HK High Court Grants Hadkinson Order and Stays Enforcement Proceedings

In La Dolce Vita Fine Dining Group Holdings Limited v Zhang Lan & Grand Lan Holdings Group (BVI) Limited & Qiao Jiang Lan Development Limited [2020] HKCFI 622, the High Court granted a Hadkinsons order and stayed proceedings in Hong Kong to set aside orders enforcing CIETAC awards (pending set aside proceedings in the PRC) on condition that the respondents pay 40% of the award sums into court.

Facts

In March 2018, the Court found R1 to be in contempt of court for breach of an injunction and asset disclosure order, made by the Court in aid of an arbitration between R1 and the Applicant.  R1 was committed to prison for 12 months for her contempt of Court.

In April 2019, in CIETAC arbitration proceedings, awards totaling approximately US$142m were made against the 3 respondents.  In July 2019, the Hong Kong High Court granted leave to the Applicant to enforce the awards in Hong Kong.  The Enforcement Orders were in the usual form, providing that the Respondents could apply to set them aside within 14 days of service.  In November 2019, the Respondents applied to set aside the Enforcement Orders, alternatively to stay the Summons pending an application to the supervisory court on the Mainland to set aside the Awards.  The Applicant, in turn, applied in December 2019 for a Hadkinson order against R1, and for security to be furnished by R2 and R3 as a condition for the stay.

The Hadkinson Order

The Court set out the principles relating to Hadkinson applications, as set out by the Court of Final Appeal in CWG v MH [2014] 4 HKLRD 141:

  • Is the party against whom the order is sought in contempt?
  • Is there an impediment to the course of justice?
  • Is there any other effective means of securing compliance with the Court’s orders?
  • Should the court exercise its discretion to impose conditions having regard to that question?
  • Is the contempt willful (is it contumacious and continuing)?
  • If so, what conditions would be proportionate?

In opposition to the application for a Hadkinson order, R1 argued that despite the Court’s finding of contempt, the Hadkinson order should not be made because:

(a)       the rule that a person who is in contempt cannot be heard applies only to voluntary applications when the person comes to the court and asks for something, and not to cases in which all that he is seeking is to be heard in respect of matters of defence.  R1 argued that she was simply seeking to resist the Applicant’s application to enforce the Awards in Hong Kong, at least before the conclusion of the Mainland proceedings commenced to set aside the Awards.  As such, the application was merely defensive in nature.  The Court rejected this argument, stating (@7):

“The application made by Zhang to set aside the Enforcement Orders is a voluntary application made by her, seeking from this Court the relief of having an order made by the Court to be discharged on grounds the onus of which is on her to establish, and invoking the exercise of the Court’s discretion to stay the enforcement of the Court’s order.”

(b)      she should not be deprived of her right to be heard, as to whether her actions and specifically her failure to disclose her assets constituted a breach of the Injunctions.  The Court rejected this argument, stating that R1 had the full opportunity to, and did, argue before the Court whether she had been in breach of the Injunctions and was in contempt of court.

(c)       the Hadkinson Order was disproportionate as it would determine the application to set aside the Enforcement Orders without giving R1 the opportunity to be heard.  This, too, was rejected (@20-21):

“Zhang’s contempt has been found to be wilful, and serious… Her refusal to comply with the disclosure order clearly impedes the course of justice.  The information sought in the disclosure order is uniquely within Zhang’s knowledge, and the Applicant has been unable to police the injunction order and to prevent the dissipation of assets within Zhang’s control… Zhang has simply flouted the disclosure order made under the Injunctions, by persistently refusing to comply and make full disclosure…”

Concluding

“Having regard to the conditions sought to be imposed in the Hadkinson Order, the seriousness of the willful and continuous breach, and giving due consideration to the other questions raised in CWG v MH , I am satisfied that the Hadkinson Order is proportionate, and that the conditions sought by the Applicant … can be reasonably complied with by Zhang.  To refrain from imposing the conditions would be tantamount to condoning Zhang’s deliberate flouting of the Injunctions and the orders made by the Court, and her impediment to the course of justice.”

Whether Security Should be Ordered Against R2 and R3 for their application to set aside or stay

The ground relied upon by R2 and R3 to set aside the Enforcement Orders is that the composition of the arbitral tribunal was not in accordance with the arbitration agreement (contained in the arbitration clauses of the underlying agreements) between the Respondents and the Applicant, such that the Awards should be set aside under s 95 (2) (e) of the Ordinance.

The Court noted that the principles applicable to the determination of an application to stay enforcement of an arbitral award pending an application to the supervisory court to set aside the award are settled and set out in the decisions in Soleh Boneh International Limited v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208, 212 and applied in Dana Shipping and Trading SA v Sino Channel Asia Ltd [2017] 1 HKC 281 and Weili Su v Shengkang Fei [2019] 2 HKLRD 1214.

Strength of argument that awards were invalid

In dealing with the strength of the argument that the awards were invalid, the Respondents argued that CIETAC, wrongfully and in disregard of the arbitration clause, failed to appoint all three members of the tribunal.  The Court rejected this argument stating that even if the composition of the tribunal was not in accordance with the agreement between the parties, it did not constitute an egregious error, to have undermined due process (referring to Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1).  The Court stated (@61):

“By the Arbitration Clause, the Respondents had agreed to arbitration of any dispute arising in, out of or in connection with the underlying agreements with the Applicants, with the seat of the arbitration in Beijing, by 3 arbitrators. The Tribunal which was empanelled in this case comprised an arbitrator selected by the Applicants, an arbitrator agreed to by all the 3 Respondents, and a third arbitrator appointed by CIETAC. The Applicants highlighted the fact that even the third presiding arbitrator was one of the candidates on the Respondents’ approved list. The Respondents had obtained what they had specified and agreed to in the Arbitration Clause.”

The Court stated that even if there had been an error by CIETAC in its decision regarding the appointment of the arbitrators:

“the Hong Kong Court as the court of enforcement is very likely to exercise its residual discretion to allow enforcement of the Awards, notwithstanding any irregularity complained of by the Respondents (Hebei Import & Export Corp v Polytech Engineering Co Ltd (1999) 2 HKCFAR 111).”

On this issue, the Court concluded (@63):

“According to the principles set out in Soleh Boneh, if the award is manifestly invalid, there should be an adjournment of the enforcement proceedings and no order for security, but if it is manifestly valid, there should be either an order for immediate enforcement, or else an order for substantial security. In between, where there are various degrees of plausibility in the argument for invalidity, the court must be guided by its preliminary conclusion on the point. In my judgment, the Awards in this case are manifestly valid.”

The ease or difficulty of the enforcement of the Awards

The Respondents argued that the Applicants could not show that R2 and R3 had assets in Hong Kong, and no security should be ordered to them to bring in assets to facilitate the Applicants’ enforcement proceedings, particularly when the period of adjournment sought should not be long, as the setting aside proceedings had been commenced on the Mainland in July 2019, and the hearing had just taken place on 30 March 2020.

The Court rejected the argument, stating (@65):

“The Applicants are entitled to seek enforcement of the Awards either in Hong Kong, or on the Mainland, subject only to the restrictions of section 93 of the Ordinance. I do not accept the Respondents’ argument that Applicants’ decision to apply for enforcement of the Awards in Hong Kong were tactical attempts to circumvent PRC law. “

Concluding (@68):

“…the Respondents through Zhang have failed to give full and honest disclosure of their assets, and whether they are able to satisfy the Awards. On the evidence of Zhang’s conduct, from the time of the Applicants’ application for the Injunctions, and after the grant of the Injunctions, as referred to in the Contempt Judgment, up to the time of these Hadkinson proceedings, it cannot be said that the Respondents have been candid and forthcoming, such that there is no risk of dissipation of the assets of Zhang, and of the companies which Zhang controls or is associated with, such as to render enforcement of the Awards more difficult if enforcement should be further delayed. The evidence of Zhang filed on behalf of the Respondents is on the whole incredulous, and unreliable.”

Result

The Court ordered the summons seeking to stay the enforcement proceedings to be adjourned for 3 months, on condition that R1, R2 and R3 give security by payment into court of 40% of the total sum of the awards and costs on an indemnity basis; failure to provide security by the specified date would result in the summons being dismissed with costs to the Applicants on an indemnity basis.

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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 Hong Kong 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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