In 中國機床銷售與技術服務有限公司 v 國晟機電設備有限公司 [2024] HKCFI 958, DHCJ Jonathan Wong (“Judge”) examined the appropriate ambit of the guidelines in Soleh Boneh v Government of Uganda [1993] 2 Lloyd’s Rep 208 (“Soleh Guidelines”) in applications for security against award debtors under RHC O.73 r.10A. After thoroughly examining the authorities from England and Hong Kong, the learned Judge confirmed the continuing validity of the Soleh Guidelines.
A. The Facts
2015 and 2016, P entered into various contracts (“Contracts”) with the Defendant (“D”) whereby D agreed to service certain machinery in Ukraine exchange for lump sum service fees. To that end, P paid lump sums totalling RMB 230 million (“Prepaid Sum”) into D’s designated Hong Kong bank account (“Account”). Pursuant to the Contracts, no money was to be transferred out of the Account without mutual consent. Due to unrest in Ukraine, P never called upon D to perform its obligations and did not authorize any payments out of the Account. From 2020, P requested D to provide information on the status of the Prepaid Sum but D persistently refused.
On 23 November 2020, P commenced a CIETAC arbitration (“Arbitration”) against D claiming (1) termination of the Contracts and (2) repayment of the Prepaid Sum.
On 17 March 2023, the arbitral tribunal (“Tribunal”) handed down its final award (“Award”) and granted P the relief sought. P subsequently obtained an ex parte order from the Hong Kong Court to enforce the Award (“Order”). D applied to set aside the Order. P applied for security from D under O.73 r.10A.
B. The Soleh Guidelines
For two decades since Karaha Bodas Co LLC v Persusahaan Pertambangan Minydak Dan Gas Bumi Negara [2003] 2 HKLRD 381, the Hong Kong Court has consistently applied the Soleh Guidelines to applications of this kind.
The Soleh Guidelines require the Court to consider two factors: (1) the validity of the award as perceived on a brief consideration of the merits, and (2) the ease or difficulty of enforcement of the award. If the award is manifestly valid, the Court will order immediate enforcement or substantial security to be paid. If it is manifestly invalid, no security will be ordered. For cases in between, the Court must make a judgment call while guided by its preliminary conclusion on the point.
A manifestly valid award may itself justify an order being made. That being said, the case for security will be stronger in the face of movement of assets or improvident trading by the award debtor, and weaker where there are and always will be insufficient assets within the jurisdiction.
C. Should a Different Test be Applied?
At the hearing of P’s application for security, D advanced a threefold argument that a different test should apply. First, a distinction had to be drawn between “active remedy” cases where the award debtor takes the initiative to apply to set aside the award in the supervisory court, and “passive remedy” cases where the award debtor waits until enforcement is sought before mounting his challenge.
Secondly, the Soleh Guidelines were only meant to apply to “active remedy” cases where an adjournment was sought from the enforcing court to give time for the supervisory court to determine the setting aside application. In such situations, there would be uncertainties as to how the supervisory court would proceed and potential for delay. These risks were lower in “passive remedy” cases as both enforcement and setting aside were considered “locally” by the same court. Thus, by applying the Soleh Guidelines to “passive remedy” cases as well, the Hong Kong Courts had “taken the wrong course”.
Thirdly, D proposed that in “passive remedy” cases, the power to order security should only be exercised if the challenge “appears flimsy or otherwise lacks substance”. This was the test applied by several first instance English courts in the context of challenging domestic awards under s.70(7) of the Arbitration Act 1996 (“Act”). It was also acknowledged by Lord Mance in IPCO (Nigeria) Ltd v Nigerian National Petroleum Corp [2017] 1 WLR 970. D’s alternative position was that even if the Soleh Guidelines continued to be applied, the local nature of “passive remedy” cases had to be given due weight.
In response, P submitted that (1) there was a long line of Hong Kong authority applying the Soleh Guidelines to O.73 r.10A applications, that (2) unlike s.70(7) of the Act, RHC O.73 r.10A was framed broadly and not limited to domestic awards, and that (3) Lord Mance in IPCO had only observed by way of obiter that there was first instance authority applying the “flimsy” test.
Whilst noting that there was no binding authority on this point as a matter of Hong Kong law, the learned Judge ultimately rejected D’s submissions and confirmed the applicability of the Soleh Guidelines to “passive remedy” cases. In doing so, his Lordship noted that in the recent decision of The Czech Republic v Diag Human SE & Anor [2023] EWCA Civ 1518, the English CA had disapproved of the “flimsy” test as it would require the merits of the challenge to be examined twice – once for the security application and again during the substantive application to set aside. Further, the English CA supported the application of the Soleh Guidelines, which warned against excessive consideration of the merits, even in the context of s.70(7) of the Act.
Given also that Hong Kong had assimilated the regimes for recognition and enforcement of awards seated in and outside Hong Kong (see AAD and AAE v BBF [2024] HKCFI 698), there was no material difference between challenging a local award (which s.70(7) of the Act was directed at) and challenging a Mainland award by way of the “passive remedy”. Thus, the Soleh Guidelines were applicable to the present case as well.
The learned Judge also rejected D’s alternative position, noting that even where the challenges were determined “locally”, substantial delays could still arise due to “various interlocutory skirmishes” (JJ Agro Industries (P) Ltd v Texuna International Ltd [1992] 2 HKLR 391). This was reflected in the present case as D had threatened to bring injunction proceedings on the basis that P’s Hong Kong solicitors were acting in conflict of interest.
In the present case, D argued that the Award should be set aside on the public policy ground due to retrospective application of Mainland law and conflict of interest. The learned Judge pointed out that each argument was beset by various problems and held that the Award was “placed decidedly closer to the side of manifest validity”. With regards to difficulty of enforcement, his Lordship noted that any security ordered can or ought to be met by the Prepaid Sum, and that D was still stonewalling P’s requests for relevant information. Further, where the relevant assets were mostly or entirely liquid as in the present case, difficulties in enforcement could be “created almost instantaneously”.
Finally, on the basis that the Court rarely makes an order for full security, the learned Judge held that an appropriate amount in the present case would be RMB 150 million.
D. Takeaways
The decision confirms that under Hong Kong law, the Soleh Guidelines govern all applications for security against an award debtor regardless of where the arbitration was seated or whether it is an “active” or “passive remedy” case. The decision provides welcome clarity to the law in this area and aligns with the desire for a straightforward and pro-enforcement approach to post-award litigation.
Mr LAI Chun Ho and Mr LIM Han Sheng, instructed by Messrs Jun He Law Offices, for the Plaintiff
The full judgment is accessible here: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=159374&currpage=T
