Pre-Arbitration Asset Preservation In Mainland China For Hong Kong Seated Arbitration: HKIAC Practices Explored

1. Introduction

For most plaintiffs and claimants, initiating dispute resolution process or achieving favorable judgment or arbitral award is not always the ultimate goal. The fundamental value of the dispute resolution process lies in obtaining the recoveries through such mechanisms. However, in international arbitration, which can often span several years, respondents may transfer their assets immediately to avoid any potential enforcement against them upon receiving the notice of arbitration if their assets have not been preserved in advance. As a result, even if the applicant can obtain favorable arbitration award and enforce such award, it may find itself in the awkward position of being unable to realize any meaningful recoveries by enforcing such award, thus failing to convert it into actual remedies.

As it typically involves complex coordination mechanisms across multiple jurisdictions and integration of judicial enforcement measures with arbitration procedures, asset preservation in international arbitration, especially pre-arbitration preservation, has always been a challenging issue. Particularly, it remains challenging for parties in most international arbitrations seated outside mainland China to apply for asset preservation in mainland China. From a global perspective, only parties in arbitration seated in Hong Kong or Macau can relatively smoothly apply for asset preservation in mainland China due to the special arrangements between mainland China and the Special Administrative Regions.

Since Hong Kong has long been a leading international arbitration center around the world, channels for asset preservation for Hong Kong seated arbitration have played a more significant role in practice. We will take the Hong Kong International Arbitration Centre (the "HKIAC") as an example in this article to analyze the rules and practices of pre-arbitration asset preservation in mainland China for Hong Kong seated arbitration.

2. Potential Approaches for Pre-Arbitration Asset Preservation

Within the current regulatory framework, there could be two potential approaches for applicants wishing to preserve respondent's assets located in mainland China before initiating arbitration with the HKIAC: the first is to apply to the People's Courts of mainland China through HKIAC for asset preservation under 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 "Mutual Assistance Arrangement"); the second is to initiate the Emergency Arbitrator Procedure in HKIAC.

• Apply for Pre-Arbitration Asset Preservation under the Mutual Assistance Arrangement

According to the Mutual Assistance Arrangement, parties to "Hong Kong Arbitration" can apply for asset preservations, through the arbitration institution, with mainland China Intermediate People's Courts before the arbitral award is rendered, referencing the provisions of the PRC Civil Procedure Law, the PRC Arbitration Law, and relevant judicial interpretations.

The Mutual Assistance Arrangement defines "Hong Kong Arbitration" as arbitration seated in Hong Kong and managed by specific institutions or permanent offices, including: (1) arbitral institutions established in Hong Kong or having their headquarters established in Hong Kong, and with their principal place of management located in Hong Kong; (2) dispute resolution institutions or permanent offices set up in Hong Kong by international intergovernmental organizations of which the PRC is a member; or (3) dispute resolution institutions or permanent offices set up in Hong Kong by other arbitral institutions and which satisfy the criteria prescribed by Hong Kong government (such as the number of arbitration cases and the amount in dispute, etc.). Hong Kong government should provide the list of the arbitration institutions and permanent offices to the PRC Supreme People's Court and such list shall be mutually recognized by both parties.

On March 31, 2023, the Hong Kong Department of Justice announced that the aforementioned arbitration institutions and permanent offices include:¹

• HKIAC;
• Hong Kong Maritime Arbitration Group;
• South China International Arbitration Center (HK);
• eBRAM International Online Dispute Resolution Centre;
• AALCO Hong Kong Regional Arbitration Centre;
• China International Economic and Trade Arbitration Commission (CIETAC) Hong Kong Arbitration Center;
• International Court of Arbitration of the International Chamber of Commerce – Asia Office.

This list will be valid till April 1, 2025, and may be updated pending the application of arbitration institutions. Therefore, in arbitration cases administered by these institutions, with Hong Kong being the seat of arbitration, parties can apply for asset preservation with People's Courts under the Mutual Assistance Arrangement before an arbitral award is rendered (including before applying for arbitration).

It is worth noting that, according to the Mutual Assistance Arrangement, if the application is to be submitted after the arbitration case is accepted by the arbitration institution, such application should be submitted to the arbitration institution first, and then transmitted to the relevant People's Court, which is similar to practice of mainland China domestic arbitration. Still, according to the judicial interpretations of PRC Supreme People's Court regarding the Mutual Assistance Arrangement², the application may also be directly submitted by the applicant, together with a forwarding letter issued by the institution, to relevant People's Courts.

As for which People's Court shall accept such application, the Mutual Assistance Arrangement stipulates that the applicant should apply to the Intermediate People's Courts where the respondent is domiciled or where the assets are located. If these locations fall within the jurisdiction of different People's Courts, the applicant should choose one of such People's Courts to submit its application, instead of applying to multiple People's Courts simultaneously.

Additionally, according to the Provisions of the PRC Supreme People's Court on Several Issues Concerning the Establishment of the International Commercial Court（《最高人民法院关于设立国际商事法庭若干问题的规定》）(the "CICC Provisions"), parties who elect arbitration institutions specified therein may apply to the International Commercial Court of the PRC Supreme People's Court (the "CICC") for asset preservations before or after applying for arbitration. Asset preservation orders rendered by the CICC may be executed by the lower-level People's Courts designated by CICC. According to the Procedural Rules for the International Commercial Court of the PRC Supreme People's Court (Trial)（《最高人民法院国际商事法庭程序规则（试行）》）, parties seeking asset preservation for cases involving disputed amounts of more than RMB 300 million or other significant international commercial cases may submit their applications to CICC through the arbitration institution, in accordance with the PRC Civil Procedure Law and PRC Arbitration Law.

According to notifications issued by the PRC Supreme People's Court, two batches of arbitration institutions have been designated under the CICC Provisions, with HKIAC being the only non-mainland domiciled institution,³ which, to some extent, has made HKIAC the most special international arbitration institutions to mainland China around the world. Therefore, most applicants should submit asset preservation application to relevant Intermediate People's Courts, while for cases of significant amounts or under the jurisdiction of CICC, applicants can choose to submit preservation applications to the PRC Supreme People's Court instead.

• Apply for Emergency Arbitrator Procedure under HKIAC Arbitration Rules

Under Article 23.1 of the 2024 HKIAC Administered Arbitration Rules (the "HKIAC Arbitration Rules"), parties to arbitration may apply for urgent interim or conservatory relief prior to the constitution of the arbitral tribunal pursuant to Schedule 4 thereof. Schedule 4 of the HKIAC Arbitration Rules provides for the Emergency Arbitrator Procedure.

Due to the lengthy process of constituting an arbitral tribunal in international arbitration, parties face risks such as asset transfers and evidence destruction before the formation of the tribunal. The Emergency Arbitrator Procedure emerged to address the need for urgent interim or preservation measures before the constitution of the tribunal, which provides a temporary relief mechanism before formation of the tribunal. After two to three decades of development, this mechanism has become an important part of the international arbitration.

Under the HKIAC Arbitration Rules, interim measures that can be applied for under the Emergency Arbitrator Procedure include but are not limited to:

(a) maintain or restore the status quo pending determination of the dispute; or

(b) take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself; or

(c) provide a means of preserving assets out of which a subsequent award may be satisfied; or

(d) preserve evidence that may be relevant and material to the resolution of the dispute.

Accordingly, interim measures under the HKIAC Arbitration Rules serve a similar function to asset preservation methods in mainland China.

According to Schedule 4, a party requiring interim measures may submit an application for the appointment of an Emergency Arbitrator to HKIAC before, concurrent with, or following the filing of a Notice of Arbitration, but prior to the constitution of the arbitral tribunal. Thus, the Emergency Arbitrator Procedure offers an alternative path for parties seeking pre-arbitration preservation.

3. Practicability of the Two Approaches

Although both approaches in the regulatory framework appear to provide sufficient mechanisms for pre-arbitration asset preservation, empirical evidence indicates that there is a significant gap between the rules and their practical application.

• People's Courts' Unclear Stance to Embrace Pre-Arbitration Asset Preservation under Mutual Assistance Arrangement

As previously mentioned, the Mutual Assistance Arrangement clearly stipulates that applicants can apply for asset preservation "before the arbitral award is rendered". This description inherently includes two stages: the pre-arbitration stage and the during-arbitration stage. In the context of the judicial system in mainland China, these correspond to pre-arbitration preservation and during-arbitration preservation, respectively.

The same conclusion can be reached through the analysis of language of the Mutual Assistance Arrangement. The arrangement differentiates between pre-arbitration and during-arbitration scenarios. For example, Article 3 of the Mutual Assistance Arrangement states that "if a preservation application is submitted before the arbitration case is accepted by the relevant arbitration institution or its permanent office, and if the People's Court does not receive letter of acceptance from the relevant institution or its permanent office within thirty days of implementing asset preservation measures, the People's Court shall lift the preservation measures accordingly". Article 4, which describes the application materials required, indicates that "if the preservation application is submitted after the arbitration case is accepted by the arbitration institution, the applicant should submit the arbitration application documents containing the main arbitration requests, the supporting facts and reasons, and the letter of acceptance by the relevant institution or its permanent office".

However, in practice, People's Courts are typically less receptive to grant an asset preservation order before the formal acceptance of an arbitration case. According to our recent experience, People's Courts still require proofs that the arbitration case has been accepted by relevant arbitration institution when applying for asset preservation.

It should be noted that according to the Mutual Assistance Arrangement, for asset preservation after the acceptance of the arbitration case, parties should apply to the arbitration institution for a "Letter of Acceptance" and submit it to the People's Courts to prove the arbitration institution has accepted the arbitration case according to its rules. For HKIAC, such letter requires a separate application procedure, which cannot be submitted before the filing of the arbitration case itself. Thus, People's Courts in fact still require applicants to apply for arbitration first and then apply for asset preservation with the People's Courts, which means they do not accept pre-arbitration preservation applications.

This contradiction can also be reflected by the statistical data. According to data published by HKIAC in October 2023, during the four years since the Mutual Assistance Arrangement took effect on October 1, 2019, all asset preservation applications made under the arrangement occurred after the acceptance of the arbitration cases, without exception.⁴

As we can see, pre-arbitration asset preservation seems to be not feasible in practice. Based on our standing, one reason for this situation may be that People's Courts consider that asset preservation measures, especially pre-arbitration asset preservation measures, could significantly impact the business operations of the respondent yet outcome of the case is uncertain. Therefore, People's Courts tend to make decisions with great care to balance the applicants' legitimate rights and the protection of respondents' daily operations. Additionally, People's Courts are typically more cautious in handling foreign-related and arbitration-related cases. Therefore, it may be difficult for People's Courts to accept pre-arbitration asset preservation applications without seeing any documents from the arbitration institutions indicating that a claim has been filed. These reasons collectively result in the current tendency of People's Courts not to accept pre-arbitration asset preservation applications.

• Difficulties in Obtaining and Enforcing Favorable Decisions in Emergency Arbitrator Procedure

While the Emergency Arbitrator Procedure enhances the framework of international arbitration rules, it also presents opportunities for further improvement.

First, Emergency Arbitrator Procedure does not encourage applicants to achieve asset preservation without opposite party's knowledge.

According to the HKIAC Arbitration Rules, necessary materials for applying for an Emergency Arbitrator Procedure include "confirmation that copies of the Application and any supporting materials ...... have been or are being communicated simultaneously to all other parties to the arbitration ......". Further, the Emergency Arbitrator's decision involves multiple opportunities for the respondent to express its views before the decision is made. The HKIAC Arbitration Rules also stipulates that the Emergency Arbitrator must "ensure that each party has a reasonable opportunity to be heard on the Application". Similar requirements are also shown in the arbitration rules of other renowned international arbitration institutions.

Therefore, for respondents intending to transfer assets to avoid enforcement, this procedure might not effectively achieve the applicant's goal, as the respondents may quickly transfer their assets upon receiving notice of the Emergency Arbitrator Procedure, which will lead to the failure of the applicant's attempt.

Second, although the threshold for initiating Emergency Arbitrator Procedure is quite accessible, it is subject to stringent substantive review standards, making it difficult for applicant to obtain a favorable decision.

The applicant must demonstrate urgency of Emergency Arbitrator's decision and its reasonable probability of success in terms of substantive rights and obligations of the arbitration case. This strict review standard is evident as shown in the statistical data released by international arbitration institutions. According to ICC, since the Emergency Arbitrator Procedure was adopted to its arbitration rules in 2012, Emergency Arbitrators have rejected 51% of all applications during the ten years until 2022. In 2023, of the 27 applications received, only 12 applications were approved, with 9 applications being partially approved.⁵

Third, Emergency Arbitrator's decisions are often difficult to be enforced by courts. Even if a party obtains a favorable Emergency Arbitrator's decision, enforcing such decision will still be a significant challenge.

Even if a party obtains favorable Emergency Arbitrator's decisions, the ultimate question of how such decisions are to be enforced remains an inescapable issue.

On the one hand, one of the fundamental principles of Emergency Arbitrator Procedure is that parties are supposed to voluntarily comply with the decisions of the Emergency Arbitrator. However, this very principle means that the legislators did not extensively consider the issue of enforcing such decisions. The silence on the enforcement of Emergency Arbitrator's decisions also provides opportunities for malicious defendants to exploit.

On the other hand, there is no consensus among countries regarding the enforcement of Emergency Arbitrator's decisions. As of now, only countries/regions such as Austria, Singapore, New Zealand, and Hong Kong have explicit legal provisions for enforcing Emergency Arbitrator's decisions. Some countries even explicitly reject the enforcement of such decisions.

Generally speaking, foreign arbitration awards are recognized and enforced by courts under The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). However, due to the provisional nature of Emergency Arbitrator's decisions and the fact that Emergency Arbitrators are typically appointed directly by arbitration institution, there remains uncertainty on critical issues as to whether Emergency Arbitrator's decisions fall within the scope of the New York Convention's arbitration awards, and whether Emergency Arbitrators fall within the scope of the New York Convention's arbitrators.

These issues are also reflected in the HKIAC Arbitration Rules. Articles 2.8 and 2.13 of the HKIAC Arbitration Rules specify that the term "arbitral tribunal" does not include Emergency Arbitrators, and the term "awards" does not include awards rendered by Emergency Arbitrators, showing HKIAC does not believe the Emergency Arbitrator, or the awards of Emergency Arbitrator, should be mixed with arbitrators or arbitral awards in regular procedures. This complicates the process for judicial authorities in recognizing and enforcing Emergency Arbitrator's decisions. Thus, whether a domestic judicial authority will recognize and enforce Emergency Arbitrator's decisions largely depends on the jurisdiction's stance toward such decisions.

In mainland China, there are currently no publicly available cases demonstrating precedent where People's Courts have recognized and enforced Emergency Arbitrator's decisions made by foreign arbitration institutions. Moreover, even if People's Courts were to support the recognition and enforcement of Emergency Arbitrator's decisions under the New York Convention, the length of procedure in recognition and enforcement runs contrary to the parties' pursuit of swift preservation measures.

Further, the Mutual Assistance Arrangement does not encompass provisions related to Emergency Arbitrator Procedure. Additionally, the New York Convention does not apply to matters between mainland China and Hong Kong; instead, the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR (《最高人民法院关于内地与香港特别行政区相互执行仲裁裁决的安排》 ) shall apply. But such arrangement also does not specify the enforcement of Emergency Arbitrator's decisions. Therefore, there is no legal basis for People's Courts to enforce Emergency Arbitrator's decisions rendered in Hong Kong.

In conclusion, for decisions rendered by Emergency Arbitrators, applicants are confronted not only with the challenge of securing favorable decisions, but also with substantial impediments as to enforcement. Consequently, the efficacy of this procedure in practical application seems to be restricted.

4. Our Observations and Recommendations

Based on the analysis above, we tend to believe that within the current framework of Hong Kong seated arbitration, there is no practically feasible direct path for applicants to achieve asset preservation before the arbitration process commences. However, this does not simply imply that there are no viable strategies available for us.

Compared with the Emergency Arbitrator Procedure, applying for asset preservation under the Mutual Assistance Arrangement presents a more pragmatic option. Given the obstacles in directly applying for pre-arbitration preservation, parties may apply for arbitration first and request the arbitration institution to issue the Letter of Acceptance simultaneously, in order to expedite the process for submitting asset preservation application to the People's Courts, thereby minimizing the time available for the respondent with malicious intent to transfer its assets. HKIAC recognizes such simultaneous submission arrangement and has further indicates that it can issue the Letter of Acceptance within 24 hours upon receipt of required materials.⁶ We also recommend that parties communicate with relevant People's Courts in advance to avoid unnecessary delays in the processing of such courts. Subject to the length of this article, we would like to refrain from elaborating on other additional measures at this time. For international clients, we advise that engaging PRC counsels at the earliest opportunity is imperative. This engagement should facilitate the formulation of a strategy for the implementation of asset preservation measures tailored to the specifics of the case, alongside the exploration of alternative solutions.

Voluntary compliance and good faith performance of arbitral awards should be fundamental principles honored by parties when choosing arbitration for dispute resolution. In most of instances, however, compulsory enforcement remains a measure of last resort by the parties involved. We respect and recognize the original intent and value behind the Mutual Assistance Arrangement and Emergency Arbitrator Procedure, but given the scenarios discussed in this article, we are of the view that there is a greater need and anticipation for the clearance of practical impediments associated with the pre-arbitration asset preservation. We are hopeful that People's Courts will effectively tackle practical challenges, thereby providing more ease to parties seeking protections of their rights and interests through international arbitration.

Footnotes

1. https://www.doj.gov.hk/en/community_engagement/announcements/20230331_an1.html

2. The Notice of the Supreme People's Court on Implementing 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 (《最高人民法院关于贯彻执行的通知》)

3. The Notice of the General Office of the Supreme People's Court on Identifying the First Batch of International Commercial Arbitration and Mediation Institutions Included in the 'One-Stop' Diversified Settlement Mechanism for International Commercial Disputes (《最高人民法院办公厅关于确定首批纳入"一站式"国际商事纠纷多元化解决机制的国际商事仲裁及调解机构的通知》) and the Notice of the General Office of the Supreme People's Court on Identifying the Second Batch of International Commercial Arbitration Institutions Included in the 'One-Stop' Diversified Settlement Mechanism for International Commercial Disputes (《最高人民法院办公厅关于确定第二批纳入"一站式"国际商事纠纷多元化解决机制的国际商事仲裁机构的通知》)

4. https://www.hkiac.org/news/hkiac-receives-100th-application-under-prc-hk-interim-measures-arrangement#

5. https://iccwbo.org/news-publications/news/icc-dispute-resolution-statistics-2023/

6. https://www.hkiac.org/arbitration/IMA-FAQs

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.