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Mediation Update

In our January 2005 issue we reported on the approach the Hong Kong courts have been taking to enforcement of mediation agreements. In that article we focused on a number of cases including Reyes J.'s first instance decision in the case of Hyundai Engineering & Construction Co Ltd. v Vigour Ltd. Since then, this case has been re-visited by the Court of Appeal.

The judge at first instance had defined the relevant test as being whether the clause in question imposed a "sufficiently certain and definable duty" to enable the court to "frame objective criteria against which a party's reasonable compliance or non-compliance with a particular obligation can be assessed." In such circumstances the clause was enforceable. A clause therefore which required the parties to it, inter alia to adopt a "Third Party Mediation procedure" imposed on those parties a duty to "...act reasonably to ensure that mediation took place in the event negotiations broke down. " Rogers VP delivering the lead judgement in the Court of Appeal, with which both other judges concurred, viewed the clause differently.

Dispute centred on the following clause which contains two "agreements" made by the parties:

"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...about the above contract that cannot be resolved 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. "

Looking at each of these, the first is an apparent agreement not to commence arbitration or court proceedings. The second seems to be an attempt at providing how disputes arising out of the contract between the parties would be resolved.

Hyundai's case on the first issue was that the" agreement" was unenforceable as it ousted the jurisdiction of the courts. Vigour, the employer, argued that it was enforceable and that if subsequent negotiations failed then the status quo was preserved and the architect's certificates issued under the contract would be conclusive. The court took the view that the first" agreement" might be enforceable but only if the second resolved any issues arising out of the contract.

On this second point, the court expressed surprise that the identities of the two negotiating parties were indicated without more precision but held that this aspect of the agreement was sufficiently precise to admit enforcement. However, the negotiating managing directors were, on the wording of the clause required to do no more than negotiate. As an "agreement to agree" this was unenforceable.

As for the "Third Party Mediation" procedure which the parties were to adopt if the managing directors' negotiations failed, the court felt that more specific provisions would have been required to make that enforceable. Most significant was the fact there was no specified third party and no means of determining how one would be appointed in the absence of agreement.

Since the dispute resolution procedure was unenforceable, the whole agreement including the agreement not to litigate or arbitrate failed.

It should be emphasised that though the view taken by the court on this particular clause differed from that of the court below, the approach taken was much the same. In essence each individual case must be judged on its merits to determine whether or not it can be enforced.

Lovells Newsletter
June 2005

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