Beware of Med-Arb Approach

Gao Haiyan v Keeneye Holdings Ltd involved a mainland arbitral award, the enforceability of which was challenged on the grounds of bias and public policy.

Arbitration had been held in Xian, after disputes had arisen over the validity of a share transfer agreement. Acting upon the suggestion of the arbitration tribunal (“Tribunal”), after the first arbitration hearing, the parties agreed that the Tribunal could engage in “med-arb”, i.e. the arbitrators first attempt to resolve the dispute as mediators, before themselves determining the merits of the dispute as arbitrators. Subsequently, a dinner was held in a hotel, where the Applicants say an abortive mediation took place. The Respondents denied that the dinner constituted any sort of mediation initiative.

The issue before Reyes J. in Hong Kong’s Court of First Instance was whether the arbitral award was tainted by apparent bias. Reyes J. proceeded on the basis (albeit with serious reservations) that the dinner, referred to above, was part of an unsuccessful mediation. Reyes J. identified the relevant test as being whether the award was made in circumstances which would cause a fair-minded observer to apprehend a real risk of bias on the part of the arbitration tribunal. He concluded that the “mediation” proceeded in such a way that there was ample justification for the fair-minded observer’s apprehension. The following facts had been taken into account when in arriving at that conclusion:

1. The settlement proposal was not made to the Respondents’ directors, officers or legal representatives, but a person “related to” the Respondents.
2. Members of the Tribunal had asked the “related” person to “work on” the Respondents, raising the concern that the proposals had been “actively pushed”, rather than communicated in a neutral fashion and leaving it to the Respondents to decide whether to accept the same.
3. The proposed settlement sum had been put forward by the Tribunal without the Applicant’s authorization or inkling as to whether the Applicants would accept the same, giving the impression that the Tribunal was acting on its own initiative, which favoured the Applicants.
4. There was no explanation for the lack of correspondence or proportionality between the RMB 50 million (said in the Award to be the fair compensation payable to the Respondents) and the RMB 250 million (said at the “mediation” to be what ought to be paid to the Applicants in return for the Share Transfer Agreement being treated as valid).
5. The setting for the mediation was odd. The court said that a private dinner in a hotel has a connotation of “wining and dining” a person to make a difficult proposal palpable, the fear being that the Tribunal had chosen the venue in order to push their RMB 250 million solution to the Respondent.

The court said that the fact that eventually, RMB 250 million not having been paid by the Respondents, the Award went in the Applicant’s favour and merely recommending a payment to the Respondents of RMB 50 million, would clinch the fair-minded observer’s conclusion of apparent bias.

Reyes J. said that there is nothing wrong in principle with med-arb and indeed the new Arbitration Ordinance expressly allows med-arb with the parties’ agreement. However, he said, from the point of view of impartiality, the med-arb process runs into self-evident difficulties and the risk of a mediation turned arbitrator appearing to be biased will always be great.