Hong Kong court confirms power to grant security for costs in set-aside applications

The Hong Kong Court of First Instance has ordered three award debtors to pay HK$2 million (approximately US$250,000) as security for the costs of an award creditor in an application to set aside an arbitral award, with the proceedings being stayed pending payment (SA & Others v. BH & Another [2024] HKCFI 1357).

The court confirmed as a threshold point that it has the power to order security for costs in set-aside applications as well as challenges to enforcement (a point which had not previously been disputed but which was specifically raised by the award debtors in this case).

A key factor in the court’s decision to grant security for costs was its conclusion that national security arguments relied upon by the overseas award debtors in the set-aside application did not have a "high degree of probability of success".

This appears to be the first arbitration-related case in which national security issues have been raised before the Hong Kong courts, although the court did not assess the substance of those issues in this decision.  Instead, the court's conclusion was based on its view that the award debtors might well be prevented by waiver, estoppel or the duty of good faith from relying on the national security arguments in the set-aside proceedings, because they had failed to raise them before the tribunal.

Background

The underlying dispute arose out of a joint venture project to develop and launch a communication satellite which was intended to provide broadcast internet services in Equatorial Africa.

The joint venture was documented in a shareholders agreement between the ultimate award creditor (a British Virgin Islands company) and the ultimate award debtors (a Netherlands company and two individuals resident in California).

The award creditor commenced arbitration against the award debtors and the joint venture company (a Cayman Islands company) pursuant to an arbitration agreement in the shareholders agreement.  The tribunal issued an award in which it found that the award debtors were in breach of the shareholders agreement and upheld claims for damages in favour of the award creditor and the joint venture company.

The award debtors applied to set aside the award, with the "main thrust" of their argument being that the subject matter of the arbitration raised national security concerns around sensitive technology, and therefore was not arbitrable, in light of the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong SAR (National Security Law) passed on 30 June 2020, which applies in Hong Kong pursuant to Article 18 of the Hong Kong Basic Law.

The award debtors also argued that the arbitral procedure was not in accordance with the parties’ agreement, they were not given a reasonable opportunity to present their case on legal issues relating to national security, and the award was in conflict with the public policy of Hong Kong.

The award creditor applied to the court for security for its costs in the set-aside application pursuant to Order 23 of the Rules of the High Court (the rulebook governing proceedings before the Court of First Instance) and the inherent jurisdiction of the court.

The award debtors opposed the application on the grounds that (i) the court had no power to order security for costs in a set-aside application (as distinct from a case in which an award debtor resisted enforcement) and (ii) security was unnecessary because they had a 13.25% shareholding in the joint venture company which they undertook not to deal in.

Power to award security for costs in set-aside cases

The award debtors' argument that the court had no power to grant security for costs in set-aside cases centred on the interaction between two provisions of the Rules of the High Court:

• Order 23, which makes general provision for applications for security for costs by a "defendant" against a "plaintiff" in proceedings before the Court of First Instance.  On its face, this would include an application by an award creditor in its capacity as the defendant in an application by an award debtor to set aside the award; and

• Order 73, which sets out rules of procedure in relation to arbitration-related proceedings before the Court of First Instance under the Hong Kong Arbitration Ordinance (Cap. 609).  These rules include a provision which expressly empowers the court to grant security where an award debtor resists enforcement of an award (Order 73 rule 10A).   

The award debtors appear to have argued that (i) as a general matter, Order 73 excluded the application to arbitration-related proceedings of other Orders of the Rules of the High Court, and (ii) specifically, Order 73 rule 10A excluded and must take precedence over Order 23.

Mimmie Chan J disagreed on both counts, holding that (i) the Rules of the High Court applied to arbitration-related proceedings unless Order 73 made specific contrary provision, and (ii) Order 73, and in particular rule 10A thereof, did not exclude Order 23.  Rule 10A of Order 73 had been introduced to cure a lacuna which had previously existed, whereby an award debtor resisting an enforcement application by the award creditor would be a "defendant" rather than a "plaintiff", such that security for costs could not be ordered against the award debtor pursuant to Order 23 (which, as noted above, provides for security to be awarded against a plaintiff).  Far from restricting the power of the court to order security for costs under Order 23, rule 10A conferred additional power to grant security that specific scenario in which Order 23 did not apply.

Legal principles

Order 23 rule 1 (which the court held to be applicable in set-aside applications) provides that security for costs may be ordered where the "plaintiff" (in this context, the award debtor applying to set aside the award) is ordinarily resident outside Hong Kong, if the court considers it just to do so having regard to all the circumstances of the case.

Factors to be taken into account include: (i) whether the plaintiff has assets in Hong Kong against which any order for costs could be enforced; (ii) the merits of the plaintiff's case; and (iii) any other factor which might make it unjust to order security.

In considering whether to grant security in a set-aside application, the courts will apply the legal principles set out in Soleh Boneh International Ltd v. Government of the Republic of Uganda [1993] 2 Lloyd's Rep 208 (which also apply in the case of challenges to enforcement).  These provide (amongst other things) that security will not be granted if the award is "manifestly invalid".

Decision

The court concluded that it was necessary and just to order the award debtors (which did not dispute that they were not ordinarily resident in Hong Kong) to furnish security for the award creditor's costs in the set-aside application, taking into account the following factors:

• Assets: the award debtors' shareholding in the joint venture company, valued at approximately US$20 million, was not (as asserted by the award debtors) "readily available" to the award creditor because the joint venture company was a private Cayman Islands company and the assets were not located in Hong Kong.  Transfers of the shares were restricted under the shareholders agreement, moreover, and the joint venture company had been put into liquidation and a winding up order made against it;

• Merits: even on a brief consideration of the strength of the award debtors' arguments on national security, the award was not "manifestly invalid" (applying the Soleh Boneh test) and the set-aside application could not be regarded as having "a high degree of probability of success".  There was no evidence that the award debtors had made any allegation to the tribunal that the subject matter of the arbitration was not arbitrable because it related to national security.  Failure to draw "such an important issue" to the tribunal's attention might well constitute waiver, estoppel or a breach of the award debtors' duty of good faith, such as to prevent them from raising the issue now.

• Other factors: the tribunal had described the conduct of the award debtors as "dishonest and egregious" and one of their claims as "specious" and unsupported by evidence.

It was therefore "reasonably clear" that the award debtors would not be cooperative in the event that a costs order were to be made against them, and that the award creditor would have difficulty recovering its costs in the absence of an order for security.

On a "broad brush approach", the court considered that the reasonable costs of the award creditor up to the 2-day substantive hearing of the set-aside application would be HK$2 million.  It directed that the proceedings be stayed until payment of that amount, to be made within 21 days of its decision.

Comment

The court's conclusion that it has the power to grant security for costs in set-aside cases is unsurprising but welcome.  As noted by the judge (and consistent with the pro-arbitration approach of the Hong Kong courts), orders for security have been made in "many other" cases (including both set-aside applications and challenges to enforcement) without any dispute as to the court's power to do so.  It is nevertheless helpful that the point has now been expressly confirmed.

The deployment of national security arguments in an arbitration-related case before the Hong Kong courts will be of interest to international parties.  Notably, the National Security Law was relied upon by overseas parties resident in the USA and the Netherlands in order to challenge the award.  It is reasonable to expect that arguments under this and other similar legal regimes may be raised in future arbitrations and arbitration-related court proceedings involving relevant subject matters and sectors.

It is important to emphasise, however, that (i) the tribunal in this case did not consider or rule on issues of national security because the award debtors did not raise the relevant arguments before it, and (ii) the court's preliminary view of the prospects of success of the set-aside application was based on that fact rather than an assessment of the substance of the national security arguments.

The decision illustrates once again the potential consequences of failing to raise before the tribunal a material argument or objection which an award debtor later seeks to rely upon in support of a challenge to the award.  Parties and their lawyers should ensure that such points are raised with the tribunal, and any necessary reservations of rights are formally communicated, at the earliest opportunity.