In Israel Sorin (IZZY) Shohat v Balram Chainrai (HCCT 9/2016), Hong Kong’s Court of First Instance held that the Court has jurisdiction to stay execution of orders granting leave to enforce arbitral awards and that stay of execution of such orders is subject to the same regime governing the stay of execution of ordinary court judgments.

Considering the circumstances of the case as a whole, however, the Court refused to stay execution, even though the award debtor had commenced court proceedings against the award creditor in Hong Kong and the award debtor had already paid a very substantial sum into court pursuant to a condition imposed by the court for granting an interim stay of execution of the enforcement order pending determination of the application for stay of execution.

Background

In December 2007, the award creditor commenced a legal action in Israel (the Israeli Action) against the award debtor, seeking a declaration that he was entitled to a half interest in loans advanced by the award debtor to a corporate borrower (the Borrower) for its purchase of shares in another company (the Company) and a lien of half of the shares under a pledge of shares by which the loans were secured. The award debtor counterclaimed against the award creditor for his breach of fiduciary duties as a trustee of the award debtor’s funds and investments regarding other joint ventures between them.

In May 2011, the parties consented to convert the Israeli Action into an arbitration (the Arbitration) and following an arbitration hearing in Israel in 2012, an arbitral award (the Award) was made upholding the award creditor’s claim and dismissing the award debtor’s counterclaim. The award debtor’s subsequent appeals against the Award were dismissed by the Israeli courts.

In July 2014, the award debtor commenced proceedings against the award creditor in Hong Kong (the High Court Action) claiming damages for negligence and breach of fiduciary duties, including the principal sum of the loan.

In February 2016, the award creditor applied to the Hong Kong court, pursuant to Section 87 of the Arbitration Ordinance, Cap. 609 and Order 73, rule 10(1) of the Rules of the High Court, Cap. 4A, to enforce the Award as a judgment of the court.

In May 2016, the award creditor applied to strike out the High Court Action on the ground that it was an abuse of process for the award debtor to seek to re-litigate the “same issues and subject matter” as in the Arbitration. The strike-out application was heard, with the court’s decision pending.

In September 2016, the award creditor was granted leave to enforce the Award in the same manner as a judgment of the court (the Enforcement Order). The award debtor then applied for a stay of execution of the Enforcement Order.

Legal Issues

The Court had to determine (i) whether the Court had jurisdiction to grant a stay of execution of the Enforcement Order, and if so, (ii) whether the execution of the Enforcement Order should be stayed in the circumstances of the case.

Does the Court have jurisdiction to stay execution of an Enforcement Order?

Yes.The Court concluded that it had jurisdiction to grant a stay of execution of the Enforcement Order. The effect of the Enforcement Order was to enable the Award to be enforced in Hong Kong in the same manner as a judgment of the court. It was not in dispute that the court had a discretion to grant a stay of execution of an ordinary judgment where the circumstances justified such stay. As a matter of principle, the Court was unable to see why the Enforcement Order should be accorded a higher status than an ordinary court judgment, or why the court would lack jurisdiction, in the strict sense, to stay the execution of the Enforcement Order in an appropriate case.

The Court accepted that the general policy of the law is to facilitate enforcement of arbitration awards, which is given effect by the rules which enable an award creditor to obtain the court’s leave to enforce the award as a court judgment by an inexpensive and expeditious procedure, and the limited and narrow grounds on which enforcement of arbitration awards may be refused by the court. However, once the court has made an order granting leave to permit an arbitration award to be enforced as a judgment of the court, whether execution of such order should be stayed is subject to the same regime governing the stay of execution of an ordinary court judgment.

Should a stay of execution be granted in this case?

In determining whether to stay the execution of the Enforcement Order, the Court found the following factors in Burnett v Francis Industries plc [1987] 1 WLR 802 as being potentially relevant:-

  1. nature of the claim (the subject matter of the arbitration award);
  2. strength of the cross-claim;
  3. size of the claim relative to the size of the cross-claim;
  4. any delay before the cross-claim will be disposed of;
  5. the extent of prejudice to the award creditor if it is denied the fruits of its award/judgment until the cross-claim is determined; and
  6. the risk of prejudice to the award debtor if it makes payment under the award/judgment.

Court Ruling

In the present case, the Court considered the following factors to be most significant:-

  1. the award creditor had got an unimpeachable award against the award debtor for a substantial sum of money;
  2. the award debtor had at most an arguable claim against the award creditor; and
  3. there would be significant delay before the award debtor’s action against the award creditor could finally be disposed of, assuming that it could survive the strike out application.

The Court therefore refused to grant the stay of execution and in accordance with the Court’s usual practice regarding unsuccessful applications to challenge enforcement of arbitration awards, it ordered the award debtor to pay the award creditor’s costs of this application on an indemnity basis.