Herbert Smith Freehills’ Hong Kong dispute resolution team has surveyed around 100 clients and contacts on their use of mediation as a dispute resolution tool in Hong Kong. Through direct interviews and voting via a bespoke iPad app, we have gained valuable insights on how international corporates use mediation in Hong Kong. This is all the more valuable as there is a paucity of data on mediation due to its confidential nature. Our research comes 5 years exactly since mediation was put at the heart of Hong Kong’s litigation landscape by Practice Direction 31 (PD 31), which effectively introduces a ‘mediation step’ into civil litigation proceedings in Hong Kong.

In our ADR in Asia: Spotlight on Mediation in Hong Kong Guide, we reveal that mediation remains under-utilised in practice in Hong Kong, despite being widely supported and recognised as having the potential to resolve disputes in a quick, cheap and confidential way. Our client research confirms that mediation has not grown faster in Asia than arbitration, despite earlier market predictions to this effect. In the context of litigation, our survey reveals that mediation is often undertaken without real intention to settle, to 'comply' with PD 31.

If you would like a copy of our ADR in Asia Guide, which summarises ADR processes and their use in Asia, contains a practical guide on how to get the most out of mediation in Hong Kong, and summarises the outputs of our recent client research, please email asia.publications@hsf.com.

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Practice Direction 31: the ‘mediation step’

PD 31 was introduced in an attempt to front-end settlement, given 90-95% of the 35,000+ cases lodged in the Hong Kong courts each year settle before the court ever delivers judgment. Often, settlement occurs very late, ‘at the court room door’ when the majority of costs have been expended. Whilst not drafted in mandatory terms, our research reveals that PD 31 has been interpreted by users as just that. No one surveyed had been bold enough to refuse to mediate, fearing the threat of a costs order against them for an unreasonable refusal to do so. Although there have been a very limited number of cases on this topic, organisations have preferred to mediate rather than test the court’s interpretation of what is or is not reasonable in this context. This contrasts with England & Wales (on which Hong Kong’s mediation rules are based), where a body of case law has developed to the effect that (exceptionally) an unreasonable delay in mediating or unreasonable conduct at a mediation, as well as unreasonable refusals, have attracted costs sanctions.

What clients want out of mediation

Gareth Thomas, head of the Hong Kong commercial litigation practice, chaired the interactive event on 29 January, where stakeholders from a range of industries and sectors convened to vote via an iPad app on a number of questions relevant to mediation in Hong Kong. Senior client panellists (Andrew Chung, managing director and senior counsel at Goldman Sachs and Fiona Stewart, regional director at Aon) contributed valuable corporate user insights on their use of mediation in Hong Kong. Gareth commented: “Disputes are an unavoidable cost of doing business and we know that our clients want a quick, cheap determination of their disputes, often in circumstances of confidentiality.”

Despite PD 31, most of the clients and contacts surveyed had only mediated between 1 and 10 times in the past five years. A good number (22% of those who voted via the iPad app) had not mediated at all. Yet the vast majority considered it to be a mandatory requirement (in the context of litigation) which could save them time and cost. Gareth added: “I hope that our research and guide help organisations to understand mediation better and to benchmark themselves against their peers when it comes to addressing their dispute resolution options.”

May Tai, a partner in the Hong Kong international arbitration practice and a CEDR accredited mediator, who has practised in the UK, the PRC and Hong Kong, commented: “In other Asian jurisdictions, mediation is often more readily embraced, particularly as an adjunct to arbitration and litigation (for example in the PRC). In Hong Kong it still lags behind, despite a developed mediation support infrastructure. Through our research, we have identified what clients want out of dispute resolution and our guide will help them to get there.”

43% of users who voted via our iPad app regard cost and time savings as the greatest benefit of mediation, followed by the range of outcomes - some not possible through the courts. May added: “In my experience, flexibility and the ability to find creative solutions is absolutely key to Chinese clients. It gives them the option to come up with a face saving solution. It can be a win-win solution for both sides. The confidentiality of mediation is attractive too, and contrasts with the often wide disclosure obligations applicable to litigation or arbitration in Hong Kong.”

The role of external counsel

Julian Copeman, head of the Greater China and disputes practices, and a CEDR accredited mediator, was closely involved in the survey and a panellist at the launch event. He commented: “What we heard throughout our client interviews, as echoed by delegates who voted via the iPad app, is that organisations defer in large part to their external lawyers when it comes to considering mediation, when and how to deploy it, and who to appoint as a mediator. This places considerable responsibility on the legal advisor as a stakeholder to mediation success. We hope that through our ADR expertise, in Asia and globally, we can help organisations to resolve their disputes earlier and in a confidential manner.”

Mediator selection

The clients surveyed and those who voted via the iPad app, want a mediator who commands the respect of the parties and has gravitas. On this May commented: “From my experience in the PRC, this is also the case. The role of the mediator is key, yet Hong Kong corporates don’t really use third parties or their own lists when choosing a mediator. 47% of those who voted through the iPad app said they relied on recommendations from contacts in the market and 38% deferred to the advice of their external lawyers. This again places a significant burden on lawyers to be well versed in mediation and be able to match the right mediator to a dispute.”

A number of those surveyed noted that evaluative mediators often added more value as they would robustly test the counterparty's case. Several found that a purely facilitative mediator was too passive and did not gain the respect of the parties.

What is the most important factor in a successful mediation?

The view here was clear: 50% of the clients interviewed and 56% of those who voted via the iPad app said it was the mindset of the parties. 18% of those voting via the iPad app said timing was the second most important. On this Fiona Stewart of Aon commented: “Timing has to be judged on a case by case basis, but it is vital to try to mediate at the right time. An early mediation, forged on too little information, is less likely to succeed. A mediation very late in the day occurs when significant costs (eg of discovery, witness statements, trial preparation) have already been incurred. In practice, PD 31 encourages mediation after pleadings but this may not be the best time. In many cases, mediations which take place then are simply ‘box-ticking’ exercises.”

Early engagement of management

In voting that the mindset of the parties is the most important factor, organisations are clearly in control of their own destiny when it comes to mediation. Gaining a better understanding of the process and, critically, engaging the right people (usually senior management) is essential. Julian Copeman commented: “when done properly, mediation brings forward that moment when management focuses on settlement, and brings the decision makers back into the room.”

Our research highlights that, when undertaken meaningfully, and at the optimum time, mediation forces everyone into an earlier appraisal of their case. Those surveyed generally said that around 50% of their mediations settled (which accords broadly with market trends for commercial disputes). Those which failed were very often helpful however - in gaining intelligence, promoting engagement with the case, narrowing the issues, or assessing the approach of the counterparty and their external lawyers.