In Peter Cheung & Co v. Perfect Direct Limited & Yu Guolin (HCMP 2493/2012) ("HCMP Action") and New Heaven Investments Limited & Rondo Development Limited v. Yu Guolin (HCA 115/2013) ("HCA Action"), the Hong Kong Court of First Instance ("CFI") has extended the principle of indemnity costs to cases where a party attempts to delay the enforcement of an arbitral award. Whilst the action in the present judgment was not a direct challenge to an arbitral award, the CFI found that the purpose of the action was "clearly an attempt to delay the enforcement of an arbitral award" and therefore indemnity costs should be awarded to deter such behaviour. Click here for the full judgment.

This extension of the indemnity costs principle, beyond challenges to arbitral agreements and awards to actions attempting delay, reinforces the pro-arbitration approach of the Hong Kong courts and its efforts to deter so-called "guerilla tactics" employed by unsuccessful parties to frustrate arbitral awards.

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Indemnity Costs Principle

Where a party has been unsuccessful in challenging an arbitral award in Hong Kong, the courts have consistently ordered, in the absence of special circumstances, that that party should pay costs on the indemnity basis. The effect is that, a party that unsuccessfully challenges an award must generally pay costs on the more onerous indemnity basis, as opposed to the typical "party-and-party" basis.

The CFI first applied this principle in relation to resisting enforcement in A v. R [2009] 3 HKLRD 389. It was later confirmed by the Court of Appeal in Gao Haiyan & Anor v. Keeneye Holdings Ltd & Anor (No 2) [2012] HKC 138. The principle was applied to set-aside cases by the Hong Kong Court of Final Appeal in Pacific China Holdings Ltd v. Grand Pacific Holdings Ltd. In late 2015, the CFI ordered indemnity costs against a party that had unsuccessfully challenged an arbitration agreement Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd (HCA 2416/2014)

Peter Cheung & New Heaven Judgments

Facts

The claimant (and respondent in the present application) in the HCMP Action, Yu Goulin ("Yu"), entered into a Guarantee Agreement with Perfect Direct Limited ("PDL") in 2010, in which PDL guaranteed the market value after 10 months of shares in a company in which Yu invested. The market value of the shares were below the guaranteed market value after 10 months, and Yu therefore requested the release of HK$150 million of bonds that were being held (by Peter Cheung & Co ("Peter Cheung") – the applicant in the present application) as security. The bonds were not released and therefore Yu initiated a claim in the Hong Kong courts in 2012. This action was shortly thereafter stayed with the consent of all parties and referred to arbitration in accordance with an arbitration agreement in the Guarantee Agreement. In November 2013, an arbitral tribunal in Shanghai issued an award in favour of Yu. An Enforcement Order in relation to the award was obtained from the Hong Kong courts in June 2014. Nevertheless, PDL refused to instruct Peter Cheung to release the bonds and instead suggested that the matter be dealt with by the HCMP Action. Accordingly, Yu restored the HCMP Action and this was due to be heard in March 2016.

Five working days before the hearing of the HCMP Action, PDL applied to consolidate that action with the separate HCA Action ("Consolidation Summons"), which involved Yu and shared some overlapping facts with the HCMP Action. No evidence in support of the Consolidation Summons was filed in the HCA Action, and the evidence filed by PDL in the HCMP Action was filed belatedly. The CFI rejected the Consolidation Summons and also found in favour of Yu in the HCMP Action. The question before the CFI was whether costs in respect of the Consolidation Summons and the HCMP Action should be ordered against PDL on an indemnity basis.

CFI Findings

The CFI awarded indemnity costs in respect of both the Consolidation Summons and the HCMP Action. Master Chow stated that the principles in A v. R equally applied to the present case. Whilst the Consolidation Summons and the HCMP Action were not applications to set aside or resist enforcement of the arbitral award, they were attempts to delay the enforcement of the award. Master Chow commented that it "would send the wrong message" to suggest "that such strategy is potentially "worth a go"", and therefore indemnity costs were warranted. It is notable that the Consolidation Summons was not without merit: previous case management conferences had suggested that consolidation may be appropriate and the facts in the two actions did overlap somewhat. However, the evident ulterior motive of PDL to delay enforcement clearly concerned the court in this case such that, irrespective of any merits, an award of indemnity costs was warranted.

In the alternative, relying on general principles that the court may take into account other factors beyond whether the application has been brought for an improper purpose, Master Chow found the defendants' behaviour justified the imposition of indemnity costs. This behaviour included the belated filing of evidence in support of the Consolidation Summons, the inexplicable delay in applying for the Consolidation Summons, PDL's attempt to re-litigate the arguments raised in the arbitration, and PDL's failure to seek set aside or appeal the Enforcement Order if it wished to challenge the award.

Commentary

Peter Cheung and New Heaven is a welcome extension of the indemnity costs principle. The judgments confirm that indemnity costs will apply not only where a party unsuccessfully seeks to challenge an arbitral award, but also where a party seeks to delay or frustrate enforcement by other means. In this respect, these judgments extend the Hong Kong courts' pro-arbitration approach and unwillingness to tolerate so-called "guerilla tactics" designed to avoid the enforcement of valid arbitral awards.