A new Practice Direction 31 (PD 31) on Mediation published by the Judiciary came into effect on 1 January 2010. PD 31 applies to all High Court and District Court civil proceedings begun by writ (including those already on foot as at 1 January 2010), except for proceedings in specialist lists (which have their own practice directions containing provisions in respect of mediation) and a small number of District Court cases.  

PD 31 outlines the new duties on parties and the new mediation procedures they need to follow. This e-bulletin highlights PD 31 and six key points you will need to be aware of when mediating in Hong Kong under the new rules. This e-bulletin also discusses the new scheme in effect from 1 January 2010 for voluntary mediation in s.168A (unfair prejudice) and 177(1)(f) (just and equitable) petitions where there is no allegation of insolvency concerning the company and no allegation that the affairs of the company would require full investigation in the public interest.

  1. Duty to explore Alternative Dispute Resolution (ADR)
  2. Costs consequences of failing to engage in mediation
  3. Preliminary case management
  4. The new mediation procedure
  5. Stay of legal proceedings
  6. Without prejudice communication and confidentiality
  7. Practice Direction 3.3 – voluntary mediation in s.168A and 177(1)(f) petitions

Click here for our conclusion.

  1. Duty to explore ADR

A series of implicit objectives which underlie the procedural rules (known as the "underlying objectives") were introduced on 2 April 2009. One of the underlying objectives of the new rules is to facilitate the early settlement of disputes. The court has a duty, as part of active case management, to further that objective by encouraging parties to use ADR where appropriate and facilitating its use ie, helping parties to settle their case. It is important to note that the parties and their legal representatives have a general duty to assist the court to further these underlying objectives.

  1. Costs consequences of failing to engage in mediation

The court may make an adverse costs order where a party "unreasonably" fails to engage in mediation. No adverse costs order will be made where there has been a minimum level of participation or a party has a reasonable explanation for not engaging in mediation, such as progressive without prejudice settlement negotiations. It is not yet clear what will constitute "unreasonable" conduct. The courts are likely to look at case law developments in England and Wales where, in the absence of written rules, court judgments illustrate in what circumstances an outright refusal to mediate may be regarded as unreasonable. Parties should, nevertheless, be aware of the risk as to costs where a party fails or refuses to engage in mediation.

  1. Preliminary case management

Parties will need to consider and ascertain whether a case is suitable for mediation at an early stage in the proceedings. Note that the timetabling questionnaire, which must be filed and served within 28 days after the close of pleadings, requires the parties to indicate whether they have attempted ADR and if not, whether any of the parties are willing to engage in ADR. Regardless of whether parties wish to engage in mediation, they will need to follow at least part of the procedure outlined in paragraph 4.

  1. The new mediation procedure

The Mediation Certificate

Each party must file a Mediation Certificate at the same time as the Timetabling Questionnaire (i.e., within 28 days after the close of pleadings). The Mediation Certificate must be signed by the parties and their solicitors. The Mediation Certificate should state whether a party is willing to attempt mediation and if not, why not. The Mediation Certificate should also confirm that the solicitors have explained to the client (i) the availability of mediation to settle the dispute and the respective costs positions of mediation as compared with the costs of the litigation; and (ii) the contents of PD 31.

The Mediation Notice

If a party wants to attempt mediation, he must serve a Mediation Notice on the other party (or parties) in the dispute as soon as possible after filing the Mediation Certificate. In the Mediation Notice, the applicant should (i) state that he wishes to attempt mediation; and (ii) make proposals for the conduct of a mediation.

The Mediation Response

The respondent must then serve and file at court a Mediation Response within 14 days. The Response should state whether the respondent agrees to mediate the dispute, and if not why not. If the respondent is willing to mediate, he should confirm whether he agrees with the applicant's proposals and, if not, he should suggest alternatives.

The Mediation Minute

Where the parties put forward differing proposals in the Mediation Notice and Response, they should attempt to reach agreement and put this in the form of a Mediation Minute signed by the applicant and the respondent or their solicitors. The Mediation Minute should be filed at court within 3 days after it has been signed.

Where the parties are unable to reach agreement on certain proposals they may make a joint application (or any party may apply) to the court for directions to resolve the points of difference. The court will only try to resolve differences concerning the process of mediation. The court should not, for example, be asked to direct a party to engage in mediation or appoint a particular mediator over the opposition of the other party.

  1. Stay of legal proceedings

The court may, either on application by one of the parties or on its own motion, stay legal proceedings for a short time to allow parties to mediate, provided the stay does not imperil any "milestone dates". Milestone dates were introduced as part of the CJR reform in April 2009 with the aim to reduce delays. These are major dates in any proceedings and include the case management conference, pre trial review and the trial date/period. A stay which has the effect of postponing a milestone date will only be granted in exceptional circumstances.

If the parties agree a settlement during the stay period, they must inform the court and take steps formally to conclude the proceedings. If no agreement is reached through mediation, the legal proceedings will continue after the stay period has expired.

  1. Without prejudice communication and confidentiality

PD 31 states that the court cannot compel the disclosure of or admit materials so long as they are protected by privilege in accordance with legal principles, including legal professional privilege and the privilege protecting without prejudice communications. Moreover, it states that communications during the mediation process, being without prejudice communications, are protected by privilege and are therefore confidential. Case law developments in England, however, demonstrate that this is an area not without debate and exceptions apply in certain instances.

The courts have, for example, allowed parties to adduce evidence in court of what happened in the later stages of mediation in order to decide whether or not a valid settlement had been concluded. Moreover, in the recent case of Farm Assist Limited (In Liquidation) v The Secretary of State for the Environment, Food and Rural Affairs (No. 2) [2009] EWHC 1102 (TCC), the court compelled a mediator to provide evidence about what took place in a mediation over which she presided despite her contentions of privilege and the fact that the mediation agreement reached between the parties contained an express provision of confidentiality. It is worth noting, however, that neither party to the case objected to the mediator being called to give evidence about the mediation (including her private conversations with the parties).

Confidentiality is central to the mediation process and it is held up as one of the key reasons why the mediation process is successful. However, the Farm Assist case makes clear that there may be exceptional circumstances where the confidentiality provisions of the settlement agreement between the parties and the mediator can be set aside in the interests of justice. Several factors made this an exceptional case including the allegation of economic duress at the mediation, and therefore the conduct of the parties during the mediation had to be assessed in order to determine whether the settlement agreement should be set aside.

In relation to privilege, the court recognised that privilege in mediation proceedings may exist in many forms (e.g. legal advice privilege, litigation privilege and without prejudice privilege), but it is yet to be definitively determined whether there is a privilege attaching to the whole mediation process. In Farm Assist, the mediation was covered by without prejudice privilege. Since without prejudice privilege existed as between the parties as opposed to being the privilege of the mediator, the parties could waive the privilege and did so by not objecting to the mediator being called to give evidence.

The Farm Assist case shows that mediation may be, at most, a form of assisted without prejudice negotiation and that the limits of without prejudice negotiations probably apply equally to mediation. In addition, the decision warns potential parties to mediation that confidentiality provisions in a settlement agreement need to be carefully structured. There may be circumstances, however, in which even the most cautiously worded agreement may not protect the parties' confidentiality where allegations are made of serious misconduct, which the court might choose to examine. Whilst we remain warned of such circumstances, it is also right to observe that it would be rare for an experienced mediator to allow the mediation process to be abused in a way that would or could give rise to such a claim.

It will be interesting to see how the Hong Kong courts will interpret PD 31 and decide on the issues of privilege and confidentiality in relation to mediations in Hong Kong, and importantly whether or not Hong Kong will follow the recent UK decisions on mediation discussed above. We will keep you informed of any developments in this area.

  1. Practice Direction 3.3 – voluntary mediation in s.168A and 177(1)(f) petitions

The Judiciary in Hong Kong has solidified the existing pilot scheme for voluntary mediation in petitions presented under s.168A and s.177(1)(f) of the Companies Ordinance. Practice Direction 3.3 (PD 3.3) came into effect on 1 January 2010 upon the expiry of the related pilot scheme for voluntary mediation introduced by the old Practice Direction 3.3. PD 3.3 provides for voluntary mediation in s.168A and s.177(1)(f) petitions where there is no allegation of insolvency concerning the company and no allegation that the affairs of the company would require full investigation in the public interest.

Where the petitions are purely disputes between shareholders, not involving the interest of the general body of creditors of the company or affecting the public interest, the court seeks to encourage the parties to consider the use of mediation as a possible means of resolving their disputes in a cost-effective and more expeditious manner. S. 177 CO specifies grounds on which a petition may be presented to the court for an order that a company be wound up under the control of the court. S. 177(1)(f) CO, on just and equitable grounds, is raised where (i) the main object of the company has failed; (ii) the company was formed to carry out a fraud or to carry on an illegal business; or (iii) the members have formed a company on the basis of a relationship involving mutual trust, understanding, and confidence which no longer exists. S.168A CO provides members of a company with an alternative remedy to winding-up against unfairly prejudicial conduct in relation to the affairs of the company and s.168A CO is raised where the intention is for the company to continue business.

Mediation under PD 3.3 is voluntary in nature. Nevertheless, there are costs sanctions for refusing or failing to mediate if another party suggests it. Unlike PD 31, no party is required to file a Mediation Certificate, and potential costs consequences for unreasonably refusing or failing to mediate do not arise until one party, of its own volition, files a Mediation Notice stating that he wishes to attempt mediation. At this point, the others are at risk if they reject the suggestion of mediation.

Conclusion

Mediation, until now, has not really been part of the litigation culture in Hong Kong. It is anticipated that new rules will bring important changes to the way disputes are dealt with in Hong Kong. We expect the following changes in attitude to occur once the new system has had time to bed in:

  • The court's power to make adverse costs orders where a party "unreasonably" refuses to mediate should ensure that parties pay more attention to ADR than has commonly been the case.
  • The use of mediation is expected to increase as public confidence in the process grows and Hong Kong's pool of trained and experienced mediators grows. This in turn should lead to more cases being settled at an earlier stage.

The success of mediation in Hong Kong will largely depend, at least initially, on whether the judges themselves become more pro-active in encouraging the process, but more importantly and in the long run will depend on whether the clients perceive the benefits of mediation and view the mediation process as an effective means of settlement.