Cf v. Shk

HCCT 45/2023

[2024] HKCFI 1493

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 45 OF 2023

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D E C I S I O N

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Background

1.On 30 April 2023, a final award was issued by the tribunal (“Award”) in an arbitration commenced by the Applicant (“CF”) in Hong Kong (“Arbitration”) against the 1^st Respondent (“SHK”) and the 2^nd Respondent (“S Listco”) under a Settlement Agreement made between CF and SHK (“Settlement Agreement”), and a Guarantee and Guarantee Supplemental Letter executed by S Listco. Under the Award, SHK and S Listco (together referred to as “Respondents”) were ordered to make payment to CF of a sum of RMB 1 billion, with interest and costs, “on a joint and several basis, without any withholding, set-off, counterclaim, retention or deduction”. The sum of RMB 1 billion was described as the “Remaining Initial Put Price” due and payable under the Settlement Agreement, payment of which was guaranteed by S Listco.

2.On 25 July 2023, in proceedings initiated by CF, leave was granted by the Court for the Award to be enforced as a judgment of the Court in Hong Kong (“Enforcement Order”).

3.On 28 August 2023, SHK and S Listco applied for execution and/or enforcement of the Enforcement Order to be stayed until the final determination of separate arbitration proceedings which had by then been commenced in Hong Kong, and were pending between SHK, CF and CF’s parent company (“2^nd Arbitration”). On behalf of SHK and S Listco, it was contended that SHK’s claims in the 2^nd Arbitration, that a Share Purchase Agreement (“SPA”) made between CF and SHK and dated 22 June 2019 had been induced by misrepresentations made by CF, constitute equitable set-off which can be asserted against CF in respect of the sum said to be due to it under the Award. SHK and S Listco claim that it would be just for the Court to order a stay of execution of the Enforcement Order, pending the final resolution of the claims made against CF in the 2^nd Arbitration.

The parties’ relationship and dispute

4.Under the SPA, CF (a company incorporated in XXXXXXXXXX) agreed to sell and SHK (a company incorporated in XXXXXXX) agreed to purchase CF’s 80% shareholding in XXXXXXXXXXXXX (“CF China”). CF, CF China and SHK entered into a Shareholders Agreement (“SHA”) on 26 September 2019, under which CF acquired an initial put option (“Option”), to require SHK to purchase its remaining 20% shares in CF China at an initial put price (“IPP”). On the same day of the SHA, S Listco signed a Letter of Guarantee in favor of CF (“Guarantee”), whereby S Listco unconditionally and irrevocably guaranteed SHK’s due and punctual performance of its obligations in relation to the payment of the IPP.

5.On 27 September 2021, CF exercised the Option, calling for SHK to purchase its 20% shares in CF China at the IPP of RMB 1.2 billion. SHK did not make payment by the deadline of 21 February 2022. On 23 February 2022, CF issued a Dispute Notice pursuant to the SHA, notifying CF that a dispute had arisen in relation to its exercise of the Option and SHK’s failure to purchase the put shares. CF also issued a demand on the same day to S Listco under the Guarantee, seeking payment of the IPP from S Listco within 30 days. The demand on S Listco was not satisfied.

6.It is not disputed that on 28 April 2022, CF and SHK entered into the Settlement Agreement. By clause 3 of the Settlement Agreement, SHK agreed to pay CF the IPP in 9 installments, and specifically covenanted to make such payment “without any withholding, set-off, counterclaim, retention or deduction”. Clause 3 has been referred to by the parties as the “Anti-Set-Off Clause”.

7.At the same time as the Settlement Agreement, S Listco executed a Guarantee Supplemental Letter in favor of CF (“Supplemental Guarantee”), extending the coverage of S Listco’s obligations under the Guarantee to include SHK’s obligations under the Settlement Agreement.

8.Upon SHK’s default in payment of the 5^th installment due under the Settlement Agreement, CF issued a second demand to S Listco under the Guarantee, seeking payment of the entire put price of RMB 1 billion which became due and payable under the terms of the Settlement Agreement (the “Remaining Initial Put Price” referred to in the Award). When payment was not received, CF commenced the Arbitration against SHK and S Listco on the basis of the Settlement Agreement and the Guarantee as extended by the Supplemental Guarantee.

9.The issues put to the tribunal for determination in the Arbitration were agreed as:

“Claimant’s Claim

1. Given the impact of the COVID-19 pandemic at the material times:-

(a) Should the 1^st Respondent’s obligation to pay the Initial Put Price under the SHA be amended and varied by the Tribunal pursuant to Art. 6:258 of the DCC?

(b) If the answer to sub-issue (a) above is yes, to what extent is the Put Option Notice, and the 1^st Respondent’s relevant obligation thereunder, enforceable?

2. In view of the findings made under Issue 1 above, are (i) the Settlement Agreement; and (ii) the Guarantee Supplemental Letter void for mistake in equity under Hong Kong law?

3. In any event, is the Parent Guarantee ineffective under Hong Kong law because the Guarantee Supplemental Letter was subject to a condition precedent- being the provision of the Shantou Mortgage to the Claimant - which was not fulfilled?

4. In view of the findings made under Issues 1-3 above:-

(a) Has the 1^st Respondent breached its obligation to pay the remaining Initial Put Price under the Settlement Agreement and is it liable to pay the same to the Claimant?

(b) Has the 2^nd Respondent breached its obligation to pay the remaining Initial Put Price under the Parent Guarantee and is it liable to pay the same to the Claimant?

Respondents’ Counterclaim

5. Does the Tribunal have jurisdiction over the SPA Counterclaim?

6. If the answer to Issue 5 above is yes:-

(a) Are the Inter-company Loans made in compliance with the laws of the PRC?

(b) If the answer to sub-issue (a) above is no, are the Inter‑company Loans valid and enforceable?

(c) Is the Inter-company Loans Representation actionable misrepresentation and not true?

(d) If the answer to sub-issue (c) above is yes, what are the loss and damage suffered by the 1^st and 2^nd Respondents (if any) as a result of the Inter-company Loans misrepresentation?

7. Are the 1^st and 2^nd Respondents entitled to set-off (i) their respective loss and damage suffered (if any) as a result of the Inter-company Loans misrepresentation against (ii) their respective liability (if any) for the Initial Put Price as per Issue 4 above?”

10.After a hearing in April 2023, the sole arbitrator issued a final Award on the merits. He found in favor of CF on its claims under the Settlement Agreement and the Guarantee, and ordered SHK and S Listco to make payment of the remaining IPP of RMB 1 billion, interest and costs, without any withholding, set-off, counterclaim, retention or deduction. The arbitrator dismissed the counterclaim of the Respondents, ruling that he did not have jurisdiction to determine either SHK’s counterclaim which was made on the basis of the SPA, or S Listco’s request for relief which extends beyond the Guarantee.

11.There is no application to set aside the Award, or the Enforcement Order.

12.The Respondents’ case is that the 2^nd Arbitration has been commenced by SHK against CF and its parent CF SA. The claims made in the 2^nd Arbitration are that CF and/or CF SA made false and misleading representations regarding the financial position of CF China, the subject company of the SPA, and in particular as to the inter-company loans (totaling RMB 5.047 million) between the subsidiaries of CF China. SHK claims that CF had failed to disclose that most of the borrowing subsidiaries were insolvent, that SHK had been led by CF’s misrepresentations into believing that repayment of the inter-company loans would not be affected, when in truth, these loans should have been recorded and properly booked as doubtful or bad debts in the audited reports, and that most of the loans had not been approved by the board of the lending subsidiaries, and that by approving these loans, the directors of the subsidiaries had breached their duties of loyalty and diligence under PRC law. On the Respondents’ case, they have sustained loss and damages exceeding RMB 1 billion as a result of the misrepresentations.

13.On timing, it is worth noting that according to SHK, the relevant misrepresentations were made in a Disclosure Letter dated 22 June 2019 which was provided by CF in relation to the SPA. The SPA was signed on 22 June 2019. The Settlement Agreement was signed later, on 28 April 2022. On the Respondents’ case as argued in the Arbitration, they had become aware in March 2022 that the inter-company loans might be problematic and posed a risk to the parent company, but it was not until early 2023 that SHK came to a “full understanding” of these loans of CF China’s subsidiaries, and discovered that the representations were false.

14.On behalf of SHK and S Listco, Counsel argued that the Court should take a holistic view of the series of different agreements made by CF, SHK and S Listco, and from such perspective decide whether it would be fair and just to stay enforcement of the judgment entered in these proceedings, when SHK and S Listco can assert an equitable set-off by reason of their reasonably arguable claims of misrepresentation made in the 2^nd Arbitration. Mr Chan referred to various authorities to support his submission that the courts are prepared to consider the close connection between the creditor’s claims and the cross-claims of the debtor which are sought to be raised, in deciding whether it would be just to allow the creditor to enforce payment without taking into consideration the cross-claim.

Applicable legal principles

15.The parties do not appear to seriously dispute that S v G [2021] 3 HKC 272 set out the relevant principles governing the Court’s exercise of its power and discretion to stay enforcement of a judgment originating from an arbitral award, in circumstances when the debtor seeks to rely on the claims made in a second pending arbitration as an equitable set-off. The decision was affirmed by the Court of Appeal in S v G [2022] HKCA 383. Paragraphs 22 to 24 of this Court’s judgment in S v G set out these relevant principles, emphasizing that the award creditor should not be deprived of the benefits of the judgment unless there is abuse or manifest injustice, and that there must be “very special circumstances” to justify a stay of enforcement. In deciding whether special circumstances exist, the nature of the claims, the extent of the identity between the claim in the judgment and the unresolved cross-claim, the strength and size of the cross-claim, the likely delay before the cross-claim can be adjudicated, and the extent of prejudice that may be suffered by the judgment creditor and the judgment debtor respectively, are all matters to be taken into consideration.

16.On appeal, Au JA also observed, at paragraph 22 of his judgment:

“It is a matter of discretion and balancing exercise for the Court to decide whether or not to grant a stay of execution. Generally, the starting point is that a judgment creditor is entitled to enforce the judgment he has secured against the judgment debtor. The discretion of the Court in granting stay of execution / enforcement should thus only be exercised in exceptional circumstances where an injustice would otherwise be caused, to prevent abuse, to preserve the dignity of the Court or to facilitate the administration of justice: Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104 at [3] - [8].”

17.On behalf of the Respondents, Mr Chan further argued that as there is now a petition for the winding-up of SHK in HCCW XXXX (“Petition”) on the basis of the judgment entered in terms of the Award, these enforcement proceedings should be stayed under section 181 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“Cap 32”), and because there is an arbitration clause in the SPA which is the subject matter of the 2^nd Arbitration, it would not be necessary or appropriate for this Court considering the stay application to look into the merits of the claims in the 2^nd Arbitration (relying on Shandong Cheming Paper Holdings Limited [2023] HKCFI 2731 – appeal against which decision has since been dismissed by the Court of Appeal), and a stay pending the determination of the cross-claims in the 2^nd Arbitration is appropriate and just.

18.In his submissions, Mr Chan asked for a stay of the enforcement of the Award and judgment entered in terms of the Award, as well as a stay of the Petition in HCCW XXXXXX.

19.On behalf of CF, Counsel pointed out that the Summons for stay issued by the Respondents on 28 August 2023 (“Summons”) refers only to section 16 of the High Court Ordinance, the Court’s inherent jurisdiction and section 181 of Cap 32, to seek a stay of the execution and/or enforcement of the Enforcement Order of 25 July 2023 - and there was no claim for stay of the winding up Petition. Mr Maurellet further pointed out that SHK was ordered to file its opposition to the Petition in January 2024, and that CF’s evidence in reply was only due 21 days thereafter (before the hearing of the Summons for stay in this action). CF was not given notice of, and has not been given the opportunity to put in its evidence in opposition to, the application for a stay of the Petition, and CF claims that it is premature for this Court to deal with such application now.

20.Under section 181 of Cap 32, the company against which a winding up petition has been presented may apply to “the court in which any action or proceeding (against the company) is pending”, for “a stay of the proceedings therein”. The court to which such an application is made may stay or restrain the proceedings on such terms as it thinks fit.

21.Whilst SHK’s application for stay under section 181 has been made in these proceedings for enforcement of the Award, the stay which may be granted by the Court is a stay of the enforcement proceedings pending before the Court - and not a stay of the Petition itself. The stay of the Petition must be made to the Companies Court before which those winding-up proceedings are pending. In the Court of Appeal’s judgment in the Shandong Chenming Paper Holdings Ltd case [2024] HKCA 352, G Lam JA explained (at paragraph 32) that “the ability to execute a judgment and to seek a winding up are treated as two different things”, a stay of execution of a judgment against a company does not in law prevent the judgment creditor from petitioning for its winding up and conversely, the refusal of a stay of execution does not prevent the Companies Court from staying the winding up petition where appropriate. The Petition and the enforcement of the judgment entered on the Award are therefore separate and distinct proceedings, and this Court will not in these proceedings consider any stay of the Petition.

22.The core dispute between the parties therefore turns on whether special circumstances exist in this case to justify a stay of these enforcement proceedings and to deprive CF of the benefits of the Award and judgment entered in its favour. The application under section 181 of Cap 32 for a stay of these enforcement proceedings must be considered and dealt with in the context of a stay of execution of a judgment, in accordance with the principles set out in S v G.

Whether just to stay enforcement

23.The Court of Appeal summarized, at paragraph 22 of the judgment in S v G [2022] HKCA 383, how the Court’s discretion to grant a stay of execution should be exercised. The starting point is that the judgment creditor is entitled to enforce the judgment it has obtained against the debtor. Accordingly, it should only be in exceptional circumstances, where an injustice would otherwise be caused, that the discretion should be exercised to grant a stay of execution or enforcement of the judgment.

24.As pointed out at first instance in S v G, all the relevant circumstances of the case will be considered, and the prejudices and injustice to the creditor and debtor respectively are to be balanced against the policy and general principle that a valid and final award should be enforced. The pertinent observations of the Court in Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104 must also be borne in mind: that for the court to exercise its power to stay enforcement of a valid judgment, justice must require it, and there must be very special circumstances. The Court should not otherwise prevent a judgment creditor from enjoying the fruits of the judgment, short of there being “abuse or manifest injustice”.

25.In determining whether the Respondents’ liability under the Settlement Agreement and the Guarantee, as found by the Tribunal in the Arbitration, can be set off against their claims made in the 2^nd Arbitration against CF and its parent company, relating to misrepresentations in or leading to the SPA, Counsel for the Respondents have urged the Court to consider the Settlement Agreement, the Guarantee, the SPA and the SHA together, as closely related transactions and agreements. It was emphasized that (even if the merits of the Respondents’ claims in the 2^nd Arbitration should be considered), such claims are genuine, reasonably arguable, and not frivolous or an abuse of process, which should be accepted as comprising an equitable set-off against the judgment sum due from the Respondents to CF.

Existence of the Anti-Set-off Clause

26.On CF’s part, its Counsel has highlighted the importance of the context in which the Settlement Agreement was made. It was emphasized that the Settlement Agreement was entered into between CF and SHK in April 2022, after SHK had made default in payment of the IPP when it was payable under the SHA. At that time, the Respondents were already in breach of the SHA and the Guarantee, and CF wanted payment of the remaining IPP immediately. The Respondents had not made payment and wanted more time. The Settlement Agreement was negotiated by sophisticated parties under legal advice. What the parties ultimately agreed upon, and what the Settlement Agreement provided for, was that the IPP which had fallen due should be paid by SHK by 9 installments, but because of the delay in payment and the additional time granted to SHK to make the payment, there was the express covenant contained in the Settlement Agreement that SHK would pay the IPP in installments and interest “without any withholding, set-off, counterclaim, retention or deduction”.

27.It was argued for CF that this Anti-Set-off Clause unequivocally excludes any form of set-off, legal or equitable (as construed and held by the Singapore Court in Koh Lin Yee v Terrestrial [2015] 2 SLR 497). On Counsel’s submission, the presence of such an Anti-Set-off Clause nullifies any right of set-off which a party may have, and the terms of the parties’ agreement must be paramount and takes precedence over the court’s discretion to grant a stay (as held in Tubeworkers Ltd v Tilbury (1985) 4 Con LR 13). In these circumstances when all cross-claims have been excluded by the parties’ express agreement, Counsel for CF contended that the purported cross-claim/set-off relied upon by the Respondents cannot be considered as an exceptional circumstance to justify a stay of the enforcement proceedings.

28.These submissions made on behalf of CF are convincing and supported by the authorities. Tubeworkers v Tilbury was the English Court of Appeal’s decision on the jurisdiction to order a stay of execution under the English equivalent of Order 47 rule 1 RSC. The plaintiffs in the case were subcontractors and obtained summary judgment against the defendants which were the main contractors of the construction. The express terms of the contract provided that the plaintiffs/subcontractors were entitled to immediate payment upon the main contractor’s receipt of a sum certified by the architect. The plaintiffs obtained judgment, but the defendants were initially granted a stay of execution of the judgment under Order 47 rule 1. On appeal, it was held that although the court’s jurisdiction to order a stay of execution was wide, such discretion ought not be exercised where to do so would overturn the contractual scheme for payment, and the mere fact that the defendants had a good or arguable counterclaim could not be a special circumstance. In his judgment, Kerr LJ observed:

“So what the learned judge has done, in effect, is that he has replaced the contractual machinery agreed between the parties by the process of the courts in ordering a stay under Order 47. In my view this is prima facie wrong. I say ‘prima facie’ because, as already mentioned, there might be exceptional circumstances to justify it. But, generally speaking, I think that the relevant terms of the contract between the parties must be paramount and take precedence over the court’s discretion under Order 47.” (Emphasis added)

29.On Mr Maurellet’s submission, the primacy of party autonomy as shown in the decision of Tubeworkers was echoed in the English Court of Appeal’s decision in Society of Lloyd’s v Leigh [1997] CLC 1398. There, the Court of Appeal considered the exercise of the discretion to order a stay of execution, in the light of a contract clause whereby the relevant parties waived any claim to a stay of execution and consented to the immediate enforcement of any judgment obtained. The following observations were made by the Court:

“Whilst it is agreed that the clause cannot oust the court’s jurisdiction, it has potent effect. The installation of the set-off and counterclaim was intended to achieve the speedy discharge of the indebtedness, which intention would be avoided and the whole function of the clause subverted by a stay of execution.”

30.In Society of Lloyd’s, the English Court of Appeal also cited the observations made by Parker LJ in Continental Illinois National Bank and Trust Company of Chicago v Papanicolaou (‘The Fedora’) [1986] 2 Lloyd’s Rep 441 at 445:

“It would defeat the whole commercial purpose of the transaction, would be out of touch with the business realities and would keep the bank waiting for a payment, which both the borrowers and the guarantors intended that it should have, whilst protracted proceedings on the alleged counterclaims were litigated. We do not doubt that the court has the discretion to grant a stay but it should in our view be ‘rarely if ever’ exercised, as Lord Dilhorne said in relation to claims on bills of exchange…”

31.The above view was endorsed by the Singapore Court of Appeal in Koh Lin Yee v Terrestrial [2015] 2 SLR 497, where Phang JA referred to the above passage in Society of Lloyd’s and dismissed an appeal against a stay of execution of a judgment. The contract considered by the Court contained a clause stating that all payments were to be made under a loan agreement “without set-off, counterclaim or condition”, and (at paragraph 73 and 74 of his judgment) Phang LJ held:

“Effectively, allowing for a stay of execution would defeat the purpose of the no set-off clause to a significant extent as it would still keep the creditor waiting for a payment that should have been made without dispute…”

32.The Anti-Set-off Clause in the Settlement Agreement clearly and plainly, on its face, provides for payment of the IPP without any withholding, set-off, counterclaim, retention or deduction. The expressed intention of the parties is obvious, and the consensus at the time when the Settlement Agreement was made must be that any right of set-off or counterclaim, and any form of deduction, would be excluded. There is no reason why SHK should be permitted to depart from what it had expressly agreed, and it cannot be unjust to find that as SHK is bound by the Anti-Set-Off Clause, it cannot be permitted to delay enforcement of the Award and judgment until its claims in the 2^nd Arbitration have been determined, and for such claims in its favour to be used as a set-off or deduction against the sum found to be due in the Arbitration.

33.This was precisely what the tribunal found in the Award, after conducting an analysis of the evidence on what SHK knew of the inter-company loans, at the time when the Settlement Agreement containing the Anti-Set-off Clause was made. CF argued in this context that SHK and S Listco are bound by the Tribunal’s findings and are estopped from reopening the binding effect of the Anti-Set-off Clause.

34.In answer to this, the Respondents claim, firstly, that the Anti‑Set-Off Clause has no legal effect by virtue of section 4 of the Misrepresentation Ordinance, and further, that no issue estoppel arises as the tribunal did not make any final or conclusive ruling in the Award on the reasonableness or validity of the Anti-Set-off Clause.

Validity of the Anti-Set-Off Clause

35.It is pertinent to consider the issues put to the tribunal in the Arbitration, and the findings made in the Award.

36.The claims initiated by CF in the Arbitration were made under the Settlement Agreement and the Guarantee, for payment of RMB 1 billion. On their part, the Respondents deny the validity and enforceability of the Supplement Agreement on the ground of mistake, and further claim that CF had made misrepresentations in relation to the inter-company loans before the SPA was made (“Misrepresentation”), with a counterclaim for damages and declaratory relief under the SPA and the Guarantee. CF claimed in the Arbitration that the tribunal did not have jurisdiction over the SPA Counterclaim.

37.The agreed issues put to the tribunal for determination in the Arbitration are set out at paragraph 115 of the Award, and repeated in paragraph 9 above.

38.Pertinently, Issue 7 is framed as separate to Issue 6 (on the Misrepresentation counterclaim). Issue 7 relates to whether the Respondents were entitled to set-off their loss and damage (sustained as a result of the Misrepresentation) against their respective liability for the IPP claimed by CF under the Settlement Agreement.

39.At paragraphs 175 and 176 of the Award, the arbitrator highlighted the fact that the Misrepresentation claim, and the damages allegedly suffered by the Respondents as a result, were raised as a defence by way of equitable set-off:

“175. As mentioned at §§111 and 113 above, the Respondents are not asking this Tribunal to finally determine the SPA counterclaim, but only to find that the SPA Counterclaim is ‘reasonably arguable’ and to grant one of the relief proposed in §10 of the Rejoinder.

176. The Respondents are relying on the SPA Counterclaim not only as a counterclaim, but for the purpose of an equitable set-off defence against the Claimant’s claim herein.” (Emphasis added)

40.Mr Chan emphasized the fact that the arbitrator ruled expressly that he did not have jurisdiction to deal with the Respondents’ counterclaim. It was submitted that, accordingly, any ruling by the arbitrator with regard to the Misrepresentation claim, including the validity or effectiveness of the Anti-Set-off Clause, is merely obiter, and was not essential to the Award to be binding, or to constitute issue estoppel, such that the Respondents are not precluded from arguing now that the Anti-set-off Clause is void under section 4 of the Misrepresentation Ordinance. Reliance was placed on the decisions made in Lincoln National Life Insurance Co v Sun Life Assurance Co of Canada [2006] 1 All ER (Comm) 676, and Good Challenger Navegante SA v Metalexportimort SA [2004] 1 Lloyd’s Rep 67 as to what can constitute issue estoppel.

41.Mr Chan contended that by ruling that he had no jurisdiction on the Misrepresentation counterclaim, and by stating that it was not necessary to deal with the arguments over whether the set-off had been established on the facts, any decision which the arbitrator had made in the Award as to the effect of section 4 cannot be final or conclusive.

42.It is clear from the Award that on the question of jurisdiction, the arbitrator had considered the arbitration agreement under which CF had submitted its claim in the Arbitration, the subject matter of CF’s claim under the Settlement Agreement, the Guarantee and the Supplemental Guarantee, and the subject matter of the Respondents’ counterclaim on the basis of the Misrepresentation made prior to the SPA. He concluded that the Respondents’ counterclaim relating to the SPA and the Misrepresentation does not fall within the scope of the arbitration agreements in the Settlement Agreement, the Guarantee and the Supplemental Guarantee pursuant to which the Arbitration was commenced and the tribunal constituted. The arbitrator’s finding was recorded at paragraph 205 of the Award:

“Accordingly, the Tribunal determines and HOLDS that it has no jurisdiction over the SPA Counterclaim (defined in the Award as ‘Respondents’ counterclaim made on the basis of the alleged misrepresentations regarding inter-company loans’), whether as a set-off or as a counterclaim by the Respondents. The question posed under Issue 5 is answered in the negative. Issue 6 has fallen away.”

43.However, it is clear from the Award and the framing of the agreed list of issues that the arbitrator did (and had to) deal with Issue 7 which was the Respondents’ defence as to their entitlement to assert a set-off against CF’s claim. The tribunal may not have jurisdiction to deal with or grant any relief to the Respondents by virtue of their counterclaim, which were claims made under or relating to the SPA, and the arbitrator had found that the SPA contains a separate arbitration clause, which conflicts with the arbitration agreements in the Settlement Agreement, the Guarantee and the Supplemental Guarantee. However, the arbitrator had jurisdiction to decide CF’s claims in the Arbitration and the Respondents’ defence to these claims, as to whether the Respondents had any right of set-off at all.

44.Pertinently, the arbitrator recorded at paragraph 207 of the Award that the parties had agreed that the tribunal “can and should decide” the important issue of set-off. The arbitrator referred to transcripts of Day 1 of the hearing where the parties’ consensus was apparently stated.

45.The arbitrator then dealt with the Respondents’ entitlement to set-off, from paragraphs 206 to 230 of the Award. He considered the evidence as to the connection between the SPA and the Settlement Agreement, the context in which the Settlement Agreement was made, the Respondents’ evidence as to the state of their knowledge of the inter‑company loans and the issues or problems raised, the effect of section 4 of the Misrepresentation Ordinance, and whether section 4 can apply to the Misrepresentation relating to the SPA, which is a different contract to the Settlement Agreement. The arbitrator pointed out (at paragraph 215) that he proceeded on the assumption that section 4 was applicable.

46.From paragraph 225 of the Award, the arbitrator stated his conclusions:

“225. The Tribunal agrees with the Claimant that the anti-set-off clause does not work to exclude its liability under the SPA, but only restricts the Respondents’ remedy in cross‑claiming for the same in these proceedings. In other words, the Respondents are entirely free to pursue its claim based on the alleged misrepresentation in another proceedings (which they seem to be doing in as the 2^nd Arbitration), despite the anti‑set‑off clause. This further tips the balance in favour of that clause being reasonable.

226. Having considered all circumstances of the case, the Tribunal is satisfied that the anti‑set‑off provision in Clause 3(a) of the Settlement Agreement meets the requirement of reasonableness under section 4 of the MO and section 3 of the CECO.

227. It follows from this conclusion that Clause 3(a) effectively precludes the Respondents from raising any set‑off in this arbitration. That consequently obliviates the need to go into the arguments over whether the Respondents have made out their case on set‑off in substance on the facts, on which it is not necessary to analyze further.

228. As to the 2^nd Respondent’s right to set off, the Respondents cited Hui v Esposito Holdings Pty Ltd (2017) 314 ALR 278 for a proposition that ‘guarantor can pray in aid of the equitable set‑off mounted by the primary debtor’.

229. Even if the 2^nd Respondent as the guarantor can stand in the shoes of the 1^st Respondent as the primary obligator, as the 1^st Respondent itself is deprived of such entitlement, so is the 2^nd Respondent. There is no reason why the 2^nd Respondent would be in a better position than the 1^st Respondent vis-a-vis the set‑off against the Claimant’s claim.

230. For all these reasons, the Tribunal HOLDS that neither the 1^st Respondent nor the 2^nd Respondent is entitled to rely on any loss and damage suffered as a result of the inter‑company loans misrepresentation to set off against their respective liability to the Claimant for the Initial Put Price. Issue 7 is therefore answered in the negative.” (Emphases added)

47.It is clear from the above and from the Award that the arbitrator did make a final decision, that the Anti-Set-off Clause satisfies the requirement of reasonableness under section 4 of the Misrepresentation Ordinance, and that the Respondents were contractually precluded from raising any defence of set-off in the Arbitration. He stated that there was no need to consider the facts and evidence on whether there can be a set-off which can be asserted by the Respondents, but that was simply because the Respondents were precluded by the Anti-Set-off Clause from relying on any form of set-off, counterclaim, retention or deduction at all against the IPP payable under the Settlement Agreement. That does not detract from the arbitrator’s finding on the reasonableness and effectiveness or validity of the Anti-Set-off Clause, or his finding that the Respondents could not assert the set-off by virtue of the operation of the clause, and that their defence accordingly failed.

48.To state the obvious, this Court is not concerned with the correctness of the arbitrator’s findings on facts or on law, and there is indeed no challenge to the arbitrator’s Award. The Respondents only attempt to claim now, for the purpose of showing that there is some exceptional circumstance or good reason for staying enforcement of the Award and judgment entered, that there is no binding decision on the Anti-Set-off Clause or on their purported right of set-off, and this has simply not been established.

49.For all purposes regarding the liability of S Listco, if SHK is liable for payment of the IPP, then S Listco is liable to CF under the Guarantee as extended by the Supplemental Guarantee, irrespective of whether it is a party to the Settlement Agreement. The arbitrator held in the Award (at paragraphs 228 and 229) that S Listco should not be in a better position than SHK vis-à-vis the set-off against the liability to pay the IPP.

The progress of the 2^nd Arbitration and other relevant factors

50.As pointed out by CF, the 2^nd Arbitration is still in its early stage. The Notice of Arbitration was filed only shortly before the Summons for stay. The claims made by SHK in the 2^nd Arbitration are not expected to be resolved for at least another 2 years after the issue of the Award. On CF’s case, significant delay would be caused if a stay should be granted, and it would be unjust for CF, which has a final and binding judgment for a substantial amount, to have to wait for the resolution of the 2^nd Arbitration. Significant delay is recognized in Israel Sorin Shohat v Balram Chainrai [2017] 6 HKC 174 to be a matter which militates against a stay.

51.Neither SHK nor CF has sought to argue that the merits of their respective claim and defence in the 2^nd Arbitration are so strong as to justify or resist a stay of enforcement. At most, it can only be said that SHK has an arguable claim in the 2^nd Arbitration.

52.I cannot see any injustice to the Respondents, if a stay is refused. SHK had agreed to submit any dispute relating to the SPA to arbitration, and it is of course entitled to pursue the 2^nd Arbitration against CF. As Counsel for CF has highlighted, there is no basis for the Respondents to claim that there is any prejudice by reason only of the fact that any award which may be obtained in the 2^nd Arbitration has to be enforced against CF outside Hong Kong. SHK had agreed to arbitrate in Hong Kong, well knowing that CF may not have assets here and has no duty to bring assets into Hong Kong.

Disposition

53.Having reviewed all the circumstances of this case, and the factors identified as being relevant to the consideration of a stay as outlined in S v G and Israel Sorin Shohat v Balram Chainrai [2017] 6 HKC 174, the balance of injustice is in favor of refusing a stay of execution of the Enforcement Order. The Summons is dismissed, with costs to CF, with Certificate for Counsel.

Mr Jose-Antonio Maurellet SC and Mr Cyrus Chua, instructed by Clifford Chance, for the applicant

Mr Frederick HF Chan, instructed by Nixon Peabody CWL, for the 1^st & 2^nd respondents