Mainland China courts may grant interim measures for HK arbitrations

The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR (the Arrangement) came into force that day: see our report dated 8 April 2019 for more information.

In a nutshell

Interim measures are aimed at protecting a party’s rights pending the outcome of a dispute. Parties often apply for interim measures to prevent the dissipation of assets or the destruction of evidence or to preserve the status quo, before final determination of the dispute. Applications for interim measures are usually made on an urgent basis.

Prior to the Arrangement coming into effect, Mainland courts would only grant interim measures in aid of domestic arbitrations (and not foreign arbitrations, including Hong Kong arbitrations). This–combined with the Mainland courts’ reluctance to give effect to interim orders made by tribunals or courts outside of Mainland China–made it difficult for a party in a foreign arbitration to obtain effective interim measures against a Mainland party, such as the freezing of assets from which an award could be paid.

The position has now changed. Under the Arrangement, parties can choose to have the arbitration seated in Hong Kong and still be able to apply for interim measures in Mainland China.

We set out below the key practical points relevant to applying for interim measures in Mainland China under the Arrangement.

Choose arbitration administered by a “qualified arbitral institution”

The Arrangement only applies to arbitration proceedings which are administered by a “qualified arbitration institution”. There are presently six qualified arbitration institutions in Hong Kong under the Arrangement: HKIAC; CIETAC HK; ICC; Hong Kong Maritime Arbitration Group; South China International Arbitration Centre (HK); and eBRAM International Online Dispute Resolution Centre. If you think that you would benefit by the Arrangement, it is important to specify in your arbitration clause that the arbitration would be administered by one of these arbitration institutions.

Be aware that ad-hoc arbitrations are not covered by the Arrangement, so an arbitration in Hong Kong under the UNCITRAL Rules (without any administering institution) will not enjoy the benefits of the Arrangement. An arbitration under the UNCITRAL Rules but administered by the HKIAC would be covered by the Arrangement.

How it will work in practice

To apply for interim measures in Mainland China under the Arrangement you will need the support of the arbitral institution. Different arbitral institutions will likely develop different practices in terms of facilitating the application for interim measures in Mainland China. Different Mainland courts also have different requirements in terms of the documents required.

It is therefore important to first check with the relevant arbitration institution and the Mainland court to understand what each requires from the applicant.

The arbitral institution will need to issue a letter to confirm that it has accepted the arbitration case and that it is transferring the application for interim measures to the respective Mainland court.

In recognition of the urgency required, as a special arrangement for Hong Kong seated arbitrations, the party can apply for the interim measures directly by submitting the letter from the arbitration institution and the necessary documents to the relevant Mainland court. By contrast, for arbitrations seated in Mainland China the arbitral institution is required to liaise with the Mainland courts on behalf of the parties when a party is seeking interim measures.

The Mainland courts will then contact the arbitral institution to confirm the details. The Department of Justice has provided contact details for the qualified arbitration institutions to the Mainland courts.

In Mainland China, in addition to obtaining interim measures for asset preservation and evidence preservation, it is also possible to obtain prohibitory or mandatory orders known as conduct preservation in order to preserve the status quo, whereby the applicant can apply to the Chinese court for orders against the other party to mandate certain acts or to prohibit the other party from committing certain acts.

Providing security in support of the application

In granting interim measures (usually asset preservation orders and prohibitory orders), the Mainland courts may require the applicant to provide appropriate monetary security in support of its application. Based on our experience, the Mainland courts would usually require some form of security (for example cash or real estate) accompanied by a letter of guarantee. If the security is provided in cash, the Mainland courts will usually ask the applicant to transfer the sum to the bank account of the Mainland courts. Liability insurance is also frequently purchased to provide security.

Where an interested party applies for asset preservation before commencement of arbitration proceedings, it would usually be required to provide security in the amount equivalent to the assets requested to be preserved although the Mainland courts can order otherwise. Where the Mainland courts orders an applicant to provide security for asset preservation during the proceedings, the amount of security shall not exceed 30% of the assets requested to be preserved; or if the assets requested to be preserved are the subject matter of dispute, the amount of security shall not exceed 30% of the value of the subject matter of dispute.

If the applicant fails to provide such security, its application will be rejected by the Mainland court. It is therefore important to ensure that sufficient security is available at the time of making the application and to check with the relevant Mainland court what type of security is acceptable.

Interim measures may be ordered before the commencement of arbitration

Under the Arrangement, parties can apply for interim measures in Mainland China before or after the commencement of arbitration. The main difference is that if interim measures are sought before an arbitration institution has accepted the case, the application should be made to the relevant local court first; in other cases, the application should be submitted in the first instance to the arbitration institution.

Even though interim measures may be granted before the commencement of arbitration, the applicant should act quickly to initiate arbitration proceedings. This is because the Mainland court will discharge the interim measures if it does not receive a confirmation from the arbitration institution, within 30 days after the grant of interim measures, that the institution has accepted the case.

Beware of procedural and logistical pitfalls

The effectiveness of interim measures often depends on their timeliness. Parties will need to factor in extra time for preparing its application for interim measures in Mainland China. For example, under the Arrangement, an applicant needs to submit, among other things, identification documents as part of the application process. Such documents, if issued by a foreign authority, will need to be verified in accordance with the requirements of Mainland law, eg certified by a China-appointed attesting officer or notarised before the Chinese consulate/embassy. This can be time-consuming. The applicant should therefore anticipate potential procedural and logistical complications, and address them proactively, to ensure that its application is not undermined by any unnecessary delays.

Choice of arbitral institution

When choosing an arbitral institution, there are a number of factors that need to be considered by the parties such as the content of the institution’s rules, the practices of the institution, the experience of the institution and the panel of arbitrators used by the institution. Following the implementation of the Arrangement, the parties may wish to consider one additional factor – the experience of the institution in applying for interim measures in the relevant region of Mainland China.

An application for interim measures in Mainland China will necessitate some liaison between the arbitral institution and the relevant Mainland court on behalf of the parties. Of the six qualified arbitration institutions in Hong Kong, CIETAC HK (being part of CIETAC) has the most extensive local network in the Mainland China. Therefore, it may be more accustomed to liaising with local courts, especially in areas such as Chongqing; Hubei; Zhejiang; Sichuan; Fujian; and Shangdong (where CIETAC has established sub-commissions). This may help facilitate the application process in those regions. Having said that, HKIAC has already successfully facilitated applications for interim measures in Mainland China in the short time by which the Arrangement has come into effect.

The Arrangement has been well received by arbitration users

Within the first 10 days after the Arrangement came into effect, the HKIAC alone has received five applications for interim measures in the Mainland China, all requesting the preservation of assets. We are aware that in one of these arbitrations, the applicant was able to obtain interim relief from the Shanghai Maritime Court within one working day. While it is too early to assess how successful the Arrangement will be, especially in relation to obtaining interim measures from courts outside of the major cities in the Mainland China, the initial signs are very promising.