Australia: Mediation-Arbitration: Is There A Method Or Is It Madness?

Mediation-Arbitration (Med-Arb) is gaining popularity as a dispute resolution method in Asia – but is it worth jumping on the bandwagon?

Med-Arb combines the familiar processes of mediation and arbitration into a single, hybrid dispute resolution package.

In Med-Arb, as in conventional mediation, the mediator endeavours to facilitate a negotiated resolution between the parties. If, however, the mediation fails, the mediator then becomes the arbitrator and authoritatively determines the dispute.

Med-Arb is on the rise in Asia and if you're doing business in the region, there's a good chance you'll come across Med-Arb in your contracts. CIETAC, China's leading arbitration body, reports it is resolving up to 30 percent of commercial disputes through Med-Arb.

The concept also ties in with "fast track" procedures now reflected in regional institutional rules such as SIAC's ¹ 2010 rules.

Australia, in contrast, has been slow to embrace Med-Arb. Our international arbitration legislation doesn't provide for it, and although State domestic legislation does, parties rarely opt for the process. However, the current rollout of new uniform state arbitration legislation containing expanded Med-Arb provisions could see Med-Arb's popularity here increase.

Med-Arb's rising status overseas is largely based on perceived time and cost efficiencies in first attempting mediation and then, if no resolution is reached, proceeding to arbitration without having to "educate" a panel of arbitrators about the dispute.

While the hybrid process seems good in theory, there are some potential pitfalls to watch out for.

Traditional mediation typically involves parties having private discussions with the mediator. In these private discussions, parties may make admissions or concessions in respect of their case, the evidence they possess, or legal advice they have received on an issue in dispute.

Mediation works because parties know the process is confidential and that all communications made are 'without prejudice'. That is, the communications cannot later be used against the party who made the statement.

Whereas mediation is conciliatory, with an expectation that parties will generally compromise to reach an agreement, arbitration is an adversarial process similar to litigation.

The danger in Med-Arb is that if the mediation fails, the mediator will be empowered to authoritatively determine the dispute as an arbitrator, despite being armed with information provided during the mediation in confidence and without prejudice. The potential for bias (actual or perceived) looms large. As such, the Med-Arb process may cause parties to be less frank during the mediation phase.

A further risk arises from the fact that mediation should not be used by parties as a "test-run" for their strongest arguments. Knowing that the mediator will become an arbitrator, parties to Med-Arb may exploit the mediation phase, treating it purely as an opportunity to gauge the mediator-arbitrator's response to their case

Common law principles of procedural fairness require that parties have adequate opportunity to respond to the case against them. If, in private discussions, a mediator-arbitrator learns of a matter adverse to a party, but then fails to disclose their knowledge of that matter before arbitration, that party could reasonably complain they were denied the right to respond to the case against them.

Australia's new uniform legislation seeks to deal with this problem in two ways. First, by requiring disclosure of all material matters learned during mediation. Second, the legislation provides that an arbitrator cannot previously have acted as mediator in a dispute unless the parties consent.

This consent must be given after the mediation ends. A party with a concern about the mediator's impartiality, or about any information that the mediator will disclose, can veto the arbitration. Of course, not going ahead with the arbitration destroys any efficiency gained through adopting the Med-Arb process in the first place.

As Australia's economic engagement with Asia grows, it is likely that Med-Arb will figure more heavily in dispute resolution mechanisms between parties. However, before agreeing to a Med-Arb process, parties should take stock of its inherent risks and consider whether Med-Arb is the right dispute resolution mechanism for their particular circumstances.

Footnotes

¹ Singapore International Arbitration Centre.

For further information contact David Abernethy and Michael Kimmins

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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