中國機床銷售與技術服務有限公司 v. Nationsync Electrical and Machinery Equip Corp Ltd

HCCT 48/2023

[2024] HKCFI 958

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 48 OF 2023

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DECISION

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1.  Introduction

1.1The Plaintiff (“P”) and the Defendant (“D”) were respectively the claimant and the respondent in an arbitration administered under the applicable rules of China International Economic and Trade Arbitration Commission (“CIETAC”). 

1.2P commenced the arbitral proceedings on 23 November 2020.  Prior to that, on 30 October 2020, P on an ex parte basis obtained a Mareva injunction against D (“Injunction Order”).  At the hearing on 4 December 2020, G Lam J discharged the Injunction Order, in part on the basis that he was not satisfied that there was a real risk of dissipation ([2020] HKCFI 3066 §26).  There is no dispute between the parties that the costs order made in favour of D, in the sum of HK$940,571.68 including interests accrued up to 13 September 2023, has until now remained unpaid (“Unpaid Costs”).

1.3On 17 March 2023, the Arbitral Tribunal published the final award (“Final Award”), by which D was ordered to make payments of various sums to P, the total of which exceeded RMB232 million (not including interests awarded).

1.4On 27 July 2023, Mimmie Chan J granted leave to P, pursuant to section 84 of the Arbitration Ordinance Cap 609 (“AO”) and RHC Order 73, rule 10, to enforce the Final Award in the same manner as a judgment of the Hong Kong court (“Enforcement Order”).  On 24 August 2023, D filed a summons pursuant to section 95 of the AO to, inter alia, set aside the Enforcement Order (“Section 95 Application”).

1.5I am seized with the summons issued by P on 13 September 2023 pursuant to RHC Order 73, rule 10A for an order that D do provide security including security for costs (“Present Application”).  By the Present Application, P seeks security for claim in the sum of RMB 233,278,155.01[1] and security for costs in the sum of HK$1,881,465, against which credit is given for the Unpaid Costs, to be paid within 14 days failing which the Section 95 Application shall stand dismissed and P shall thereafter be at liberty to take enforcement proceedings pursuant to the Enforcement Order.

1.6At the hearing, P was represented by Mr Lai Chun Ho (with Mr Han Sheng Lim) and D by Mr Wing So, all of counsel.

1.7Before I deal with the facts of the Present Application and how I should exercise my discretion, it is necessary to first deal with a preliminary matter, as Mr So invited me to “critically examine” the local case law on the principles applicable to an application for security made under RHC Order 73, rule 10A.  It is Mr So’s position that the Hong Kong court has since Karaha Bodas Co LLC v Persusahaan Pertambangan Minydak Dan Gas Bumi Negara [2003] 2 HKLRD 381 “[taken] a wrong course”.

2.  The principles governing an application made under RHC Order 73, rule 10A

2.1RCH Order 73, rule 10A provides:

“Where a debtor has applied under rule 10(6) to set aside an order made under rule 10(4) , the Court may, either of its own motion or on an application made by the creditor, and if, having regard to all the circumstances of the case it thinks it just to do so, impose such terms, as to giving security or otherwise, as a condition of the further conduct of the application, as it thinks fit.”

2.2Ever since RHC Order 73, rule 10A came into effect, the relevant cases, as acknowledged by Mr So, have consistently and uniformly applied the guidelines set out in Soleh Boneh v Government of Uganda [1993] 2 Lloyd’s Rep 208 to an application for security made pursuant to it.  Those guidelines, per Staughton LJ at page 212, are as follows (“Soleh Guidelines”):

“In my judgment two important factors must be considered on such an application, although I do not mean to say that there may not be others. The first is the strength of the argument that the award is invalid, as perceived on a brief consideration by the Court which is asked to enforce the award while proceedings to set it aside are pending elsewhere. If the award is manifestly invalid, there should be an adjournment and no order for security; if it is manifestly valid, there should either be an order for immediate enforcement, or else an order for substantial security. In between there will be various degrees of plausibility in the argument for invalidity; and the Judge must be guided by his preliminary conclusion on the point.

The second point is that the Court must consider the ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, for example, by movement of assets or by improvident trading, if enforcement is delayed. If that is likely to occur, the case for security is stronger; if, on the other hand, there are and always will be insufficient assets within the jurisdiction, the case for security must necessarily be weakened.”

2.3It appears from the cases cited by counsel that the first case to apply the Soleh Guidelines to an application made pursuant to RHC Order 73, rule 10A is Karaha.  That case is also useful in another aspect, as Burrell J had therein set out the relevant history to, and the purpose of, enacting RHC Order 73, rule 10A:

“[5] Order 73, rule 10A was introduced as result of the ruling of Kaplan J in JJ Agro Industries (P) Ltd v. Texuna International Ltd [1992] 2 HKLR 391. In so far as it is relevant to the question of security that decision was that section 44(5) only enabled a court to order security in respect of section 44(2)(f) and that the court had no jurisdiction, under section 44(5) to order security under section 44(2)(a)-(e). Order 73, rule 10A was therefore introduced…

…

[8] In short, this is an application solely under rule 10A which governs the whole of section 44(2). I regard the commentary in the Hong Kong Civil Procedure on rule 10A, which is as follows :

‘Effect of rule - This provision places the court's power to order security of its own motion or on the application of the creditor in relation to applications under s.44(2)(a)-(e) and (3) of the Arbitration Ordinance on the same footing as the powers vested in it by s.44(5) of the Ordinance in relation to applications under s.44(2)(f). In so doing, it negatives the decision of the former High Court in JJ Argo Industries (P) Ltd (a firm) v Texuna International Ltd [1994] 1 H.K.L.R. 89. It is therefore submitted that the court will apply the same principles in r.10A cases as apply to applications under s.44(5) of the Arbitration Ordinance (see Soleh Boneh International Ltd v. Government of the Republic of Uganda and National Housing Corp [1993] 2 Lloyds's Rep.208)."

simply to mean that as a result of the introduction of rule 10A security can now be ordered in respect of all the subsections to section 44(2) whereas before, it was only possible in relation to subsection (f). Moreover, when exercising the court's discretion the same principles apply.

[9] The court must now decide if it just to order security in all the circumstances of the case. The two main considerations under the heading of "the circumstances of the case" are:

(i) the merits of Pertamina's challenge to the award; and

(ii) the ease or difficulty of enforcement and whether it will be rendered more difficult as enforcement is delayed.

(Soleh Boneh International Ltd v. Uganda [1993] 2 Lloyd's Reports, at p.212.1 and Dardana Ltd v. Yokos Oil [2002] 1 Lloyd's Reports, at p.230.1.)”

2.4To put matters into their proper perspective, the “anomaly” identified in JJ Agro by Kaplan J was as follows:

“[23] I think I should quote sub-section 5 of section 44 because it deals with a specific instance where security can be ordered but those circumstances do not apply in the present case.

‘Where an application for the setting aside or suspension of a Convention award has been made to such a competent authority as is mentioned in sub-section 2(f), the court before which enforcement of the award is sought, may, if it thinks fit, adjourn the proceedings and may, on the application of the party seeking to enforce the award, order the other party to give security.’

[24] I do not know why the court is not given power to order security to be put up by any Defendant opposing the enforcement of an award. I can see no reason why the court should not be given a discretion in appropriate circumstances to order security to be put up, especially as there have been instances of cases before me where the application to enforce (because it was contested) had taken almost a year to come on as a result of various interlocutory skirmishes. During the period of delay there must, in some cases, be a risk that the Defendant will utilise the time to ensure that such assets as he has in Hong Kong will no longer be there. It seems to me that justice requires the court to have such a power and with the growing number of applications to enforce Convention awards, this may be a matter which could be considered by the Rules Committee or the Attorney General.”

2.5The foregoing was dealing with the repealed Arbitration Ordinance Cap 341.  The current position is set out at Hong Kong Civil Procedure 2024 Note 73/10A/1 (which is substantially similar to the commentary relied on by Burrell J in Karaha cited above):

“Effect of rule – This provision places the Court’s power to order security on its own motion or on the application of the creditor in relation to application under r.10(4) on the same footing as the powers vested in it by the relevant sections in the Arbitration Ordinance.

In so doing, it negates the decision of [JJ Agro].  It is therefore submitted that the Court will apply the same principles in r.10A cases as apply to applications under ss.86 and 89 of the [AO] (see [Soleh] and [Kahara] in which it was specifically held by Burrell J that O.73, r.10A applied to all of the grounds for resisting a Convention award provided by s.44(2) of the repealed Arbitration Ordinance (Cap.341) (see 89(2) of the [AO] for the equivalent section).  See also: Shangdong Hongri Acron Chemical Joint Stock Company Ltd v PetroChina International (Hong Kong) Corp Ltd (HCCT 45/2009, [2011] HKEC 1566) and Po Fat Construction Co Ltd v Incorporated Owners of Kin Sang Estate (HCCT 15 &23/2013, [2013] HKEC 1875); L v B (HCCT 41/2015, [2016] HKEC 1100); Dana Shipping and Trading SA v Sino Channel Asia Ltd (HCCT 47/2015, [2016] HKEC 599).”

D's submissions

2.6The “wrong course” identified by Mr So is premised upon the distinction between the two options available to D under the choice of remedies doctrine.  He relied on Astro Nusantara International BV & Ors v PT Ayunda Prima Mitra & Ors (2018) 21 HKCFAR 118:

“[74] In Paklito Investment Ltd v Klockner East Asia Ltd,[81] Kaplan J referred to the choice of remedies doctrine as follows:

“It is clear to me that a party faced with a Convention award against him has two options. Firstly, he can apply to the courts of the country where the award was made to seek the setting aside of the award. If the award is set aside then this becomes a ground in itself for opposing enforcement under the Convention. Secondly, the unsuccessful party can decide to take no steps to set aside the award but wait until enforcement is sought and attempt to establish a Convention ground of opposition.”

…

[78] Section 44(2) is therefore consonant with the choice of remedies principle and enables the party concerned to resist enforcement in Hong Kong without having challenged the awards in the supervisory court. It follows that the decisions of the Courts below to treat the fact that the awards have not been set aside in Singapore as a major factor in refusing a time extension come into conflict with the choice of remedies principle.

[79] Moreover, since the doctrine admits of (and indeed presupposes) a choice being made between an active or passive remedy, to hold it against First Media that it made a deliberate choice in favour of a passive remedy also conflicts with the choice of remedies principle.”

2.7Mr So submitted that the Soleh Guidelines are only meant to be applicable in the active remedy scenario, namely where section 89(5) of the AO^[2] has been triggered.  That subsection provides:

“If an application for setting aside or suspending a Convention award has been made to a competent authority as mentioned in subsection (2)(f), the court before which enforcement of the award is sought –

(a) may, if it thinks fit, adjourn the proceedings for the enforcement of the award; and

(b) may, on the application of the party seeking to enforce the award, order the person against whom the enforcement is invoked to give security.”

2.8Mr So’s argument that the Soleh Guidelines are not meant to apply to, as here, a passive remedy scenario ran as follows.

2.9As a matter of principle, the common law does not recognize any general right for an application for security for judgment, as opposed to security for costs.  The functional tool for the reduction of the risk of unenforceability is the Mareva jurisdiction: Zuckerman on Civil Procedure: Principles of Practice (4^th Ed) §10.240.

2.10In the arbitration context, a narrow exception is created under the New York Convention under Article VI, the Hong Kong embodiment of which is section 89(5) of the AO.  In the guide to the New York Convention published by the UNCITRAL Secretariat, it is stated at §50 that “Contracting States only consider whether to order security when contemplating adjournment”.

2.11In IPCO (Nigeria) Ltd v Nigerian National Petroleum Corp [2017] 1 WLR 970, Lord Mance said as follows:

“[41] In my opinion, the conditions for recognition and enforcement set out in articles V and VI of the Convention do constitute a code. Just as article V codifies the grounds of challenge (see Dicey, Morris & Collins, The Conflict of Laws, 15th ed (2012), para 16-137), so the combination of articles V and VI must have been intended to establish a common international approach, within the field which they cover. They contemplate that a challenge under article V may only be made conditional upon the provision of security in one situation falling within their scope. Had it been contemplated that the right to have a decision of a properly arguable challenge, on a ground mentioned in article V (domestically, section 103(2) and (3)), might be made conditional upon provision of security in the amount of the award, that could and would have been said. The Convention reflects a balancing of interests, with a prima facie right to enforce being countered by rights of challenge. Apart from the second paragraph of article VI, its provisions were not aimed at improving award creditors’ prospects of laying hands on assets to satisfy awards. Courts have, as noted in Dardana v Yukos [2002] 1 All ER (Comm) 819 other means of assisting award creditors, which do not impinge on award debtors’ rights of challenge, eg disclosure and freezing orders.

…

[43] … As I have indicated, I consider that articles V and VI constitute a code relating to security for an award when the issue is enforcement or adjournment; and that the code excludes requiring security for an award in the face of a properly arguable challenge under article V, except in so far as article VI provides…” (emphasis added)

2.12Mr So however accepted that, in both Hong Kong (RHC Order 73, rule 10A) and England (Arbitration Act 1996 (“AA”) section 70(7)), provisions are made for further bases to order security for cases falling without the rubric of the New York Convention.  Section 70(7) of AA^[3], which applies to English-seated arbitrations, provides:

“The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with.”

2.13As regards how the discretion is to be exercised under section 70(7), Lord Mance said at IPCO §43:

“…the power under section 70(7) will only be exercised if the challenge appears ‘flimsy or otherwise lacks substance’: A v B (Arbitration: Security) [2011] Bus LR 1020, para 32, per Flaux J and Y v S [2015] 2 All ER (Comm) 85, para 33, per Eder J.”

2.14Building from the foregoing, Mr So submitted that the Soleh Guidelines should not be applied to a passive remedy scenario.  He advanced the following two propositions.

2.15Mr So’s primary position is that the Soleh Guidelines are to be rejected and the flimsy test in IPCO is to be introduced as an initial threshold requirement, failing which no security for claim should be ordered.  He justified his primary position on the bases that (1) as the issue of enforceability is to be determined only “locally”, its resolution is less subject to risks of delay and uncertainties as to what could happen at the supervisory court in a positive remedy scenario, and (2) the adoption of the Soleh Boneh Guidelines in a passive remedy scenario represents a departure from the New York Convention which the court, for the sake of maintaining a common international approach, should seek to avoid.

2.16Mr So’s secondary position is that the Soleh Guidelines should be modified in that all references to adjournment should be removed and the court should place weight to the fact that resolution of the issues is done “locally” as a factor against the grant of security.

P’s submissions

2.17Mr Lai’s answers were as follows.

2.18First, he submitted that I am bound by the decision of Wisdom Glory Investment Ltd v ADWO Media Holding Limited [2022] HKCA 685 §§11 and 16(2), at which the Court of Appeal applied the Soleh Guidelines in an application for security made under RHC Order 73, rule 10A.  He also added that the foregoing is the case in numerous Court of First Instance decisions, including Firm “H” v “W” [2021] HKCFI 68 §4, Q v F [2023] HKCFI 647 §§3-5, A1 v W1 [2022] HKCFI 3173 §6, Guo Shun Kai §§11-12, X v Jemmy Chien [2019] HKCFI 2172 §§6 and 8, Dana Shipping and Trading SA v Sino Channel Asia Ltd [2017] 1 HKC 281 §7 and Karaha §§3 and 9.

2.19Secondly, Mr Lai said that D’s propositions are based on the wrong assumption that the Hong Kong regime should follow the English regime notwithstanding that there are clear differences between the two.  In particular, Mr So’s reliance on section 70(7) is misplaced, as it only applies to the enforcement of an award obtained in an English-seated arbitration: IPCO §17.  RHC Order 73, rule 10A however is broadly worded to include the enforcement of awards from all arbitrations.

2.20Thirdly, as set out at IPCO §41 (cited above), under the English regime, there is no jurisdiction for the court to order security pending the setting aside of a non-English seated award before the English court.  On the other hand, RHC Order 73, rule 10A provides for jurisdiction to order security even in cases of “foreign” awards.

2.21Fourthly, D’s reliance on the flimsy test is misplaced, as the Supreme Court in IPCO only observed by way of obiter dicta that there is first instance authority holding that security should only be ordered under section 70(7) of AA where the ground of setting aside is “flimsy of otherwise lacks substance”.

My view

2.22The Present Application is concerned with a passive remedy scenario where no adjournment is sought pending the resolution of an application in the supervisory court. 

2.23As pointed out by Mr Lai, RHC Order 73, rule 10A is drafted broadly to cover all arbitrations.  Of the cases relied on by Mr Lai (set out at §2.18 above), only A1 v W1 and Karaha deal with a situation analogous to the present.  The other cases either deal with local awards (Wisdom Glory, Firm H, Q v F and Jemmy Chien) or a positive remedy scenario (Guo Shun Kai and Dana Shipping).  To that extent, it seems to me that there is some force in Mr So’s submissions that there is no binding authority against the propositions advanced by him.

2.24I do not accept Mr So’s primary position (§2.15 above) for the following reasons. 

2.25The fundamental premise of Mr So’s submission is that for cases outside the rubric of a positive remedy case (in which the issue of adjournment pending resolution elsewhere falls for consideration), the flimsy test propounded by the UKSC at IPCO §43 by reference to section 70(7) of AA should apply. 

2.26IPCO §43 has been commented on by the English Court of Appeal in The Czech Republic v Diag Human SE & Anor [2023] EWCA Civ 1518:

“[54] It is true that the “flimsiness” requirement has the formidable support of Lord Mance in IPCO [then IPCO §43 is set out]

[55] However, this approval of the first instance cases was plainly obiter and is not binding. More fundamentally, neither Lord Mance nor (with one exception) the judges who decided those cases took any account of the fact that, if a challenge to an award is flimsy in the sense that it has no real prospect of success, it should be summarily dismissed, so that no question of security arises…

[56] It is in my view undesirable to adopt a criterion that an application be shown to be “flimsy”, “unlikely to succeed” or “shadowy” before security can be ordered, because that will lead to precisely the kind of “minitrial” which the courts have deprecated in other procedural contexts. The merits of a challenge ought not to have to be examined twice, once in order to see whether they are “flimsy” for the purpose of an application for security, and then again on the hearing of the substantive application. Such an approach could only add to the delay and expense which section 1 of the 1996 Act tells us it is the object of arbitration to avoid. This view is supported by the practice of the Commercial Court that applications for security under section 70(7) should in general be marked with a time estimate of one hour or less (see paragraph O8.11 of the Guide – although the hearing below, including the application for security for costs, was listed for a full day). That practice plainly envisages that it will not be necessary or appropriate to investigate the merits of the substantive challenge in any detail. While listing practice cannot dictate the way in which the discretion under section 70(7) should be exercised, there is in my view good sense in the thinking which underpins this practice.”

2.27Importantly, even in the context of section 70(7) of AA, the English Court of Appeal considered that the Soleh Guidelines are to be commended:

“[57] I would also suggest that there is considerable wisdom in the approach of Lord Justice Staughton in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208. Dealing with the question whether security should be ordered on an adjournment of proceedings to enforce a New York Convention award pursuant to Article 5(5) of the Convention (see now section 103(5) of the Arbitration Act 1996), which is in some respects an analogous situation, Lord Justice Staughton emphasised the need to avoid going into the merits in too much detail on such an application [then the Soleh Guidelines are set out]” (emphasis added)

2.28To further erode the basis of Mr So’s submission that the flimsy test in IPCO should be an initial threshold, the English Court of Appeal went further to state as follows:

“[58] To go beyond a brief consideration of the award and the challenge in order to see whether the challenge is manifestly valid or invalid is unlikely to be helpful on an application of this nature…

[59] The irrelevance in general of the merits of the challenge to an award is also in accordance with principle. If an award creditor can show that it is prejudiced by the challenge, for example because the debtor is actively taking steps to make enforcement more difficult, that is a powerful reason for ordering security as a condition of proceeding with the challenge, regardless of whether the challenge can be characterized as ‘flimsy’…”

2.29It seems to me that Czech Republic is entirely inimical to Mr So’s proposition that the flimsy test should be regarded as the minimum threshold in an application under section 70(7) of AA.  Once Mr So’s underlying premise is shown to be incorrect, there can be no further question that that incorrect test should then be imported to RHC Order 73, rule 10A.  For completeness, I should point out that Mr So submitted at the hearing that flimsy test is “not in substance too different from the manifest validity test”. That proposition is plainly against what is set out in Czech Republic.

2.30Further, Czech Republic is also an authority for the proposition that the Soleh Guidelines is to be commended in cases where the challenges to the enforceability of an award are to be determined locally, which is consonant with all the Hong Kong authorities applying the Soleh Guidelines to cases involving local awards, in particular the Court of Appeal decision in Wisdom Glory.

2.31In the above regard, I do not believe, for present purposes, there is a material difference between the present case (which is concerned with D electing the passive remedy in Hong Kong in relation to a Mainland Award) and those involving challenging a local award: Czech Republic §57 cited at §2.27 above.  As pointed out by DHCJ Reyes SC at AAD and AAE v BBF [2024] HKCFI 698 §21:

“… Nevertheless, the AO has assimilated the regimes for the recognition and enforcement of awards seated in and outside of Hong Kong. This has the consequence that, in practice, the regimes for the recognition and enforcement of Hong Kong and non-Hong Kong seated awards are similar. I infer from this fact that, in the absence of compelling reason, the principles governing the recognition and enforcement in Hong Kong of Convention and non-Convention awards (including the principles governing the requirement of security as a condition for hearing an application for refusing recognition and enforcement of an award) should be the same.”

2.32I am therefore not persuaded by Mr So that, as regards his primary position, the Hong Kong court, in applying the Soleh Guidelines to an application made under RHC Order 73, rule 10A (in the context involving a party exercising the passive remedy), has “taken a wrong course”.

2.33Turning to Mr So’s secondary position (§2.16 above), it seems obvious that, in a passive remedy situation, any reference to an adjournment while proceedings to set aside an award are pending elsewhere is not apposite.  I further do not accept the fact that the challenges against enforcement are to be determined locally necessarily is a factor against the grant of security.

2.34In so saying, I am prepared to proceed on the basis that where the challenges are to be determined “locally”, the Hong Kong court has more control over the proceedings as opposed to awaiting resolution elsewhere.  But, first, as pointed out by Kaplan J in Agro, there may be instances where even local challenges take time to resolve because of interlocutory skirmishes.  In the present case, the Section 95 Application asks for a case management stay for P and its legal representatives in Hong Kong (“JunHe Hong Kong”) to consider whether JunHe Hong Kong ought to be replaced due to the conflict of interest between them and D.  It is obvious from the evidence that JunHe Hong Kong and P do not regard D’s complaint of conflict of interest to be meritorious.  I simply cannot conclude at this stage (and D has not suggested otherwise) whether D will, for example, issue injunction proceedings to prohibit JunHe Hong Kong to continue to act for P.

2.35Secondly, the key question to the second consideration identified in the Soleh Guidelines is the ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, for example, by movement of assets or by improvident trading, if enforcement is delayed.  Take the present case as an example.  D's key assets were previously identified to mainly comprise of cash.  It seems to me self-evident that any difficulty in enforcement, when the assets to be enforced against are entirely or mostly liquid, can be created almost instantaneously.

2.36For the above reasons, I do not agree with Mr So that there should be any departure from the cases cited at §2.18 above.  I will therefore continue to apply the Soleh Guidelines in the determination of the Present Application.

3.  Relevant background

3.1The relevant background matters are set out in Mr Lai’s written submissions which are largely not disputed by Mr So.

3.2P is a Mainland company engaged in the manufacture and export of industrial machinery.  D is a Hong Kong company that provides technical support, testing and maintenance services for industrial telecommunications equipment.

3.3On 7 January 2013, P entered into an agreement with a company for the sale of telecommunications equipment to be delivered to Ukraine.  The agreement required P to maintain and service the equipment sold for 10 years.

3.4Between September 2015 and March 2016, P and D entered into 5 agreements (“Service Agreements”) whereby D agreed to maintain and service the telecommunications equipment in exchange for lump sum service fees from P.  Per Clause 3 of each Service Agreement, P was to prepay the service fees into D’s designated HSBC account (“D’s Main Account”).  The money would also cover the cost of purchasing maintenance equipment, as well as remuneration and travelling expenses of maintenance personnel.

3.5On 15 November 2015, P and D entered into a separate agreement regulating the use of the service fees (“Account Operation Agreement”). The key terms were as follows:

(1)  the service fees prepayable by P under the Service Agreements would instead be paid into a subsidiary account of D’s Main Account (“Joint Account”);

(2)  all of the funds in the Joint Account would comprise of the service fees prepaid by P (ie the Joint Account would not contain any money from other sources);

(3)  the Joint Account would be jointly managed by P and D from the day of its opening until 12 November 2020;

(4)  any outward transfers of the principal would require the signatures of both of P and D’s authorized representatives; and

(5)  the Account Operation Agreement would terminate automatically on 12 November 2020 unless the parties signed another agreement to extend the arrangements.

3.6From December 2015 until October 2019, P paid a total of RMB230,245,399.32 (“Prepaid Sum”) into the Joint Account, thereby performing its obligations under the Service Agreements. 

3.7It is P’s case that, due to unrest in Ukraine, it did not call upon D to perform its obligations under the Service Agreements. Thus, P never authorized any payments out of the Joint Account, and the Prepaid Sum should have remained intact in the Joint Account.

3.8From around March 2020, P started requesting D to provide an update as to the status of the Prepaid Sum, as well as the bank statements and fund usage documents in respect of the Joint Account.  D refused to do so.

3.9On 23 November 2020, P commenced the arbitration and claimed inter alia for termination of the Service Agreements and repayment of the Prepaid Sum.

3.10Substantive hearings were held on 30 December 2021, 4 August 2022 and 9 September 2022.  In the arbitration:

(1)  P was represented by a team of Mainland lawyers (“P’s Mainland Lawyers”) that were originally from AnJie Law Firm and moved to JunHe Beijing between December 2021 and January 2022;

(2)  D was represented by a team of Mainland lawyers from East & Concord Partners.

3.11On 29 June 2022, the Arbitral Tribunal issued an interim award (“Interim Award”), which held inter alia that the Account Operation Agreement was a constituent part (组成部分) of the Service Agreements, such that a breach of the former would also amount to a breach of the latter.

3.12On 17 March 2023, the Arbitral Tribunal handed down the Final Award ordering the repayment of the Prepaid Sum to P together with interest and costs. The Arbitral Tribunal’s key findings were as follows:

(1)  The parties were in dispute as to whether P could legally terminate the Service Agreements and recover the Prepaid Sum paid thereunder;

(2)  Article 563 of the Mainland Civil Code provided that a party could terminate an indefinite contract (不定期合同) at any time so long as it gave the counterparty reasonable prior notice;

(3)  Article 3 of the Several Provisions on the Time Effectiveness of the Mainland Civil Code (“Time Provisions”) provided that where civil disputes arising from facts predating the effective date of the Mainland Civil Code have no relevant applicable law, the Mainland Civil Code can be retrospectively applied to them except where (1) such application clearly impairs the lawful rights and interests of the parties, (2) increases the parties’ legal obligations or (3) departs from the parties’ reasonable expectations (“Disqualifying Conditions”);

(4)  Although the signing of the Service Agreements preceded the effective date of Article 563 of the Mainland Civil Code, there was no relevant applicable law equivalent to Article 563 of the Mainland Civil Code at the time. Further, its retrospective application would not trigger any of the Disqualifying Conditions.  Therefore, Article 563 was applicable to the dispute;

(5)  The Service Agreements constituted indefinite contracts within the meaning of Article 563 of the Mainland Civil Code, entitling P to terminate them at any time.  The Service Agreements had been effectively terminated when P’s Request for Arbitration was served on D (ie 15 January 2021);

(6)  D had breached the Account Operation Agreement by unilaterally moving funds out of the Joint Account without obtaining the signature of P’s authorized representative.  As the Account Operation Agreement was a constituent part of the Service Agreements, the latter had been breached by D as well;

(7)  D failed to prove that it had provided any services under the Service Agreement. As the Service Agreements had been terminated, D’s continued possession of the Prepaid Sum constituted unjust enrichment under Mainland law (不当得利). D was therefore required to repay the Prepaid Sum to P.

4.  The Section 95 Application

4.1The Section 95 Application seeks to set aside the Enforcement Order on the following grounds (in so far as pursued by Mr So for the purpose of the Present Application):

(1)  The Arbitral Tribunal had impermissibly retrospectively applied Article 563 of the Mainland Civil Code to contracts predating its effective date and as a result: (a) it would be contrary to public policy for the Final Award to be enforced and (b) the Final Award dealt with a difference not contemplated by or not falling within the terms of the submission to arbitration and/or contains decisions on matters beyond the scope of the submission to arbitration (“Retrospectivity Ground”);

(2)  The Final Award was obtained in a manner whereby P’s legal representatives were acting in conflict of interest with D, and that it would be contrary to public policy for the Final Award to be enforced (“Conflict of Interest Ground”);

(3)  Given the material non-disclosure of P’s failure to pay the Unpaid Costs, it would be contrary to public policy to allow the Enforcement Order to stand and/or the court should otherwise consider it just to set aside the Enforcement Order, with a consideration of regranting the Enforcement Order with costs consequences (“MND Ground”).

4.2In respect of the Retrospectivity Ground, Mr So only pursued it on the basis that the retrospective application of Article 563 of the Mainland Civil Code is contrary to public policy.  Mr So did not seriously advance any argument on how it can be said that the Arbitral Tribunal’s decision to retrospectively apply Article 563 of the Mainland Code can be challenged on any due process considerations.

4.3As regards the MND Ground, Mr So accepted that it is not a ground to invalidate the Final Award, but is relevant only to the issue of quantum (ie I should take into account the consequence of a regrant and the likely costs order) or the terms of the order (eg by making the satisfaction of the Unpaid Costs a condition precedent to D’s payment of security).

4.4I now turn to the Present Application.

5.  Manifest validity

5.1The Retrospectivity Ground and the Conflict of Interest Ground are pursued on the public policy ground. 

5.2There is no dispute between counsel that the public policy ground is limited in scope and is to be sparingly applied.  It only applies where enforcement of the award would be so repugnant as to “shock the conscience” or is “clearly injurious to the public good” or “wholly offensive to the ordinary reasonable and fully informed member of the public” or where it “violates the forum’s most basic notion of morality and justice”. Public policy is often invoked by a losing party in an attempt to manipulate an enforcing court into re-opening matters which have been determined in an arbitration.  The court must be vigilant that the public policy objection is not abused in order to obtain for the losing party a second chance at arguing a case: A v R [2009] 3 HKLRD 389.

5.3Counsel also agreed that the enforcing court is entitled and should adjudicate the public policy ground based on its own basic concepts of justice.  As stated at Astro §77, although an award may be valid by the law of the place where it is made, its making may be attended by such a grave departure from basic concepts of justice as applied by the court of enforcement that the award should not be enforced.

The Retrospectivity Ground

5.4The Arbitral Tribunal noted that Article 563(2) of the Mainland Civil Code (民法典)provides:

“以持续履行的债务为内容的不定期合同，当事人可以随时解除合同，但是应当在合理期限之前通知对方。”

5.5The Arbitral Tribunal further noted that Article 3 of the Time Provisions (民法典时间效力的若干规定) provides:

“民法典施行前的法律事实引起的民事纠纷案件，当时的法律、司法解释没有规定而民法典有规定的，可以适用民法典的规定，但是明显减损当事人合法权益、增加当事人法定义务或者背离当事人合理预期的除外。”

5.6As pointed out above, the Arbitral Tribunal held, on the facts before it, that P was entitled to rely on Article 563(2) of the Mainland Civil Code to terminate the Service Agreements, as none of the Disqualifying Conditions was engaged.

5.7D relies on a PRC legal opinion prepared by one Mr Li Shaobo (“Mr Li”) of East & Concord Partners.  As pointed out by Mr Lai, East & Concord Partners had acted for D in the arbitral proceedings.  It is doubtful whether Mr Li can be regarded as an independent expert.  In any event, Mr Li’s opinion is not verified by a statement of truth and does not contain the requisite expert witness’s declaration as required by RHC Order 38, rule 37C.

5.8There can be no question that Article 563(2) has the effect of creating a new right in the present case; hence the need for the Arbitral Tribunal to refer to Article 3 of the Time Provisions.  Putting aside its questionable admissibility, the tenor of Mr Li’s opinion is that the Arbitral Tribunal’s application of Article 563(2) is itself contrary to public policy.  It must therefore follow that it is Mr Li’s opinion that the enactment of Article 563(2) is itself unconstitutional or contrary to public policy as a matter of PRC law.  It appears that the argument was not raised before the Arbitral Tribunal and I am unable to accept D is entitled to mount such an argument on what is obviously a very controversial and difficult point without having filed proper independent expert evidence.

5.9Looking at the matter from the Hong Kong perspective, I agree with Mr Lai that statutes with retrospective application are not inherently repugnant to Hong Kong law and thus should not be regarded as innately contrary to public policy: Wilson v First County Trust Ltd [2004] 1 AC 816 §153 and Harvest Good Development Ltd v Secretary for Justice [2007] 4 HKC 1 §173.

5.10I also do not regard it as helpful for Mr So to make sweeping propositions.   For example, he submitted that if the Mainland Civil Code could be retrospectively applied whenever there was a legal vacuum previously, it would lead to absurd situations that one could be liable for breach of contracts, torts, or in the present case, unjust enrichment for acts years prior to a new legislation.  In my view, such sweeping propositions do not reflect accurately the safeguards sought to be introduced by way of the Disqualifying Conditions.

5.11As I understand the Final Award, the Arbitral Tribunal’s conclusion that the Service Agreements were indefinite contracts (不定期合同) is based on the finding that there was no time stipulation for their duration.  As such, provided that the Disqualifying Conditions were not engaged, Article 563(2) enabled P to terminate the Service Agreements on reasonable notice.

5.12On the present material, I do not at this stage see how the foregoing can be a shock to the conscience, injurious to the public good, or offensive. To the contrary, that result is not unlike common law principles.  As set out Nicholas Reda & Anor v Flat Limited [2002] UKPC 38 at §57:

“In their Lordships’ view there is no such rule. The true rule, which is not confined to contracts of employment but applies to contracts generally, is that a contract which contains no express provision for its determination is generally (though not invariably) subject to an implied term that it is determinable by reasonable notice: see Chitty on Contracts (28th Ed.) at para. 13-025. The implication is made as a matter of law as a necessary incident of a class of contract which would otherwise be incapable of being determined at all. Most contracts of employment are of indefinite duration and are accordingly terminable by reasonable notice in the absence of express provision to the contrary. Lefebvre v HOJ Industries Ltd was such a contract. But there is no need for the law to imply such a requirement in a case where the contract is for a fixed term.” (emphasis added)

Conflict of Interest Ground

5.13The undisputed matters relevant to the Conflict of Interest Ground are as follows:

(1)  In April 2020, D engaged 4 lawyers of JunHe Beijing (“D’s Former Laywers”) to provide advice on its disputes with P.  The retainer was for the period between 10 April 2020 to 9 April 2021; 

(2)  In July 2020, well before its expiry, D terminated the retainer signed with JunHe Beijing;

(3)  In December 2021 and January 2022, whilst the arbitral proceedings were underway, P’s Mainland Lawyers moved from AnJie Law Firm to JunHe Beijing;

(4)  JunHe Beijing’s representation of P did not involve the breach of any Mainland legislation or CIETAC rules.

5.14The significance of subparagraph (4) of the preceding paragraph is that, according to Mr So, it cannot be said that D had waived its objection in relation to JunHe Beijing’s representation of P, as even if raised in the course of the arbitral proceedings, that objection would have been futile as there was no breach of any Mainland legislation or CIETAC rules.

5.15I am prepared to accept that there was no waiver in relation to the issue of alleged conflict of interest arising from JunHe Beijing’s representation of P, but the complaint now made by Mr So is not conflict of interest but breach of confidentiality.

5.16As pointed out by Mr Lai, Bolkiah v KMPG [1999] 2 AC 222 at 235C-D and cited in Nishimatsu-Costain-China Harbour JV v Ip Kwan & Co [2001] 1 HKLRD 84 are authorities for the proposition that there is no conflict of interest in respect of a former client, since the fiduciary relationship ends with the termination of the retainer.  The only duty which survives the termination of the client relationship is the continuing duty to preserve the confidentiality of the information imparted during its subsistence.

5.17Mr So did not have any quarrel with the above proposition.  He submitted that the evidence does not suggest that any Chinese walls or security measures were in place within Beijing JunHe and that there were risks that confidential information imparted to D’s Former Lawyers might have been accessed by P’s Mainland Lawyers.

5.18I agree with Mr Lai that there are a number of difficulties with the Conflict of Interest Ground.

5.19First, as pointed out by Mr Lai, the current complaint is breach of confidentiality, which is different from the ground set out in the Section 95 Application (ie conflict of interest).  During the course of the hearing, Mr So accepted that there was no express reference to any breach of confidentiality in D’s evidence. 

5.20Secondly, whilst the complaint by D of JunHe Beijing’s representation of P during the arbitral proceedings might have been futile, D has not adduced any evidence to the effect that a complaint based on breach of confidentiality could not have been made and would not be entertained by the Arbitral Tribunal.  In this connection, I accept Mr Lai’s submissions that, on the evidence, D plainly had knowledge of JunHe Beijing’s involvement as P’s legal representation shortly after the hearing on 30 December 2021, when East & Concord Partners confirmed on its behalf that D had no objection to JunHe Beijing’s engagement by P.

5.21Thirdly, in terms of evidence:

(1)  there is before me sworn evidence from P’s Mainland Lawyers confirming that D’s Former Lawyers had never interacted or communicated with P’s Mainland Lawyers regarding the parties’ dispute;

(2)  apart from a general assertion that JunHe Beijing provided advice to D on all aspects of the dispute in relation to the arbitral proceedings and became privy to information on D’s assets, litigation strategy and other highly sensitive information, D has not provided any particulars of such confidential information, on the basis that it was advised not to on the ground of legal professional privilege;

(3)  it is a matter for D whether it wishes to apply to adduce the privileged material in a sealed envelope for the court’s assessment, but as matters presently stand, the court notes that there is simply no evidence proffered by D to suggest that the Final Award referred to any material which could arguably show that there was a breach of confidentiality.

5.22Fourthly, and relatedly, as Mr Lai pointed out, the court retains a residual discretion to enforce the Final Award, even where a prima facie case on the policy ground is made out, one of which is where the matters complained of did not affect the outcome of the dispute in the Arbitration: X Chartering v Y, HCCT 20 of 2013, 3 March 2014 §§16 and 30. No evidence was adduced, and no submission was made, as to how it can be said that the alleged breach of confidentiality could have affected the Final Award.  In particular, it appears that the argument on the applicability of Article 563(2) was predominantly a legal argument and it is unlikely, and Mr So did not seek to demonstrate how, any “confidential information” could have affected the outcome.

5.23Therefore, on a brief consideration, it appears to me that neither the Retrospectivity Ground nor the Conflict of Interest Ground can be characterized as strong.  Between the two ends of manifest validity and manifest invalidity, it seems to me that the Final Award is placed decidedly closer to the side of manifest validity.

5.24In my view, the manifest validity of the Final Award itself provides a sufficient reason for ordering security.  Even were it not so, it seems to me that the second factor identified in the Soleh Guidelines, namely ease of difficulty in enforcement, would also provide additional justification for ordering security.

Ease or difficulty in enforcement

5.25P has commissioned an investigative report which has identified that D has no known fixed assets in Hong Kong.  However, it cannot be disputed that by reason of the Prepaid Sum, D had substantial deposits in its bank accounts in Hong Kong, which despite P’s demands, D has refused to account for.  This is simply not a case where there are and always will be insufficient assets within the jurisdiction.

5.26Mr So understandably relied on the reasons given by G Lam J in discharging the Injunction Order, in particular his Lordship’s then observation that there was no real risk of dissipation.  But that observation was made before the publication of the Final Award, before D’s liability to P had been crystallized.  In the present case, after the grant of the Enforcement Order, on 25 August 2023, requests were made to D’s solicitors to disclose the balances of D’s accounts (into which the Prepaid Sum been deposited).  D had simply stonewalled the said requests.

5.27In the particular circumstances of the present case, I find that the D’s refusal to provide any information objectionable.  Although G Lam J had provisionally formed the view that the Prepaid Sum belonged to D, a different conclusion was reached in the Final Award (page 61).  The Arbitral Tribunal held that the Prepaid Sum represented advanced payments and could only be “earned” by D following its provision of the services contemplated under Service Agreements.  The Arbitral Tribunal rejected D’s case that it had incurred liability to third parties in the sum of RMB54,550,000 (pages 66-67) and found that D was not able to prove that it had provided any service to earn the Prepaid Sum.  The foregoing being the case, it seems to me that it can only be commercially right that D do provide information on what had become of the Prepaid Sum, and its refusal to do so plainly provides a basis to infer or show difficulty in enforcement.

5.28Further, I accept Mr Lai’s submission that the size of the award is a relevant consideration.  At IPCO (Nigeria) Ltd v Nigerian National Petroleum Corp [2015] 2 CLC 816 §21, it is stated:

“…where there is a very large award, delay without security is inherently likely to prejudice the award creditor and certainly risks doing so. We regard that as a factor which would incline us towards providing some security.”

5.29For the above reasons, I am of the view that the enforcement of the award will be rendered more difficult, by movement of assets when, as here, enforcement is delayed.

6.  Other factors: Security for Claim

6.1I am prepared to proceed on the basis that D, in opting for the passive remedy, is not a factor which should be viewed adversely against it.

6.2However, it seems to me that an important factor in the present case is that any security ordered can be met or ought to be met by the Prepaid Sum.  As I understand D’s position, D did not make a counterclaim in the arbitral proceedings, and the only basis upon which it could keep the Prepaid Sum was if the Service Agreements were still “alive” (but were found to have been terminated in the Final Award). 

6.3The present situation is unlike the usual cases where a party resisting enforcement is driven to “dip into” its own resources to put up security for an award in damages.  In this regard, Mr So did not make any submissions on the specific amount of security that would be beyond the capacity of D.  It seems to me therefore there can be no suggestion that the ordering of security has the de facto effect of stifling the Section 95 Application.

6.4In my view, an appropriate amount of security would be RMB150 million which is somewhat less than what Mr Lai asked for.  But I accept Mr So’s submission that the court rarely makes an order for full security. 

6.5I also do not believe it is right to accede to P’s suggestion that it should be relieved from its obligation to pay the Unpaid Costs by giving credit against the security ordered. 

7.  Security for costs

7.1Mr So did not dispute D’s liability to provide security for costs but submitted that the quantum claimed in the Skeleton Bill of Costs is excessive.  I agree with him.  On a broad-brush basis, it seems to me than a sum of HK$900,000 is appropriate.  In doing so, I have provisionally formed the view that the MND Ground is unlikely to lead to an adverse costs order against P, in the sense that it would lead to the discharge and the regrant of the Enforcement Order.

8.  Conclusion

8.1For the above reasons, I make the following orders:

(1)  P do pay to D the Unpaid Costs within 14 days[4] hereof;

(2)  D do within 14 days thereafter make payment for security into court (or provide such security in a manner to the satisfaction or P) in the sums of:

(a)  RMB150,000,000 or its Hong Kong dollar equivalent being security for P’s claim under the Final Award;

(b)  HK$900,000 being security for costs of these proceedings including the costs of opposing the Section 95 Application.

failing which the Section 95 Application do stand dismissed with costs be paid to P on an indemnity basis, and P be entitled to take enforcement proceedings pursuant to the Enforcement Order.

8.2I also make a costs order nisi that D do pay the costs of and occasioned by the Present Application to A, to be summarily assessed.  P is to lodge its Statement of Costs within 3 days hereof and D its Statement of Objections within 3 days thereafter.  I will then conduct the assessment on the papers.

8.3I thank all counsel for their assistance.

Mr LAI Chun Ho and Mr LIM Han Sheng, instructed by Messrs Jun He Law Offices, for the Plaintiff

Mr Wing SO, instructed by Messrs B Mak & Co, for the Defendant