PRC Asset Preservation in Hong Kong Arbitration – New Opportunities
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In contracts between international clients and their Chinese counterparts, an important question is always where (in or outside China) and how (through litigation or arbitration) future disputes should be resolved. The choice should never be a standard one – consideration should always be given to the terms of the contract and the circumstances of the parties.
Until now, one important factor has been that interim preservation measures in China, such as the freezing of bank accounts, were only available for litigation and arbitration administered within Mainland China. In other words, by choosing litigation or arbitration outside China, there was no good way to mitigate the risk that the Chinese counterpart would shift assets to evade an eventual court judgment or arbitration award.
New Arrangements
The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region, which went into effect on 1 October 2019, changes this. Under the Arrangement, parties to an arbitration in Hong Kong that is administered by certain designated arbitration institutes, can apply to a PRC court for interim measures both right before and during the arbitration.
The Arrangement details three kinds of interim measures that may be applied:
- Asset preservation (i.e. the freezing of assets, such as bank accounts or real estate);
- Evidence preservation (i.e. compelling a counterpart to produce evidence that otherwise may be destroyed or may be difficult to obtain later on); and
- Conduct preservation (i.e. forms of injunctive relief and orders to compel).
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Asset Preservation in Mainland China
Of the above interim measures, PRC courts rarely grant evidence and conduct preservation applications, and so in practice, these applications under the Arrangement will need to meet a very high standard to be considered. On the other hand, asset preservation is a very common tool in Chinese litigation to protect the assets for a final judgment, but also to pressure a counterpart into a settlement. As long as a case is filed, assets can be found and a security is provided, Chinese courts will generally be willing to grant an application for asset preservation.
Hopefully, Chinese courts will be equally eager to entertain an application for asset preservation based on an arbitration in Hong Kong. This may remain difficult for applications pre-arbitration – which should be filed directly to the competent People’s Court at intermediate level. But applications for interim measures after an arbitration has been filed – which must be made through the Hong Kong arbitration institute – are more likely to be successful.
Conclusions
The Arrangement is clearly a boon to Hong Kong arbitration, at least if administered by one of the six institutions that the Arrangement qualifies. This includes the Hong Kong International Arbitration Centre and the Hong Kong Chapter of the International Chamber of Commerce (ICC). The opportunities that the Arrangement brings, may be especially interesting to international companies that have little faith in the Chinese court system or in Chinese arbitration.
But while the Arrangement could strengthen the position of Hong Kong as a regional arbitration center, it is not expected to divert much international business from dispute resolution in China itself. In recent years, more and more multinationals have successfully resolved disputes directly in Chinese courts and arbitration, and confidence in these institutions is growing. International companies should continue to weigh all relevant factors when deciding on the dispute resolution clause in their contracts.
About the authors:
Mr. Maarten Roos advises international business on disputes in China and represents clients in international arbitrations under PRC law; he is also on the arbitration panel of the Shanghai Arbitration Center. Ms. Limeng Yang is an experienced litigator, representing international and domestic companies in Chinese litigation all over China.