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Shotgun Mediation

When two parties agree to resolve differences amicably and not resort to hostilities "forever and ever" there is a hint of matrimony in the air. So indeed the contracting parties in the recent Hong Kong first instance decision in Hyundai Engineering & Construction Co Ltd v. Vigour Ltd ("Hyundai") joked, when they agreed to suspend reference to arbitration in favour of negotiation and mediation.

The parallel between mediation and marriage is apposite. Both are consensual processes and require some mutual understanding, respect and the willingness to compromise. However, when irreconcilable differences arise and hostility seems imminent, can two warring parties be forced to stand by their vows? Can there, in effect, be a "shotgun mediation" ?

"Warning Shots"

Generally the Court has no power to compel a party to mediate without their agreement. However the recent tendency, world over, seems to be towards enforcing alternative dispute resolution ("ADR") clauses wherever they are sufficiently clear to admit such enforcement. In 2003, we reported on the Cable & Wireless v. IBM United Limited ("IBM") decision in which an English Court construed an agreement that "the parties shall attempt in good faith to resolve the dispute or claim through an alternative dispute resolution (ADR) procedure as recommended to the parties by the Centre for Dispute Resolution" as analogous to an agreement to arbitrate. In the circumstances, such an agreement could be enforced by staying litigation proceedings (if they had commenced) pending ADR. Alternatively if no proceedings had yet been started, the agreement could be enforced by a mandatory injunction requiring the parties to use the dispute resolution procedure agreed.

That case followed a series of earlier decisions such as the one in Dunnett v. Railtrack plc, in which cost penalties were imposed on parties refusing ADR. It seems the courts are increasingly inclined to hold parties to their mediation promise.

Hong Kong Trends

Until recently the question how Hong Kong courts would deal with the matter was a moot one. In the Kenon case (Kenon Engineering Ltd v Nippon Kobau Koji Kabushiki Kaisha), the Court at first instance (July 2003) questioned its power to order a stay to mediation and indeed the value of so doing.

"Final and Binding" - Till Death Us Do Part?

The agreement in the Kenon case was in the following terms:

All disputes, controversies or differences which may arise between [the parties] out of or in relation to or in connection with the Sub-Contract or breach thereof shall finally be settled by the Mediation Procedure under the Laws of Hong Kong SAR of PRC The award rendered by the mediation procedure shall be final and binding on both [the parties]."

The court found it difficult to ascribe a meaning to this clause. Ordinarily mediation would not entail an award as such, merely a consensus reached between the parties. The reference to a final and binding award tended to suggest some type of third party determination. The clause was further complicated by the fact that originally it had referred to arbitration but the reference to arbitration had been crossed through and the words "mediation procedure" substituted. In light of that factual matrix, the judge determined that the parties knew the difference between arbitration and mediation as procedures and they specifically did not desire arbitration. Consequently the court held that the clause was not analogous to an arbitration agreement.

Having decided that, the judge went on to say "...even if I have power to do so... [t]here is point in staying the proceedings to mediation because the parties can choose not to mediate at any time. "

The decision was appealed, and in May this year ([2004] HKCA 114), it was re-considered. Upholding the first instance finding that there was no arbitration clause, Le Pichon JA, giving the lead judgement of the Court of Appeal. considered the circumstances in which the Hong Kong Courts might consider staying litigation pending ADR.

The IBM case and another English decision (Channel Tunnel Group Limited v. Balfour Beatty Construction Limited ("CTG")) were both cited with approval. In both cases (the CTG case involved an agreement to refer disputes for expert determination) the courts felt able to enforce ADR provisions which were clearly spelled out and certain.

Although in the Kenon case no stay was ordered, it seems that the court would have entertained a stay if there had been an agreement "...where the procedures for mediation [we}re clearly identified such as the CEDR mediation rules or where the provision [wals sufficiently certain for the court to stay the court proceedings." The mediation clause before the court in this instance failed because it lacked the requisite objective criteria to allow determination of whether the parties had complied with their obligations under it.

"Forever and ever..."

Between the first instance and appellate decisions in Kenon, a differently constituted first instance court was called upon to consider a different ADR clause. In the Hyundai case the contract contained a clause providing for disputes to be referred to mediation or arbitration. Time limits were imposed on references to arbitration.

Disputes arose between the parties in respect of delays to completion. Both parties believed that the architect's assessment of extension of time was incorrect (the contractor thought it was insufficient and the employer, too generous). Negotiation followed but with time for reference to arbitration running out, the contractor issued first an invitation to the employer to extend time for such referrals and then, when this was refused, Notices of Arbitration. The contractor made it clear that the notices were protective only and that amicable negotiation was its preferred method of dispute resolution. The employer indicated a willingness to negotiate but not "with a gun against his head" and so the parties agreed on a procedure for negotiation and resolution of their differences.

The supplemental agreement which the parties signed provided:

"The parties will not continue arbitration and will not bring any arbitration or court action forever and any right to sue each other will not be exercised any more mutually and the parties will start to discuss together to resolve any differences ... and any arguments that may come up now and in the future for anything about the above contract that cannot be finalised will be resolved and decided by the managing directors of the ultimate shareholder group of the highest level provided failing an ultimate agreement then both parties shall agree and submit to Third Party Mediation procedure which shall be conducted and completed as soon as possible and in any case no party will exercise the right to sue against each other".

The court first determined that the agreement did not operate either to preclude the right to arbitrate or the right to litigate. It then considered whether the parties would be entitled to stay any litigation or arbitration proceedings commenced, and enforce the negotiation and mediation procedures described in the supplemental agreement.

With regard to the concerns of the lower court in the Kenon case, Reyes J advanced the view that the courts did have power in particular circumstances to stay proceedings to allow parties to fulfil their ADR promises. He reviewed numerous commonwealth authorities offering insights into when purported ADR clauses constitute unenforceable "agreements to agree" and when they entail a "sufficiently certain and definable duty" as to be enforceable. Ultimately, he stated that "... there is probably no hard and fast rule that agreements to negotiate or mediate in good faith are per se unenforceable." Instead, he suggested that the Court should look at each situation and determine "whether it is possible to frame objective criteria against which a party's reasonable compliance or non-compliance with a particular obligation can be assessed." If it is possible to decide on objective grounds whether or not there has been a breach of a particular agreement then the agreement can be enforced and the parties required to uphold their bargain.

On the facts of this case, therefore, the absence of any reference to specific agreed mediation rules in the clause did not prevent Reyes J from holding it "neither unenforceable nor uncertain". The clause contained, he said, a duty that the parties". ..act reasonably to ensure that mediation took place in the event negotiations broke down. "

A minimum step, he suggested, in ensuring mediation took place would be the appointment of a mediator who could try to guide the parties towards agreement of a procedure for resolving their differences.

Conclusions: For better, for worse...

The views expressed by Reyes J. in relation to agreements which do not refer to specific mediation or dispute resolution regimes seem to go further than those expressed by the Court of Appeal. which did not specifically endorse them. The appellate court did however endorse the general approach of viewing each case on its merits to determine the existence or not of objective criteria for assessment. Further, both courts suggest (albeit to a degree obiter) that agreements spelling out a specific mediation procedure or regime are likely to be enforceable.

The message seems to be "take care when drafting your mediation clause". With careful drafting, you may be able to lead your unwilling contractual partner up the aisle to the altar of mediation, for richer, for poorer, for better or worse.

Lovells, Asia Focus
January 2005

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