Landmark First Order Under Mainland-HK Arbitration Arrangement Issued

Edward Liu, a Hong Kong-based legal director at Hill Dickinson who represented the applicant in this case, said the Hong Kong International Arbitration Centre (HKIAC) was widely believed to be one of the "qualified arbitral institutions." As such, he advised his client to include in the settlement agreement an arbitration provision with the HKIAC as the administrator to take advantage of the new rules.

"In case [the Shanghai company] defaulted and decided not to pay the settlement sum, then we could apply for interim measures from a Chinese court through the HKIAC under the new Arrangement," Liu said. "We felt from our negotiations on the settlement agreement that there was a risk they would default."

Liu's prediction borne out as the respondent failed to pay the required sum. On July 16, his client started a second arbitration in accordance with the terms of the settlement agreement. This time, instead of an ad hoc proceeding seated in Hong Kong, the applicant initiated an institutional arbitration proceeding administered by the HKIAC.

This was an unusual move for a shipping dispute. According to the Chartered Institute of Arbitrators, ad hoc is the preferred arbitration method in the global maritime industry because of the superior speed, flexibility and better price it offers. The initial charter party was typical of the industry in that it provided for an ad hoc arbitration in the event of a dispute arising.

But the Arrangement does not cover ad hoc arbitration proceedings whereby parties independently determine the procedure rather than follow the rules of an arbitral institution such as the HKIAC. Only those proceedings administered by qualified arbitral institutions in Hong Kong are eligible for interim relief from a mainland court. Therefore, had the applicant in this case followed the shipping industry custom and had only an ad hoc arbitration clause in the settlement, it would not have been able to apply for interim measures under the Arrangement.

"I encourage parties from the shipping industry to bear the Arrangement in mind when drafting arbitration clauses," Liu said. "If one of the parties to the shipping contract is China-related, there is no reason not to choose a Hong Kong-seated arbitration in order to take advantage of the Arrangement."

The Hong Kong government has promoted the city as a maritime arbitration center in recent years. Hong Kong Maritime Arbitration Group, an offshoot of the HKIAC, is one of the other five arbitral institutions designated as "qualified" for the purposes of the Arrangement.

On October 1, the day the Arrangement came into effect, the applicant notified the HKIAC under Article 3 of the Arrangement of its application for an asset preservation order. The next day, the HKIAC issued a letter confirming that the application had been accepted and, in accordance with guidance published by China's Supreme People's Court in late September, directed the applicant to directly submit the application to the Shanghai Maritime Court.

"Different courts will have different practices or requirements on the documents to be submitted and the content thereof," said Anna Lan, a Shanghai-based partner at Co-Effort Law Firm representing the applicant there. "Being the first application under the Arrangement, the submission of documents was strictly based on the relevant articles of the Arrangement."

She officially submitted the documents including the parties' arbitration agreement, a statement of claim and supporting evidence when she was summoned by the court in the morning of October 8, although the court had already reviewed scanned copies of these which she sent them in late September before the Arrangement came into effect.

That afternoon, the court approved the application and handed down the asset preservation order. As such, the first order was issued on the first working day after China's "Golden Week" holiday period, just days after the Arrangement came into effect. The respondent's bank account was frozen the following day.

Article 8 of the Arrangement says that applications for interim relief shall be examined "expeditiously" but it does not specify just how long this really means. Can we infer from the first case that future cases will be dealt with as quickly? Lan said it depends on the substance of each case.

"Our case is a special case because it is the first case," Lan said. "It is unclear whether other regulations or judicial interpretations relating to property preservation would apply."

She points to China's Civil Procedure Law and guidance previously issued by the Supreme People's Court on the handling of property preservation cases as factors which can affect the length of cases. In her case, she and the applicant's other lawyers had confirmed the application method and required documents with the Shanghai Maritime Court before submitting the application.

Liu highlights the fact that the case was adjudicated by a maritime court which have an edge over other courts in terms of their ability to implement the Arrangement. Maritime courts have more experience dealing with overseas arbitration proceedings due to the international nature of the maritime industry. They have even granted interim measures in aid of foreign arbitration proceedings before in accordance with Article 21 of PRC Maritime Procedure Law, albeit in a limited scope.

"[Maritime courts] are the most professional and international courts in mainland China," Liu said. He added that other courts will likely need more time to familiarize themselves with the new rules as most have never dealt with applications for interim relief in aid of foreign arbitration proceedings before.

Mainland courts are usually quick with deciding whether to issue preservation orders due to the risk of asset dissipation if a decision is delayed, said Paul Starr, a Hong Kong-based Partner at King & Wood Mallesons. He recommends parties act with urgency as delay can be fatal to their applications.

"It is a drastic remedy to freeze someone's assets. The courts have an "urgency test" where they ask the applicant whether the matter is urgent and why it has taken so long to lodge an application," he said. "If you sit on an application, and nothing has happened, then it goes against you as it suggests that there is little risk [of asset dissipation]."

The HKIAC has said that it received five applications for interim relief in the first 10 days of the Arrangement coming into effect, four of which are still pending. That number is likely to increase now that the first order has quickly been handed down, Starr said.

"Clients with Hong Kong-seated arbitrations are calling daily about wanting to go to the mainland to try this new form of relief. Everyone is very excited."