Supplemental Arrangement for enforcement of arbitral awards strengthening Hong Kong’s status as the international arbitration hub

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) has been described as the most successful treaty in private international law, facilitating the enforcement of international arbitration agreements and awards across the globe. P.R. China entered into the New York Convention since 1987. Upon resumption of sovereignty over Hong Kong on 1 July 1997, the Government of China extended the territorial application of the New York Convention to Hong Kong. Given that Hong Kong is part of China since then, the New York Convention is inapplicable between Hong Kong and China – as such, Hong Kong and Mainland China entered into the “Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region” (the “Hong Kong Arrangement”) since 2000. In the following 20 years, the implementation of the Hong Kong Arrangement has been very good overall. A large number of arbitral awards have been mutually enforced in the two jurisdictions, and cases of non-enforcement are rare. It can be said that the Hong Kong Arrangement has become the key attraction for parties to an international contract with Chinese elements to select Hong Kong as the seat for arbitration.

Upon the 20th Anniversary of the Hong Kong Arrangement, the Supreme People’s Court (the “SPC”) and the Department of Justice (the “DoJ”) entered into the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (the “Supplemental Arrangement”) on 27 November 2020. Upon the conclusion of the Supplemental Arrangement, the SPC and the DoJ had also jointly published Chinese-English bilingual summaries of 10 landmark cases concerning the 20-year old Hong Kong Arrangement.

The Supplemental Arrangement consists of a number of important amendments and supplements to the current enforcement regime, in particular, (1) whether the enforcing court can make orders of preservative measures against the award debtor’s assets upon application for enforcement of the award, and (2) whether the award creditor can apply to enforce the award simultaneously in both the Mainland court and Hong Kong court when the award debtor has assets in both jurisdictions.

First, the original Hong Kong Arrangement had not clearly stipulate any assets preservation measures when the enforcement application is pending. In contrast, Art.11 of the Arrangement between the Mainland and the Macau SAR on Reciprocal Recognition and Enforcement of Arbitration Awards (the “Macau Arrangement”) (effective from 2008) provides that “A court may, before or after accepting an application for admitting and enforcing an arbitration award, take protective measures against the property of the party against whom the application is filed in accordance with the legal provisions of the locality of the court if the application requires to do so.”

Under section 89(5) of the Arbitration Ordinance (Cap. 609) and Order 73, rule 10A of the Rules of High Court (Cap. 4A), the Hong Kong Court has the power to order security (for both award and costs) for adjournment of enforcement proceedings. For example in Baosteel Engineering & Technology Group Co. Ltd. v China Zenith Chemical Group Ltd. [2018] HKCFI 1678, the Court of First Instance granted a temporary stay of the award for six months from 11 July 2018, on the condition that the award debtor has to pay the full amount of the award into court as security or provide a bank guarantee for that amount.

The Mainland courts are also open to make order of asset preservations or security pending enforcement of a Hong Kong arbitral award in the Mainland. For instance, in Fujian Zongheng Gaosu Information Technology Limited Co., Fujian Focus Media Limited Co., Cheng Zheng v Shidai Cayman Investment Co. (Case no.: (2014) Rong Zhi Jian Zi No. 51), the Fuzhou Intermediate People’s Court granted asset preservation pending enforcement of a Hong Kong arbitral award, as the court reasoned that the application filed under the Hong Kong Arrangement should be treated as akin to an enforcement under the Civil Procedure Law, which allows for asset preservation. This is further confirmed in the Supreme People’s Court in the case Automotive Gate Fzco (SPC Reply Civil Others [2017] No. 219). The Supreme People’s Court stated in its reply that: “The applicant filed an application for asset preservation in the People’s Court, after the applicant has applied to the People’s Court for recognition and enforcement of the Hong Kong arbitral award. Currently, there is no clear legal provision in this regard. With reference to the established principle in Art. 100 of the Civil Procedure Law of the People’s Republic of China, when the applicant provides sufficient guarantee, the application for asset preservation can be approved”.

In addition, in the application of Farenco Shipping Pte. Ltd.for enforcement of arbitral awards made in Hong Kong ((2018)Yue 72 Ren Gang No. 1 , (2019) Yue 72 Ren Gang No. 1), the Guangzhou Maritime Court had granted interim measures upon the award creditor’s application before the award was recognised and enforced – by freezing the award debtor’s deposit at the China Merchants Bank (Shenzhen Branch) before handing down its court ruling. In its judgment, the Guangzhou Maritime Court noted that the Mainland and HKSAR Arrangement was silent on whether the court can, before or after handling an application for recognition and enforcement of an arbitration award, grant interim measures against the property of the party against whom the application is filed. It, therefore, referred to the Macau Arrangement, the provisions of the Civil Procedure Law of the People’s Republic of China and its relevant judicial interpretations to decide that the court has the power to grant preventive remedies to facilitate the smooth enforcement of the awards for the better protection of the legitimate rights and interests of the party concerned.

Accordingly, there are indeed no legal obstacles to grant asset preservation measures when applying for recognition and enforcement of arbitral awards in the two jurisdictions.

It is noteworthy that under the “Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region” (the “Interim Measures Arrangement”), which took effect on 1 October 2019, the parties in the two jurisdictions are expressly permitted to apply for interim measures and preservation orders before the commencement of and during arbitration proceedings. Therefore, as the Supplemental Arrangement confirms that preservation measures can also be applied for at the stage of pending enforcement, this will undoubtedly fill in the gap under the current regime, allowing clear legal certainty and protection for the effective enforcement of arbitral awards in the two jurisdictions.

Second, under Art.2 of the Hong Kong Arrangement, an award creditor cannot apply for simultaneous enforcement of the award against the award debtor, even if the award debtor owns assets in both the Mainland and Hong Kong. Such requirement is obviously odd to international arbitration practice, because the New York Convention does not impose any restrictions on the recognition and enforcement of arbitral awards in multiple places at the same time. In addition, under the Macau Arrangement, an award creditor can apply for recognition and enforcement to the Mainland court and the Macao court respectively, as long as the total amount recovered does not exceed the award amount.

In fact, there are situations where the award creditors were disallowed to enforce the award simultaneously in the two places. In CL v SCG [2019] HKCFI 398, the successful party in the Hong Kong arbitration first applied to enforce the award in the Mainland. However, as the Mainland application was unsuccessful, the applicant then turned to enforce the award in Hong Kong. However, the Hong Kong court refused to enforce the award because the 6 years of statutory limitation period under the Limitation Ordinance had already lapsed when the application was filed. This case may seem exceptional, but it shows that if the successful party in an arbitration is restrained from initiate parallel enforcement procedures in Hong Kong and the Mainland at the same time, the enforcement procedures may last for several years, which would eventually result in a situation where the award is barred by the statutory limitation period, and justice cannot be achieved. As such, to fill the loopholes under the current regime, it is best to reform and permit simultaneous recognition and enforcement of award in Hong Kong and the Mainland.

All in all, under the Belt and Road Initiative and the Guangdong-Hong Kong-Macao Greater Bay Area development plan, we have seen a fast collaboration and integration of judicial assistance arrangements between Hong Kong and the Mainland. The combination of the Supplemental Arrangement revision and the Interim Measures Arrangement will not only greatly support Hong Kong’s calibre as the world’s leading international arbitration centre, but also facilitate the Mainland to optimise its business environment and rule of law. Since 1997, Hong Kong and the Mainland have so far signed 8 mutual legal assistance arrangements in civil and commercial areas, covering matrimonial and family matters, service of judicial documents, entrusted evidence collection, interim measures for arbitration, reciprocal recognition of judgment in certain agreed fields, enforcement of arbitral awards, and recognition and enforcement of civil and commercial judgments.  Undoubtedly, this comprehensive arrangement framework has benefited from the effective implementation of the “One Country Two Systems” and the “Basic Law”, and also enable the Hong Kong legal services industry to unleash their strengths and potential.

Legal Director, Hill Dickinson Hong Kong

Edward is qualified as a solicitor in England & Wales as well as a lawyer in P.R. China.  His main area of practice is in commercial and shipping litigation and arbitration. He is extensively experienced in advising and handling international commercial disputes covering areas such as sale of goods/trade and commodities, energy and offshore projects, shareholder and equity-related disputes, and international investment (particularly connected with Belt & Road projects), commercial fraud, worldwide enforcement of judgments and arbitration awards etc.  Edward has been appointed as members of a number of advisory bodies to the Hong Kong government, including Advisory Committee on Promotion of Arbitration, Steering Committee on Mediation, Aviation Development and Three-Runway Advisory Committee, Hong Kong Maritime and Port Board, and an adjudicator of the Registration of Persons Tribunal.  He is also the principal representative of the International Chamber of Shipping (China) Liaison Office.