Hong Kong Court Confirms Jurisdiction to Order Security for Costs against Foreign Individual and Hong Kong Company in Set-Aside Proceedings of Arbitral Awards

In a significant decision for international arbitration practitioners, the Hong Kong Court of First Instance (HKCFI), in the recent decision of P1 and P2 v D [2024] HKCFI 3052, reaffirmed its jurisdiction and provided clarity as to when to order security for costs against parties seeking to set aside awards of Hong Kong seated arbitration.

The ruling in P1 and P2 v D illustrates how Hong Kong courts uphold Hong Kong’s pro-arbitration policy in set-aside applications – by distinguishing security for costs applications during set-aside proceedings (court proceedings during the ‘challenge’ phase) and those during the arbitral tribunal’s phase of determining parties’ mutual rights and obligations (arbitral proceedings during the ‘determination’ phase), the court found that policy considerations underlying the Hong Kong Arbitration Ordinance (Cap. 609, Arbitration Ordinance), which prohibits an arbitral tribunal from ordering security for costs against a foreign plaintiff on its foreign nature, do not apply to security for costs applications heard by the court during set-aside proceedings.

Background of P1 and P2 v D

The case of P1 and P2 v D arose from a dispute between the first plaintiff and the second plaintiff (collectively, the Plaintiffs), and the defendant concerning an Investor Framework Agreement executed in 2017. P1 and P2 are a foreign national and a Hong Kong company respectively. The dispute was arbitrated in Hong Kong under the Hong Kong International Arbitration Centre (HKIAC) Rules.

In April 2023, the arbitral tribunal issued a Partial Final Award, ruling that the Plaintiffs had breached the IFA. The Plaintiffs subsequently filed an application to set aside the Partial Final Award under Section 81 of Arbitration Ordinance. D then filed an application for security for costs from the Plaintiffs.

Originally, D relied solely on Order 23 rule 1(1)(a) of the Rules of the High Court (Cap. 4, RHC) as its basis for applying for security for costs. However, since Order 23 rule 1(1)(a) of the RHC applies to plaintiffs ordinarily out of the jurisdiction, it does not apply to P2 being a Hong Kong company. D subsequently sought leave to amend its summons to also rely on Section 905 of the Companies Ordinance (Cap 622, Companies Ordinance), which governs both foreign and Hong Kong companies, in relation to P2.

Key Issues

The court had to consider two key propositions advanced by the

Plaintiffs:

1. Whereas residence overseas is relevant in an application for security for costs under Order 23 rule 1 of the RHC, this rule should be displaced in the arbitration context, where the circumstances are evenly balanced, such that it would ordinarily be just not to order security for costs (the “First Proposition”);
2. In an application for security for costs concerning arbitral proceedings, an order for security for costs will typically only be made where the defendant is “likely to be impecunious” (the “Second Proposition”).

Court’s Decision

The court granted D’s application for security for costs against the Plaintiffs.

The court affirmed the decision of Mimmie Chan J in SA v BH [2024]3 HKLRD 204 and emphasised the distinction between security for costs applications heard by courts during set-aside proceedings (which are court proceedings during the challenge phase) and security for costs applications heard by arbitral tribunal during the determination phase (which are arbitral proceedings). The court emphasised the distinct roles of arbitral tribunals and courts in the arbitral process, and found that policy considerations underlying section 56(2) of Arbitration Ordinance, which prohibits an arbitral tribunal from ordering security for costs against a foreign plaintiff on its foreign nature, do not apply to security for costs applications in setaside proceeding. The latter is heard before the courts pursuant to Order 23 rule 1 of the RHC, in which being ordinarily resident outside Hong Kong is a ground for ordering security for costs against a plaintiff. As a result, different considerations apply.

First Proposition

The court rejected the Plaintiffs’ arguments that the pro-arbitration policy of Hong Kong should weigh decisively against an order for security for costs; instead, the pro-arbitration policy of Hong Kong would mean that the court shall not allow a situation where a challenge of an award is made easier and more accessible to the party challenging the award, or a situation where it is more onerous for a party resisting such challenge. Challenges against arbitral awards under Section 81 of Arbitration Ordinance should be of an exceptional nature.

Thus, in deciding a security for costs application during the challenge phase under Order 23 rule 1 of the RHC, the Court will not adopt a “wholesale importation” of the rationale behind Section 56 of Arbitration Ordinance. In reaching this conclusion, the Court gave, inter alia, the following reasons:

1. Asymmetry in Security for Costs Applications: The court noted that Order 23 rule 1(1)(a) of the RHC applies asymmetrically, targeting foreign plaintiffs but not defendants. This asymmetry is justified by the practical difficulty of enforcing costs orders against foreign plaintiffs and the fact that defendants are merely defending themselves against claims initiated by plaintiffs. In the words of the judge, the Plaintiffs “in seeking to set aside the Award, are plainly the real attackers.”
2. Policy Considerations in Arbitration-Related Court Proceedings: While Hong Kong’s arbitration-friendly policy discourages arbitral tribunals from ordering security for costs based solely on foreign residency, the court did not follow Singapore’s court approach in Zhong Da Chemical Development Co Ltd v Lanco Industries Ltd [2009] 3 SLR(R) 1017, and ruled that this rationale does not automatically extend to court proceedings during the challenge phase. The court emphasised the need to safeguard defendants from incurring unrecoverable costs in challenges to arbitral awards.
3. Parties’ Choice of Hong Kong as the Seat of Arbitration: Since parties choose Hong Kong as the seat of the arbitration, it is natural that the full panoply of Hong Kong statutory framework and Hong Kong court procedural rules will apply when the court’s jurisdiction is invoked in the challenge phase. In particular, since the parties have chosen not to opt-in for the provisions under Schedule 2 of Arbitration Ordinance, the considerations in Schedule 2 of the Arbitration Ordinance did not apply.

Second Proposition

The court rejected the Plaintiffs’ argument that security for costs should only be ordered against a plaintiff who is demonstrably impecunious. The court clarified that the relevant consideration is the ease of enforcement of a potential costs order, not merely the plaintiff’s financial condition.

Whether Security for Costs Should be Ordered

Given the lack of presence of P1 in Hong Kong, the lack of assets of P2 in Hong Kong and difficulties in enforcing an adverse costs order against P1, the court ordered security for costs against P1 and P2. The court placed emphasis on the ease of enforcement, and noted D’s concerns (amongst others) that P1/P2 were cautious not to reveal details of P1’s assets and wealth in the arbitral proceedings.

Conclusion and Comments

The decision of P1 and P2 v D provides welcoming clarity on Hong Kong court’s approach to security for costs in award challenge proceedings. It demonstrates that while Hong Kong maintains its commitment to being an arbitrationfriendly jurisdiction, this does not extend to making it easier for parties to challenge awards; rather, the court shall not create a situation where challenging an award is made easier or more accessible.

The emphasis on enforcement practicalities rather than mere impecuniosity provides a more nuanced framework for courts to consider security applications. This approach appropriately balances access to justice concerns with the need to protect successful parties from pyrrhic victories on costs.

The decision is a timely reminder of the court’s pivotal role in balancing the interests of arbitration users and ensuring the fairness of the arbitral process. By confirming its jurisdiction to order security for costs against foreign plaintiffs, the Hong Kong Court has provided clarity on an important procedural issue while reaffirming its commitment to upholding Hong Kong’s standing as a leading arbitration hub.

The decision highlights the importance of asset transparency in Hong Kong court proceedings. Parties seeking to resist security applications should be prepared to provide clear evidence about their assets and ability to satisfy potential costs orders.

It underscores the importance of ensuring that challenges to arbitral awards shall not become a tool for delaying enforcement without adequate safeguards.

Additionally, the decision serves as a practical reminder to arbitration practitioners in Hong Kong that they should be careful in stating the correct basis for applying for security for costs under the RHC and/or Companies Ordinance, to avoid the need in amending the summons and causing delay in seeking security.

Anson Cheung, Trainee Solicitor, assisted in the preparation of this briefing.