When the Hong Kong Court of Appeal (HKCA) laid down its judgment in the Gao Haiyan and Xie Heping v Keeneye Holdings Ltd and Another (please see box out for more details on the case), the dispute resolution community in Hong Kong sat up and took notice. The case was unique because it involved an arb-med procedure in China, and forced the Hong Kong Court to grapple with its understanding of the low profile (at least in Hong Kong) approach.
Arb-med or med-arb is a practice where the arbitrator also acts as the mediator, or the mediator becomes the arbitrator, within the same dispute. To put it more simply, the same person acts both as the mediator seeking to encourage a settlement between parties, and as the arbitrator to determine the facts of the case and issue a binding, final award. This mixing of arbitration and mediation is quite common in civil law jurisdictions, but is still regarded with skepticism and suspicion in common law ones such as Hong Kong. Although the practice is permitted in Hong Kong’s Arbitration Ordinance (in section 33), it hasn’t taken root – none of the lawyers who spoke to ALB could name a case that had utilised the arb-med option in Hong Kong. Justin D’Agostino, a Hong Kong-based arbitration partner at Herbert Smith and council member of the Hong Kong International Arbitration Centre (HKIAC), says: “As a common law lawyer, one tends to be nervous of a judge or arbitrator conducting a mediation.
Switching from the role of arbitrator into the role of mediator – and then back again if the process fails – is not within one’s normal contemplation.”
Pros and cons
The main obstacle to arb-med, lawyers say, is that there is a legal requirement in Hong Kong to disclose confidential information that is obtained over the course of the dispute resolution process. This is not the same for arb-meds conducted in China. “If there is a widespread objection to arb-med in Hong Kong or even a suspicion about it, it’s about the confidentiality issues,” says Abdulali Jiwaji, a Hong Kong-based disputes partner at Simmons & Simmons. If the mediator were to become an arbitrator during a case, the revelation of confidential information to all parties by the mediator-turned-arbitrator would discourage parties from having frank discussions with the mediator and defeat the purpose of an arb-med.“The difficulty is that, under Hong Kong's Arbitration Ordinance, if an arb-med procedure fails, then any confidential information the arbitrator learned during his time as mediator must be shared with the other side,” says D’Agostino. “This is likely to dissuade the parties from speaking freely and openly during the mediation, which is likely to hamper its effectiveness significantly.”
Arbitrations and mediations are considered to be quite different, and as such, most international arbitration rules (such as the ICC’s – International Chamber of Commerce) have kept the two processes separate. An arbitration involves a neutral arbitrator or tribunal, and it has no additional knowledge of the dispute or the positions of the parties beyond the facts presented in the case. Mediations require parties to share extra information in confidence and are largely conducted through shuttle diplomacy. Any confidential information shared with the mediator is kept private, and is not released to the other side. Concerns about blending the two procedures rest in the disclosure of confidential information to all parties, and the possible tainting of the arbitrator’s or mediator’s neutrality and fairness of the existing arbitration or litigation. “In theory, whatever is discussed in private should not be given regard to when you consider the parties’ formal position,” says Friven Yeoh, a dispute resolution partner at O’Melveny & Myers in Hong Kong. “But I think it is very difficult as we are all human.”
Despite the murky waters of confidentiality and its potential impact on fairness and neutrality in a judgment, there are advantages to arb-med. For clients, it can be very efficient and cost-effective because it nudges parties ahead to reach an early settlement and so avoid drawn-out hearings and the hefty legal fees they entail. “I’ve seen it work really well in Europe, for example, where the process resulted in the settlement of a complex dispute relatively early on in the proceedings, and saved clients an absolute fortune,” says D’Agostino. Also, arbitrators or mediators will already be very familiar with the case, its parties and counsel, and should be in a favourable position to settle the dispute. Any settlement reached during arb-med can be recorded as a final award by the tribunal, which is enforced under the New York Convention.
China and Japan
You don’t need to extol the virtues of arb-med to the dispute resolution community in China. In fact, data from CIETAC (China International Economic and Trade Arbitration Commission), the country’s main arbitration body, reveals that 20 to 30 percent of its cases were resolved using arb-med. Yeoh explains that it is quite common in CIETAC arbitrations to have the tribunal suggest in the middle of the proceedings that the parties take a break and then offer to become mediators, after the parties have submitted their position and evidence. “This involves putting aside all the legal differences and the formal aspects of the party’s case, and seeing whether the parties can come up with a compromise with the tribunal acting as facilitator of this process,” he says. The Keeneye arb-med was conducted in this flexible and pro-conciliation environment.
Under CIETAC’s new arbitration rules, particularly in Article 45, an arbitral tribunal is able to conciliate a case during arbitration proceedings in the situation where the parties consent to that procedure. “In this context, 'conciliation' is used to describe what we would typically refer to as 'mediation',” says Ula Cartwright-Finch, an associate based in Herbert Smith’s Hong Kong office. “In an arb-med procedure of this type, the arbitral tribunal has a wide discretion under the CIETAC Arbitration Rules to conduct the mediation in the manner it considers appropriate.” She points out that the CIETAC rules also contain provisions, which would assist any arb-med procedure in the PRC on a practical level. For example, the provisions allow the arbitral tribunal to make an arbitral award reflecting the terms of any settlement agreement the parties sign as a result of the process. The CIETAC rules also expressly prohibit the parties from invoking anything that is said during the mediation by way of claim or defence in any subsequent proceedings – whether arbitral, court or otherwise. “Our understanding is that, in practice, an arbitral tribunal in the PRC tends to offer to act as mediator to the parties of its own accord and as a matter of course in most, if not all, cases,” says Cartwright-Finch. “It would then be up to the parties to give their consent to that process, or to look for an alternative, or, of course, to proceed with the arbitration without any formal mediation process.”
China is not the only Asian jurisdiction that is warm to arb-med. Japan’s arbitration law (in Article 38.4) as well as the Japan Commercial Arbitration Association (JCAA) arbitration rules allow arbitrators to attempt and settle the disputes, subject to the parties’ consent. The JCAA’s mediation rules also allow a mediator in a dispute to act as an arbitrator in any subsequent arbitral proceedings from the same dispute, and any mediation settlement may be incorporated into an arbitration award. A 2009 JCAA newsletter revealed that 25 cases out of 48 JCAA arbitrations between 1999 and 2008 reached successful outcomes, with arbitrators helping the parties in reaching a settlement.
Will it work in Hong Kong?
The Keeneye case judgment cast a spotlight onto the question: Will arb-med ever work in Hong Kong? Some lawyers have a tempered outlook, citing low awareness of the procedure - the relative novelty of mediation in the Hong Kong market - and the inexperience of mediators and arbitrators there. “Whether it can take off and grow; I think never say never,” says Jiwaji of Simmons & Simmons. “I wouldn’t rule it out because I can see the scope for it being useful for disputes. You always have to look at the future, and just because something is new and unfamiliar, doesn’t mean it can’t be effective.” Yeoh of O’Melvey and Myers is similarly cautiously optimistic when he says: “I am certainly personally open to it if the ground rules are set right. We have seen it work in China; a lot of cases get settled through arb-med. So, I don’t see why it can’t happen out here in Hong Kong.” He says it is crucial, though, that parties enter the process with open eyes and reasonable expectations, and that an “experienced and astute” arbitrator or mediator be involved.
However, there is at least one passionate supporter of the approach in Hong Kong. “I'm a proponent of it in principle, and I think common law lawyers especially need to be more open-minded to the process,” says D’Agostino of Herbert Smith. He champions raising awareness through more arbitrator training, educating about the benefits of the process, promotion of the arb-med provision by counsel to clients, and the willingness of lawyers themselves to undergo a mentality shift. “Lawyers shouldn’t wait until they’ve experienced it for themselves. We should be educating ourselves and our clients on the different styles of arb-med, and suggest it for the right case at the right time,” he says. Yeoh believes the common law lawyer culture explains, in part, why counsel are hesitant to embrace arb-med. “I think a lot of the times, the resistance comes from common law lawyers putting on very parochial, cultural lenses to this whole arb-med issue. It’s in our blood because that’s how we’re trained to look at things. If we are crossing into the unknown, there is a concern or uneasiness that we might be overstepping the boundaries.”
Role of evaluative mediation
D’Agostino particularly believes that arb-med can successfully develop through an evaluative mediation. There are two main types of mediation - facilitative and evaluative.
In a facilitative mediation, a mediator goes back and forth between parties’ rooms, hearing from both sides, and aiming to bring parties together in a neutral setting to reach a settlement. The evaluative approach also includes a mediator holding separate meetings with the parties. However, the mediator will make known the strengths and weaknesses of each party’s position in this case. He will indicate how he or she thinks the judge will decide, and make suggestions on suitable settlement options. “In evaluative mediation, arb-med could work in a plenary session when the mediator isn't hearing anything in private,” says D’Agostino. The Herbert Smith lawyers believe facilitative mediation is unlikely to be an effective model within arb-med. This is largely because the Hong Kong arbitration ordinance (which addresses arb-med) requires an arbitrator-mediator to disclose confidential information learned about during the mediation, in the event that the mediation fails and the arbitration recommences.“I’m personally skeptical of arb-med where the arbitrator acts as a traditional facilitative mediator, but I think practitioners need to be more open-minded about using arbitrators in evaluative mediations.”
Jiwaji agrees that evaluative mediation is an easier step to take than diving into arb-med, but it has its pitfalls. “It is a much easier step, but you will see many clients still being uncomfortable taking that risk as they may get an adverse opinion,” he says. “It may help the cultural shift to start with an evaluative mediation, but the fact remains that you are still dealing with a separate person who is a mediator. But in arb-med, you are mixing the two roles which is where the danger comes in.” Robert Lewington, a Hong Kong-based dispute resolution partner at Simmons & Simmons, feels that evaluative mediation and arb-med take away from the attraction of mediation, which is the ability to enter a room with a mediator and speak freely with the knowledge that he or she will not divulge that information to the other side. “In an evaluative mediation or arb-med, you’ve always got one eye on the fact that this person is actually going to make a judgment on your case; and that’s risky,” he says.
Because the culture of mediation is still so young in Hong Kong, one Hong Kong mediator (who is also a barrister) queried whether or not Hong Kong was even at the stage of conducting evaluative mediations yet. “All the training I’ve been through was for facilitative mediation,” she says. “I’m more of an evaluative mediator in practice. But mediation in Hong Kong is almost exclusively known to be facilitative.” When considering mediation as a standalone procedure, Hong Kong dispute resolution practitioners tend to think of the facilitative approach only. However, the arbitration ordinance is likely to lead parties away from utilising the facilitative style due to the disclosure requirement, should the mediation fail. “People are concerned with the disclosure provisions of the Arbitration Ordinance, which would clearly impact facilitative mediations. But nobody’s considering evaluative styles,” says D’Agostino.
Baby steps
Another shift that is required before the practice of arb-med takes off in Hong Kong is for the dispute resolution practitioner to be comfortable with switching between arbitrator and mediator roles. Cartwright-Finch points this out when she says: “It’s not just parties in Hong Kong that are wary of the process; arbitrators are not necessarily prepared to do it either because of the potential repercussions on their appointment, or on the arbitral award.”
“I think we're a long way off still,” says D’Agostino. “We are not really appreciating the benefits of evaluative mediation.” Even though he is enthusiastic about moving towards more evaluative mediations, which in turn could lead to more arb-meds, D’Agostino emphasises that arb-med would only work in specific scenarios and if the timing is right. Another key pre-requisite to an arb-med’s success is having the arbitrator or tribunal be very informed and updated on the specifics of the case. “In the case I saw where the arb-med worked effectively, the tribunal was totally on top of the facts and law. This gave the mediation credibility and was critical to the success of the process,” says D’Agostino.
In this context, Jiwaji says that if the HKIAC could release a set of guidelines or rules for how arb-med should be conducted, then some of the stigma would dissipate. “It would be good to see more arbitral institutions incorporating a framework for arb-med in their rules,” he says. “That would create a culture where it is more accepted. It would give authenticity to the process.” The HKIAC’s secretary-general, Chiann Bao, provides some encouragement that these guidelines may be in the works. She notes the arbitration body is in the process of amending its arbitration administration rules, and that the issue of arb-med had been raised at one of the consultation sessions. “There has been some conversation about the option of including some sort of arb-med provision in our amended rules,” says Bao. “We are only in the consultation stage right now, so it is difficult to say for sure that this is the actual path we will go down.”
Arb-med can be a useful tool for the settlement of disputes and with increased education, training and open-mindedness – plus guidance from the HKIAC – it could take root in the mid term. The recent exposure of the Keeneye case and subsequent discussions of the judgment within the Hong Kong dispute resolution community seem to have been the first steps in raising awareness of the arb-med facility.
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Gao Haiyan and Xie Heping v Keeneye Holdings
A dispute over the validity of a contract for the sale and purchase of shares between Gao Haiyan and Xie Heping (the applicant) and Keeneye Holdings (the respondent), which sparked the now-infamous arbitration, was administered by the Xian Arbitration Commission (XAC). The arbitration complied with the Xian Commission Arbitration Rules, which allows arbitrators to act as mediators during an arbitration. During the arbitration, the parties agreed to mediate.
One of the arbitrators and the secretary general of the XAC were appointed by the tribunal to conduct the mediation. The controversy began because instead of approaching the parties directly, the mediators approached a third party, Zeng Wei, who was friendly with and connected to one of the respondents, namely Keeneye. Wei and the two mediators met for a “mediation” over dinner at the Xian Shangri-La hotel. At the dinner, the mediators suggested Keeneye pay 250 million yuan to Gao Haiyan to settle the case, and asked Zeng to persuade Keeneye to accept this outcome as a mediated settlement. Both parties rejected the proposal, and the arbitration continued. The tribunal ultimately published its award, ruling that the contract between the parties was void, and made a non-binding recommendation that Gao Haiyan pay Keeneye 50 million yuan as compensation.
Keeneye appealed to the Xian Intermediate Court (XIC), alleging the process was conducted improperly and that there was bias on the part of the arbitration tribunal. The XIC dismissed the appeal, finding no bias, and Gao Haiyan subsequently applied to the Hong Kong courts for enforcement of the award. The Hong Kong Court of First Instance (HKCFI) ruled that the award was unenforceable on grounds of public policy. It held that various aspects of the way the mediation was conducted were lacking in transparency, independence, and propriety. But on Dec. 11, 2011, the Hong Kong Court of Appeal (HKCA) reversed this HKCFI decision. It stated in unequivocal terms that “there is nothing wrong in principle with med-arb.” The HKCA allowed the appeal, and approved the enforcement of the award in Hong Kong on the grounds that (i) Keeneye had waived its right to object (ii) There was no apparent bias. As the respondent did not raise any objection to the arb-med procedure during the arbitration, it waived its right to do so in the enforcement proceedings also. Lawyers say that based on this, the case serves as a powerful reminder to parties about the importance of raising objections to the adopted procedure in an arbitration promptly.
“I call this the ‘when in Rome’ case,” says Herbert Smith arbitration partner and council member of the Hong Kong International Arbitration Centre, Justin D’Agostino. “When I first read the judgment, I thought it was a strange decision – it was an unusual mediation after all. But on reflection, I do think the HKCA has got it right; if you agree to arbitrate in a country like China, then you have to accept the way things are done there.” ALB