Arbitration is a consensual dispute resolution process (based on the arbitration agreement) and one of its advantages is that it affords the parties control over the arbitration process. In particular, the parties have considerable choice over the way in which their dispute is conducted. They are able to choose whether to engage in ad hoc or institutionally-administered arbitration, choose the seat of the arbitration (particularly appealing to parties to international contracts who may want to avoid using the home courts of one of the parties to ensure neutrality and/or to avoid the unfamiliarity of local court proceedings), choose their presiding arbitrators and appoint arbitrators who have expertise in the particular area of dispute, and choose the language in which the arbitration is to be conducted.
As the nature of disputes being referred to arbitration continues to grow in complexity, and bearing in mind that arbitration is a party funded process, the time and costs spent during arbitral proceedings are on the increase. Hong Kong already has in place sophisticated legislation to support any arbitral proceedings conducted in Hong Kong, but is seeking to streamline the arbitral process further with the introduction of a new law. In an attempt to resolve disputes in an efficient and cost effective manner, it is becoming increasingly common for parties to incorporate mediation into the arbitral process in a similar manner to the way mediation is used in court proceedings. Under Hong Kong's Civil Justice Reforms (CJR), which came into effect on 2 April 2009 and changed the rules governing court proceedings in Hong Kong, litigating parties are encouraged to settle their disputes through the use of alternative dispute resolution procedures such as mediation. Advantages of mediation include that it is affordable, efficient, effective, informal and flexible, empowering and confidential. The Hong Kong courts have long been supportive of mediation and other alternative forms of dispute resolution and mediation is no doubt growing in importance in Hong Kong since the implementation of the CJR.
Arbitration in Hong Kong
The existing arbitral regime in Hong Kong is governed by the Arbitration Ordinance (Ordinance) which makes a distinction between domestic arbitrations (involving local parties only), the rules of which are prescribed by the Ordinance itself; and international arbitrations (involving foreign parties), which incorporate the Model Law adopted by the United Nations Commission on International Trade Law.
The Arbitration Bill (Bill), which is currently progressing through Hong Kong’s legislative process, makes a number of changes to the current regime. Amongst other things, a unitary regime will be established, with the distinction between domestic and international arbitrations to be abolished. The Hong Kong Court of First Instance will have the power to grant interim measures and preliminary orders in relation to arbitral proceedings conducted in and outside Hong Kong. The reforms recognise the need to facilitate the fair and speedy resolution of disputes and aim to promote greater autonomy for parties engaged in arbitration in Hong Kong. The Bill envisages that mediation may be included in the arbitral process. It is not yet known when this new piece of legislation will come into effect.
Mediation is an alternative dispute resolution procedure suitable for all civil disputes where the parties are committed to reaching settlement. It involves the parties meeting in the presence of an independent third party - the mediator - whose role is to facilitate an agreement by the parties to settle the dispute. Unlike a tribunal member, the mediator has no determinative powers and is not able to make a binding ruling in relation to the dispute. Accordingly, whether the matter settles at mediation and, if so, on what terms is entirely within the parties’ control.
All negotiations and discussions at the mediation are confidential, carried out on a “without prejudice” basis and are non-binding on the parties. This helps to encourage the parties to engage in a frank exchange of their positions and expectations. The mediation process is designed to help the parties identify the key areas of dispute and to reach an agreement which will satisfy their respective interests. It is particularly effective where the parties have an ongoing relationship. Mediation provides the parties with an opportunity to reach commercial outcomes that cannot be achieved by the arbitral tribunal. For example, while an arbitral tribunal can interpret the meaning of a contract, the tribunal cannot generally help the parties to renegotiate the terms of that contract unless the parties expressly give them the power to do so. Mediation, on the other hand, allows the parties to agree to such a course of action. Terms of any settlement reached at mediation should be recorded in writing and signed by the parties, at which stage the settlement terms will become binding. Even where the parties do not settle their dispute at mediation, they may find that the process has helped them to narrow the issues - which may, in turn, reduce time and costs at any subsequent arbitration hearing.
Mediation as part of the arbitral process
As arbitration is a consensual process, the parties will need to agree to incorporate their participation at mediation into that process. This may be done at the outset, with the parties providing for mediation in the dispute resolution clause (i.e. as a stepped clause including an agreement to mediate, and if that fails, to arbitrate, although such clauses need to be carefully drafted), or at a later stage with the consent of all parties. The parties should give consideration, amongst other things, to when in the dispute resolution process they envisage the mediation taking place, where the mediation will be held, who the mediator will be, how costs will be allocated, and the minimum level of participation required by the parties.
Under the CJR, any mediation sessions which litigating parties agree to attend are run by independent mediators appointed by the parties; the Hong Kong courts are not involved in the mediation process. If the matter fails to settle at mediation, the parties are free to continue with the existing litigation process without reference to what happened at the mediation. Parties involved in arbitration proceedings need to consider whether, like the process provided for under the CJR, they want to appoint a mediator separate to the arbitrator or whether they want the arbitrator to take on both roles. The issue of one person switching between roles is an ongoing issue of debate in the arbitration/ADR community. One question in particular is whether that person can act impartially and not let what s/he may have learned in the mediation influence his or her decision if later required to rule on the matter.
As currently worded, the Arbitration Bill allows an arbitrator in Hong Kong to act as mediator after arbitral proceedings have been commenced, so long as all parties have consented in writing. The Bill further provides that, in the event that settlement is not reached at the mediation, no objection may be made against the person acting as arbitrator solely on the ground that the person has acted previously as mediator. Interestingly, and similar to the conciliation process provided for in Hong Kong’s current arbitration law, the Bill envisages that where an arbitrator obtains confidential information from a party during the course of mediation and the mediation terminates with no settlement having been reached, the arbitrator must disclose to all other parties as much of that information as the arbitrator considers material to the arbitral proceedings. This provision appears to be at odds with the underlying objective of “without prejudice” communications, which are generally understood to be confidential, so that discussions during the course of the mediation should not be referred to in a later form of dispute resolution proceedings. The obvious concern is that this provision may discourage parties from engaging in a full and frank discussion of their respective positions during the course of mediation, in the fear that information may be used against them at a later stage if the matter does not settle.
The fact that the parties have considerable choice and control over the way in which the arbitral process is conducted, together with the finality of the process and the relative ease of enforcement of an arbitral award, makes arbitration an attractive option. However, as disputes continue to grow in complexity, so too do the costs and time involved in the arbitral process.
It is becoming increasingly common for parties, recognising the advantages of mediation - including the possible time and cost savings - to incorporate mediation into the arbitration process. The expected increase of qualified and experienced mediators in Hong Kong as a result of the CJR’s desire to encourage the use of mediation to facilitate the settlement of dispute between litigating parties, will no doubt be an advantage for parties involved in arbitration who would like to engage in mediation as part of that process.
The interesting issues of interplay between mediation and arbitration and the approach of different common law and civil law jurisdictions will remain, but no matter how mediation is incorporated, it remains highly likely that it will be a valuable step in the dispute resolution process.