In Baosteel Engineering & Technology Group Co. Ltd. v. China Zenith Chemical Group Ltd. [HCCT 7/2018], the Hong Kong Court of First Instance granted a temporary stay of enforcement of an arbitral award. In order to ensure that the award creditor’s interests were not prejudiced, the operation of the stay was made conditional on the award debtor paying security.

Background

Baosteel Engineering & Technology Group Co. Ltd. (BS), a Mainland Chinese Company, entered into an agreement with Hong Kong-listed China Zenith (CZ), as well as and CZ’s Mainland Chinese subsidiary, Heihe Longjiang Chemical Company Ltd. (HH). The agreement prescribed the fees for the construction of a plant in Mainland China. Disputes arose, and the award was rendered in favour of BS, holding CZ and HH jointly and severely liable to pay outstanding fees amounting to RMB 19.44 Million. BS obtained leave to enforce the award from the Hong Kong Courts on 7 February 2018. CZ sought to have the enforcement order set aside; however its application was dismissed on account of its failure to provide security as required by the order of another judge. CZ has since accepted and admitted that it had sought neither to appeal nor vary the dismissal order.

In the interim, HH initiated proceedings against BS in the Heihe Intermediate Court (HH Court) for breach of an agreement between HH and BS, detailing the work to be carried out by BS on the project. HH alleged that BS provided defective designs, and claimed damages amounting to RMB 32.97 million. In response, BS challenged the jurisdiction of the HH Court. Awaiting a decision on jurisdiction by the HH Court, CZ sought a stay of enforcement of the award before the Hong Kong Courts.

The arguments

CZ argued that HH’s claims against BS before the HH Court arose from the same subject matter as the award. Hence, the judgement debt (RMB 32.97 million) should be set off against the award in favour of BS (RMB 19.44 million), if the claims were successfully established.

On the other hand the plaintiff contended that the cross claims pending before the HH Court had been initiated by a separate entity, namely HH, and not by CZ, against whom enforcement had been sought and granted in Hong Kong. Accordingly, the pending cross claims could not be relied upon to stay the enforcement of the award. Further, BS argued that there was no date by which a decision could reasonably be expected and a decision on jurisdiction did not eliminate the possibility of future proceedings on the merits of the claim. BS submitted that the uncertainty of the proceedings could cause the enforcement of the award to be delayed for a prolonged and indefinite period.

Decision

Mimmie Chan J. observed that a delay in the enforcement of the award on account of cross claims made by HH, and the resultant possibility of a judgment at an uncertain time in the future, would be prejudicial to the interests of BS. She noted that there was no evidence to indicate that BS would not be in a position to pay HH, if the HH Courts were to make such an order. However, the Court took into account that there were doubts about CZ’s position as a going concern, based on its financial statements and reports. In light of such concerns, it considered CZ’s position, whereby HH could recover the judgment debt from BS on the Mainland, however, foreign exchange controls in the PRC would prevent HH from reimbursing CZ in Hong Kong.

Chan J. ordered a temporary stay of enforcement for a period of six months. However, she noted her reluctance in granting the stay and imposed conditions on its operation; requiring CZ to pay into Court the entire amount of the award (RMB 19, 818,046) or provide a bank guarantee for such sum. Additionally, the Court granted the parties liberty to vary, lift or continue the stay in the event of any change in status of the proceedings before the HH Court.

Discussion

It is possible that the decision is an attempt by the Court to find the middle ground between the parties’ interests and specific factual circumstances on one hand, and preventing undue delay to the arbitral process, within reason, on the other hand. However, the judge’s reasoning is not fully articulated in the written judgment and it is therefore unclear what ultimately persuaded the Court to allow the stay in spite of its expressed misgivings.

Chan J. potentially sought to address these misgivings by making the operation of the stay conditional on the payment of full security by CZ. Such payment serves to protect BS from any financial difficulties that CZ might face between the date of the judgment and the expiry of the stay. By the same token if security is not paid, the suspension is discharged.