The practice of mixing mediation and arbitration involves an arbitrator also acting as a mediator in the same dispute – commonly known as 'arb-med', or 'med-arb' if a mediator subsequently becomes the arbitrator in the same dispute. This can lead to complications. The practice is commonplace for arbitrations conducted in Mainland China and is explicitly allowed under the new Hong Kong Arbitration Ordinance, which came into force on June 1 2011 - although it has not gained popularity in other international arbitration venues. A key risk arising from the practice is that an arbitral award made following a failed mediation can be tainted by bias and rendered unenforceable.
The difficulties that can be caused by an arb-med process are illustrated by Gao Haiyan v Keeneye Holdings Limited.
The arbitration arose from a dispute over the validity of a contract for the sale and purchase of shares between the parties. The arbitration was administered by the Xian Arbitration Commission (XAC) and conducted in accordance with the Xian Commission Arbitration Rules, which allowed an arbitrator to act as a mediator during the arbitration. In the course of 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.
However, rather than approaching the parties directly, the mediators approached a third party, Zeng Wei, who was connected to and friendly with one of the respondents, Keeneye, and put forward a proposal for the respondents to pay Rmb250 million to the applicants to settle the case. This conversation took place at a dinner meeting at a hotel restaurant, at the suggestion of the mediators. The mediators also requested that Zeng try to persuade Keeneye to accept the proposal. However, neither party was ready to settle at that stage and the arbitration continued. Ultimately, the tribunal ruled that the contract between the parties was void and recommended that the applicants pay Rmb50 million to the respondents as compensation.
Keeneye appealed the decision to the Xian Intermediate Court, alleging that the process had been tainted by improper conduct and manipulation of the case by the arbitrators. The appeal was dismissed and the applicants subsequently applied to the Hong Kong courts to enforce the award.
The first instance court held that the award was unenforceable on grounds of public policy. Various aspects of the conduct of the mediation, including the dinner meeting and the discussions with a person connected to the respondents, were found to have lacked transparency and independence, resulting in a tainted award.
In December 2011 the first instance decision was reversed by the Court of Appeal. The Court of Appeal held that given the circumstances of the case, no appearance of apparent bias had been established which would lead the court to refuse enforcement of the arbitral award. The court paid particular regard to the decision of the Xian Intermediate Court, which refused to set aside the award on the grounds of bias. The court recognised that a party might feel some unease about the way in which the mediation was conducted, because mediation is normally conducted differently in Hong Kong. However, the court stated that what would give rise to an apprehension of apparent bias may also depend on an understanding of how mediation is normally conducted in the place where it occurred. What would constitute the norm in one jurisdiction would be better decided by the courts of that jurisdiction – in this case, the Xian court.
Further, the Court of Appeal acknowledged the need for the court to recognise the validity of decisions of foreign arbitral tribunals as a matter of comity, and to give effect to them; and that it would take a very strong case before the court would reach a decision that there had been a violation of the most basic notions of morality and justice.
The decision is a positive affirmation that the Hong Kong courts respect the need for finality regarding international awards and respect the supervisory jurisdiction of the courts of the seat of the arbitration. It follows that the Hong Kong courts will not be quick to find procedural impropriety where local cultural differences may be the explanation. Parties should consider carefully any local practices before committing to arbitration in a particular jurisdiction.
If the parties are considering arb-med, it is also worth them considering incorporating a set of rules to provide a framework for the arbitrators to encourage and facilitate settlement between the parties (eg, the Centre for Effective Dispute Resolution's recent Rules for the Facilitation of Settlement in International Arbitration). Given the prevalence of arb-med in mainland China, there is scope for the practice to be explored by parties arbitrating in Hong Kong, and this is likely to lead to further challenges based on impartiality and bias.
For further information on this topic please contact Abdulali Jiwaji, Mary Lau or Eric Tong at Simmons & Simmons by telephone (+852 2868 1131), fax (+852 2810 5040) or email ([email protected], [email protected] or [email protected]).