Hong Kong: The Real Risk Of Bias In "Chinese Style" Arbitrations

Last Updated: 12 May 2011
Article by Phillip Georgiou

It is not uncommon for arbitrations conducted in Mainland China to morph from an arbitration to a mediation and then back to an arbitration if a mediated settlement cannot be achieved. Under these types of arbitrations, it is the arbitrator who usually proposes to the parties that mediation should be utilized to assist with the resolution of the dispute, and, of critical significance, the arbitrator takes on the role of mediator. If the mediation fails, the parties resume the arbitral proceedings and the mediator returns to the role of arbitrator.

This hybrid process of dispute resolution, sometimes referred to as "Arb-Med" (or "Med-Arb" where a failed mediation turns into an arbitration), is not confined to Mainland China. For instance, the Singapore Mediation Center ("SMC") and the Singapore International Arbitration Center ("SIAC") have prescribed a procedure to govern disputes that are submitted to the SMC and the SIAC for resolution by Med-Arb. Similarly, there are provisions placed in the new Hong Kong Arbitration Ordinance (Cap.609), which comes into effect on June 1, 2011, that help facilitate Med-Arb and Arb-Med in Hong Kong by providing a statutory framework for them.

However, the use of such procedures in the international arbitration arena as well as arbitrations in Hong Kong are uncommon due to the real risk of the arbitrator being tainted by actual or apparent bias. The recent Hong Kong case of Gao Haiyan v Keeneye Holdings Ltd is a clear example of this risk as an arbitral award was rendered unenforceable due to the presence of bias. In this case, Reyes J held that an award made by the Xian Arbitration Commission ("XAC") could not be enforced in Hong Kong on the ground that it was contrary to public policy because of the apparent bias of the arbitral tribunal that resulted from a mediation that took place during the arbitration proceedings.

Background

In July and August 2008, pursuant to a share transfer agreement (the "Agreement") and a supplementary share transfer agreement, Gao and Xie (the "Applicants") transferred their interests in a BVI company to Keeneye Holdings and New Purples (the "Respondents"). In July 2009, the Respondents commenced arbitration proceedings in Xian, pursuant to an arbitration clause in the Agreement, claiming that the Agreement was valid while the Applicants counterclaimed that the Agreement was invalid.

The arbitration tribunal consisted of Jiang Ping (the chief arbitrator), Zhou Jian (the arbitrator nominated by the Applicants), and Liu Chuntian (the arbitrator nominated by the Respondents). At the end of the first arbitration hearing in December 2009, both parties agreed, when asked by the tribunal, to attempt mediation to settle their disputes.

The tribunal appointed Pan Junxin (XAC's Secretary General) and Zhou Jian to contact the parties with a proposal that the parties settle the case by the Respondents paying RMB 250 million to the Applicants in return for a decision in the Respondents' favor (i.e., that the Agreement would remain valid). Pan contacted a lawyer acting for the Applicants and told him the tribunal's proposal. Subsequently, both Pan and Zhou contacted Zeng Wei, a person who was perceived to have influence over the Respondents, to present to him the tribunal's suggestion.

Zeng suggested that the three of them (Zeng, Pan, and Zhou) meet and discuss this matter over dinner at the Xian Shangri-la Hotel on March 27, 2010. During dinner, Pan and Zhou told Zeng about the tribunal's proposal of RMB 250 million and asked Zeng to "work on" the Respondents.

The Respondents later refused to pay RMB 250 million to the Applicants. Arbitral proceedings resumed, and an award was published on June 17, 2010 by the XAC (the "Award"). The Award dismissed the Respondents' claim in its entirety and held that the Agreement was invalid and unenforceable. The tribunal went on to give a mere recommendation, which was not a part of the Award, that for the sake of fairness and reasonableness, the Applicants should pay RMB 50 million to the Respondents as economic compensation.

On August 2, 2010, Saunders J of the Hong Kong High Court granted an ex parte order for the enforcement of the Award in Hong Kong. The Respondents applied to set aside the ex parte order by contending that the enforcement of the Award would be contrary to public policy as it was tainted by actual or apparent bias. The Applicants argued that there was no bias and that the dinner on March 27, 2010 was an "abortive mediation" that was carried out pursuant to the XAC's Arbitration Rules.

The Decision

Reyes J noted that in deciding whether or not to set aside the ex parte order to enforce the Award in Hong Kong, he would have to decide if enforcing the Award would be contrary to public policy. One element that would suggest a contradiction to public policy is actual or apparent bias. In considering all the material facts, such as how the mediation was conducted and the events that transpired during the dinner on March 27, 2010, Reyes J set aside the ex parte order on grounds of public policy because the Award was indeed tainted with apparent bias.

Reyes J held that there were problems with the mediation right from the onset as neither the tribunal as a whole nor the chief arbitrator (Jiang Ping) conducted the mediation. Instead, the mediation was conducted by Zhou (the arbitrator nominated by the Applicants) and Pan (the XAC's Secretary General who had nothing to do with the arbitral proceedings).

To add to the problem of apparent bias, Pan and Zhou never conducted a mediation with all the parties present. Instead, the mediation was conducted with "related parties." Pan contacted the Applicant's lawyers and proposed the RMB 250 million settlement, to be paid by the Respondents to the Applicants, while the Respondents' lawyer was contacted to obtain details of Zeng (a third party who was perceived to have influence on the Respondents). There was no evidence that the Applicants had approved the RMB 250 million settlement before it was presented to Zeng, nor was there evidence to show that the Respondents had agreed to have Zeng represent them in the mediation. To make the bias even more apparent, Pan and Zhou had asked Zeng, during the dinner at Shangri-la, to "work on" the Respondents with regards to the RMB 250 million settlement. According to Reyes J, the expression "work on" had overtones of Pan and Zhou "actively pushing" for the settlement. Finally, the proposed RMB 250 million settlement, to be paid by the Respondents to the Applicants in return for the Agreement remaining valid, was actually far from the RMB 50 million that the tribunal "recommended" that the Applicants pay the Respondents for economic compensation following the Award in the Applicant's favor for the termination of the Agreement.

Accordingly, Reyes J held that all of the above would lead a "fair-minded observer" to conclude that the tribunal was biased, because they had clearly structured the negotiations in a way that favored the Applicants.

Commentary

This case warns that one must be careful when engaging in Med-Arb or Arb-Med because any signs of actual or apparent bias exerted by the tribunal may lead to the subsequent award becoming invalid and unenforceable. The decision in this case raises concerns because it is common for arbitrations in Mainland China to have some form of mediation conducted by the arbitral tribunal.

Reyes J stated that there was nothing wrong in principle with such hybrid procedures. However, in terms of impartiality, the procedure "runs into self-evident difficulties." This is because, in the Judge's words, "justice requires that decision-makers are not only impartial, but seen to be such.... [t]he would-be mediator must ensure at all times, especially when one might act as arbitrator later on, that nothing is said or done in the mediation which could convey an impression of bias."

As such, it seems that the bottom line is that the arbitral tribunal must, when conducting mediations for the same dispute, take extra precautions to ensure that they stay neutral and conduct the mediations in a way that would not cause a "fair-minded observer" to conclude that there was any bias or apparent bias present.

Med-Arb/Arb-Med and the Hong Kong Arbitration Ordinance

To facilitate Med-Arb or Arb-Med proceedings, sections 32 and 33 of the new Hong Kong Arbitration Ordinance (Cap. 609) provide a statutory framework for Med-Arb and Arb-Med. Furthermore, as a safeguard to protect the arbitrator against claims for actual or apparent bias, Section 33(4) provides that upon resuming the role of an arbitrator, the mediator must disclose to the parties all confidential information material to the dispute that was obtained during the mediation. Although this appears to be a good measure to be adopted by arbitrators to avoid bias, such a safeguard has many negative implications. For instance, in knowing that the mediator will have to disclose all confidential information to the parties before resuming the role of an arbitrator, the parties may be hesitant about what they disclose to the mediator. This is likely to hinder the mediation process.

In this regard, Reyes J highlighted that information obtained by the mediator may consciously or subconsciously affect him/her when sitting as the arbitrator. Hence, the mediator who may subsequently become the arbitrator must be particularly careful not to show any signs of bias. Given this, Reyes J has stated that "the problems inherent in Med-Arb are such that many arbitrators decline to engage in it. They view the risk of apparent bias arising from their participation in Med-Arb as an insurmountable difficulty." The same concerns apply equally to Arb-Med.

Conclusion

Parties wishing to use Med-Arb or Arb-Med to settle their disputes must be prepared to accept that if mediation fails, any confidential information exchanged during the mediation will be disclosed to all parties before arbitration begins or resumes. Arbitrators must also take extra steps to stay impartial throughout the mediation/arbitration proceedings and be careful with how they convey suggestions to settle during the mediation. A balance must be struck between staying neutral and, at the same time, not hindering the mediation process. It remains to be seen if Arb-Med or Med-Arb will take off in Hong Kong. However, given the distinct differences between the legal systems and procedures in Hong Kong and Mainland China, it is unlikely that we will see a surge in the use of hybrid mediation-arbitration procedures in Hong Kong anytime soon.

The words of Reyes J in Gao Haiyan v Keeneye Holdings Ltd. suggest that it is almost inevitable that parties and arbitrators will be very reluctant to adopt such procedures. More importantly, parties engaged in arbitrations in Mainland China, where there is a likelihood of enforcement outside of Mainland China, should be wary of the effects of apparent bias if they agree to arbitrators sitting as mediators and then resuming the role of arbitrator if the mediation fails, because the risk of apparent bias in "Chinese style" arbitrations is real.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Phillip Georgiou
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.