15 Mar 2012

Resolution of disputes in China - What it means for Australia

by Victor Lau, Vanja Bulut

Australian parties who are working with Chinese investors should consider embracing the arb-med model of dispute resolution in their agreements as it may indeed foster a better commercial relationship.

As Australia increases its trade with our neighbouring Asian countries, we must begin to recognise and embrace the methods of dispute resolution commonly used by our trade partners. One stand-out method of dispute resolution that is underutilised in Australia is the arb-med model, which has been widely used in the Peoples' Republic of China.

In recent years, amendments incorporating provisions on arb-med have been made in other Asia Pacific jurisdictions, including Hong Kong's Arbitration Ordinance, the Singaporean International Arbitration Act, and the uniform state Commercial Arbitration Acts in Australia. It is perhaps a sign of what is to come in Australia's international arbitration practice.

The Chinese arb-med model

The arb-med model of dispute resolution is a fusion of arbitration and mediation which seeks to encourage parties to an arbitration to engage in mediation and achieve a win-win outcome. The model refers to a process whereby the neutral third party acts as an arbitrator first, but the arbitrator is then allowed to act as a mediator in the same proceeding to assist the parties resolve the dispute, before an award is handed down. If settlement is reached, the parties may agree that it form part of a consent award. If the parties chose to resolve the disputes through mediation first, but fail to achieve a settled outcome, the parties may move to a binding arbitration using the same neutral third party under a "med-arb" model.

In China, under the China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules (the most recent version being effective from 1 March 2012), parties may agree to have the arbitrator conciliate the matter, in the manner it considers appropriate (Article 45). While mediation was first provided for in the CIETAC Rules in 1989, the practice dates back to pre-Communist China and is linked to Confucian philosophy.

Given that this method of dispute resolution is rooted in Chinese history, it is perhaps of little surprise that it is considered to be highly effective by Chinese practitioners. Statistical measures by various academics have reported that arbitrations handled by CIETAC which were settled by mediation increased from around 20% in the 1990s to around 30% in recent years.

In December 2011, Hong Kong's Court of Appeal, in Gao Haiyan v Keeneye Holdings Limited, upheld an international award from a Chinese arbitration seat that undertook a med-arb approach. Significant issues were raised regarding the appearance of bias on a dinner discussion that was held in a hotel between one of the parties and the arbitration tribunal, during which a mediation proposal of a settlement figure of RMB250 million was put to the party by the arbitration tribunal. Although at first instance the award was overturned, the Court of Appeal considered the cultural expectations of the original seat of arbitration on how mediation is normally conducted, and upheld the arbitral award as no apparent bias had been established. This can be seen as an indication of Hong Kong's approval of the arb-med model of dispute resolution, as well as the importance of finality of arbitral awards.

The debate surrounding the arb-med model

Under the arb-med approach to dispute resolution, the parties attempt to resolve their dispute through mediation on either one aspect of the dispute or the entire dispute, and if resolution cannot be reached, the parties have the advantage of directly entering into arbitration with the certainty of a binding decision.

The arb-med model is appealing for parties as:

  • it is cost-efficient since a failed mediation will not result in wasted costs, as the arbitrator knows the case for arbitration;
  • it is time-efficient as parties are able to come to a mediation with the intention of reaching a mutually acceptable solution, but with the certainty that if they do not do so, they will walk away with a binding award, and bring the dispute to an end;
  • it maximises the opportunity for settlement, as the timing for settlement can influence the parties' attitudes to settlement. If settlement is brought in too early in the process, a party may not appreciate the significance of the issues and be unwilling to settle. Alternatively if it is too late in the process the parties may be less willing to settle as they have spent significant costs and resources on the arbitration. An experienced arbitrator will be best placed to judge when settlement discussions are to take place, and in some instances by raising pertinent questions for the parties' consideration;
  • a settlement agreement entered into during the course of an international arbitration may form part of a consent award, so that it can be enforced under the New York Convention for those states that are members to the New York Convention; and
  • it facilitates a settled, rather than a decided, outcome and allows the parties to a dispute to maintain a friendly and co-operative relationship, which is very important if the parties wish to continue with their commercial relationship.

While arb-med is clearly more efficient than if mediation and arbitration were pursued separately, traditionally this method of dispute resolution has been unpopular as many believe that the role of an arbitrator and a mediator is incompatible. Some argue that the role of an arbitrator can be tainted if the arbitrator is placed in a facilitative position, where one-on-one meetings are encouraged and the mediator works with the parties in order to assist them to reach a mutually acceptable outcome. Some see this as being in conflict with arbitrations where procedural fairness requires arguments to be put to the opposing party for rebuttal. The Australian domestic model, and other jurisdictions, have attempted to remedy these concerns, as discussed below.

The Australian domestic model

The recent commencement of the uniform state Commercial Arbitration Acts have paved the way for an increase in the use of the arb-med model. Section 27D of the Commercial Arbitration Act 2010 (NSW) provides an arbitrator with powers to act as a mediator (or indeed as a conciliator or other non-arbitral intermediary).

One problem that arises when a mediator, being potentially exposed to confidential information, then takes on the role of an independent arbitrator is that there is a possibility that the arbitrator loses his or her impartiality, or creates an appearance of bias as the confidential information passed on during mediation may then influence the arbitrator's decision.

To address the above, section 27D(4) of the Act provides that a mediator cannot subsequently act as an arbitrator unless the parties have provided written consent. Further, section 27D(5) stipulates that a party, who has provided such consent, may not make an objection of apparent bias solely on the ground that the arbitrator has previously acted as a mediator. This in turn provides some reassurance to the parties that the award determined by the arbitrator will be final, enforceable, and not challenged on the fatal basis that the arbitrator acted under an apparent bias.

Under section 27D(7) of the Act, an arbitrator is required to disclose any material they have obtained during mediation to all other parties, if they believe that the information is material to the arbitration proceedings. These and other measures aim to minimise the breakdown of the arbitration on the basis of apparent bias.

Future of arb-med in Australia

The new domestic legislative framework seeks to address the traditional criticisms of the arb-med model in order to make this method of dispute resolution more attractive, and may indeed shape the future of arb-med in the international arbitration sphere in Australia. While the international arbitration legislation, the International Arbitration Act 1974 (Cth), does not provide for arb-med, it does not remove the possibility of the arb-med model being used by the parties through agreement.

Australian parties who are working with Chinese investors should consider embracing this method of dispute resolution in their agreements as it may indeed foster a better commercial relationship.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.