Hong Kong Court grants temporary stay of enforcement of arbitral award

06 March 2019, Construction, by Kwok Kit Cheung,

In Baosteel Engineering & Technology Group Co. Ltd. v. China Zenith Chemical Group Ltd HCCT 7/2018, Hong Kong’s Court of First Instance (CFI) granted a temporary six month stay of execution of an order whereby the Plaintiff (BS), a Mainland company, was granted leave to enforce an arbitral award in Hong Kong. The stay was conditional upon the Defendant (CZ), a Hong Kong listed company, paying into Court the full amount due under the award or providing a bank guarantee for that sum. The Court dismissed CZ’s application to extend the stay beyond the six months and its application for leave to appeal against that dismissal.

Background 

BS, CZ and CZ’s 90% subsidiary on the Mainland, (HH), had entered into a Debt Agreement for payment of fees in respect of the construction of a plant in the Mainland (Project).  An arbitral award dated 16 April 2017 (Award) was made in an arbitration between BS as claimant, and CZ and HH as respondents, under which CZ and HH were ordered to jointly and severally pay RMB19.44 million of outstanding fees to BS. On 7 February 2018, the Hong Kong Court granted BS leave to enforce the Award in Hong Kong (Enforcement Order).

Grounds for stay application

CZ applied for a stay of enforcement of the Award in Hong Kong on that basis that HH had a cross-claim against BS in a Mainland court for damages arising out of HH’s claim in respect of defective and unfit designs provided by BS for the Project, pursuant to an agreement between HH and BS (Project Defects Claim). The Project Defects Claim fell outside the scope of the arbitration clause in the Debt Agreement and arose out of a separate agreement between HH and BS. BS had challenged the jurisdiction of the Mainland court and a decision on that challenge was awaited. 

CZ claimed that as the Project Defects Claim arose out of the Project, and the work carried out by BS for the Project, the cross-claim by HH in respect of the defects in BS’s work arose out of the same subject matter as the Award. CZ argued that if HH’s claims were successful and made the subject matter of a Mainland Court PRC judgment, the PRC judgment debt should be set-off against the Award in favour of BS, to fully extinguish any sum which may be payable by CZ to BS under the Award, as the amount of the Project Defects Claim (RMB32.97 million) exceeded the Award of RMB19.44 million.

Court’s decision on 11 July 2018

On 11 July 2018, Hong Kong’s CFI “with some reluctance” granted a temporary stay of the Award for six months from that date, on the condition that CZ pay the full amount of the Award into Court or provide a bank guarantee for that amount. The Court held that: 

  • The alleged cross-claim and set-off was sought to be asserted, not by CZ, which was the party already ordered to be jointly andseverally liable for payment under the Award, but by HH.
  • CZ’s liability to pay arose as early as 16 April 2017, when the Award was made. BS was entitled, as judgment creditor, to enforce the Award against any available assets of CZ in Hong Kong, pursuant to the leave granted under the Enforcement Order made in February 2018. The fact that there were ongoing and yet unconcluded proceedings on the Mainland for liquidated damages alleged by HH to be due, was not in itself a valid ground to resist or delay enforcement of the Award. There was no concrete or realistic date as to when any judgment may be delivered in the Mainland proceedings.  
  • BS, as the judgment creditor under the Award, would be unfairly prejudiced if enforcement of the Award in Hong Kong was delayed due to claims made by HH on the Mainland, on the basis that it may result in a Mainland judgment in the indefinite future and which may give rise to BS’s liability to pay HH an amount exceeding that payable by CZ to BS under the Award. 
  • There was no evidence that BS would not be able to pay a Mainland judgment, if and when such judgment was issued.  
  • At most, CZ claimed that even if HH could recover the PRC judgment debt from BS on the Mainland, due to Mainland foreign exchange controls, HH would not be able to reimburse CZ in Hong Kong.

Court’s decision on 7 January 2019

The CFI refused CZ’s application to extend the stay of enforcement beyond six months because:

  • CZ had not been able to show that a judgment in the Mainland proceedings would be handed down in the fixed foreseeable future, whereby BS’s entitlement to payment from CZ under the Award would be affected. In the Court’s experience, there may be another twelve months at least from the conclusion of the trial until judgment was handed down and then the conclusion of any further appeal. 
  • There was no good reason why as judgment creditor, BS’s right to enforce the Award should be further delayed and prejudiced. The fact that CZ may not be able to recover any payment from BS in Hong Kong due to foreign exchange control was only speculative.
  • Any set off raised in the Mainland proceedings was raised by HH and not CZ.
  • The argument of double recovery would only arise if HH succeeded in obtaining a judgment against BS and BS sought to recover from either HH or CZ the full amount BS recovered from CZ under the Award (or which HH set-off from any judgment sum in its favour in the Mainland).

Court’s decision on 10 January 2019

CZ sought leave to appeal against the Court’s exercise of discretion on 7 January 2019 (referred to above) whereby it refused to extend the six month stay. The Court refused to grant leave holding:

  • CZ had a high threshold to surmount.
  • CZ was severally liable under the Award and BS was entitled to enforce it against any available assets of CZ in Hong Kong.
  • The set-off sought to be asserted in the Mainland was asserted by HH, a separate legal entity, albeit a subsidiary of CZ.  
  • The Court was entitled to consider the likely overall delay that may be occasioned if a further stay was granted, and what may be the likely consequences, including the likelihood of a judgment being issued in the foreseeable future and the likelihood and effect of an appeal against such judgment. 
  • There was no evidence that CZ would not be able to recover from BS any amount required to be repaid by it to CZ from the Award.
  • It would not be just and equitable for a further stay to be granted and for enforcement of the judgment to be further delayed.

Comments 

This judgment makes it clear that the Courts will not easily grant a stay of enforcement of an arbitral award and in deciding whether to grant a stay will consider the likely overall delay and likely consequences if a stay is granted.  It is not clear from the judgment whether CZ has complied with the condition for granting the stay by paying into Court the full amount due under the award or providing a bank guarantee for that sum. If it did, BS can now just apply for payment out or enforce the bank guarantee for satisfying the Award. The time and costs for any enforcement proceedings against CZ will be saved.