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The dangers of arb-med

20 April 2011

The Hong Kong Court of First Instance has refused on public policy grounds to enforce a Mainland arbitral award where one of the arbitrators had acted as both arbitrator and mediator.

The case is Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514, Justice Reyes, 12 April 2011.

The decision represents a rare example of the Hong Kong courts refusing enforcement of a foreign award on public policy grounds and is likely to be of interest to practitioners and clients across the Asia Pacific region given the popularity of arb-med in many jurisdictions, including Mainland China.

Facts

Under a share transfer agreement (Agreement), Gao Haiyan and his wife (Gao) agreed to transfer shares to Keeneye Holdings Ltd (Keeneye). Gao later alleged that the Agreement was void on grounds of duress and misrepresentation. Arbitration proceedings in respect of this dispute were commenced and were administered by the Xian Arbitration Commission. The arbitral tribunal (Tribunal) ultimately gave an award in favour of Gao, ordering the Agreement to be revoked and making a non-binding recommendation that Keeneye pay Gao RMB 50 million (Award). Gao then sought to enforce the Award in Hong Kong. Keeneye resisted enforcement on the basis of public policy, being one of the grounds available for resisting enforcement of a Mainland award in Hong Kong: section 40E(3) Arbitration Ordinance (Cap. 341) (and under the terms of the New York Convention).

Keeneye's public policy argument was based on the conduct of one of the three members of the Tribunal between the first and second hearings in the Xian arbitral proceedings. At the first hearing, the parties agreed to seek to resolve the dispute by mediation, before the Tribunal determined the dispute on the merits at the second hearing. Following the first hearing, the Tribunal decided to suggest to Keeneye that the dispute be settled by Keeneye paying Gao RMB 250 million. To this end, a member of the Tribunal and the Secretary General of the Xian Arbitration Commission (Secretary) made this suggestion over dinner with a person related to Keeneye (Zeng). The Tribunal member and the Secretary asked Zeng to "work on" Keeneye. Keeneye refused this suggestion. Later, Gao informed the Tribunal that he was unwilling to settle the dispute for RMB 250 million.

Does what happened show a real risk of actual or apparent bias?

In considering Keeneye's application to resist enforcement of the Award, the Court focused on assessing whether the Award was made in circumstances that would cause a fair-minded observer to apprehend a real possibility of bias on the part of the Tribunal.

The Court held that, in light of the facts set out above, a fair-minded observer would be concerned that the underlying message being conveyed to Zeng was that the Tribunal favoured Gao. The Court stated that questions raised by the conduct of the Tribunal member and the Secretary included: (i) Why did they meet with Zeng rather than Keeneye's legal representatives? (ii) Why did they ask Zeng "to work on" Keeneye? This tended to suggest that they were pushing their own proposal rather than merely communicating a plan in a neutral fashion; (iii) Why did they propose the figure of RMB 250 million without prior authorisation from Gao? This suggested acting they were acting on their own an initiative that favoured Gao; (iv) Why did they suggest that Keeneye pay RMB 250 million, which was disproportionate when compared with the Award of a non-binding recommendation that Keeneye pay RMB 50 million? The Court also observed that the manner in which the mediation procedure had been conducted was not in accordance with the Xian Arbitration Commission's Arbitration Rules, which were adopted by the parties.

In light of the above, the Court held that while arbitral awards should normally be enforced, it would be contrary to public policy to uphold an award tainted by an appearance of bias, and therefore refused to enforce the Award.

Does the arb-med procedure in itself create an appearance of bias?

It is important to emphasise that the Court confirmed there is nothing wrong in principle with arb-med. Indeed the procedure is expressly permitted in a number of jurisdictions in the region. For instance, the China International Economic and Trade Arbitration Commission Arbitration Rules allow an arbitrator to act as a mediator during the arbitration proceedings to encourage settlement between the parties (Article 40). Similarly, Article 36 of the Xian Arbitration Commission's Arbitration Rules empowers the Tribunal to conduct mediation at any time before the rendering of an award subject to the parties' agreement. Hong Kong's new Arbitration Ordinance also allows an arbitrator to act as a mediator with the parties' agreement (sections 32(3) and 33), subject to certain important safeguards designed to ensure equality of access to confidential information.

However, the judgment highlights the risks involved in an arbitrator acting as mediator. It is for these reasons that the practice of arb-med is viewed with suspicion in many jurisdictions. For example, during a mediation, parties often disclose information, whether helpful or prejudicial to their case, in confidence to a mediator. If mediation breaks down and arbitration resumes, that information may influence the mediator when acting as arbitrator. In these circumstances it would be unfair for the mediator turned arbitrator to rely on confidential information without first disclosing the same to all the other parties, thereby giving them an opportunity to comment or make any responsive submissions. As a result, section 33(4) of the new Arbitration Ordinance obliges a mediator turned arbitrator to disclose to all other parties any confidential information obtained during the mediation that is "material to the arbitration proceedings" before resuming the arbitral proceedings.

Did Keeneye waive its right to complain about bias or is the court estopped from considering this issue on enforcement?

Gao argued that Keeneye was estopped from alleging bias on the part of the Tribunal because Keeneye: (i) failed to raise that allegation at the second arbitration hearing; and (ii) had lost an application to set aside the Award before the Xian Intermediate Court on grounds including the alleged bias of the Tribunal.

The Court rejected the first argument and observed that Keeneye was in a difficult position: raising an allegation of bias would risk antagonising the Tribunal, and a complaint to the Xian Arbitration Commission may have been determined by the Secretary, who had participated in the events complained of.

The Court also rejected the second argument and referred to the Court of Final Appeal's decision in Hebei Import & Export Corp v Polytek Engineering Co Ltd [1991] 1 HKLRD 665. In that case, the CFA held that a Hong Kong court must apply Hong Kong public policy considerations in deciding whether to refuse to enforce a foreign arbitral award. The fact that a foreign court has decided the same award did not conflict with public policy considerations in its own jurisdiction did not give rise to an estoppel on that issue, as the Hong Kong court and the foreign court may have regard to different public policy considerations.

Conclusion

In practice the use of arb-med is comparatively rare in Hong Kong. However, it is a much more common means of dispute resolution in other jurisdictions in the region, including Mainland China. This decision highlights the importance of ensuring that any mediation conducted by arbitrators is conducted in an appropriate manner in order to ensure that, if the mediation does not produce a settlement and the arbitration proceedings continue, any award will be enforceable. Ultimately however it remains to be seen whether this decision will serve to discourage parties in other jurisdictions from appointing arbitrators to act as mediators.