Provision of "interim measures" strengthens Hong Kong's position as a level playing field in arbitration against PRC counterparties

Responding to growing geopolitical tensions between Taiwan and mainland China (PRC), Taiwanese businesses are considering ways to diversify their operations away from their largest trading partner. In 2022, China accounted for a quarter of total trade and more than 20 percent of imports in Taiwan, while the US came in second, with nearly 13 percent of Taiwan's total trade and 10 percent of imports—a 19 percent year-on-year increase that underscores the trend. Remarking on the effect China's troubled economy could have on Taiwan, Hsiao Bi-Khim, Taiwan's ambassador to the US, told Bloomberg in September, "[Taiwanese] companies are thinking about how to position assets in a way that best protects their company interests."

In spite of this diversification trend, Taiwan's long-term business interests will remain entwined with PRC companies. To best position themselves for success in these relationships, Taiwanese companies should consider the business advantage that Hong Kong arbitration clauses offer when doing business in China.

In a move that reaffirms Hong Kong's position as the preeminent gateway to Mainland China, more PRC companies are now insisting on Hong Kong arbitration clauses in their contracts. The region is considered a more attractive arbitration venue for foreign companies operating in the PRC, and the preference it is now being shown marks a U-turn on the prior trend of moving proceedings to alternative regions, notably Singapore. Some Chinese companies are also establishing operating subsidiaries in Hong Kong in order to transact with their foreign counterparts.

Hong Kong as an arbitration destination of choice

Taiwanese companies should familiarize themselves with arbitration developments in Hong Kong in recent years, specifically two that relate to "interim measures." These little-known but valuable instruments strengthen Hong Kong's position as a level playing field for arbitration, especially against PRC counterparties.

Interim measures are important for their ability to expedite the ultimate resolution of a dispute. This is because contemporary litigation and arbitration, in most legal systems, has procedural safeguards that may delay final decision-making, unless a tribunal is able to grant interim measures.

The two relatively new methods for obtaining interim measures in Hong Kong, through the Mutual Arrangement and the China International Commercial Court (CICC), allow parties to overcome procedural delays and thus obtain swifter resolution.

Notably, Hong Kong is the only place outside mainland China where Chinese courts will support arbitrations with the provision of interim measures.

The Mutual Arrangement for court-ordered interim measures

The Mutual Arrangement—also known as the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and the Hong Kong Special Administrative Region—came into force on October 1, 2019.

Several signatories to the founding treaty of international arbitration, the New York Convention, believe that only final awards, not interim ones, are binding. This currently includes China, but the Mutual Arrangement bridges the gap by allowing Chinese national courts to grant court-ordered interim measures for Hong Kong–seated arbitrations. These measures may include conduct preservation, asset preservation and evidence presentation.

The Mutual Arrangement is thus far considered an unqualified success. According to the Hong Kong International Arbitration Centre (HKIAC), PRC courts have approved 100 applications for interim measures since October 11, 2023, effectively preserving assets totaling RMB 27.4 billion (US$3.8 billion). The vast majority of applications, 94 in total, involved the preservation of assets, while two were made for preservation of evidence, and four were for the preservation of conduct. To date, only a small number of applications have been rejected, including one that was rejected because it concerned an ad hoc arbitration, which does not qualify under the Mutual Arrangement.

Interim measures through the China International Commercial Court

Since June 2022, parties in arbitration at the HKIAC can apply to the CICC for mainland Chinese interim relief and enforcement. Applications are made directly through a "one-stop" mechanism, which is currently only available to parties at the HKIAC.

Unlike the Mutual Arrangement, which requires applications to be made to the relevant Intermediate People's Court and is better suited to cases where assets are located within one city or province, the CICC is centralized and has the power to order the preservation of assets across mainland China. The court only accepts cases that exceed CNY 300 million, have a significant impact on the mainland and qualify under the definition of international commercial cases.

The CICC presents several other advantages. Since the court is part of the Supreme People's Court of the PRC, the judges are highly qualified, experienced in international arbitration, and proficient in both Chinese and English. Additionally, the CICC does not require parties to translate documents into English, which is necessary for Mutual Arrangement applications. Lastly, the court has also provided for a streamlined process of proving foreign law.

Given the importance of interim measures, it is important to structure any arbitration clauses carefully in order to benefit from the novel interim measure mechanisms when entering into a contract with a PRC counterparty. This is vital to ensure a level playing field when cases of potential arbitration arise against PRC counterparties.

[View source.]