Background facts

In 2005, the claimants and the respondent executed an Original Equipment Manufacturer (OEM) Supply Agreement for the supply of machines by the claimants to the respondent. The parties then entered into purchase orders pursuant to the OEM Supply Agreement. Subsequently, the respondent stopped purchasing machines, with substantial outstanding payments, and started to manufacture machines similar to those of the claimants. The claimants commenced arbitration at the Hong Kong International Arbitration Centre.

By June 2019, the tribunal had issued a final award and an addendum thereto on liability, both in favour of the claimants (the Liability Awards). In August 2019, the claimants applied to the Shenzhen Intermediate People’s Court for the recognition and enforcement of the Liability Awards. In September 2019, the respondent applied to set aside the Liability Awards (the Setting Aside Application). In December 2019, the claimants applied to the Hong Kong Court of First Instance to enforce the Liability Awards (the Enforcement Application and collectively with the Setting Aside Application, the Prior Proceedings). In August 2020, the court recognised the Liability Awards and dismissed the respondent’s Setting Aside Application. The court subsequently issued cost orders against the respondent covering the claimants’ costs in the Prior Proceedings and ordered payment out of security for costs paid by the respondent (collectively the Prior Cost Orders).

In 2022, the tribunal issued a final award on quantum and pre-award interest in favour of the claimants (collectively the Quantum Awards). In February 2023, upon the claimants’ application, the court issued an ex parte recognition order, and in August 2023 the respondent filed an anti-recognition application (Anti-Recognition Application). In October 2023, in response to the respondent’s Anti-Recognition Application, the claimants issued a security application (the Security Application) seeking, among others, an order that the Anti-Recognition Application not be heard until the respondent has complied with an order made before the Hong Kong court (the Hadkinson Order) that the respondent provide security for the sums due under the Quantum Awards and security for the claimants’ costs of opposing the Anti-Recognition Application. The claimants also asked that, if the respondent fails to provide such security, the Anti-Recognition Application should be dismissed with indemnity costs.

Decision

Deputy High Court Judge Anselmo Reyes, SC noted that a court will generally not ask the respondent to put up security as a condition to resisting a claim or application. The party in the position of the respondent (in this case the party applying to set aside an enforcement order) is entitled to be heard and defend itself unconditionally. Even in the case of a difficult and obstructionist respondent, this would not be a sufficient factor to deprive it of its right to defend a claim. Furthermore, the judge noted that a losing party in arbitral proceedings can resist the recognition and enforcement of an arbitral award, and it is only in exceptional circumstances that they will be deprived of this entitlement.

Having considered the submissions of the claimants, the judge refused to grant a Hadkinson Order, distinguishing the respondent in this case, which had not paid the debts adjudged, from cases of ignoring an injunction or an order for the disclosure of assets or a court order in matrimonial proceedings for the provision of information or maintenance in which Hadkinson Orders were granted.

The judge also held that there were no grounds to grant security for the sums due under the Quantum Awards. Although the respondent was being difficult and fighting every step in the arbitration proceedings, the respondent was entitled to do so. The effect of ordering the respondent to pay a substantial amount of security before it was allowed to pursue its Setting Aside Application would be akin to barring the respondent from pursuing its application, which would be a denial of justice to the respondent. Furthermore, the judge rejected the claimants’ submission that an order for security would prevent the respondent from dissipating its assets as, if the claimants were right in their apprehension, the respondent would simply not put up the security and continue to dissipate assets. The claimants instead should have applied to the court for the speedy determination of the Anti-Recognition Application, in which process the court can dismiss the Anti-Recognition Application and allow the claimants to enforce the Quantum Awards in the same manner as any other Hong Kong court judgment.

It was also held that there were no grounds to grant security for the claimants’ costs of opposing the Anti-Recognition Application. Although the respondent is based out of Hong Kong, this is not a sufficient basis for ordering security for costs since it is likely that in Hong Kong-seated cross-border arbitration, at least one party is based outside of Hong Kong. It is inappropriate to order security for costs purely because a party is resident in a foreign jurisdiction as difficulties of enforcing an award against a debtor may have been part of the commercial risk that an enforcing party undertook when it entered into a business relationship with that debtor. The claimants failed to show more to justify an order for security for costs. Moreover, there was no evidence to show that the respondent is impecunious. Furthermore, the claimants were effectively seeking to strike out the respondent’s Anti-Recognition Application if security is not paid. The judge was not prepared to strike out the respondent’s application without hearing the merits of its case.

In light of the above, the judge dismissed the claimants’ Security Application and ordered it to pay the respondent’s costs of the Security Application on a party and party basis.