Hong Kong Court rules on staying execution of arbitral enforcement order

Overview

In Israel Sorin (IZZY) Shohat v Balram Chainrai [2017] HKEC 1118, the Hong Kong Court of First Instance considered that enforcement of arbitral awards should be subject to the same regime as governs the stay of execution of an ordinary court judgment, and ruled that the Court had jurisdiction to stay execution of an arbitral award enforcement order.

However, in the circumstances of this case, the Court refused to grant a stay of execution, despite a pending action commenced by the respondent before the High Court.

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Background

The Applicant, a businessman resident in Israel (Applicant), regularly introduced the Respondent, a businessman from Hong Kong (Respondent), to business ventures in Israel.  One business venture involved loans advanced by the Respondent to Kushnir Family (Holdings) Ltd (Borrower), for the latter's purchase of a 35% shareholding in Nachushtan Investment Company Limited. The loan was secured by a pledge of the shares by the Borrower to the Respondent (Share Pledge).

In December 2007, the Applicant sought a declaration from the Israeli courts that he was entitled to a half interest in the loan and a lien of half the shares under the Share Pledge. In its counterclaim, the Respondent argued that the Applicant had breached its fiduciary duties as a trustee of the Respondent's funds and investments regarding other joint ventures between them.

In May 2011, the parties agreed to convert the legal proceedings before the Israeli courts into an arbitration. The arbitrator upheld the Applicant's claim and dismissed the Respondent's counterclaim. On 2 February 2016, the Applicant applied to the Hong Kong court to enforce the award as a judgment of the court, pursuant to Section 87 of the Arbitration Ordinance and Order 73, rule 10(1) of the Rules of the High Court. In the meantime, however, the Respondent had commenced legal proceedings in the Hong Kong High Court, claiming damages for negligence and breach of fiduciary duties against the Applicant (High Court Action).

On 3 May 2016, the Applicant applied to strike out the High Court Action, on the basis that the Respondent was seeking to relitigate the "same issues and subject matter". The Applicant argued this constituted an abuse of process.

On 15 September 2016, with the court's decision on the strike out application still pending, Justice Mimmie Chan rendered an enforcement order (Enforcement Order) "granting leave to the Applicant to enforce the [a]ward in the same manner as a judgment of the court". As the Respondent did not apply to set aside the Enforcement Order, the Court of First Instance considered the Enforcement Order valid and binding on the Respondent.

The legal issue that arose was whether, considering that the award was enforceable in the same manner as a court judgment, the Court had the same discretion to grant a stay of execution of the award as it would have for a court judgment, and whether, in the circumstances, it should do so.

Counsel for the Applicant submitted that there had been no application to set aside the Enforcement Order, and that the application for stay was therefore misconceived. He also argued that, because the award itself had not been challenged, the general policy of facilitating the enforcement of arbitral awards should prevail and prevent delaying the enforcement of the award.

The Respondent submitted that he was entitled to obtain a stay of execution, relying on the fact that the Respondent had paid the equivalent of HKD 33.5 million into court pursuant to the Enforcement Order as a condition for granting an interim stay of execution. Counsel for the Respondent also referred to the fact that the Respondent was likely to have to face difficulty enforcing the Hong Kong court's judgment in Israel.  

Decision

In its decision of 26 May 2017, the Court reiterated that it had discretion to grant a stay of execution of an ordinary judgment where the circumstances would justify such a stay. In light of the fact that the effect of the Enforcement Order is to enable enforcement of the award in the same manner as a judgment of the court, Justice Anderson Chow felt that as a matter of principle, there was no reason why the court would lack jurisdiction to grant a stay in the execution of the award. Chow J considered conflicting English decisions on this matter, but considered that he was not bound by these authorities.

Addressing the Applicant's argument on the "ethos of enforcement of awards", Chow J made a distinction between enforcement of arbitral awards on the one hand, which indeed should be an inexpensive and expeditious procedure, and the question whether to stay execution of the Enforcement Order. He concluded that the enforcement of the arbitral award should be subject to the same regime as governs the stay of execution of a court judgment. Therefore, the Court had jurisdiction to grant a stay of execution of the Enforcement Order.

In deciding whether to stay execution of the Enforcement Order, the Court considered Burnett v Francis Industries Plc [1987] 1 WLR 802, in which the Court listed a number of factors relevant to stay of execution of a court judgment. These are: the nature of the claim, the strength of the cross-claim, the size of the claim relative to the size of the cross-claim, any delay before the cross-claim will be disposed of, the extent of the prejudice to the creditor if it is denied the fruits of the judgment until the cross-claim is determined and the risk of prejudice to the debtor if it makes payment under the judgment.

Chow J considered certain circumstances to be particularly relevant in the case at hand. First, the Applicant had an award for a substantial sum of money against the Respondent; second, the Respondent had, at most, an "arguable" claim against the Applicant before the High Court; and third, there would be a significant delay before the Respondent's action would be finally disposed of.

In light of these, Chow J refused to grant the stay of execution of the Enforcement Order sought by the Respondent.

He ordered the Respondent to pay costs on the indemnity basis, "in accordance with the Court's usual practice regarding unsuccessful applications to challenge the enforcement of arbitration awards", a practice which is extended yet further by this decision.  

Comment

The Hong Kong Court has indicated that it will apply a flexible interpretation of section 84 Arbitration Ordinance and Order 73, rule 10(1) Rules of the High Court, bringing the regimes applicable to the stay of execution of awards and court judgments closer. While the flexibility is welcome, this decision also extends the scope of the court's powers to delay enforcement of an arbitral award. However, it is likely that the power will be exercised sparingly, in keeping with Hong Kong's usual practice of encouraging enforcement and the arbitral process overall.