Five ways to fail in your PRC interim relief application

Much ink has been spilled on the two-year-old mechanism enabling parties to Hong Kong arbitration to obtain interim relief in Mainland China. This “Arrangement”[1] has been widely used by parties to Hong Kong-seated arbitration, with the HKIAC alone reportedly processing over 50 applications in its role as administering institution.[2]

Rather less attention has been paid to the user experience, including the potential difficulties navigating a system in which certain procedural rights are available in theory but not in practice, and de facto practices are emerging which are not yet expressly stipulated in the Arrangement.

In this note, the authors, whose firm has dealt with over 10 applications for interim relief under the Arrangement, identify five pitfalls that parties should note when seeking to rely on the Arrangement.  Failure to identify or account for these issues can jeopardize, or at least delay an application for relief.

1. Applying for the wrong type of relief

In theory, relief granted under the Arrangement could extend beyond the preservation of assets or evidence, to ‘injunction-style’ relief comprising a court order requiring the counterparty to do or refrain from doing particular acts.   

However, in practice, applications for relief other than the preservation of assets are rare and much less likely to succeed. The HKIAC’s statistics confirm this. Of the 50 applications for interim relief under the Arrangement, all but 3 were for the preservation of assets.[3]  

These limitations are a function of PRC judicial practice.  PRC courts hearing interim relief applications will not assess whether the applicant has a strong arguable case in the substantive action.  This distinguishes PRC procedures from those in some other jurisdictions. It also has the effect that PRC Courts are reluctant to grant injunction-style relief for concern it will result in a de facto granting of the relief sought in the substantive arbitral proceedings.

Applicants for interim relief under the Arrangement should bear this in mind.  For example, an investor seeking to prevent a founder party from pursuing a rival investment, may not be able to use the Arrangement mechanism to obtain PRC judicial interim relief with this effect.  

2. Applying pre-arbitration

An applicant for judicial interim relief in support of arbitration would normally make its application to the court prior to commencing any substantive arbitration proceedings. This reduces the risk of prematurely notifying the counter-party of formal proceedings, and triggering the very conduct, i.e. dissipation of assets or destruction of evidence, the relief is intended to prevent.

However, while, the Arrangement provides for such a pre-arbitration application in Article 3[4], such an application is unlikely to succeed in practice.  In the authors’ experience, it is a prerequisite for any application for interim relief under the Arrangement that a letter of acceptance be first issued by the relevant arbitral institution.  This in turn is only possible after the arbitration has been properly commenced.

A party which has applied for relief prior to commencement of proceedings in reliance on Article 3 might therefore find itself having to withdraw that application and re-submit it at a later stage once it commences the arbitration. This can lead to critical delay, and sometimes additional procedural complication, as the court requires additional formalities to be met on the second application. 

3.  Applying to the wrong court

By Article 3 of the Arrangement, Parties applying for interim relief in the PRC may apply to the courts of either the PRC-based counterparty’s place of residence or alternatively the location of the property or evidence to be preserved.   Generally, courts are empowered to secure assets both in the city or province in which they are located, and also elsewhere in China.   

A party which chooses the correct court will improve its chances of success and reduce the time needed to obtain relief. Conversely, a party applying to the wrong court can hamper or even destroy its chances of success.   

Counsel should weigh a variety of factors.  The court in the counter-party’s place of residence might be unwilling to grant measures that would severely disrupt the counterparty’s operation, such as freezing bank accounts essential to keeping the business running.   By contrast a court outside the counterparty’s place of residence may be less concerned with such considerations, but also less inclined to freeze assets located outside of its jurisdiction, given the additional time and steps required to ascertain such assets.  Different courts may apply different levels of scrutiny to an application. Some will review in detail, while some will treat the application as more of a formality.  The workload of the court in question will also be a factor.

A party which fails to do its due diligence in selecting the right court therefore faces a risk of additional cost and delay in the application.

4.  Failing to communicate

Even a party which selects the right court, might run into difficulties if it does not take proper steps to communicate with that court.  Initial enquiries will allow applicants to understand the level of scrutiny which the court will apply, and to anticipate and avoid issues at the outset.  Subsequent communication will allow the applicant to solve problems quickly if they come up during the processing of an application.

Judicial queries might comprise anything from clarifications regarding documentary evidence, questions aimed at understanding the process and status of the Hong Kong-seated arbitration, to questions going to the substantive issues in the case.

While effective and early communication is necessary, it is not always sufficient.   In a recent application, the duty judge first informed the applicants before any application had been made that certain documents were not required, only for the judge hearing the application to later ask for the same documents to be submitted. This delayed the application process considerably.  It is therefore important to plan for contingencies, and not rely entirely upon early communication with the court.

5. Poor preparation or sequencing

In view of the pitfalls mentioned, good preparation is at a premium. This is particularly important when it comes to issues of notice.  A poorly prepared applicant that inadvertently ‘tips off’ its counterparty may find that by the time it obtains relief, assets have already been dissipated or evidence destroyed.

Here a crucial distinction should be made. While interim relief applications may themselves be made ex parte without notice, the arbitration proceedings upon which such applications are premised may not.  In practice, even if an applicant does not notify the other side of the preservatory claim itself, it will, by notifying the counterparty of the formal measures underway to prosecute the claim, risk the counterparty ‘putting two and two together’ and anticipate the interim relief application.

Parties seeking to minimize this risk therefore need to eliminate any delay between the date of filing the arbitration on the one hand and applying for relief on the other, so limiting the scope for asset dissipation or evidence destruction. This can be done by properly sequencing the applications so as to submit each simultaneously.

The preparation phase may pose particular challenges for non-PRC incorporated applicants. In such cases, the PRC courts will require certain application documents to be notarized and legalized by the relevant Chinese embassy abroad.  Completing the necessary formalities will take considerable time, in particular in the aftermath of the pandemic.   Again, a party which fails to bear these kind of issues in mind might be delayed days or even weeks in making its application.

Conclusion

Applications for interim relief are by definition urgent, given their purpose is to prevent the other party changing the status quo, by for instance transferring assets or destroying evidence.  Parties which are well-prepared and properly-advised, may not only enhance the prospects of success in bringing an application under the Arrangement, but also reduce considerably the time needed to obtain relief.  In the PRC context, a party which knows the practical realities of applications under the Arrangement will be far better placed than one that does not.

 

[1] 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.
[2] HKIAC press release dated 14 September 2021; https://www.hkiac.org/news/50-applications-under-interim-measures-arran….
[3] Idem.
[4] (requiring an arbitration to be commenced within 30 days after the application for interim relief has been made).

Jurisdictions

Partner, Fangda Partners

Counsel (International Arbitration), Fangda Partners

Matthew Townsend is an arbitration lawyer based in Hong Kong.  His practice is primarily focused on international arbitration and dispute resolution, often (but not always) involving Chinese parties.

Townsend has experience of arbitration in a number of jurisdictions under a number of different arbitration rules.  His practice focuses on the energy, infrastructure, construction, technology and international trade sectors.  He has experience acting as advocate at all stages of an arbitration hearing

Counsel (Dispute Resolution), Fangda Partners