Successful asset preservation application in Mainland China prior to the recognition of Hong Kong arbitral award

We are pleased to announce that, following a victory in an arbitration at the Hong Kong International Arbitration Centre (HKIAC) led by DLA Piper Hong Kong, we have recently succeeded in assisting a client based in Middle East in obtaining an order from the Ningbo Intermediate People’s Court for asset preservation prior to the recognition and enforcement of the HKIAC arbitral award in Ningbo, China. 

As far as we know, this is the first case in the Zhejiang Province (where Ningbo is located) in which a Mainland China People’s Court orders asset preservation against the respondent before recognizing and enforcing a Hong Kong arbitral award pursuant to the “Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland China and the Hong Kong SAR” (the Supplemental Arrangement).

The Supplemental Arrangement

The Supplemental Arrangement was signed by the Supreme People’s Court of China and the Hong Kong Department of Justice on 27 November 2020, which modifies and supplements the former 1999 Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland China and the Hong Kong SAR (the 1999 Arrangement). It entered into force partially on the same day and partially on 19 May 2021.

In the 1999 Arrangement, there is no specific rule on asset preservation pending enforcement of a Hong Kong arbitral award. This Supplemental Arrangement introduces this relief – Article 4 of the Supplemental Arrangement clarifies and confirms that a party may apply to the competent Mainland China People’s Court for preservation measures before or after the Court's acceptance of an application to recognise and enforce a Hong Kong arbitral award. This interlocutory relief particularly addresses foreign applicant's concern that the Mainland Chinese respondent may dissipate its assets while the award is going through recognition and enforcement process.

Successful Application Secured by DLA Piper

In this matter, DLA Piper Hong Kong acted for the Claimant, a company based in Middle East, against the Ningbo-based Respondent. In the awards and the addendums thereto, the HKIAC Tribunal ruled in favour of the Claimant on both merits and costs.

Immediately after the issuance of the final addendum, DLA Piper Hong Kong collaborated with a law firm in Ningbo to apply to the Ningbo Intermediate People’s Court for the recognition and enforcement of the arbitral awards in early November 2021.

In the meantime, a separate application was filed with the same court for asset preservation against the Ningbo-based Respondent pursuant to Article 4 of the Supplemental Arrangement for the purpose of securing the enforcement of the arbitral awards. Given that it is the first time for the Ningbo Intermediate People’s Court to deal with such application, we understand that it does take some time for the trial judge to consider the application including seeking advice from the judges of the superior People’s Court. The asset preservation application was accepted and finally granted by the Ningbo Intermediate People’s Court on 9 November 2021. The ruling for asset preservation was issued against the Respondent for freezing its cash and/or detain its assets up to the value of the arbitral awards.

Practical Tips

Based on our observations and experience in handling asset preservation under the Supplemental Arrangement, here are some practical tips and factors to consider:

Enhanced Legal Framework

The Supplemental Arrangement is another welcomed development with respect to interim measures.  This is additional to the “Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland China and of the Hong Kong” launched in 2019 (Interim Measures Arrangement). 

The Interim Measures Arrangement gives the Mainland China People’s Courts the power to order interim measures before or during the course of Hong Kong arbitrations administered by designated institutions (see our Insight published on 21 October 2019).  However, the parties cannot avail themselves of the Interim Measures Arrangement after the conclusion of the arbitral proceedings.

The Supplemental Arrangement therefore fills the gap in this regard. More importantly, the Supplemental Arrangement applies to any arbitral award made in Hong Kong, including those rendered by an ad hoc arbitral tribunal. Therefore, for foreign parties in any ad hoc arbitration seated in Hong Kong or institutional Hong Kong arbitration administrated by non-designated institutions, (which cannot at present benefit from the Interim Measures Arrangement), the Supplemental Arrangement serves as a separate avenue for them to secure the effectiveness of the arbitral award in the post-award stage.

So far, Hong Kong is the only arbitral seat outside of Mainland China in which parties can apply for interim measures from the Mainland China People’s Courts throughout the entire lifespan of the arbitration including the enforcement stage.

Counter-Security as a “Must”

In Mainland China, the applicant is generally required to provide security for preservation measures in support of recognition and enforcement of arbitral award. The legal basis for the Court to order the applicant to provide the security is stipulated in Article 100 of the Civil Procedural Law of the People's Republic of China (Amended in 2017) which applies to any asset preservation during the course of litigation.

According to Article 5 of the Provisions of the Supreme People's Court on Several Issues concerning the Handling of Property Preservation Cases by the People's Courts (2020 Revision), where a People's Court orders an applicant to provide security for property preservation under Article 100 of the Civil Procedure Law, the amount of security shall not exceed 30% of the requested amount of property to be preserved. 

Apart from security in cash, most Mainland China People’s Courts now accept guarantees from qualified insurance companies or guarantee companies in Mainland China. However, based on our experience in dealing with asset preservation, different People’s Courts have their own internal reviewing standard and regulations with regards the amount and form of security to be provided. For example in our case, given that the security is provided by a guarantee company, the Ningbo Intermediate People’s Court requires the applicant to provide full security equivalent to the amount of assets to be preserved.

Therefore, it is crucial for the applicant to find out the specific requirements of the Mainland China People’s Court where it intends to file the application so that proper arrangements can be made.

Translation and Notarisation

Attention should also be given to the translation and other logistical issues such as the notarisation and authentication of documents in support of asset preservation. Although the Supreme People’s Court of China has promulgated certain judicial interpretations with regard to the list of documents requested and their format in support of recognition and enforcement of foreign arbitral award, it is our experience that in practice, different People’s Courts may have their own specific requirements. For example, in our case, the applicant is also requested to submit a letter issued by the HKIAC confirming the successful service of the awards on the Respondent’s solicitors, in order to demonstrate the effective dates of the awards.

Therefore, it is of vital importance for the applicant to ascertain as early as possible which documents must accompany the application as required by the competent Mainland China People’s Court.

Conclusion

The Supplemental Arrangement greatly strengthens the mutual legal assistance regime between the Mainland China and Hong Kong. Together with the Interim Measures Arrangement, they reinforce and enhance Hong Kong’s special role and status as an international arbitration center and the preferred seat of arbitration for resolving sino-foreign disputes.

This successful application secured by DLA Piper carries significant value for future applications for interim measures in the Mainland China People’s Courts in support of recognition and enforcement of Hong Kong arbitral awards under the Supplemental Arrangement. This success also demonstrates our team’s ability to collaborate and utilise its global resources to provide seamless legal services across multiple jurisdictions (including the Mainland China, the Middle East and Hong Kong).

If you would like to discuss how this Supplemental Arrangement affects your business, please feel free to contact the authors listed below.