Baosteel Engineering & Technology Group Co Ltd v. China Zenith Chemical Group Ltd

HCCT 7/2018

[2018] HKCFI 1678

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 7 OF 2018

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Before: Hon Mimmie Chan J in Chambers (open to public)

Date of Hearing: 11 July 2018

Date of Decision: 11 July 2018

Date of Reasons for Decision: 18 July 2018

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REASONS FOR DECISION

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1.On 11 July 2018, this Court granted a temporary stay of execution of the Order made on 7 February 2018 (“Enforcement Order”), whereby leave was granted to the Plaintiff (“BS”) (a Mainland company) to enforce an arbitral award dated 16 April 2017 (“Award”) in Hong Kong, in the same manner as a judgment of this Court. The stay was for a period of 6 months, conditional upon payment by the Defendant (“CZ”) into court of a sum of RMB 19,818,046 within 14 days, or its provision of a guarantee in favor of BS from a bank acceptable to BS within the same period of 14 days, failing which the application for stay of execution be dismissed.

2.The following are the brief reasons for my decision to grant the stay.

3.The Award was made in an arbitration between BS as claimant, and CZ (a company listed in Hong Kong) and Heihe Longjiang Chemical Company Ltd (“HH”), CZ’s 90% subsidiary on the Mainland, as respondents, relating to disputes arising under an agreement (“Debt Agreement”) for payment of fees in respect of the construction of a plant on the Mainland (“Project”).  The Award was for payment by CZ and HH, jointly and severally, of a sum of RMB 19.44 million of outstanding fees to BS. 

4.It is indisputable, and is not disputed, that CZ’s initial application (made on 6 April 2018) to set aside the Enforcement Order was dismissed, upon CZ’s failure to provide security in accordance with the Order made by Deputy High Court Judge Maurellet SC made on 23 May 2018 (“23/5 Order”).  CZ has chosen not to apply for variation of the 23/5 Order, nor to appeal against it.

5.The grounds of CZ’s application for stay of enforcement is that HH has a cross-claim against BS for damages arising out of HH’s claim in respect of defective and unfit designs provided by BS, pursuant to an agreement between HH and BS for works to be carried out by BS for the Project (“Project Defects Claim”).  The Project Defects Claim arises out of the separate agreement between HH and BS, and falls outside the scope of the arbitration clause in the Debt Agreement.

6.The Project Defects Claim is now the subject matter of legal proceedings which have been commenced by HH against BS in the Heihe Intermediate Court (“HH Court”) on the Mainland, whereby HH claims a sum of approximately RMB 32.97 million against BS as damages.  The trial or 1^st hearing was originally scheduled for 17 April 2018, but BS has challenged the jurisdiction of the HH Court.  A decision on the challenge is awaited.

7.CZ claims that as the Project Defects Claim arises 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 arises out of the same subject matter as the Award.  It was argued for CZ that if HH’s claims are successfully established and made the subject matter of a judgment of the Mainland Court (“PRC Judgment Debt”), the PRC Judgment Debt should be set-off against the Award in favor 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 is RMB 32.97 million and exceeds the Award of RMB 19.44 million. 

8.As highlighted by BS, the alleged cross-claim and set-off is sought to be asserted, not by CZ which is the party already ordered to be jointly and severally liable for payment under the Award, but by HH.  The Award was made on 16 April 2017, and CZ’s liability to pay arose as early as from that date.  The Enforcement Order was made on 7 February 2018.  BS is entitled, as judgment creditor, to enforce the Award against CZ in Hong Kong, pursuant to leave granted under the Enforcement Order. 

9.The fact that there are ongoing and as yet unconcluded proceedings on the Mainland, for unliquidated damages alleged by HH to be due, is not in itself a valid ground to resist or delay enforcement of the Award.  There is no concrete or realistic date as to when any judgment may be delivered in the Mainland proceedings.  Late July 2018 is only the date when some ruling is expected on BS’s challenge to the jurisdiction of the HH Court.  If the challenge is unsuccessful, the proceedings in the HH Court will continue, and CZ can only state that as a general rule, and in the usual course, a judgment should be expected between 6 to 12 months of the 1^st hearing after July 2018.  If the challenge to the jurisdiction of the HH Court is successful, the Project Defects Claim may be pursued by proceedings to be instituted in another Mainland court, and judgment will be further delayed. 

10.In my view, BS as the judgment creditor under the Award will be unfairly prejudiced if enforcement of the Award in Hong Kong is delayed by reason of some claim made by another party, 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’ liability to pay to HH an amount which exceeds the sum payable by CZ to BS under the Award.  There is no evidence that BS will not be in a position to pay under any Mainland judgment, if and when such judgment is issued.  At most, CZ claims that even if HH can recover the PRC Judgment Debt from BS on the Mainland, due to foreign exchange controls on the Mainland, HH would not be able to reimburse CZ in Hong Kong.

11.Although CZ is a company listed on the Main Board of the Hong Kong Exchange, BS claims that there are concerns about CZ as a going concern, and this is evidenced by CZ’s own 2017 Annual Report and the Consolidated Financial Statements, its directors’ views on the future liquidity and financial position of CZ and its group, and by its qualified 2017-2018 Report and the Consolidated Financial Statement. 

12.Balancing all the foregoing matters, I was only prepared, with some reluctance, to order a temporary stay of enforcement on the Award for a period of 6 months from 11 July 2018, conditional upon CZ’s provision of security in Hong Kong, by payment into court of the full amount of the Award, calculated to be RMB 19,818,046, or the provision of a bank guarantee for such sum.  If security could not be duly provided within 14 days, the application for stay of execution is discharged.  Liberty was given to both parties to apply to vary, lift or continue the stay, if the status of the Mainland proceedings is rendered more certain after the end of July 2018 and if the Mainland proceedings can be seen to progress without prejudice to CZ’s interests in the timely enforcement of the Award in Hong Kong.  Costs were ordered to be paid by CZ to BS.

Mr Darren FitzGerald, of FitzGerald Lawyers, for the plaintiff

Mr Christopher Chain and Ms Stephanie Hung, instructed by Wellington Legal, for the defendant