The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland & of the Hong Kong Special Administrative Region (the “Arrangement”) has come into force for more than a year. The Arrangement gives parties to a Hong Kong-seated arbitration rights to seek interim measures before Mainland courts. However, many Hong Kong lawyers are encountering difficulties because legal regimes in the Mainland China are noticeably different from those in Hong Kong.
Recently, Global Law Office (“GLO”) assisted a Fortune 500 affiliate (the “Client”) to file a Property Preservation Application (the “Application”) in Qingdao Intermediate People’s Court (the “Qingdao Court”) during a HKIAC arbitration proceeding. After reviewing the Application and conducting a hearing, the Qingdao Court swiftly approved the Application, and froze assets of the respondents (the “Respondents”) in an aggregate value of approximately RMB 100 million. The Respondents were therefore under great pressure and urged to settle the case on the same day as the interim measure was executed. This is the first case that Qingdao Court agrees to grant property preservation in aid of a Hong Kong arbitration. Some lessons could be drawn for Hong Kong arbitration practitioners when they are considering the use of interim measures in Mainland China.
Background
In this case, the dispute arises from a Sales and Purchase Agreement (the “Agreement”) signed by the Client and the Respondents. The Client purchased a project company from one of the Respondents, and in the Agreement, the Respondents represented and warranted that the project company had no undisclosed contracts or liabilities.
After closing of the transaction contemplated by the Agreement, the project company was sued by a creditor, who asserted that there was a Guarantee Agreement between the creditor and the project company. The Guarantee Agreement provided that the project company would fully guarantee the repayment of a loan borrowed by one of the Respondents, and such Guarantee Agreement was signed shortly before the Client purchased the project company from one of the Respondents. The bank accounts of the project company were frozen, which caused a severe impact on its operation.
GLO’s Strategies and Effects
Facing the disadvantaged situation, GLO worked with a top-tier U.S. law firm to figure out feasible and effective strategies, i.e., commencing HKIAC arbitration as a foundation, and applying for Property Preservation before Qingdao Court to press the Respondents to indemnify against the losses of the Client and the project company.
To satisfy the requirement of PRC courts, GLO assisted the U.S. firm to amend the Notice of Arbitration and other relevant materials. With half-a-month hard work, the whole set of application materials were filed to the HKIAC.
At the Qingdao Court, GLO persuaded the judge to approve the Application by emphasizing the emergencies of this case. And Qingdao court swiftly rendered a ruling to approve the property preservation one day after the hearing.
Usually, a PRC court would only preserve property pursuant to the list of assets provided by an applicant. However, in this case, GLO managed to persuade the judge to investigate the Respondents’ assets. At last, the PRC court agreed to use its internal investigation and control system to search and freeze the Respondents’ assets.
Under the extreme pressure of property preservation, the Respondents agreed to settle with the Client in the amount equal to the losses sought by the Client within a short period of time.
Practical Tips
1. The Chance of PRC courts to grant a property preservation is considerably high.
Comparing to Mareva Injunction, the threshold is much lower in applying for property preservation before PRC courts. PRC courts usually would not consider the possibilities of the applicant’s chance to win the case, nor would it investigate whether the opposing party is dissipating assets.
Though the threshold to be reviewed is not very strict, the formalities and requirements should be followed pursuant to the Arrangement and relevant PRC laws, including: (1) Property Preservation Application, with related supporting materials; (2) the arbitration agreement; (3) documents of identity; (4) particulars of assets to be preserved; (5) the Letter of Acceptance issued by the arbitration institution; (5) security; and (6) other documents as required by the court.
For the applicants from outside Mainland China, it is noteworthy that the documents of identity and supporting documents generated outside Mainland China should be translated to Chinese, and notarized in accordance with relevant PRC laws. As it is time-consuming but significant, the applicant should reserve at least 2-3 weeks and get the translation and notarization work done ahead of filling the Notice of Arbitration.
Besides, it is necessary to liaise with the arbitration institution as well as the court to understand any specific requirements beforehand, which may streamline the whole process and advance the application with less barriers.
2. Cooperation between Hong Kong and PRC lawyers is critical to increase the chance of obtaining the Interim Measure.
Though the Arrangement has been in force for over a year, many PRC judges are still unfamiliar with the Arrangement and need experienced lawyers’ assistance in granting property preservation measures. It is crucial to engage PRC lawyers to address PRC judges’ concerns and obtain support from the courts.
Considering the different procedures between PRC litigation and Hong Kong arbitration, PRC lawyers’ participation in drafting or revising the Notice of Arbitration as well as preparing the supporting materials, can satisfy PRC courts’ needs for review by emphasizing the emergencies of the case, the solid foundation of legal arguments as well as the relief to be sought.
Besides, PRC lawyers can also help to choose appropriate forum to prevent local protectionism, identify assets through due diligence, and contact qualified insurance companies to provide guarantees, etc., which make the whole application procedures advance efficiently and smoothly.
The lead counsels in this case include Huawei Lin, Zhibin Li and Jack Law from Global Law Office.
