Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Mediating Your Way Out of Arbitration – The Pitfalls of Arb-Med.

9 November, 2011

 

 

Gao Hai Yan & Anor v. Keeneye Holdings Ltd & Ors [2011] HKEC 514
 
Arbitration-Mediation (“Arb-Med”) is a hybrid of the arbitration and mediation processes. It allows an arbitrator presiding over an arbitration to utilise mediation to attempt a consensual resolution of the dispute before an award is rendered in the arbitration. If the mediation is unsuccessful, parties may then continue with the arbitration. It is well established in civil law jurisdictions and the PRC. Article 33 of the Hong Kong Arbitration Ordinance (Cap 609), which came into force earlier this year, permits an arbitrator to act as a mediator after arbitral proceedings have been commenced. However, Arb-Med is a process that is still relatively new to common law jurisdictions.
 
The case of Gao Hai Yan & Anor v. Keeneye Holdings Ltd & Ors [2011] HKEC 514 illustrates the risks associated with the Arb-Med process and discusses the precautions an arbitrator involved in an Arb-Med situation should take.
 
The background facts
 
The case involved a share sale agreement (“the Agreement”) entered into by the parties which Gao alleged was void on the grounds of duress and misrepresentation. The parties referred the dispute to arbitration.The arbitration was administered by the Xian Arbitration Commission (“XAC”) and conducted in accordance with the Xian Arbitration Commission Arbitration Rules (“the Rules”). Article 36 of the Rules permits an arbitrator to act as a mediator during the arbitration. The hearing of the first tranche of the arbitration ended in December 2009. Further to the tribunal’s recommendation, the parties agreed to mediate the dispute before the tribunal rendered its award in the arbitration.
 
Further to the agreement to mediate, the tribunal decided to recommend to the parties that they settle the dispute by way of payment by Keeneye of the sum of CNY250 million to Gao as compensation on the assumption that the tribunal would find that the Agreement was valid. The tribunal appointed the Secretary-General of the XAC and one of the arbitrators (the “mediators”) to contact parties with this suggestion. However, instead of approaching the parties directly, the mediators approached a person friendly and related to Keeneye, Zeng Wei, informed him of the tribunal’s recommendation over dinner on 27 March 2010 and asked that he “work on” Keeneye. Eventually, both Gao and Keeneye were not prepared to settle at CNY250 million.
 
Arbitration resumed and, in June 2010, the tribunal rendered its decision (“the Award”). The tribunal revoked the Agreement and recommended that Keeneye pay CNY50 million as ‘economic compensation’ to Gao. Keeneye appealed the Award to the Xian Intermediate Court contending that the difference in outcome was because the tribunal / mediators had shown “favouritism and malpractice”. The appeal was dismissed. Gao then applied to the Hong Kong courts for enforcement of the Award. The application was first made ex parte and granted. Keeneye appealed the order granting enforcement, citing Article 40E(3) of the Arbitration Ordinance (Cap 341), then in force, which provided that enforcement of a mainland arbitral award may be refused if enforcement would be against public policy.
 
The Court’s decision
 
The Court refused to enforce the Award on public policy grounds. It found that the Award was tainted by bias because the events of 27 March 2010 would have caused a fair minded observer to apprehend a real risk of bias on the part of the tribunal and that the tribunal favoured Gao. The fact that stood out the most was that when the CNY250 million was not agreed between the parties as a final settlement, the tribunal rendered an award in Gao’s favour revoking the Agreement. This was contrary to what the mediators told Zeng Wei on 27 March 2010. Further, there were many “awkward and unanswered questions” arising out of the way the meeting on 27 March 2010 was conducted. For example, why did the mediators meet with Zeng Wei and not the directors, officers or lawyers of Keeneye and why was the sum of CNY250 million proposed without the authorisation of or confirmation from Gao?
 
The Court also found that it was not stopped from hearing the appeal even though the XAC rejected Keeneye’s submission of bias. The issue of bias has to be considered from the point of view of Hong Kong public policy which may be different from Xian public policy (Hebei Import & Export Corp. v. Polytek Engineering Co Ltd [1999] 1 HKLRD 665).
 
Comment
 
This decision highlights the risks associated with Arb-Med. Although the Court emphasised that there is nothing wrong in principle with Arb-Med, the problems inherent in Arb-Med are self-evident to a common law lawyer accustomed to common law confidentiality and disclosure rules. The risk of an arbitrator-mediator being biased cannot be ignored. It is not uncommon in a mediation for a party to disclose confidential, privileged or even damaging information to the mediator which it would not have normally disclosed to an arbitrator. It is unrealistic to expect a person to ignore such information, therefore calling into question the impartiality of the arbitrator/ mediator. Further, mediators are free to meet with each party in private. The other party to the mediation will not know what has been said by his opponent during these private sessions and so will not have an opportunity to respond. Some argue this process contradicts notions of natural justice and due process, cornerstones of our legal system.
 
For these reasons, practitioners in many jurisdictions remain sceptical of Arb-Med. On the other hand, Arb-Med can, in theory, be an effective tool for reducing costs, increasing efficiency and achieving a win-win result for all parties. Parties opting for Arb-Med should ideally agree that the arbitrator and mediator be different persons. If, however, the arbitration and mediation need to be conducted by the same person, parties should select a person who is known for integrity and agree on the process, the extent of the mediator’s disclosure obligations and the extent of the parties’ waiver of their right to challenge the award before proceeding with the mediation. Practitioners of Arb-Med must exercise caution to ensure that their awards are not tainted by the appearance of bias or else the award may be unenforceable. This is of increased importance if the award is to be enforced in a foreign jurisdiction. In the meantime, it remains to be seen whether the process of Arb-Med will gain popularity in Hong Kong and other common law jurisdictions as it has in civil law jurisdictions.
 
 
For further information, please contact:
 
Max Cross, Ince & Co
 
Suyin Anand, Ince & Co
 
 
 
 

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