Hong Kong-China Arbitration Arrangement a Boon for Lenders

The new arrangement enabling Hong Kong-seated arbitrations to seek interim measures from mainland courts represents a step forward for China’s offshore financiers.

On 2 April 2019, the governments of Hong Kong and China agreed to an arrangement enabling Hong Kong-seated arbitrations to seek interim measures from courts in the mainland.

Under the existing regime, parties to a China-related transaction – such as Hong Kong or international lenders seeking recovery from a China-based borrower in default – experience difficulties seeking interim measures because Chinese courts have not had the power to order such measures in support of foreign-seated arbitrations, according to a recent client bulletin from international law firm Allen & Overy.

At the same time, interim measures obtained from a foreign-seated arbitration are not enforceable by courts in mainland China, at times forcing parties to adopt a clause providing for China-seated arbitrations, administered by an onshore arbitral institution.

Once the new arrangement takes effect, it will provide an additional option for parties in a Hong Kong arbitration to obtain interim measures – such as asset preservation orders – in Mainland China, which can be crucial for financial institutions to ensure recovery of funds once a China-based borrower has defaulted.

Many offshore lenders have exposure to Mainland China-based borrowers through cross-border lending.

According to Allen & Overy Senior Associate Joanne Lau, as it is understood that the arrangement will be retrospectively applicable to arbitrations that have already commenced, financial services firms should already be considering the new arrangement when selecting their dispute resolution forum.

Jane Jiang, a Partner at Allen & Overy in Shanghai, says it remains to be seen whether there will be additional guidance in relation to the implementation of the new arrangement by Chinese courts, but it represents a step forward for financiers – including both Hong Kong and international institutions.

“Currently, offshore arbitration is less attractive if a financier is concerned about the availability of interim measures , but once the arrangement is fully effective and implementation is shown to be working well, it could present a good combination of both the adjudication impartiality and fairness of an offshore tribunal as well as the availability of asset preservation orders against mainland based assets,” Jiang said. “This combination represents the best of both worlds.”

For Hong Kong-seated arbitrations, both Jiang and Lau highlight that firms should make sure to select an arbitral institution from the ‘prescribed list’, which is likely to include the HKIAC (Hong Kong International Arbitration Centre), the ICC (International Chamber of Commerce) and the CIETAC (China International Economic and Trade Arbitration Commission).

According to Lau, the Department of Justice recently indicated in a LegCo paper that the arrangement is expected to take effect in Q2 or Q3 this year.

“The Arrangement certainly makes Hong Kong arbitration a very attractive dispute resolution option for lenders,” Lau said.

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