Beware of Med-Arb Approach: a Follow-Up

In the September 2011 issue of our Construction and Arbitration Newsletter, we reported on a High Court decision made by Reyes J on 12 April 2011 in Gao Haiyan v Keeneye Holdings Ltd (HCCT 41/2010).

Background

Reyes J refused enforcement of a Mainland award made by an arbitral tribunal appointed by the Xian Arbitration Commission (“the Commission”) on the basis that enforcement would be contrary to public policy, as the arbitration process had been tainted by bias or the perception of bias.

A previous application by the Respondents to the Xian Intermediate People’s Court (“the Xian Court”) to have the award set aside had been refused.

On 2 December 2011, the Court of Appeal (CACV 79/2011) overturned Reyes J’s judgment and allowed enforcement. The Court of Appeal’s judgment was given by Tang V-P.

Basically, the arbitration concerned the validity of Share Transfer Agreements. The factual background is however, as the Court of Appeal put it, “complicated and murky”.

At the centre of the dispute in the enforcement proceedings in Hong Kong, were the circumstances surrounding an unsuccessful attempt at mediation, in the form of arbitration-mediation (so-called “arb-med”), a process where an arbitrator transforms his role to one of mediator and, if the mediation fails, resumes his role as arbitrator. The Commission’s arbitration rules (“the Xian Rules”) permit arbitrators and, with the parties’ consent, third parties, to act as mediators, and to meet with the parties jointly or separately.

The mediation took place over dinner at the Shangri-la Hotel. The parties agreed to arb-med, but did not attend the mediation. However, a third party attended, who the Tribunal believed was friendly with the Respondents. Further, the Secretary-General (“the SG”) of the Commission acted as mediator and the mediation was conducted by the SG together with a party-appointed member of the Tribunal, whereas the presiding arbitrator and the other party-appointed member of the Tribunal did not attend. At the mediation, the Tribunal gave the view that it regarded the Share Transfer Agreements to be valid, but proposed that the Respondents compensate the Applicants by paying RMB250million. When this view was conveyed to the Respondents, they refused to pay the proposed compensation. After the arbitration had resumed, the Respondents made supplemental submissions, attacking the integrity of the Applicant and a hearing took place. Subsequently, the Tribunal issued an award to the effect that the Share Transfer Agreements were not valid, this being the opposite result of what was said during the mediation.

The Court of Appeal’s decision

The key issues to be dealt with by the Court of Appeal related to waiver and apparent bias.

Had the Respondents waived their right to complain about any irregularities relating to the mediation?

The issue of waiver concerned whether the Respondents had waived their right to complain about the events in the Shangri-la Hotel. Contrary to Reyes J’s conclusion, the Court of Appeal found that a clear case of waiver had been made out.

Tang V-P did not believe that the Respondents had an apprehension of bias or impropriety, real or apparent, prior to the making of the award. Instead of bringing a complaint, they had continued the arbitration, as if there had been compliance with the relevant rule, hoping for a satisfactory conclusion, even though it was their case that they feared that, should they antagonise the arbitral tribunal by complaining, that might result in an unfavourable or less favourable result.

Reyes J on the other hand took the view that the Respondents’ decision to make submissions and continue the arbitration, but to attack the integrity of the applicant, was a “clumsy compromise solution”. However, Tang V-P made clear that this was not a substitute for a complaint about impropriety or bias, apparent or real, against the arbitral tribunal or the SG. This in particular, since the Xian Rules made express provision for waiver of the right to object. Accordingly, what the Respondents should have done was object promptly, during the arbitration, to any events in the Shangri-la Hotel they considered irregular. Since they failed to do so, they were deemed to have waived their right to object to any irregularities at a later stage, whether in setting-aside or enforcement proceedings.

Tang V-P accepted Reyes J’s findings that no estoppel arose from the decision of the Xian Court, but emphasized that the Xian Court’s decision to refuse to set aside the award for bias was nevertheless relevant to the enforcement court’s decision and that Reyes J should have given more weight to it.

Did the mediation disclose the apprehension of bias, so as to justify refusal of enforcement on grounds of public policy?

The second issue dealt with by the Court of Appeal was whether a case of apparent bias had been established. The Court of Appeal was not satisfied that it had.

Although Reyes J had confirmed that in principle there was nothing wrong with arb-med (provision for which is expressly made in the new Arbitration Ordinance, Cap. 609), he concluded that the events at the Shangri-la Hotel, as briefly described above, gave rise to an apprehension of bias and that, as a matter of public policy, the award should not be enforced in Hong Kong.

Tang V-P found that no case of apparent bias had been established and certainly not such that would lead the court to refuse enforcement of the award. Tang V-P accepted that one might share Reyes J’s unease about the way in which the mediation was conducted, because it is normally conducted differently in Hong Kong. However, he found that, when looking at the question of whether the conduct of the mediation would give rise to an apprehension of apparent bias, the enforcement court must take into account differences in mediation culture and practice at the place of the mediation.

Moreover, Tang V-P held that where the court at the seat of arbitration with supervisory jurisdiction (here the Xian Court) had refused to set aside the award, due weight must be given by the enforcement court to the supervisory court’s decision, as the supervisory court is in a better position to decide whether or not certain conduct or events are acceptable at the seat of arbitration (e.g. whether it is acceptable to hold a mediation over dinner in a hotel or what role a Mainland lawyer may be expected to play during mediation).

Tang V-P confirmed that in Hong Kong, enforcement of an award should be refused for public policy reasons only if enforcement would be contrary to the fundamental conceptions of morality and justice in Hong Kong. However, in the context of the present case, Tang V-P found that this did not mean that if it was common for mediation to be conducted over dinner at a hotel in Xian, an award would not be enforced in Hong Kong because in Hong Kong such conduct might give rise to an appearance of bias.

Finally, Tang V-P dealt with the question of whether enforcement in Hong Kong can be refused at all in cases of apparent bias or whether actual bias is required. Tang V-P’s view on this issue appears to be that enforcement may be refused in cases of apparent bias, but that the judge, when dealing with this question, should not be too ready to refuse enforcement on the basis of his own notions of what may amount to bias.

Comment

1. In line with the pro-enforcement attitude of the Hong Kong courts, it remains the position in Hong Kong that the public policy ground is to be interpreted narrowly and that the enforcement court does not go into the merits of the award.

2. The Court of Appeal’s decision confirms the importance of prompt complaint, where a party considers itself confronted with procedural irregularities which may however be cured. A party cannot keep such complaints up his sleeve and try to rely on them later, whether at the stage of setting aside or enforcement proceedings.

3. It is important to bear in mind that the scope of the public policy ground may differ widely from one jurisdiction to another and an enforcement court is not prevented from considering the question of bias from the viewpoint of its own public policy (as also emphasized by Reyes J in his decision). Enforcement courts of other jurisdictions might therefore reach a different decision to the Court of Appeal, if they conclude that the mediation process at hand violates the public policy of their jurisdiction.

4. While arb-med is popular in the Mainland and many parties from the Mainland are quite familiar with it, there is a certain distrust of this process in Hong Kong. The core problem with arb-med lies in the risk of an appearance of bias on the part of a mediator when he turns again into an arbitrator, if the mediation fails.

5. Despite the outcome of this case, arbitrator-mediators and the parties should strive to adhere to Reyes J’s statement that:

“…labelling a process as mediation does not mean that anything goes. There are appropriate and inappropriate ways of conducting mediations. The would-be mediator must ensure at all times, especially when one might act as arbitrator later on, that nothing is said or done in the mediation which could convey an impression of bias.”

6. This case provides a good example of the general importance of having sound knowledge of the cultural differences and local practices at the seat of arbitration (and, if different, the place where the arbitration is conducted) and that parties should only agree to a seat after they have properly considered such differences.