service Agreement, I am not satisfied that the Awards, and the arbitrator’s findings on the existence of an arbitration agreement, are manifestly invalid.”

Nor did the court consider that the awards were contrary to Hong Kong public policy, re-emphasising a point made many times in the Hong Kong courts that the ground of public policy should be narrowly construed, stating [21-22]:

“The ground on public policy should be narrowly construed. Non-enforcement of the Service Agreement and any award based thereon should be balanced against public policy interests in upholding parties’ agreement to arbitrate their dispute, facilitating enforcement of arbitral awards, and observing obligations assumed under the New York Convention for enforcement of arbitral awards. If the Court accepts that there was a valid and binding Service Agreement between the Plaintiff and the Defendant, there is no reason to refuse enforcement of the Awards on the ground that the Service Agreement was a sham, to assist Chen in avoiding the consequences of his acting in breach of his fiduciary duties to the 3rd Party, and that to enforce same would be contrary to public policy in Hong Kong.”

Ease or difficulty of enforcement of the award

The Plaintiff argued that it did not have any assets in Hong Kong, but since it was part of a Group with substantial assets in Singapore, the Mainland, and elsewhere, the enforcement of the Awards would not be rendered more difficult as a result of the short delay between the hearing of the application for security and the substantive hearing of the setting aside application.

The court emphasised that the focus should be on whether difficulty of enforcement here is increased due to the delay, as security is not to facilitate the enforcement process by requiring assets to be brought into a jurisdiction where there were none before, a point that has repeatedly been made by the Hong Kong courts.

The Plaintiff produced various financial records showing significant assets, with the Defendant arguing that even if the valuation referred to by the Plaintiff was reliable, it would be extremely difficult to realise the shares of the private companies held, directly or indirectly, by the Plaintiff, and to convert such assets into cash. The court considered that these difficulties of enforcement were inherent in the Plaintiff’s enforcement of the Awards in its favour, and were not caused by any delay occasioned by the setting aside application to be heard. The court also accepted that there was no evidence of any dissipation, or risk of dissipation by the Plaintiff.

Security for Defendant’s costs

The court considered that one of the factors which could be taken into consideration in the exercise of the court’s discretion as to whether it should order the Plaintiff to provide security for the Defendant’s costs is the additional costs to be incurred by the Defendant in seeking enforcement overseas of any order that may be made in his favour. Accordingly, the Court ordered the Plaintiff to provide security for the Defendant’s costs in the sum of HK$500,000, to be paid within 7 days.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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