Global asset management quarterly: A global briefing on developments and market trends
Welcome to the thirteenth edition of Global asset management quarterly.
For clients whose commercial contract includes a Chinese element or whose dispute resolution clause specifies China-seated arbitration – our Hong Kong arbitration lawyers share their practical experience of ‘mediation-arbitration’, a form of dispute resolution growing in popularity in the People’s Republic of China.
Med-arb is the process by which an arbitrator acts as mediator in arbitral proceedings. A mediator-arbitrator moves between the adjudicative role that he/she plays in the arbitration (reaching determinations based upon the facts and the law) and the conciliatory role of mediator (assisting the parties towards settlement based on their respective bargaining positions). If the mediation fails, the arbitrator switches roles, putting on her adjudicative hat, and may render a binding decision on the merits.
Med–arb can be initiated by the parties or by the arbitral tribunal. It is usually commenced at an early stage of proceedings, but this is not always the case – we have participated in med-arb procedures which were not commenced until the oral hearing.
Many common law lawyers view med-arb critically, so tribunals consisting mainly of common law lawyers are unlikely to prefer med–arb.
Med-arb procedures are most common in arbitrations in the People’s Republic of China, or in arbitrations that have a significant PRC element.
Med-arb can be an effective means of resolving disputes. It allows an arbitrator to render an early evaluation of the parties’ cases, and that can impel parties to reconsider their bargaining positions, making settlement a possibility.
There are also potential cost savings in med–arb. There is no duplication of time and cost in bringing different individuals up to speed with the legal and factual background.
The terms of a mediated settlement may be readily rendered as an arbitration award. The award will in turn benefit from the cross-border enforcement mechanism for these awards (arising from the New York Convention).
“Critics of med–arb see a potential tension arising from a single person taking both an arbitrator’s and a mediator’s role. This applies particularly to the treatment of confidential and privileged information in the med–arb process.”
There are two approaches. One is evaluative: a mediator appraises each party’s case and directs them towards settlement. The other is facilitative: a mediator facilitates a dialogue but offers no evaluation.
PRC arbitrators tend to take the former approach, which is often effective if a bit rough and ready.
The evaluative mediation style can be a two-edged sword. Its power arises from the fact that the arbitrator has given an advance warning of his/her determination should the mediation fail. This puts the parties under pressure to change their bargaining positions. The risk is that the arbitrator, in making an evaluation, will prompt the party to make greater efforts to defend itself, so prolonging and complicating the mediation and the subsequent arbitration. A further, serious, concern is that, by consciously favoring one party’s case over another before a full hearing, the tribunal may by some be seen to be prejudging the parties’ cases, compromising its neutrality and even giving rise to challenges around its independence and impartiality.
Parties are free to set their own med-arb procedure, but in practice (at least in the PRC) they defer to the tribunal on the conduct of any mediation–arbitration. They may also be subject to the rules of an arbitration institution and the applicable law. For instance, if the proceedings are in Hong Kong the mediator has a duty to disclose to all parties any confidential information obtained during the mediation which he/she considers material to the arbitral proceedings. No equivalent requirements apply in (for example) Singapore or China.
Non-compliance may jeopardize the enforceability of a subsequent arbitration award. Parties should check on the required procedure in the seat of the arbitration.
Critics of med–arb see a potential tension arising from a single person taking both an arbitrator’s and a mediator’s role. This applies particularly to the treatment of confidential and privileged information in the med–arb process. The mediator-arbitrator may, during the mediation phase, be exposed to information, such as a party’s bottom-line negotiating position or prejudicial allegations made privately regarding the other parties’ conduct or motivations. If mediation fails, the information or allegations might influence the arbitrator’s determination. This unease persists even if the arbitrator is instructed to disregard the prejudicial information in question—she may be unable to do so.
Med-arb is voluntary, not compulsory. A party may simply refuse to participate. Instead, it may choose to press ahead with the arbitration or it may propose mediation by an independent third party. This latter option is the usual method of mediating in international arbitration proceedings. As the mediator is not a member of the tribunal, the conciliatory mediation process is kept separate and distinct from the adjudicative arbitration process; and, since the mediation is confidential, prejudicial information revealed may not be divulged in the arbitration.
Parties concerned over the risks of med–arb can and probably should insist upon an independent mediator who is not a member of the tribunal.
There is scope for parties to include safeguards in the process. In practice, however, a tribunal will push hard to conduct the form of med–arb it prefers: the parties will have limited scope to introduce safeguards.
What form might these safeguards take? Parties concerned about the possibility of prejudicial statements being made in private caucus sessions may agree that all communications between the arbitrators and the parties shall be made collectively, not separately. This will allow parties to reply to any allegations. Parties may also reach written agreement on the treatment of information learned in confidence by the arbitrator during the mediation phase, requiring disclosure in certain instances.
Parties should embark on any med–arb procedure with open eyes. Third-party mediation is a better alternative in most instances, especially where the dispute is high-value. This offers many of the benefits of med–arb, but without the concerns over prejudice and confidentiality.
In our experience an evaluative med–arb is best suited to a dispute where the amount in dispute is low and where the costs of proceeding with a full arbitration may be out of all proportion to the benefits of proceeding with the arbitration.
Philip Nunn is a consultant and Matthew Townsend is an associate in the Hong Kong office of Norton Rose Fulbright.
Welcome to the thirteenth edition of Global asset management quarterly.
If COP25, 2019 were to be summarized in a word, it would be ‘pathways’ – shorthand for the social, economic and technological choices that must be made in the near term in order to avoid catastrophic climate change.
Jargon at international climate talks often acts as a barrier to quick understanding of the nature and status of key issues – Article 6, ITMOs, ‘corresponding adjustments’ and (my personal favourite) A6,4ERs are just a few of the phrases used.