HONG KONG COURT MAKES HADKINSON ORDER AND IMPOSES SECURITY AGAINST CHINESE BILLIONAIRE

The Hong Kong Court of First Instance has granted a so-called “Hadkinson order”, adjourning an application to resist enforcement of CIETAC arbitral awards, on the basis of the applicant’s poor conduct in earlier stages of the proceedings. The court also ordered the parties resisting enforcement to pay 40% of the award amounts as security. The application is the latest in a series of interim relief and enforcement proceedings in support of a Beijing seated CIETAC arbitration against Zhang Lan, billionaire and founder of the South Beauty restaurant group. Madam Zhang was earlier held in contempt of court for breaching a Hong Kong court injunction and asset disclosure order.

La Dolce Vita Fine Dining Group Holdings Ltd v Zhang Lan [2020] HKCFI 622

Background

The South Beauty Group is well known as the only Chinese cuisine service provider for the 2008 Beijing Olympics games. In 2014, Zhang and her controlling entities entered into a share sale and purchase agreement with the investment arm of CVC Capital Partners, which took an 83 per cent stake in the restaurant chain, in return for a US$300 million investment.

Since 2015, CVC and Zhang have been embroiled in a heated dispute, both in litigation and arbitration, with CVC obtaining a freezing injunction and an asset disclosure order against Zhang in Hong Kong, in support of a CIETAC arbitration. Zhang breached the orders, and was held in in contempt of court and sentenced to 12 months in prison.

In April 2019, CVC obtained a favourable award against Zhang and her two co-Respondents (both entities related to Zhang) for over US$140 million. CVC applied to enforce the award in Hong Kong, while the Respondents have applied to set aside the award in the Mainland Chinese courts.

In November 2019, the Respondents issued a summons in Hong Kong, seeking to set aside the enforcement orders. In the alternative, they sought to adjourn the summons pending the outcome of her application to the Mainland courts.

As a consequence, CVC applied to the Hong Kong court for a so-called “Hadkinson order” that the Respondents’ summons not be heard until Zhang has purged her contempt of court by complying with both the injunction and the order to give full disclosure of her assets.

What is a Hadkinson order?

A Hadkinson order is made in an ongoing proceeding where a party has breached another order of the court. It seeks to impose conditions that “purge” the party of its contempt, failing which the party will be prevented from being heard by the court.

It is a cost-effective way to ensure a party complies with the court’s orders and to prevent a judgment or award being circumvented. However, the court must be alive to the prejudicial nature of the Hadkinson order, which could otherwise be considered to contravene public policy for restricting the right to a fair hearing and access to justice.

How the court handled the application in this instance?

The court applied the principles set out by the Hong Kong Court of Appeal in CWG v MH [2014] 1 HKLRD 838:

1. Is the party against whom the order is sought in contempt?
2. Is there an impediment to the course of justice?
3. Is there any other effective means of securing compliance with the court’s order?
4. Should the court exercise its discretion to impose conditions having regard to that question?
5. Is the contempt wilful (contumacious and continuing)?
6. If so, what conditions would be proportionate?

In considering its decision, the court was keenly focused on the circumstances of the interim proceedings and the arbitral proceedings, to give it a picture of the parties’ earlier conduct.

The court held that Zhang’s conduct throughout the prior proceedings had not been candid or forthcoming, and that the evidence she had filed was, on the whole, “incredulous and unreliable”. Her conduct influenced the court’s decision to grant a Hadkinson order.

The court considered that Zhang’s wilful and continuous breaches meant a Hadkinson order was an appropriate and proportionate measure, and that Zhang could reasonably comply with the terms of the order. Most importantly, the court considered that to refrain from imposing the conditions would be tantamount to condoning Zhang’s deliberate flouting of the injunctions and disclosure order, as well as “her impediment to the course of justice”. This made the Hadkinson order appropriate in light of Zhang’s conduct.

The order for security

In deciding whether to order security, the court considered whether the CIETAC awards were valid.

It took a holistic approach, analysing the parties’ agreement to arbitrate and the CIETAC rules to determine the merits of the Respondents’ argument on the invalidity of the awards and the application of Article 27 of the rules on multi-party appointment.

The Respondents argued that they had not been able to agree jointly to appoint an arbitrator, but were instead forced to appoint one under protest, and that this rendered the arbitration clause “inoperative” under the CIETAC Rules. They therefore reserved their rights to challenge the tribunal’s jurisdiction.

The court disagreed. In its view, the Respondents’ interests appeared to be aligned and there was no credible explanation for their refusal to agree on a candidate. The other Respondents are, essentially, holding entities under Zhang’s control, as evidenced by the fact that Zhang made submissions on their behalf in the Hadkinson proceedings. Further, Article 32 of the PRC Arbitration Law provides that, where parties fail to appoint an arbitrator within the relevant time limit, the arbitrator shall be appointed by the chairman of the arbitration commission. Therefore, the court took a preliminary view that the composition of the tribunal was valid. Even if the Respondents were correct as to Article 27, the judge failed to see how this would constitute an egregious error that undermined due process. As such, the court considered that the awards in this case are manifestly valid.

Despite her findings in relation the Respondents’ conduct, including by granting the Hadkinson order, Chan J agreed to adjourn the Respondents’ summons to set aside the enforcement order in respect of the award. However, the judge imposed a condition that the Respondents pay into court security of 40% of the total sum of the awards, plus costs of the summons on the indemnity basis. This condition applied to all three Respondents, although the applicants originally sought security against the second and third respondents only. The court required payment of the security within three weeks from the date of its order, failing which the summons would be dismissed.

Comments

This case is a reminder that party conduct plays a vital role in the dispute resolution process, and that the Hong Kong courts can sanction misconduct in ways that affect a party’s usual right to be heard. As in this case, the courts will not hesitate to penalise parties whose behaviour – in arbitration or related court proceedings – cannot be justified. Litigation strategy is an important aspect of any case, but should never extend to obstructing the arbitral procedure or flouting the orders of a national court.

In addition, Hong Kong courts will be slow to grant unconditional adjournments of enforcement orders on grounds of set aside proceedings elsewhere. They will generally order some form of security before granting such an application. As here, they may also impose a time limit for the provision of security, failing which the application is likely to be dismissed.

For further information, please contact Kathryn Sanger, Partner, Simon Chapman, Partner, Briana Young, Professional Support Consultant, Beaumont Yun, Trainee Solicitor, or your usual Herbert Smith Freehills contact.