Focus: Hong Kong enforces PRC 'med-arb' award
10 January 2012
In brief: Hong Kong's pro-enforcement approach to arbitral awards has been confirmed by a recent Court of Appeal decision. It overturns the lower court's order refusing to enforce a PRC arbitral award on the ground of apprehended bias due to the way a 'med-arb' process was conducted. Partner Mun Yeow and Senior Associate Morgana Brady report.
- What is 'med-arb'?
- Court of First Instance
- Court of Appeal
- The decision's significance
How does it affect you?
- This decision is a reminder to parties and their lawyers that, where they believe some irregularity has occurred in the arbitral or 'med-arb' process, they must not 'keep the point up their sleeve' for later use in challenging the award, or they risk being found to have waived their right to object .
- It should also give comfort to parties seeking to enforce a PRC or Convention award in Hong Kong where that award has been obtained by 'med-arb', including where the mediation was conducted differently from Hong Kong's standard mediation practices.
- However, the decision is unlikely to dispel the concerns of common law lawyers and their clients regarding 'med-arb', meaning that it can be expected to remain relatively rare in Hong Kong.
In April 2011, the Court of First Instance refused to enforce a PRC arbitral award on the ground of apprehended bias arising from the manner in which a 'med-arb' process had been conducted in Xi'an. In December 2011, the Court of Appeal overturned that decision, upholding the enforcement of the award.1 It ruled that the respondents had waived the right to object to how the 'med-arb' process had been conducted because they had failed to raise any objection during the arbitration itself. In any event, the court found that the 'med-arb' process had not been conducted in a way that gave rise to apprehended bias. As such, there was no public policy ground for refusing to enforce the award.
'Med-arb' is the process by which parties to an arbitration can agree, during those proceedings, to engage in a non-binding mediation of the dispute with the arbitrator acting as mediator. If the mediation is unsuccessful, the arbitrator resumes their role as arbitrator, and the arbitration continues to a final and binding determination. 'Med-arb' is provided for by provisions in the Arbitration Ordinance (Cap 609) (Hong Kong) (the Ordinance).2
The main advantage of 'med-arb' is that it allows parties to engage in mediation assisted by a person (the arbitrator) who already has knowledge of the issues relevant to their dispute. In this way, 'med-arb' can reduce costs and delays associated with conducting a wholly separate mediation. However, the 'med-arb' process can also give rise to concerns regarding inequality of access to information, or, if the mediation is unsuccessful, the treatment of confidential information revealed to the mediator/arbitrator. As such, despite being provided for under the Ordinance, 'med-arb' is rarely practised in Hong Kong. Conversely, 'med-arb' is comparatively common in the PRC and a number of other jurisdictions, with the result that Hong Kong courts can be called upon to enforce foreign 'med-arb' awards.
Gao and Keeneye were parties to an arbitration conducted under the auspices of the Xi'an Arbitration Commission (the XAC). The tribunal suggested that the parties engage in mediation in an attempt to settle the dispute. The parties agreed and mediation was held, with members of the tribunal acting as mediators. The mediation was unsuccessful. Consequently, the dispute went to a second arbitral hearing, with the tribunal ruling in favour of Gao.
Keeneye appealed against the arbitral award to the Xi'an Intermediate Court, contending that there had been 'favouritism and malpractice' by the tribunal, such that the award should be set aside. In particular, Keeneye criticised the tribunal for holding a private mediation session over dinner at a five-star hotel, which was attended by the member of the tribunal that Gao had appointed, the Secretary-General of the XAC and Mr Zeng, who was a third party related to Keeneye and considered 'friendly' with them. Neither Keeneye nor its lawyers were invited to the dinner.
At the dinner, the mediators proposed a settlement that involved Keeneye making a payment of RMB250 million to Gao. The mediators asked Mr Zeng to 'work on' Keeneye in regards to the proposal. Notably, the settlement offer was an initiative of the tribunal itself, not put forward by Gao. Ultimately, both Gao and Keeneye rejected the proposal, and the mediation failed. The arbitration then proceeded to final determination, without either party raising any objections to how the mediation had been conducted or regarding non-compliance with the XAC Arbitration Rules.
Keeneye's appeal to the Xi'an Intermediate Court was dismissed. The court ruled that the 'med-arb' process had been conducted in compliance with the XAC's Arbitration Rules and that the evidence did not establish any favouritism by the tribunal. Accordingly, the award was upheld.
Gao obtained leave to enforce the award in Hong Kong, but Keeneye successfully applied to the Court of First Instance to set aside the award on public policy grounds.3 At first instance, Justice Reyes found that, although no actual bias was established, a fair-minded observer would feel a 'palpable sense of unease' owing to the way in which the 'med-arb' process had been conducted, such that the award was tainted by apprehended bias. In these circumstances, his Honour held that it would be wrong to uphold the award, as justice would not be seen to be done. Although Justice Reyes recognised that there was nothing in principle wrong with 'med-arb', he found that the circumstances of this case meant that the award should not be enforced in Hong Kong. Gao appealed to the Court of Appeal.
The Court of Appeal allowed Gao's appeal and upheld enforcement of the award. It did so on two principal grounds:
- Waiver of the right to object: The XAC Arbitration Rules, like many institutional arbitration rules, expressly provide that a party will be deemed to have waived its right to object to any non-compliance with those rules if that party continues to participate in the arbitration without raising a complaint.4 Bearing this in mind, the Court of Appeal held that Keeneye had waived its right to object to the award on the ground of bias or impropriety. Keeneye's failure to raise a complaint of bias precluded the tribunal from having an opportunity to deal with the issue, including by taking action to remedy the situation if deemed necessary. Moreover, the Xi'an court, in exercise of its supervisory jurisdiction, had refused Keeneye's attempt to have the award set aside for impropriety, concluding that there had been a waiver of the right to object. Although the Court of Appeal recognised that the Xi'an court's judgment did not give rise to an estoppel, it held that the judgment was highly relevant to the issue of a waiver and that the Court of First Instance had failed to accord it sufficient weight. In light of these factors, the Court of Appeal held that there was a clear case of a waiver of Keeneye's right to object.
- No apprehended bias: The Court of Appeal also overturned the finding of apparent bias. In doing so, the court emphasised that its own role when called on to enforce arbitral awards was not to express any opinion on the correctness or otherwise of the tribunal's decision. In the present case, the sole question to be asked was whether, under section 40E(3) of the Arbitration Ordinance (Cap 301),5 it would be 'contrary to public policy to enforce the award'. Enforcement should be refused on such ground only if it would be 'contrary to the fundamental conceptions of morality and fairness of Hong Kong' to enforce the award. Again, the court noted that due weight must be given to the Xi'an court's decision as to whether the mediation process had been conducted in a way that gave rise to an apprehension of bias. The Court of Appeal noted that the Xi'an court was better placed to decide whether a mediation over dinner in a hotel was an acceptable practice in mainland China. It concluded that an apprehension of bias 'may depend on an understanding of how mediation is normally conducted in the place where it was conducted', even if that differs from the way in which a mediation is normally conducted in Hong Kong. Following a close analysis of the factual circumstances relevant to the issue of bias, the Court of Appeal held that no perception of bias arose.
This decision confirms Hong Kong's pro-enforcement approach to arbitral awards, and reminds parties and their lawyers that, where they believe some irregularity has occurred in the arbitral or 'med-arb' process, they must raise the issue promptly. Otherwise, the party risks being found to have waived its right to object to the award or to seek to have it set aside.
It should also give comfort to parties who are seeking to enforce a PRC or Convention award in Hong Kong where that award has been obtained by 'med-arb', including in circumstances where the mediation was conducted in a way that differs from Hong Kong's standard mediation practices. The decision makes it clear that enforcement of an award on public policy grounds should be refused only if it would be 'contrary to the fundamental conceptions of morality and fairness of Hong Kong' to enforce it. In deciding whether this is the case, Hong Kong's courts should have regard to the normal practices of the forum in which arbitration or 'med-arb' takes place.
However, the decision is unlikely to dispel the concerns of common law lawyers and their clients regarding 'med-arb'. Parties are likely to remain reluctant to disclose confidential information to an arbitrator who may ultimately be called upon to rule on their case. Further, s33(4) of the Ordinance, which requires a mediator/arbitrator to disclose any confidential information that they deem 'material to the arbitral proceedings' before those proceedings re-commence following an unsuccessful mediation, may also make parties reluctant to participate in 'med-arb'. As a result, 'med-arb' can be expected to remain relatively rare in Hong Kong.
- Gao Haiyan v. Keeneye Holdings Ltd, CACV 79/2011, 2 December 2011.
- Section 33.
- Gao Haiyan v Keeneye Holding Ltd  3 HKC 157, 12 April 2011.
- For example, the HKIAC Administered Arbitration Rules (Art. 33) and the UNCITRAL Arbitration Rules 2010 (Art. 32) provide that a party will be deemed to have waived its right to object to any non-compliance with the rules if that party has failed to raise such objection promptly.
- Section 40E has now been superseded by s95 of Hong Kong's new Arbitration Ordinance (Cap. 609).
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