On October 1, 2019, 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 (hereinafter referred to as the ¡°Preservation Arrangement¡±)came into force. Prior to its promulgation, if a party to Hong Kong arbitral proceedings wished to obtain interim relief against a mainland party, they were to a large extent forced to rely upon the powers conferred upon arbitral tribunals and/or emergency arbitrators to issue interim measures under the applicable arbitration rules. Following the promulgation of the ¡°Preservation Arrangement¡±, however, parties can now apply for preservation measures (including property preservation orders, evidence preservation orders, and conduct preservation orders) in support of arbitration from the mainland courts.

This article analyzes the impact of the ¡°Preservation Arrangement¡± on international arbitration practice based on our recent experience in representing clients in Hong Kong arbitral proceedings, and discusses the relevant considerations for parties in Hong Kong arbitral proceedings in choosing whether to apply for interim measures in the arbitral proceedings themselves or to apply for preservation measures from the mainland courts.

I. The Impact of the ¡° Preservation Arrangement¡± on International Arbitration Practice

Preservation measures are often akin to ¡°nuclear weapons¡± for the parties in the legal arsenal. In many cases, strong preservation measures not only guarantee the enforcement of awards, but also substantially change the bargaining power of the parties to the dispute and force the party upon whom preservation measures have been imposed to voluntarily settle the dispute before the award is made. However, there had previously existed no legal basis upon which mainland courts could impose preservation measures against a party involved in overseas arbitration proceedings. As a consequence, arbitration before a domestic Chinese arbitral institution always carried a natural ¡°advantage¡± over arbitration before an overseas arbitration institution, as parties to domestic arbitration were able to apply for preservation measures against mainland parties.

Against this backdrop, the impact of the ¡°Preservation Arrangement¡± is significant and far-reaching.

From a macro perspective, we expect that more parties involved in cross-border disputes will choose to arbitrate their disputes before Hong Kong arbitration institutions and select Hong Kong as the place of arbitration. Owing to a range of factors, including the highly professional nature of the arbitration institutions in Hong Kong, the proarbitration stance of the Hong Kong courts, and the fact that a significant number of renowned international arbitration practitioners arc based in Hong Kong, Hong Kong arbitration has always been a popular choice. Following the introduction of the ¡°Preservation Arrangement¡±, compared with domestic arbitration, Hong Kong arbitration will no longer be encumbered with the ¡°disadvantage¡± of parties being unable to apply for preservation measures from the mainland courts, and will carry an advantage vis-a-vis other foreign arbitral institutions (such as regional rivals in Singapore), who are not covered by the terms of the ¡°Preservation Arrangement¡±. Therefore, it is likely that more parties in cross-border transactions involving mainland parties will choose arbitration in Hong Kong as their preferred dispute resolution mechanism.

From a case-by-case perspective, parties to ongoing Hong Kong arbitral proceedings and parties who intend to initiate arbitral proceedings in Hong Kong in the future will now be able to utilize the mechanism created by the ¡°Preservation Arrangement¡± in order to apply for preservation measures from a competent mainland court against a counterparty whose domicile or property is located in Chinese mainland. Based on our recent experience in handling Hong Kong arbitrations, we believe that the ¡°Preservation Arrangement¡± will have the following key impacts on the individual parties to arbitration in Hong Kong:½÷·ÀÆ­×Ó

Firstly, for certain types of disputes (such as those involving equity investments, valuation adjustment mechanisms (¡°VAM¡±), etc.), the ¡°Preservation Arrangement¡± significantly enhances the position of one party. Because disputes in relation to VAMs or red-chip structures generally involve overseas entities registered in Hong Kong, the Cayman Islands, BVI and other such places, as well as more complex transaction structures, Hong Kong is therefore generally chosen as the seat of arbitration. In cases of this kind, the target company in the dispute is usually a company registered in Chinese mainland, and the de facto controller of the overseas entity will in most cases be a company and/or a natural person in Chinese mainland. Therefore, if preservation measures can be imposed upon the property of the target company or the actual controller in the arbitration proceedings, this can significantly affect the balance of power between the parties and the strategic considerations underpinning the dispute settlement process.

For example, we recently represented an investor in a VAM-related dispute, in which we requested that the actual controller of a natural person located in the mainland fulfill its repurchasing commitment. The dispute resolution clause of the underlying contract provided for HKIAC arbitration. At the time of the dispute, the ¡°Preservation Arrangement¡± had not yet been introduced, such that the client was unable to apply for any preservation measures against the property of the actual controller located in the mainland. In view of the time and cost that would have been involved in any arbitration proceedings in Hong Kong, the client chose to conduct commercial negotiations with the actual controller first, rather than directly initiating arbitration. However, during the negotiation process, the ¡°Preservation Arrangement¡± was promulgated. We then advised the client to apply for preservation measures under the ¡°Preservation Arrangement¡± as a means of exerting pressure on the actual controller, a strategy that ultimately bore fruit when the parties successfully settled the dispute. This case illustrates that following the entry into force of the ¡°Preservation Arrangement¡±, investors can now initiate Hong Kong arbitration proceedings and at the same time apply for property preservation measures against the actual controller in accordance with the ¡°Preservation Arrangement¡±, in order to exert pressure on the other party and maximize their leverage in settlement negotiations. It is not always necessary to actually complete the arbitral proceedings.

Secondly, the entry into force of the ¡°Preservation Arrangement¡± means that mainland parties need to pay careful attention to their transaction structure, in order to reduce the risk of the other party applying for preservation measures in accordance with the ¡°Preservation Arrangement¡± and thus affecting its normal business operation.

For example, in a dispute concerning a joint real estate development project, our client was a state-owned enterprise which signed a cooperation agreement with an overseas entity, under which our client was appointed the actual operator of the real estate cooperative development in the mainland. The relevant dispute resolution clause of the contract provided for HKIAC arbitration. During the actual performance of the parties¡¯ cooperation, the client¡¯s actual management and operation of the real estate project in the mainland was conducted through multi-layer holding companies. From a strategic point of view, this meant that the project company that the client used to conduct its management of the project was not a party to the arbitration clause. As such, any property preservation measures would have been limited to the client¡¯s equity in the holding company, and the assets of the project company itself could not become subject to preservation orders, thus ensuring that the operations of the project company would not be disturbed by any disputes between the contracting parties. This case illustrates that, prior to the entry into force of the ¡°Preservation Arrangement¡±, parties whose assets were chiefly located in Chinese mainland were largely immune from preservation measures in overseas arbitration. However, with the implementation of the ¡°Preservation Arrangement¡±, mainland parties will now need to pay more attention to these risks. For example, when agreeing to overseas arbitration, parties should consider employing holding companies and similar transaction structures in order to reduce the risk of the other party directly taking preservation measures against its mainland assets and thereby avoiding any negative impact on the company¡¯s operations.

II. Considerations in Determining Whether to Apply for Interim Measures in Arbitration or Preservation Measures in the Mainland Courts

In recent years, major Hong Kong arbitration institutions such as the HKIAC, the ICC and the CIETAC Hong Kong Arbitration Center have introduced emergency arbitration mechanisms into their arbitration rules, enabling parties to obtain interim relief prior to the constitution of the arbitral tribunal. The rules of these institutions also permit parties to apply to the arbitral tribunal for related interim measures after the tribunal has been constituted. The ¡°Preservation Arrangement¡± provides these parties with an additional option, which is to apply to the mainland courts for preservation measures.

The interim measures available to arbitral tribunals are generally similar in nature to the preservation measures available to the mainland courts, including both injunctions and preservation orders concerning conduct, property and evidence. Nevertheless, due to the different standards applied by the courts and other practical issues, both mechanisms mentioned above have advantages and disadvantages in different types of cases. In any given case, determining whether the parties should apply for interim measures (including emergency measures) in the arbitration proceedings or preservation measures in the mainland courts involves a comprehensive measure of various factors, some of which are listed below:

1. At present, applications for preservation measures in the mainland courts are conducted on an ex parte basis, i.e., the application does not require the participation of the other party. By contrast, emergency arbitration procedures are conducted on an inter parte basis. Therefore, court preservation measures are likely to be particularly attractive in cases where there is a significant risk of the other party transferring its property.

2. It is necessary to consider whether the arbitration rules applicable to the dispute contain an emergency arbitrator procedure. For example, parties that signed an arbitration agreement providing for HKIAC arbitration before the publication of the 2013 version of the HKIAC Rules (November 1, 2013) may not be able to avail themselves of the emergency arbitration procedures, and applying for interim measures after the arbitral tribunal has been constituted will inevitably involve some delay. In these circumstances, preservation measures in the mainland courts are likely to be the preferred option.

3. Under China law, there is currently no legal basis for mainland courts to enforce interim awards or emergency arbitrator decisions made by Hong Kong arbitral tribunals. Therefore, interim measures and emergency decisions made in Hong Kong arbitration proceedings cannot be recognized and enforced in the mainland courts for the time being. Therefore, if the domicile or property of the respondent or the evidence in question is located in the mainland, it would be more effective to apply for preservation measures in the mainland courts.

4. Parties applying for conduct preservation orders or similar relief may be better served by applying for emergency arbitration or applying to the arbitral tribunal for interim measures. This is because the mainland courts are often reluctant to issue orders of this kind due to certain practical considerations, and even if the court were to issue an injunction, the cooperation of the other party cannot be guaranteed. By contrast, although an injunction issued by an arbitral tribunal or emergency arbitrator is not legally enforceable, failure to adhere to the tribunal¡¯s orders may have significant repercussions for the delinquent party. For example, the arbitral tribunal may require the party to bear a greater share of the legal costs in the final cost award, and the delinquent party will inevitably leave a bad impression on the arbitral tribunal at an early stage of the arbitration. In this sense, preservation orders issued by arbitral tribunals or emergency arbitrators commonly have a degree of soft binding power even if they are not strictly enforceable.

5. Although the duration of the emergency arbitration procedure is short, the inherent characteristics of the Hong Kong arbitration process and the habits of different arbitrators mean that the parties will often need to prepare multiple rounds of highly complicated legal submissions, witness testimony, and in some cases participate in a physical hearing before the application is decided. Emergency arbitration proceedings are hugely burdensome on time for both parties and their lawyers. Similarly, if the parties apply for interim measures after the arbitral tribunal has been constituted, the costs of hearing the application may be relatively high. By contrast, there are relatively few documents required to apply for property preservation before the mainland courts, and witness testimony is rarely required. Although most courts require several rounds of discussions concerning the preservation application, court proceedings are likely to be more efficient than arbitral proceedings in Hong Kong from the perspective of manpower and material resources.

III. Conclusion

The introduction of the ¡°Preservation Arrangement¡± reflects the fundamental objective of achieving closer judicial assistance between the mainland and Hong Kong under the ¡°one country, two systems¡± policy, and provides multiple options for parties to cross-border arbitrations. From the perspective of risk prevention, when drafting their contracts or designing dispute resolution clauses and transaction structures, commercial parties should take into account the possible impact of the ¡°Preservation Arrangement¡± on their bargaining power and overall dispute resolution strategy.