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Arbitrability and National Security: A Case Study from Hong Kong
Introduction
The case SA & Others v. BH & Another [2024] HKCFI 1357 deals with complex issues of arbitration, enforcement, and security for costs. It involves multiple parties in a joint venture and addresses critical questions about the applicability of national security laws to arbitration proceedings. This article will dissect the case details, the legal principles involved, and the implications of the court's decision.
Case Background
The plaintiffs and the first defendant are parties to a shareholders' agreement (SHA) and partners in a joint venture holding shares in the second defendant, a company incorporated in the Cayman Islands. The first defendant is also a company incorporated in the British Virgin Islands.
The dispute arose under the SHA, which contained an arbitration clause leading to arbitration proceedings in Hong Kong. The first defendant, as the claimant, and the plaintiffs and the second defendant, as respondents, were involved in arbitration. An interim award dated June 21, 2023, favoured the first defendant, finding the plaintiffs in breach of the SHA and awarding damages.
On October 10, 2023, the plaintiffs initiated proceedings to set aside the award, arguing that the arbitration's subject matter fell within the scope of national security concerns under the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong SAR (NSL) and the related Interpretation by the National People's Congress Standing Committee. They contended that these matters were not arbitrable in Hong Kong and that the arbitral procedure violated their rights, particularly regarding presenting their case on national security issues.
Legal Issues and Arguments
Security for Costs:
The first defendant applied for security for costs, which the plaintiffs opposed, arguing that the court lacked the power to order such security. They also claimed to have substantial assets, including a 13.25% shareholding in the second defendant and offered an undertaking not to deal with these shares during the proceedings.
Applicability of Order 23:
The court considered whether Order 23 of the Rules of the High Court (RHC), which allows for security for costs, applied in this case. The plaintiffs argued that this order should not apply to arbitration enforcement proceedings. However, previous cases have established that Order 23 can be applied in situations where a party seeks to set aside an arbitral award or opposes its enforcement.
National Security and Arbitrability:
The plaintiffs' primary argument for setting aside the award was based on national security concerns, asserting that the subject matter was within the scope of the NSL and the Interpretation, which should preclude arbitration. They argued that the tribunal failed to adhere to the agreed-upon procedure and that the award conflicted with Hong Kong's public policy.
Court's Analysis and Decision
Order 23 and Security for Costs:
The court found that Order 23 was not excluded by any statutory provision of the Arbitration Ordinance or Order 73 itself. Therefore, it had the discretion to order security for costs in arbitration-related proceedings. In deciding whether to exercise this discretion, the court considered several factors:
- The plaintiffs were ordinarily resident outside Hong Kong.
- The plaintiffs' assertion of having substantial assets within the jurisdiction.
- The merits of the plaintiffs' case.
- Any delay in the security application.
- Other factors that could make the order unjust.
The plaintiffs contended that their shareholding in the second defendant, valued at approximately US$20 million, was sufficient security. They offered an undertaking not to dispose of or diminish the value of these shares until the conclusion of the proceedings or further court order.
National Security Concerns:
Regarding the national security argument, the court noted that the plaintiff's invocation of the NSL and the Interpretation required careful consideration. The plaintiffs argued that the arbitration tribunal did not give them a reasonable opportunity to present their case on national security issues, which constituted a breach of the agreed arbitral procedure and public policy.
However, the court highlighted that these arguments would be thoroughly examined during the substantive hearing on the application to set aside the award. The present decision was focused on the application for security for costs.
Implications of the Decision
For Arbitration in Hong Kong:
This case underscores the court's willingness to apply existing procedural rules, such as Order 23, to arbitration-related proceedings. It reaffirms that parties seeking to set aside or oppose the enforcement of arbitral awards can be ordered to provide security for costs, ensuring that defendants are protected against potentially frivolous or unmeritorious challenges.
National Security and Arbitrability:
The plaintiffs' argument regarding national security highlights the growing intersection between arbitration and national security concerns, particularly in jurisdictions like Hong Kong, where the NSL has introduced new dimensions to legal and arbitral processes. The outcome of the substantive hearing on this matter could have significant implications for the scope of arbitrable issues in Hong Kong and the application of national security laws to arbitration.
Practical Considerations for Parties:
For parties involved in international joint ventures and arbitration agreements, this case emphasizes the importance of considering the enforceability of arbitration awards and the potential for security for cost orders. Parties should be prepared to demonstrate their financial standing and readiness to provide security if necessary, particularly when they are residents outside the jurisdiction where enforcement is sought.
Conclusion
The SA & Others v. BH & Another [2024] HKCFI 1357 case provides a critical examination of the interplay between arbitration procedures, enforcement of awards, and national security concerns in Hong Kong. The court's decision to potentially apply Order 23 for security for costs, despite the complex backdrop of national security arguments, highlights the robust procedural framework supporting arbitration in Hong Kong. This case serves as a vital reference for legal practitioners and parties engaged in arbitration, emphasizing the need to navigate both procedural and substantive legal challenges effectively.
- Hong Kong court rules on security for costs in international arbitration case involving national security concerns.
- The case highlights intersection of national security laws and arbitration in Hong Kong.
- The decision sets precedent for balancing enforcement procedures and national security concerns in arbitration.
