SHANDONG HONGRI ACRON CHEMICAL JOINT STOCK CO LTD v. PETROCHINA INTERNATIONAL (HONG KONG) CORPORATION LTD

CACV 31/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 31 OF 2011

(ON APPEAL FROM HCCT NO. 45 OF 2009)

____________

BETWEEN

	SHANDONG HONGRI ACRON CHEMICAL JOINT STOCK COMPANY LIMITED	Applicant/ Creditor
and
	PETROCHINA INTERNATIONAL (HONG KONG) CORPORATION LIMITED	Respondent/ Debtor

____________

Before: Hon Kwan JA in Chambers

Dates of Written Submissions: 14, 21 and 28 July 2011

Date of Handing Down of Decision on costs: 11 August 2011

____________________________

DECISION ON COSTS

_____________________________

 

1.  On 13 June 2011, I handed down my decision dismissing the respondent’s application for security for costs of the appeal. I made an order nisi that the respondent is to pay the applicant’s costs in any event on a party and party basis, with a certificate for two counsel. The respondent applied by summons on 27 June 2011 to vary the order nisi that there should be no order as to costs of its failed application, alternatively the applicant be deprived of half of its costs and with no certificate for two counsel. I directed that this application be dealt with on the basis of written submissions without a hearing.

2.  To seek a no costs order on an application which the respondent has lost is simply unrealistic. Nothing further need be said about this.

3.  The respondent’s position, as stated in its two submissions of ten pages, may be summarised as follows:

(1)   it is not asking for an “issue based order” but a “proportionate costs order”, namely, that the costs awarded to the applicant should be reduced by 50%;

(2)   it is relying on principle (iii) in In re Elgindata Ltd. (No. 2) [1992] 1 WLR 1207, namely, that the court may deprive a successful party of part of his costs if that party raises issues or makes allegations on which he fails and such issues have caused a significant increase in the length or costs of the proceedings;

(3)   the applicant has raised a number of grounds to oppose the application for security for costs (set out in paragraphs 1 and 17 of my earlier decision) and has failed on all of them except the issue that the court should not exercise its discretion to order security in the context of a foreign arbitration award against an award creditor (“the Discretion Issue”);

(4)   the issues on which the applicant failed constituted the bulk of the issues or arguments between the parties, a substantial proportion of the time and costs was spent on those issues and this has significantly increased the length and costs of the proceedings;

(5)   the applicant had never made clear to the respondent or explained in detail its argument on the Discretion Issue until it served its skeleton on the respondent five days before the hearing; and

(6)   a certificate for two counsel should not be granted as the application is a straightforward interlocutory application.

4.  I reject the above contentions of the respondent.  I see no sufficient basis for departing from the general rule that costs should follow the event. The issues on which the applicant failed were easily disposed of and would not have caused significant increase in the length or costs of the proceedings. Besides, it lies ill in the mouth of the respondent to complain of lengthy affidavits and evidence filed by the parties dealing with the substantive merits of the case of each when it was the respondent who asserted that the appeal had no merits in the first letter of its solicitors seeking security for costs.

5.  Quite clearly, it was the Discretion Issue that was the substantial issue in this application.  It was not a point decided previously by the Court of Appeal and which I did not find easy to resolve.  The applicant had given notice to the respondent that the Discretion Issue would be taken to oppose the application in the letter of its solicitors dated 24 March 2011 and its affidavit in opposition filed on 23 May 2011, although the detailed arguments were not developed.  It was really up to the respondent’s legal team to do their own research and form their own view on the Discretion Issue.  They decided to proceed with the application and the Discretion Issue was resolved against them.  This issue justified the engagement of leading counsel, who prepared the written submission.  

6.  I decline to vary the order nisi as sought by the respondent.  I also decline to vary the order from paying costs in any event to costs forthwith, as sought by the applicant.  I order the respondent to pay the applicant’s costs of the application for security for costs and the application to vary the order nisi in any event.  I grant a certificate for two counsel in the application for security for costs only.

(Susan Kwan) Justice of Appeal

Ms Teresa Cheng, SC and Mr Adrian Lai, instructed by Messrs Hogan Lovells, for the Applicant

Messrs Mayer Brown JSM, for the Respondent

CACV 31/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 31 OF 2011

(ON APPEAL FROM HCCT NO 45 of 2009)

____________

BETWEEN

	SHANDONG HONGRI ACRON CHEMICAL JOINT STOCK COMPANY LIMITED	Appellant/ Creditor
	and
	PETROCHINA INTERNATIONAL (HONG KONG) CORPORATION LIMITED	Respondent/ Debtor

____________

Before : Hon Cheung CJHC, Kwan JA and Lam J in Court

Date of Hearing : 13 July 2011

Date of Judgment : 25 July 2011

_______________

J U D G M E N T

_______________

Hon Cheung CJHC:

Facts

1.  This is an appeal from the order of Saunders J dated 25 January 2011 relating to an application to enforce an arbitral award dated 21 September 2009.

2.  The Applicant, Shandong Hongri Acron Chemical Joint Stock Company Limited, a company incorporated in the Mainland, carries on business as a manufacturer of fertilizers.  The Respondent, Petrochina International (Hong Kong) Corporation Limited, a local company, is a supplier of chemical products and commodities.  The parties entered into a contract dated 4 July 2008 for the supply of lump sulphur with defined specifications.  A total of 3,937.448 tonnes of sulphur were supplied under the contract, and USD3,051,522.20 was paid as purchase price.  The Applicant accepted and used 126.87 tonnes but rejected the rest (3,810.578 tonnes) as being of the wrong specifications.  It claimed for the return of the balance purchase price in the sum of USD2,953,198 in respect of the rejected sulphur.

3.  Pursuant to an arbitration clause in the contract, the parties’ dispute was heard by an arbitral tribunal of the China International Economic and Trade Arbitration Commission (“CIETAC”) in Beijing. By an arbitral award dated 21 September 2009 given by the majority of the Arbitral Tribunal, the Tribunal found in favour of the Applicant and made the following awards:

“(1) The Applicant shall return 3,810.578 tonnes of sulphur to the Respondent.

(2) The Respondent shall return USD2,953,198 (being the payment received for the goods) to the Applicant.

(3) The Respondent shall pay RMB11,126.18 (converted from USD1,624.26) as damages, the amount being insurance premium paid by the Applicant.

(4) The Respondent shall indemnify the Applicant’s costs incurred on the relevant goods under the Sales/Purchase Contract at the destination port, which included 14 expenses such as ‘service fees’, in the amount of RMB350,002.58 (calculated up to December 2008).

(5) The Respondent shall pay an examination and certification fee to the Applicant in the amount of RMB65,400.00 as damages.

(6) The costs of this arbitration is RMB347,372. The Respondent shall bear 70% of the costs (it being RMB243,160.4), and the Applicant shall bear 30% of the costs (it being RMB104,211.6). As the Applicant has already prepaid the arbitration fee in full, the Respondent shall reimburse the Applicant the sum of RMB243,160.4.

(7) Other claims made by the Applicant in the arbitration are dismissed.

The sums mentioned in (2), (3), (4), (5) and (6) above, which are payable to the Applicant, shall be fully paid by the Respondent to the Applicant within 30 days from the date of this Award. Should payment be made after the deadline, interest shall be added in accordance with the law.

This is the final award, and is effective on the date when the award is made.” (English translation)

4.  After the arbitral award was made, the parties could not agree on the inspection and return of the sulphur still in the possession of the Applicant.  The Respondent took the stance that repayment of the balance purchase price ordered under paragraph (2) of the arbitral award and payment of other sums ordered were conditional upon the return of the rejected sulphur to the Respondent “in the same status and quality” as and when the same was delivered to the Applicant.

5.  The Applicant disagreed and on 17November 2009, applied for leave to enforce paragraphs (2) to (6) of the arbitral award in Hong Kong.

6.  This was opposed by the Respondent, who in due course also applied for leave to enforce paragraph (1) of the award in Hong Kong.  Saunders J was seized of the matter as well as a number of interlocutory applications made by the parties respectively.  In substance, the Respondent argued that repayment of the balance purchase price and payment of the other sums were conditional upon the return of the rejected sulphur.  The Respondent relied on the arbitral award itself as well as the nature of the dispute between the parties and of the awards in support of its contention.  Further, the Respondent relied on two letters from the CIETAC Secretariat dated 18 November 2009 and 20 November 2009 and a third letter from the Arbitral Tribunal dated 30 March 2010 (collectively “the CIETAC letters”), which the Respondent claimed were additional/supplemental awards made by the Arbitral Tribunal, in support of its argument.  The three CIETAC letters suggested that the Respondent’s understanding of the position was the correct one (see below).

7.  After eleven hearings, Saunders J handed down a Ruling on 25 January 2011.  The Judge accepted the Respondent’s argument that under the arbitral award, the obligation of the Respondent to make payment of the sums awarded to the Applicant was not “concurrent” with (used in the sense of “independent of”) the obligation of the Applicant to return the sulphur, but was subsequent to, and conditional upon, due performance of that obligation.  However, the Judge did not base his decision on the three CIETAC letters.  He found that they did not constitute additional or supplemental awards by the Arbitral Tribunal, and in any event, so far as the second and third letters were concerned, they were issued without affording the Applicant any opportunity to be heard.

8.  Paragraph 1 of the sealed Order of the Judge gave leave to the Respondent to enforce paragraph (1) of the arbitral award relating to the return of the sulphur.  Whilst the Ruling was silent on the matter, paragraph 2 of the Order ordered that the Applicant do forthwith return to the Respondent the original 3,810.578 tonnes of sulphur “in the same status and quality” as and when the same were received by the Applicant.  Paragraphs 3 and 4 of the Order gave leave to the Applicant to enforce paragraphs (2) to (6) of the arbitral award but the judgment so entered shall require payment of the various sums awarded in paragraphs (2) to (6) only “upon due performance” of the Applicant’s obligation to return the sulphur in the manner described above.

9.  From that Ruling and Order, the Applicant appeals to this Court.

General principles

10.  Section 2GG(1) of the old Arbitration Ordinance (Cap. 341) (which continues to apply to arbitrations commenced before 1 June 2011) provides that :

“An award, order or direction made or given in or in relation to arbitration proceedings by an arbitral tribunal is enforceable in the same way as a judgment, order or direction of the Court that has the same effect, but only with the leave of the Court or a judge of the Court. If that leave is given, the Court or judge may enter judgment in terms of the award, order or direction.”

11.  As the majority of the Court of Final Appeal in Democratic Republic of the Congo v FG Hemisphere Associates LLC, FACV 5-7/2010, 8 June 2010, a case concerned with state immunity, recognized, there are two different stages in the enforcement of an arbitral award.  That is, the recognition stage at which an award is converted into a judgment and the execution stage at which the judgment is enforced :

“382. An application for the grant of leave to enforce the award, often referred to as the ‘recognition’ phase of enforcement, therefore involves discretionary adjudicative proceedings in which the impleaded State may claim state immunity.

383. It is furthermore clear, as stated above, that even where the recognition proceedings are successful, when the applicant subsequently seeks to execute the award (now treated like a judgment of the court), the impleaded State has a further right to object to execution against the targeted property on the ground of state immunity. The parties have jointly requested the Court to focus only on the recognition proceedings, leaving aside questions of execution.”

12.  Furthermore, at the recognition stage, the court’s task is to decide whether leave should be granted to “enter judgment in terms of the award, order or direction”.  The court respects the plain intent behind the relevant provisions to make awards to which they apply enforceable with ease, subject to the narrowly confined exceptions, “almost as a matter of administrative procedure” : Gater Assets Ltd v NAK Naftogaz Ukrainiy [2007] 2 Lloyd’s Rep 588, para 59. As has been pointed out by Gross J in Norsk Hydro Asa v State Property Fund of Ukraine [2002] EWHC 2102 (Comm), paras 17 to 19, there is an important policy interest in ensuring the effective and speedy enforcement of international arbitration awards; the corollary, however, is that the task of the enforcing court should be “as mechanistic as possible”.  The enforcing court is neither entitled nor bound to go behind the award in question, explore the reasoning of the arbitral tribunal or second‑guess its intention. Therefore, under section 2GG(1) if an award is entered as a judgment then it has to be entered “in terms of the award” : Walker v Rowe [2000] 1 Lloyd’s Rep 116, 121.

13.  These principles, advanced forcefully by Ms Teresa Cheng SC, Mr Adrian Lai with her, for the Applicant, have indeed been followed in this jurisdiction, a jurisdiction which, like many other jurisdictions, adopts a “pro‑arbitration” approach. See, for instance, Xiamen Xinjingdi Group Ltd v Eton Properties Ltd [2008] 4 HKLRD 972, paras 46‑47 (Reyes J); affirmed on appeal : [2009] 4 HKLRD 353, para 28.  This is not to say that no practical difficulties can arise or may have to be dealt with by the court in the execution of the arbitral award as a judgment.  Practical issues may arise in executing the judgment.  However, as a rule, those issues are to be resolved, if necessary, only at the execution stage : Xiamen Xinjingdi, paras 128‑131 (Reyes J).

Arbitral award imposes no condition precedent

14.  Bearing in mind these general principles, which are not really disputed by Mr Peter Ng SC for the Respondent, one turns to the arbitral award in the present case.  I have extracted the dispositive part of the arbitral award. Putting aside the CIETAC letters for the time being, it is plain that the award does not say that the payment obligations in paragraphs (2) to (6) are conditional or dependent on paragraph (1) (return of the sulphur).  It is true that the award gives the Respondent 30 days after the making of the award to perform paragraphs (2) to (6).  It is also true that whilst the award does not impose any time limit for the performance of paragraph (1), Article 49(1) of the CIETAC Arbitration Rules provides that in such an event the parties shall execute the arbitral award “immediately”.  Yet, it does not follow that performance of paragraph (1) by the Applicant is a condition precedent to the Respondent’s performance of paragraphs (2) to (6).

15.  Plainly, the award does not say so.  Nor does Article 49(1), or indeed any other rules, in the CIETAC Arbitration Rules.

16.  Therefore, in the context of enforcing paragraphs (2) to (6) by means of entering a judgment “in terms of the award”, there is no question of imposing a delivery condition in terms of paragraph (1) to the payment obligations under paragraphs (2) to (6).  To do otherwise would be to alter, rather than to enforce, the award, something that the enforcement court is not entitled to do.

17.  Mr Ng argues that the nature of the obligations created under paragraphs (1) and (2) respectively, namely, return of the remaining sulphur following rejection and repayment of the corresponding price previously paid, indicates that the respective obligations are not independent ones.  Paragraphs (1) and (2) of the award deal with a restitution situation and seek to restore the matter to its original status.

18.  The law of restitution may vary from one jurisdiction to another.  It is for the Arbitral Tribunal seized of the arbitration to apply the applicable law.  So far as Hong Kong as the enforcement jurisdiction is concerned, it should adopt as mechanistic approach as possible, and should not second‑guess the intention of the Arbitral Tribunal.

19.  Moreover, even if one were to assume that return of the goods and repayment of the price already paid are not mutually independent of each other, still it does not follow that the respective awards requiring the buyer to return the rejected goods and the seller to repay the price received must be conditional on each other.  It is perfectly possible for a tribunal, or for that matter, a court, to order respectively the buyer to return the rejected goods and the seller to repay the price received, failing which the seller may seek enforcement of the return obligation from the court or, as the case may be, the buyer may apply to court to execute the award/order for repayment against the seller who has failed to comply with the same.  One must not confuse rights and obligations under the law of restitution with awards and orders as means to give effect to those substantive rights and obligations.

20.  It is therefore dangerous and indeed wrong to go behind an arbitral award and get embroiled in the underlying dispute between the parties or an arbitral tribunal’s reasoning for its decision.  Put another way, this case illustrates the importance of adhering to the mechanistic approach at the recognition stage.

21.  By the same token, there is no justification for imposing the further condition that the 3,810.578 tonnes of sulphur must be returned “in the same status and quality as and when the same were received” by the Applicant to the payment obligations under paragraphs (2) to (6) of the award.  Even under Hong Kong law, the court adopts a very flexible and practical approach in a restitution situation, particularly when the subject matter to be returned is liable to change over time.  Any practical difficulties arising should be dealt with, where necessary, at the execution stage at which the judgment is executed.  There is no basis for imposing an inflexible condition precedent at the recognition stage.

The CIETAC letters

22.  Mr Ng prays in aid the three CIETAC letters.  Senior Counsel essentially argues that the three letters are or amount to additional or supplemental awards made by the Arbitral Tribunal, and they form an integral part of the original arbitral award.  To fully understand Mr Ng’s argument, it is necessary to outline the events leading to the issue of these three letters and the underlying regulatory regime.

23.  Article 56 of the Arbitration Law of the Peoples’ Republic of China provides that :

“對裁決書中的文字、計算錯誤或者仲裁庭已經裁決但在裁決書中遺漏的事項，仲裁庭應當補正;當事人自收到裁決書之日起三十日內，可以請求仲裁庭補正。”

“Where a clerical or calculation error is contained in the award or certain matter is omitted from the award after the decision is made by the arbitration tribunal, the arbitration tribunal must make a supplement or rectification; a party to the arbitration may, within 30 days of the receipt of the award, request the arbitration tribunal to make a supplement or rectification.” (English translation)

24.  Article 48 of the CIETAC Arbitration Rules reads (in English and in Chinese – both are official versions) :

“Article 48 Additional Award

Within thirty (30) days from the date on which the arbitral award is received, either party may request the arbitral tribunal in writing for an additional award on any claim or counterclaim which was advanced in the arbitration proceedings but was omitted from the award. If such omission does exist, the arbitral tribunal shall make an additional award within thirty (30) days from the date of receipt of the written request. The arbitral tribunal may also make an additional award on its own initiative within a reasonable period of time after the arbitral award is issued. Such additional award shall form a part of the arbitral award previously rendered.”

“第四十八條　補充裁決

如果裁決有漏裁事項，任何一方當事人可以在收到裁決書之日起30天內以書面形式請求仲裁庭就裁決中漏裁的仲裁事項作出補充裁決;如確有漏裁事項，仲裁庭應在收到上述書面申請之日起30天內作出補充裁決。仲裁庭也可以在發出裁決書後的合理時間內自行作出補充裁決。該補充裁決構成原裁決書的一部分。”

25.  Furthermore, Article 43(3) and (6) of the CIETAC Arbitration Rules stipulate that the CIETAC stamp shall be affixed to the award and the arbitral award shall be signed by a majority of arbitrators respectively.

26.  As mentioned, the arbitral award was dated 21 September 2009. On 9 October 2009, the Respondent’s Chinese lawyers applied under Article 48 of the CIETAC Arbitration Rules to the Arbitral Tribunal to make a supplemental award to the effect that the Applicant had to return the rejected sulphur in its original status and quality to the Respondent, failing which the Respondent would have no obligation to make any payment awarded under paragraphs (2) to (6) of the award.

27.  The Respondent did not copy its application to the Applicant.  However, CIETAC did so on 19  October 2009.  On 22 October 2009, the Applicant’s Chinese lawyers submitted to the Tribunal its written objections to the application.

28.  On 17 November 2009, the Applicant’s lawyers in Hong Kong applied ex parte to the court for leave to enforce paragraphs (2) to (6) of the arbitral award.

29.  On the following day, the CIETAC Secretariat issued the following letter (English translation):

“CHINA INTRNATIONAL ECONOMIC AND TRADE

ARBITRATION COMMISSION

(2009)中國貿仲京字第020486號

Dispute arising from a Sales/Purchase Contract of Sulphur (Case No. G20080536)

Applicant: Shandong Hongri Acron Chemical Joint Stock

Company Limited

Arbitration Agents: Zhang Qikun, Zhang Hongwei, Qiao

Dongsheng, Sun Shunli

Respondent: PetroChina International (Hong Kong) Corporation

Limited

Arbitration Agents: Gao Yifeng, Jiang Jingye

In relation to the arbitration of the captioned dispute, we acknowledge the receipt of the Respondent’s ‘Application for Supplementary Award’, which was sent to us on 12^th October 2009. We also acknowledge the receipt of the ‘Opposition to the Respondent’s Application for Supplementary Award’, in which the Applicant commented on the said application.

The arbitral tribunal holds the view that the rulings on the return of the goods and the return of the payment for the goods in this case is actually the result of the termination of the disputed contract. This is a restoration of the subject matter to its original condition under Article 97 of the Contract Law. The Respondent brought up the issue of the time limits for the compliance with the first item of the award and the second to sixth items of the award. According to Article 49 of the Arbitration Regulations, the first item of the award regarding the return of goods should be carried out immediately after the arbitral award comes into effect. The time limit for the compliance with this matter had not been indicated in the award previously. Regarding the second to the sixth items of the award, the obligation to make the payments should be discharged within the period indicated in the arbitral award, that is, within 30 days from the date of the arbitral award.

Notice of the above matters is hereby given to the parties.

18^th November 2009

Enclosure: as stated

[Stamp mark of the CIETAC Secretariat]”

30.  By a letter dated 19 November 2009, the Respondent’s Chinese lawyers wrote to the Tribunal again.  The material part of the letter reads (English translation) :

“We acknowledge receipt of CIETAC Beijing Document No. 020486 of 2009 issued by the Arbitration Commission on 18 November 2009 with regard to the application for additional award filed by the Respondent in the above‑mentioned case, PetroChina International (Hong Kong) Corporation Limited.

Based on the aforesaid document issued by the Arbitration Commission, it is the understanding of Respondent PetroChina International (Hong Kong) Corporation Limited that the Arbitration Tribunal interprets CIETAC Beijing Arbitral Award No. 0305 of 2009 as follows: Applicant Shandong Hongri Acron Chemical Joint Stock Company, Ltd. and Respondent PetroChina International (Hong Kong) Corporation Limited shall first execute item (i) of the Award; after completing the full execution of item (i) of the Award, the parties shall continue to execute items (ii) through (vi) of the Award.

We ask the Arbitration Commission and the Arbitration Tribunal kindly to confirm our understanding by replying to this letter.”

31.  Neither the Respondent nor CIETAC copied this letter to the Applicant.  Rather, on 20 November 2009, the CIETAC Secretariat issued its second letter (English translation):

“CHINA INTRNATIONAL ECONOMIC AND TRADE

ARBITRATION COMMISSION

(2009)中國貿仲京字第022143號

Dispute arising from a Sales/Purchase Contract of Sulphur (Case No. G20080536)

Applicant: Shandong Hongri Acron Chemical Joint Stock

Company Limited

Arbitration Agents: Zhang Qikun, Zhang Hongwei, Qiao

Dongsheng, Sun Shunli

Respondent: PetroChina International (Hong Kong) Corporation

Limited

Arbitration Agents: Gao Yifeng, Jiang Jingye

In relation to the arbitration of the captioned dispute, we acknowledge the receipt of a faxed letter from the Respondent to us on 20th November 2009. In that letter, the Respondent requested us to clarify the sequence of compliance with the award items in the arbitral award numbered 0305 of this case.

We refer to our letter numbered 020486. Regarding the relationship between the return of sulphur and the return of the payment for the goods as stated in the arbitral award numbered 0305 of this case, the arbitral tribunal is of the view that if the Applicant fails to return to the Respondent the goods under the disputed contract in this case at the status when the goods were originally received, then the Applicant does not have the right to demand the return of the payment for the goods from the Respondent.

Notice of the above matters is hereby given to the parties.

20^th November 2009

Enclosure: as stated

[Stamp mark of the CIETAC Secretariat]”

32.  On 24 March 2010, the Respondent’s Chinese lawyers wrote to CIETAC asking the latter to confirm that the two previous letters were supplemental awards to the original award, binding on the parties.  This letter was prompted, apparently, by an argument in the proceedings below that the two earlier letters only came from the CIETAC Secretariat, rather than the Arbitral Tribunal.

33.  Again, neither the Respondent nor CIETAC copied this last letter to the Applicant, who remained ignorant of it.

34.  On 30 March 2010, a third letter was issued (English translation) :

“ (2009) China Mao Zong Jin Zi No. 005046

Re: G20080536Dispute arising from a Sales/Purchase

Contract of Sulphur

Applicant Shandong Hongri Acron Chemical Joint Stock

Company Limited

Agents for the Arbitration Zhang Qikun, Zhang Hongwei, Qiao

Dongsheng, Sun Shunli

Respondent PetroChina International (Hong Kong) Corporation

Limited

Agents for the Arbitration Gao Yifeng, Jiang Jingye

In relation to the arbitration proceedings of the captioned dispute, we confirm having received and forwarded a copy of the Respondent’s letter received by this Commission on 26 March 2010 to the Applicant. In the said letter, the Respondent requested this Commission to specify clearly whether the Letter No. 020486 and the Letter No. 022143 constituted supplementary awards which are binding on both parties.

The Arbitral Tribunal confirms that the Letter No. 020486 and the Letter No. 022143 as mentioned above are supplementary explanations of the Arbitral Award of the arbitration proceedings No. 020080536 and form part of the said Arbitration Award.

For your attention.

Chief Arbitrator: [signature]

Arbitrator: [signature]

30^th March 2010

[Stamp mark of the CIETAC Secretariat]”

Supplemental awards?

35.  As mentioned, Mr Ng relies on these three letters to say that the payment obligations created under paragraphs (2) to (6) of the original arbitral award are qualified by two conditions precedent, that is, return of the rejected sulphur in its original status and quality.

36.  Mr Ng does not dispute that as a general principle, an arbitral tribunal becomes functus officio after publication of the award.  It has no inherent jurisdiction to vary the final and binding award it has published.  He nonetheless argues that the Tribunal has jurisdiction to issue the three letters by way of supplemental awards pursuant to Article 56 of the Arbitration Law and/or Article 48 of the CIETAC Arbitration Rules.

37.  Mr Ng’s reliance on Article 56 of the Arbitration Law is, with respect, misplaced.  Amongst other things (which are not relevant), Article 56 deals with the situation where the Tribunal has reached a decision on a particular matter or issue uder arbitration but has omitted or otherwise failed to set out its decision thereon in the award.  This is to be contrasted with the situation catered for under Article 48 of the CIETAC Arbitration Rules.  The relevant situation dealt with under Article 48 is where the Tribunal has omitted or failed to deal with and decide upon a matter or issue under arbitration at all.  Therefore, the two Articles deal with totally different and indeed mutually exclusive scenarios, and Mr Ng cannot rely on both at the same time.

38.  On the materials available, plainly, one is not concerned with the former situation covered by Article 56.  There is no evidence to suggest that the Arbitral Tribunal has dealt with and decided on the suggested relationship between the payment obligations imposed under paragraphs (2) to (6) of the arbitral award and the prior return of the rejected sulphur in its original status and quality, but has somehow failed to set its decision out in the arbitral award published.

39.  Furthermore, all correspondence between the parties or the Respondent on the one part and CIETAC on the other referred only to Article 48 of the CIETAC Arbitration Rules, but not Article 56 of the Arbitration Law.

40.  Turning to Article 48 of the CIETAC Arbitration Rules, one does find a Chinese and an English version of the same rule; both are, we are given to understand, authentic versions.  The Chinese version refers to “漏裁事項” whereas the English version is more informative : “any claim or counterclaim which was advanced in the arbitration proceedings but was omitted from the award”.

41.  In my view, given that both versions are authentic, it is reasonable to read the two together, with the more elaborate English version informing the proper understanding of the more succinct Chinese version.  If this be the correct approach, it is immediately apparent that the present case does not fall within Article 48.  It is common ground that the inter‑relationship, if any, between the return of the rejected goods and the payment obligations was never raised as a claim, counterclaim or even as an issue before the Arbitral Tribunal prior to the publication of the award.  It was not “a claim or counterclaim which was advanced in the arbitration proceedings but was omitted from the award”.

42.  In fact, even if one were to focus on the Chinese version only, it is difficult to turn a matter that had never been raised before the Tribunal during the proceedings as one that the Tribunal had “omitted to arbitrate on”, which is what “漏裁” suggests literally.

43.  In any event, even assuming that Article 48 applies to the present situation, Mr Ng’s reliance on Article 48 and the three letters is still fraught with difficulties.

44.  First, with the exception of the original application for a supplemental award under Article 48 and the first letter, everything else was done out of time.  Article 48 requires an application to be made within 30 days after the making of the award, and the additional or supplemental award to be made within 30 days from the date of receipt of the application.  Based on the chronology of events given above, it is clear that both the second and third letters were issued out of time.  As regards the first letter, by itself it is insufficient for Mr Ng’s purpose, as it simply refers to Article 49 of the Arbitration Rules and does not say that the payment obligations under paragraphs (2) to (6) are conditional on compliance with the return obligation under paragraph (1), not to mention the further condition that the sulphur shall be returned in the same status and quality.  It is plain that the second letter is a much more important letter from the Respondent’s perspective.  However, it is equally plain that it was issued out of time.

45.  Secondly, both the first and second letters were actually issued by the CIETAC Secretariat.  They were not signed by anybody but the stamp of the Secretariat was affixed to each of them.  This falls foul of the requirement under Article 43 of the CIETAC Arbitration Rules which requires the stamp of CIETAC to be affixed to the award and the award to be signed by a majority of arbitrators.  The third letter was obviously an attempt to rectify these defects.  At best, the third letter, when read together with the first and second, might be taken to mean that an additional or supplemental award was eventually made by the Tribunal on 30 March 2010, the date of the third letter.  One could read the third letter as incorporating the contents of the first and second letters.  But then the third letter was issued way out of time.  Equally fatally, whilst it was signed by a majority of arbitrators, CIETAC’s stamp was not affixed to it – rather, one still finds the stamp mark of the CIETAC Secretariat on this letter.

46.  Thirdly and even more fundamentally, as mentioned, apart from the first letter, the Applicant never had an opportunity to make submissions to the Arbitral Tribunal before the second and third letters were issued.  Given the importance of the subject matter concerned, it was a gross breach of the rules of natural justice.  The Applicant never had sight of the two letters dated 19 November 2009 and 24 March 2010 which led to the issue of the second and third letters.

47.  Mr Ng seeks to overcome the time point by arguing that Article 48 permits the Arbitral Tribunal, on its own initiative, to make an additional award “within a reasonable period of time after the arbitral award is issued”.

48.  This argument must be rejected.  First, it is plain from the three letters and the correspondence leading to the same that the three letters were all issued in response to requests made by the Respondent. They were not issued by the Arbitral Tribunal “on its own initiative”.

49.  Secondly, if the second and/or third letters were indeed issued by the Arbitral Tribunal “on its own initiative”, it would only make the breach of the rules of natural justice in the present case even more serious.  If the Tribunal was thinking of issuing a supplemental award in the form of the second or third letter “on its own initiative”, it ought to have afforded the Applicant an opportunity to be heard.  Matters that no doubt the Applicant, if given such opportunity, would have addressed the Tribunal on would include, amongst other things, whether the Tribunal ought to do so under Article 48, whether the period of reasonable time had already lapsed by then, and the prejudice to the Applicant in view of the fact that enforcement proceedings had already been commenced in Hong Kong.

50.  As a last attempt to save the three letters, Mr Ng argues that as the enforcement court, the court in Hong Kong must not usurp the function of the supervising court in Beijing.  All questions about the validity of the three letters as supplemental awards should have been dealt with in Beijing.  The local court should accept the three letters as supplemental awards at their face value.

51.  There is of course a distinction between the role of the supervising court and that of the enforcement court.  That has been clearly explained by the Court of Final Appeal in Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, 136–137, in the context of resisting enforcement on the “contrary to public policy” ground under section 44(3) of the old Arbitration Ordinance.

52.  Admittedly, one is dealing with the recognition stage in the enforcement of a Mainland arbitral award here.  Nonetheless, first, the role to be played by the enforcement court and the extent to which it may overlap with that played by the supervising court must depend on the circumstances.  I do not accept that the enforcement court must accept every piece of paper placed before it that is said to be an arbitral award or supplemental award as such, despite glaring discrepancies between the description of what amounts to an arbitral award or supplemental award in the relevant law or rules and what the court finds on the face of the so called award or supplemental award.  Secondly, there can be no dispute that the enforcement court is entitled to look at its own public policy relating to enforcement of foreign or Mainland awards.  As mentioned, public policy, in terms of observance of the rules of natural justice, is in issue in the present case, so far as the second and third letters are concerned.

53.  It is for the Respondent, who relies on the three letters as additional or supplemental awards, to satisfy the Court that indeed they are such awards.

Conclusion

54.  For all these reasons, I do not accept any of the three letters constitute an additional or supplemental award.  In those circumstances, the views expressed by the Arbitral Tribunal or the CIETAC Secretariat in the three letters are simply inadmissible in the enforcement proceedings in Hong Kong.  They must be ignored.  What one is left with is the arbitral award.  As explained, under the award, there is no place for the imposition of the suggested conditions on the payment obligations under paragraphs (2) to (6), the enforcement of which is sought in Hong Kong.

Outcome

55.  I would therefore allow the appeal and set aside paragraphs 1 to 4 of the Order dated 25 January 2011 of the Judge.  In substitution thereof, I would order that judgment be entered in favour of the Respondent in terms of paragraph (1) of the arbitral award dated 21 September 2009, and judgment be entered in favour of the Applicant in terms of paragraphs (2) to (6) of the arbitral award  and for interests on the sums of USD2,953,198 and RMB669,689.16, both at judgment rate from 22 October 2009 to the date of payment.

56.  As for the declaratory relief sought in paragraph 3 on page 3 of the Notice of Appeal, this judgment speaks for itself and there is no reason for the grant of such declaratory relief.

57.  As for the costs below, it would be noticed that I have kept intact the original paragraph 5 of the Order dated 25 January 2011, namely, that there be a hearing on costs if agreement cannot be reached between the parties.  Hopefully, the parties will reach an agreement on costs following the Court’s judgment, failing which the matter will be decided by the Judge at a further hearing, no doubt in accordance with this judgment.  For the same reason, it is not for this Court to deal with all outstanding applications and summonses and their costs.  They should be disposed of by agreement, if possible, failing which by the Judge at a further hearing, again in accordance with this judgment.

58.  As for the costs of this appeal, I would make a costs order nisi that they be paid by the Respondent to the Applicant, to be taxed if not agreed, with a certificate for two counsel.  The only exception is the costs of preparation of Bundles A1 to A6 and Bundle B.  For reasons canvassed towards the end of the hearing, I do not consider that the bundles were required at all for the purposes of this appeal.  I would disallow those costs so far as party and party taxation is concerned.

Hon Kwan JA :

59.  I agree with the judgment of the Chief Judge.

Hon Lam J :

60.  I also agree.

(Andrew Cheung) Chief Judge, High Court

(Susan Kwan) Justice of Appeal

(Johnson Lam) Judge of the Court of First Instance

Ms Teresa Cheng SC and Mr Adrian Lai, instructed by Hogan Lovells, for the Appellant

Mr Peter Ng SC, instructed by Mayer Brown JSM, for the Respondent

CACV 31/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 31 OF 2011

(ON APPEAL FROM HCCT NO. 45 OF 2009)

____________

IN THE MATTER OF ENFORCEMENT OF ARBITRATION AWARD

____________

BETWEEN

	SHANDONG HONGRI ACRON CHEMICAL JOINT STOCK COMPANY LIMITED	Applicant/ Creditor
and
	PETROCHINA INTERNATIONAL (HONG KONG) CORPORATION LIMITED	Respondent/ Debtor

____________

Before: Hon Kwan JA in Chambers

Date of Hearing: 8 June 2011

Date of Handing Down of Decision: 13 June 2011

_______________

DECISION

_______________

 

1.  This is an application for security for costs in an appeal. A point of some importance was raised in opposition by the appellant, which put in a written submission by Miss Teresa Cheng, SC and Mr Adrian Lai. Put shortly, they contended that the Court of Appeal should not exercise its discretion to order security in the context of enforcement of a foreign arbitration award against an award creditor, even if it has jurisdiction to do so.

2.  The order made by Saunders J on 25 January 2011 being the subject of this appeal was made in somewhat unusual circumstances.  The background matters relevant to this application, taking from two rulings given by the Judge on 6 August 2010 and 25 January 2011, may be stated as follows.

The background

3.  On 21 September 2009, the China International Economic and Trade Arbitration Commission (“CIETAC”) issued an award in an arbitration between the parties to these proceedings, Shandong Hongri Acron Chemical Joint Stock Co. Ltd. (“Hongri”) and Petrochina International (Hong Kong) Corporation Ltd. (“Petrochina”).  Hongri is a company incorporated in the PRC carrying on business as a manufacturer of fertilisers.  The relevant parts of the award read as follows:

“1. [Hongri] shall return 3,810.578 tonnes of sulphur to [Petrochina].

2. [Petrochina] shall return to [Hongri] the sum of US$2,953,198, being the payment received for the goods.

3. [Petrochina] shall indemnify [Hongri] the sum of US$1,624.26 … , being the insurance premium incurred.

4. [Petrochina] shall indemnify [Hongri] the sum of RMB 350,002.58, being 14 items of fees … incurred in relation to the goods under the Sale and Purchase Contract at the destination port…

5. [Petrochina] shall indemnify [Hongri] the sum of RMB65,400, being the authentication fee.

6. … [Petrochina] is responsible for 70% of the arbitration fee… [Petrochina] shall pay to [Hongri] the sum of RMB 243,160.40.

The sums mentioned in (2), (3), (4), (5) and (6) above, which are payable to [Hongri], shall be paid by [Petrochina] to [Hongri] within 30 days from the date of this award. Should payment be made after the deadline, interest shall be added in accordance with the law.”

4.  On 17 November 2009, Hongri made an ex parte application under sections 2GG and 40B of the Arbitration Ordinance, Cap. 341 for leave to enforce paragraphs 2 to 6 of the award, but excluding paragraph 1.  Saunders J made an order in terms on 18 November (“the Ex Parte Order”).

5.  On 4 December 2009, Petrochina applied to set aside the Ex Parte Order contending that by reason of what it described as a supplemental award of CIETAC by two letters dated 18 and 20 November 2009, the return of the goods in the same status as and when they were originally received was a condition precedent to its obligation to pay the amount ordered under the award.  Petrochina alleged Hongri had refused to discharge its obligation to return the goods.

6.  On 16 December 2009, Saunders J ordered that the sum of US$2,953,198 be paid into court pending a joint inspection of the goods by each party’s expert.  He further ordered upon satisfactory inspection that the goods are the original goods and upon the return of them to Petrochina, the said sum be paid out of court to Hongri.  Petrochina paid into court the said sum on 23 December.  Notwithstanding the payment, no successful arrangement was made to enable the return of the goods, so the funds have remained in court.

7.  On 16 March 2010, Hongri applied by summons under Order 14A for trial of preliminary issues.  The issues included the following: whether as a matter of law (1) the obligation of Hongri in paragraph 1 of the award and the obligation of Petrochina in paragraph 2 of the award are concurrent obligations; and (2) whether the two letters of CIETAC dated 18 and 20 November 2009 are binding on the parties as a supplementary award. 

8.  On 17 May 2010, Saunders J gave leave to Petrochina to amend its summons of 4 December 2009, to add seeking leave to enforce the whole of the award including paragraph 1. 

9.  On 6 August 2010, Saunders J made an order to vary the Ex Parte Order by granting leave to Petrochina to enforce paragraph 1 of the award against Hongri and ordered Hongri do forthwith return to Petrochina 3,810.578 tonnes of sulphur.  He stayed execution of the judgment pending further order of the court and gave directions for a case management conference in respect of Hongri’s summons under Order 14A dated 16 March.

10.  On 21 January 2011, the Judge heard Hongri’s Order 14A summons and Petrochina’s amended summons of 18 May 2010.  On 25 January, he gave his ruling on the three issues argued before him as follows:

(1)  On the issue whether the obligation of Hongri in paragraph 1 of the award and the obligation of Petrochina in paragraph 2 of the award are concurrent obligations, or whether the return of the sulphur is a condition precedent to payment, the Judge held that the obligation of Petrochina to make payment of the sums awarded is not concurrent with Hongri’s obligation to return the sulphur, but is subsequent to, and conditional upon the due performance of that obligation.

(2)  On the issue whether the two letters of CIETAC dated 18 and 20 November 2009 are binding on the parties as a supplementary award, the Judge held that these letters and a third letter of CIETAC dated 30 March 2010 do not form part of the arbitral award.

(3)  On the issue whether the Ex Parte Order should be set aside for material nondisclosure by Hongri, the Judge was satisfied there was no material nondisclosure.

11.  The order made by Judge as a result of the above rulings, which is the subject of Hongri’s appeal, is in these terms:

“1. Leave be granted to [Petrochina] to enforce paragraph 1 of the Arbitral Award … against [Hongri] in the same manner as a judgment of the High Court of the Hong Kong Special Administrative Region to same effect.

2. [Hongri] do forthwith return to[Petrochina] the original 3,810.578 tonnes of sulphur delivered under the contract … in the same status and quality as and when the same were received by [Hongri] (“the Delivery Obligation”).

3. Leave be granted to [Hongri] to enforce paragraphs 2 to 6 of the Arbitral Award… against [Petrochina] in the same manner as a judgment of the High Court of the Hong Kong Special Administrative Region to same effect.

4. Judgment be entered that, upon due performance of [Hongri’s] Delivery Obligation, [Petrochina] do pay to [Hongri] (a) the sum of US$2,953,198; (b) the sum of RMB 11,126.18; (c) the sum of RMB 350,002.58; (d) the sum of RMB 65,400; (e) the sum of RMB 243,160.40; (f) interest on the sum of US$2,953,198 at judgment rate from 22 October 2009 to the date of payment; and (g) interest on the sum of RMB 669,689.16 at judgment rate from 22 October 2009 to the date of payment.

5. There be a hearing on costs if agreement cannot be reached between [Hongri] and [Petrochina].

And it is ordered that the Order for stay of execution made by the Honourable Mr Justice Saunders dated 6 August 2010 be lifted.”

12.  Hongri filed a Notice of Appeal on 22 February 2011 against the above order, seeking to set aside paragraphs 2 and 4 thereof, and contending that the obligation of Hongri in paragraph 1 of the award and the obligation of Petrochina in paragraph 2 of the award are concurrent obligations and are to be performed independently of each other.  Further, Hongri seeks a declaration there is no requirement that it shall return the sulphur in the same status and quality as and when the same were received by it.

13.  Petrochina filed a Respondent’s Notice on 15 March 2011 seeking to vary paragraph 1 of the order to read “to enforce paragraph 1 of the Arbitral Award … as supplemented by the two letter of CIETAC … dated 18 and 20 November 2009”, on the ground that the Judge had erred in holding that the said letters were not supplement to and did not form part of the Award.

14.  As matters now stand, the disputes between the parties as to the quality of the goods in Hongri’s possession waiting to be returned and whether they were the original goods delivered remain unresolved.  Notwithstanding the stay of execution in August 2010 was lifted by the order made on 25 January 2011, no order has been made to enable execution of the judgment that has been entered as a result of the ruling of Saunders J in January 2011.

15.  On 17 March 2011, Petrochina’s solicitors wrote to Hongri’s solicitors requesting security for costs of the appeal in the region of HK$713,050, on the basis Hongri is ordinarily resident out of Hong Kong and the appeal has no merits.  Hongri’s solicitors replied on 24 March 2011 declining to provide security and stating, among other reasons, no security for costs should be made as the court is dealing with enforcement procedures arising out of Order 73 of the Rules of the High Court.  Petrochina’s solicitors replied to this on 3 May 2011 and issued the present summons seeking security on 6 May.

16.  In the hearing before me, Mr Lai appeared on his own to present oral submissions for Hongri.  Petrochina appeared by its solicitor Mr Simon Wong.

The grounds of opposition

17.  Hongri raised a number of grounds in opposition.  Other than the first ground, which I have mentioned at the outset, the other three were:

(1)  Hongri has reasonably strong merits in the appeal;

(2)  Hongri has sufficient assets within the jurisdiction, being the sums paid into court by Petrochina in the total amount of US$3,025,198 (being the totality of the sums under paragraphs 2 to 6 of the award); and

(3)  Petrochina has delayed in taking out this application. 

18.  Hongri’s counsel also submitted that the amount of security sought in the sum of HK$713,050 is excessive.  Firstly, the estimated costs should be reduced as a substantial part relates to the Respondent’s Notice.  Secondly, the estimated costs are grossly inflated.

19.  I propose to deal with the other grounds of opposition first before I turn to the main ground.  The question of quantum will be dealt with last.

Merits in the appeal

20.  I do not propose to set out the arguments raised in the Notice of Appeal and Hongri’s submissions why paragraphs 2 and 4 of the order should be set aside.  Suffice it to say on a preliminary assessment I regard the grounds of appeal as reasonably arguable, but I do not think the higher threshold of strong grounds of appeal is met.

21.  Petrochina has contended the appeal has no merits to support its argument that the court should exercise discretion to order security for costs in these circumstances.  For the same reason as above, I do not think this is made out.

22.  My preliminary assessment is that the merits in this appeal do not go strongly one way or other.  Hence, I will not take into account the strong merits as contended by Hongri in deciding whether to refuse security, nor will I take into account the lack of merits as contended by Petrochina in considering whether to award security. 

Assets within jurisdiction

23.  Hongri contended that the total sums paid into court by Petrochina of US$3,025,198 are an asset of Hongri, as it has always been in the position to return the goods and the non-fulfilment of the Delivery Obligation is solely attributed to Petrochina’s unreasonable behaviour and unfounded allegation.  Hence, the sums paid into court can be used to set off any potential claim of Petrochina in costs.  Other than these sums, there is no evidence Hongri has any assets in Hong Kong.

24.  Hongri’s counsel further submitted that paragraph 1 of the award amounts to an order for specific performance against Hongri to deliver the goods to Petrochina.  In the event the order for specific performance has become impossible to be enforced, the court may substitute damages.  So even if there had been deterioration of the goods which renders it impossible to return the goods in the same status and quality as and when the same were received by Hongri, the court may provide for remedies such as compensation or abatement to achieve practical restitution and justice.  On the evidence adduced by Hongri, and assuming the goods have now become worthless, the maximum amount of damages Petrochina could recover would be US$1,084,716, not taking into account that the goods had been defective when first received by Hongri.  After deducting US$1,084,716 from the sums paid into court, the remaining sum of US$1.9 million odd is more than sufficient to meet any claim of costs by Petrochina.

25.  Mr Wong submitted for Petrochina the effect of the order under appeal is that if Hongri fails to return the goods in the same status and quality as and when the same were received by it, Hongri does not have the right to demand the sums paid into court.  As the order under appeal is valid and subsisting, Hongri does not have any right or interest in those funds.  He contended that the effect of paragraphs 1 and 2 of the award is to put the parties into the same situation as if the contract had been nullified and for this to happen, the remedy is possible only if restoration to the status quo ante is feasible.  As Hongri has not yet performed the Delivery Obligation, it has no right to enforce payment for the goods, and no right to apply the sums paid into court to meet any claim of costs by Petrochina.

26.  As to the remedies in equity where it has become impossible to enforce specific performance, Mr Wong submitted the parties are bound by the terms of the award.  If Hongri cannot comply with the Delivery Obligation and requests for an order for payment, then it would need to apply to the arbitral tribunal or the PRC Court for appropriate relief. 

27.  Security for costs of the appeal is to cater for the situation where Hongri is liable for Petrochina’s costs.  This situation will arise where the above contentions along the lines developed above by Mr Wong are upheld.  So for this reason, I do not think it appropriate for present purpose to regard the sums paid into court as the assets of Hongri readily available to meet its costs liability to Petrochina in the appeal. 

Delay in application

28.  I propose to deal with this shortly.  There is a gap between 24 March 2011 (the date of the letter of Hongri’s solicitors refusing to provide security) and 3 May 2011 (the date of the letter of reply of Petrochina’s solicitors).  The present summons was issued on 6 May and the appeal is to be heard on 13 July 2011.  Petrochina’s solicitors explained that the period of inaction was due to the intervening Easter holidays and Labour Day holiday and the absence on leave of the handling solicitor.  I do not think the delay is such that I should exercise my discretion to refuse security.

Security for costs on appeal in enforcement of foreign arbitral award

29.  I come to the principal ground of opposition.

30.  It is pertinent to bear in mind these matters which are not controversial. 

31.  Order 59 rule 10(5) provides that the Court of Appeal “may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just.” The overriding consideration that the rule requires is whether “special”, not exceptional, circumstances exist making it just to order security (Chung Kau v. Hong Kong Housing Authority & Ors. [2004] 2 HKLRD 650 at 656H, para. 14(4)).

32.  As stated in the Hong Kong Civil Procedure 2011, Vol. 1, para. 59/10/28, the principles governing the award of security for costs at the stage of the Court of Appeal are wider and stricter than those applicable to the award of security for costs in the court below.  The categories of “special circumstances” for this purpose are not closed.  In deciding whether to award security for the costs of an appeal to the Court of Appeal, the court takes into account the fact that the appellant has already had the issue concerned determined in the court below, and it is prima facie an injustice to the respondent to allow an appeal to the Court of Appeal to proceed without security for costs being furnished in circumstances where the respondent will be unable to enforce against the appellant any order for costs made by the Court of Appeal.

33.  The rationale for the practice of ordering security where the appellant is resident abroad is undue delay or expense in enforcing the costs order abroad.  This is not based on any intention to discriminate against foreign appellants.  The presumption that it is difficult to enforce the costs order abroad may be disproved by the appellant, in which case security will not be ordered (Hong Kong Civil Procedure 2011, para. 59/10/31).

34.  Where special circumstances exist, as where the appellant is resident abroad, the court still has a residual discretion not to order security if the appellant could demonstrate counterveiling factors which would militate against such an order being made (Chung Kau v. Hong Kong Housing Authority & Ors., at 656D, para. 14(2)).

35.  A common counterveiling factor is the merits of the appeal.  I have found against Hongri on this, holding that it has not met the higher threshold of strong grounds of appeal.

36.  Hongri submitted that another counterveiling factor I should take into account is that security is sought against an award creditor in the context of the enforcement of an international arbitration award.

37.  As I understand the submissions of Hongri’s counsel, founded largely on the decision of the English Court of Appeal in Gater Assets Ltd. v. NAK Naftogaz Ukrainiy [2007] 2 Lloyd’s Rep 588, they did not argue strongly there is no jurisdiction for the Court of Appeal to order security for costs in an appeal.  Their primary submission is that security should not be ordered in this situation as a matter of discretion.

38.  They drew my attention to the judgment of Moser LJ in Gater Assets, paras. 92 and 93, in which the judge concluded the court did not have jurisdiction to order security for costs against an award creditor in proceedings to set aside an order to enforce a foreign arbitral award.  Rix LJ assumed but did not decide there is technical jurisdiction to order security for costs against an award creditor and decided the appeal on the basis of discretion (paras. 75 and 88).  Buxton LJ, who was in the minority, was of the view that the English court did possess jurisdiction to order security for costs and should exercise its discretion to order security in the enforcement proceedings.

39.  I am inclined to think there is jurisdiction for the Court of Appeal to order security for costs in this appeal.  My reasons are as follows.

40.  Firstly, there is no statutory provision to remove the power conferred by Order 59 rule 10(5) in this situation.  Nor is there any express provision that security for costs of an appeal may not be ordered in this context on the ground of foreign residence, similar to section 56(2) or Schedule 2, section 7(2) in the new Arbitration Ordinance, Cap. 609, which came into operation on 1 June 2011.

41.  Secondly, the cases of T K Bulkhandling GmbH v. Meridian Success International Ltd., HCMP No. 4765 of 1998, Findlay J, 30 November 1998 and FG Hemisphere Associates LLC v. Democratic Republic of the Congo & Ors, HCMP No. 928 of 2008, Dep J Mayo, 22 October 2008 are distinguishable.  In both these cases, the award debtor applied for security for costs against the award creditor in respect of an application by the debtor to set aside leave granted to enforce a foreign award.  Findlay J referred to Order 73 rule 10A, which makes special provision for ordering security against a debtor seeking to set aside the ex parte order giving leave to enforce the award, and made the point that if it were envisaged that a debtor involved in the Order 73 procedure should be permitted to apply for security for costs against the award creditor, that would have been provided in rule 10A.  The judge did not think this omission was accidental and was satisfied that Order 23 did not apply to the enforcement procedures in Order 73.  In the second case, Dep J Mayo agreed with Findlay J and also followed the majority decision in Gater Assets. He too held Order 73 must take precedence over Order 23.

42.  Gater Assets was not concerned with the jurisdiction of the Court of Appeal to order security for costs in an appeal.  The present appeal is plainly not governed by the procedures in Order 73.  As submitted by Mr Wong, procedural matters in this appeal are governed by Order 59 and are outside the regime of Order 73.  The argument which found favour with Findlay J that Order 73 provides for a self-contained statutory regime governing procedural matters relating to the enforcement of arbitration awards does not apply to the stage of an appeal so as to exclude the jurisdiction to order security for costs in an appeal.

43.  I turn to consider the matters relevant to the exercise of discretion urged upon me.  As Dep J Mayo had remarked in FG Hemisphere Associates LLC v. Democratic Republic of the Congo at para. 15, the issues of jurisdiction and the relevant exercise of the discretion are to an extent inter-related.

44.  Hongri’s counsel pointed out that where an award creditor seeks to enforce an arbitration award under the New York Convention, the court must have regard to Article III of the Convention, which provides that each contracting state shall recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in Articles IV to VI, and there shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which the Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.  They submitted that the jurisprudence applicable to Convention awards should apply equally to Mainland awards, as prior to the reunification on 1 July 1997, Mainland awards were Convention awards and the Convention only ceased to apply to Mainland awards after reunification because the PRC and Hong Kong are no longer separate members to the Convention vis-à-vis each other.

45.  These matters are not controversial, and Mr Wong has not argued to the contrary.

46.  Relying on Gater Assets, Hongri’s counsel made the point that in the case of the enforcement of a domestic award, an award debtor would not in principle be entitled to security for costs, so that to impose security for costs against an award creditor who seeks enforcement of a Convention award would be to impose substantially more onerous conditions than were imposed in the case of domestic awards and is in breach of Article III of the Convention.  Further, under the Convention, an award creditor is entitled as of right to enforce his award subject only to the narrow exceptions allowed, as this is part of an international agreement to make international arbitration attractive and efficient.  To require an award creditor to provide security for costs before he can enforce his award would seem to run counter to the essential basis of the Convention, and derogates from the requirement in Article III that enforcement be accorded under the conditions laid down in Articles IV to VI (paras. 72, 80 and 81, per Rix LJ).

47.  Hongri’s counsel submitted that the same reasoning and policy consideration should apply to the Mainland award here, and should militate against the exercise of discretion in ordering security for costs in this appeal.  As in Convention awards, an award creditor of a Mainland award is entitled as of right to enforce his award subject only to the same narrow exceptions allowed.  They submitted further that the “rules of procedure of the territory” in Article III should include the appeal procedures.  So to order security for the costs of an appeal against an international award creditor on the ground of foreign residence is to place such a creditor in a worse position than in the case of enforcement of domestic awards.  This lacks justification and is against the spirit of promoting international arbitration.

48.  Petrochina’s answer to the above is that this opposition is entirely irrelevant, as when this appeal is heard by the Court of Appeal, one has gone past the stage at which the award is registered and becomes enforceable as a local judgment.  Hongri is appealing against the determination of preliminary issues made by the court below in granting leave to enforce the whole of the award.  The Court of Appeal is not concerned with the enforcement of the award.  There is no reason why the general considerations mentioned earlier governing the exercise of discretion in requiring security for costs on appeal should not apply in the case of this foreign appellant.

49.  I do not find this an easy decision.  In the end, I am persuaded by the submissions of Hongri.  The award may now be entered as a judgment with the leave granted by the court but judgment has not been executed.  I do not think it is correct to say that the Court of Appeal is not concerned with the enforcement of the award, as the preliminary issues decided against Hongri being the subject of the appeal would have a bearing on the execution of the judgment and the execution stage in the enforcement of the award has not been carried out.  I am inclined to think that the same considerations militating against the ordering of security for costs against a foreign award creditor in the earlier stage of the enforcement of an award should also apply to the present stage, and this should be a sufficient counterveiling factor against requiring Hongri to provide security.  It would not be appropriate to impose a further condition on Hongri in its enforcement of the award by requiring it to provide security for costs on appeal.

50.  I will exercise my discretion to decline ordering security in this situation.

Quantum

51.  In view of the above decision, it is unnecessary to deal with Hongri’s submissions on quantum.

Orders

52.  I dismiss the application for security for costs of this appeal.  I make an order nisi that Petrochina is to pay the costs of Hongri in this application in any event on a party and party basis, with a certificate for two counsel.

(Susan Kwan) Justice of Appeal

Mr Adrian Lai, instructed by Hogan Lovells, for the Applicant

Mr Wong Chi Man Simon, of Mayer Brown JSM, for the Respondent