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Note: CSSC Huangpu Wenchong Shipbuilding Co Ltd (Shipbuilder/Beneficiary), a shipyard located in mainland China, entered into two shipbuilding contracts with identical terms with two different buyers, alleged to be nominees of Dry Bulk Services Ltd, a Hong Kong ship-management company (previously KC Maritime Ltd) (Contractor/Guarantor). Pursuant to the contracts, Contractor/Guarantor issued two irrevocable on-demand guarantees equal to the sum of the second, third, and fourth installments of the contract price and interest for a period of 90 days for payment obligations to Shipbuilder/Beneficiary. Each of these guarantees were subject to a limit of USD 6,871,458, and to “be construed in accordance with and governed by the Laws of England.” The guarantees further required that “any dispute shall be referred to and resolved by arbitration in London under the rules of the London Maritime Arbitration Association.”

After Contractor/Guarantor defaulted on the second and third installment payments, Shipbuilder/Beneficiary served a “statutory demand” on Contractor/Guarantor, demanding payment of the second, third, and fourth installments and interests, for a sum of USD 13,624,568.04. Contractor/Guarantor refused the demand, alleging design flaws in the vessels, and requested suspension of payment. In 2016, Shipbuilder/Beneficiary commenced two arbitrations in London against the buyers “pursuant to the arbitration clause in each guarantee.”

“In aid of” the two arbitrations, Shipbuilder/Beneficiary in June 2016 applied to the Hong Kong courts ex parte for an interim worldwide Mareva injunction to freeze the assets of Contractor/Guarantor to the extent of USD 13,742,916, with an ancillary disclosure order.

After Contractor/Guarantor appeared at the hearing and offered an undertaking in terms of the draft order pending full argument, Shipbuilder/Beneficiary filed an inter partes summons. The High Court of the Hong Kong Special Administrative Region, Court of First Instance, Deputy Judge Cooney, ruled in favor of the Shipbuilder/Beneficiary and granted the Mareva injunction against the assets of Contractor/Guarantor worldwide, but did not enjoin Contractor/Guarantor from spending HKD 25,000 per week on its ordinary and proper business expenses, nor prohibiting reasonable legal expenses incurred by Contractor/Guarantor in the arbitration proceedings.

The Judge first found that, under Sec 21M of the High Court Ordinance, Cap 4, the court may “grant interim relief in aid of proceedings outside Hong Kong without requiring that the relief must be incidental to substantive proceedings commenced in Hong Kong,” and that it is necessary that the proceedings outside Hong Kong “are capable of giving rise to a judgment which may be enforced in Hong Kong under any ordinance or at common law.” The Judge concluded that there is no dispute about the present case on this matter.

The Judge then applied “a two-stage test for determining the grant of interim relief: 1) whether the facts of the case warrant the grant of interim relief if substantive proceedings were brought in Hong Kong; and 2) under section 21M(4), whether it is unjust or inconvenient for the court to grant the interim relief.” Contractor/Guarantor argued that Shipbuilder/Beneficiary cannot demand installment payments when it is aware of a critical design flaw in a prior completed vessel of the same type that would entitle the buyer to cancel the contract. Shipbuilder/Beneficiary denied the alleged defects. The Judge determined that the allegations of defects are matters for trial and Shipbuilder/Beneficiary had “a good arguable case” and that the installment payments are due and payable.

Then, regarding the guarantees, Contractor/Guarantor argued that, “given it is not a financial institution, there is a strong legal presumption that the guarantees are not 'on-demand' guarantees such that [Contractor/Guarantor] is not liable without [Shipbuilder/Beneficiary] having recourse to the buyers first.” The Judge determined that Shipbuilder/Beneficiary had “a good arguable case” about its claims on the guarantees because “on their proper construction the guarantees are on-demand guarantees and thereby rebut the presumption relied upon by [Contractor/Guarantor].” Contractor/Guarantor further argued that the guarantees were unenforceable due to lack of consideration because they were signed after the shipbuilding contracts. The Judge determined that “if the giving of the consideration and the making of the promise are substantially one transaction, the exact order in which these events occur is not decisive.”

The Judge further determined that Contractor/Guarantor had the assets in Hong Kong and outside of Hong Kong referred to by Shipbuilder/Beneficiary, and that there is a real risk that Contractor/Guarantor will dispose of its assets to avoid the possibility of judgment or render the possibility of future tracing of the assets remote in fact or in law. The Judge further determined that it would not be assumed that the injunction would be too late or that there would be a lack of urgency, and that a Mareva injunction in Hong Kong would not short-circuit the procedural protection available at the seat of arbitration in England.

Finally, regarding the issue of the cross-undertaking, the Judge determined that Contractor/Guarantor had “not discharged its burden of showing the need for fortification or the appropriate quantum because it has not produced any evidence of the likelihood of significant loss arising as a result of the injunction.” Shipbuilder/Beneficiary had offered undertakings to the court in terms of the Schedule to the draft order, stating that, being a state-owned enterprise, Shipbuilder/Beneficiary has a paid-up share capital of RMB 19,737,985,420,000, and was of sufficient financial standing to give the undertaking. Contractor/Guarantor contended that the cross-undertaking would be insufficient, because the paid-up capital is unhelpful in the absence of accounts. Contractor/Guarantor further contended that, there would be difficulty in enforcement because “there is no choice of court agreement” and “it is notoriously difficult for foreign parties seeking to enforce awards, judgements or undertakings against state-owned enterprises before [Chinese] courts.”

[AYW]

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