Updated: Mar 19, 2020
By Andrew Kemp
The city is encouraging businesses to pursue alternative dispute resolutions (ADRs) prior to launching litigation
Hong Kong has long attracted business to its shores thanks to its robust, independent and highly respected legal system. Investors enjoy a high degree of confidence that they will be able to resolve their disputes through litigation and arbitration. Hong Kong, however, has been trying for more than a decade to grow the commercial space’s appetite for mediation as an alternative dispute resolution (ADR) mechanism.
Mediation has several clear advantages when it comes to resolving commercial disputes. Not only is it faster, more efficient and confidential it is also non-binding and allows companies to engage in without prejudice discussions prior to launching litigation.
While the main purpose of mediation is to help parties resolve their dispute amicably, the process can also be used as an initial step in the road to litigation. This can help both sides gain a greater understanding of the facts of the case as well as the opposing side’s arguments, without being bound by any ruling.
Road to mediation
Hong Kong introduced mediation as a voluntary resolution process under the Civil Justice Reform (CJR) on April 2, 2009. The CJR stipulated that mediation would be the courts’ recommended ADR and required judges to encourage parties to use the process whenever appropriate.
“Mediation can save time and costs, and avoid the stress involved in litigation, but it should only be attempted at the right time and when the parties are both genuinely willing to mediate.”
Kenix Yuen, Consultant, Gall
On January 1, 2013, the Hong Kong Mediation Ordinance came into force, providing both a regulatory framework for mediation’s promotion as well as its confidentiality. The ordinance prohibits the disclosure of related communications, unless there are exceptional circumstances or the court has directed their disclosure.
The Practice Direction on Mediation (PD 31), meanwhile, came into effect on November 1, 2014 and created a framework for mediation. Under PD 31, parties to a civil dispute must explore the possibility of mediation before pursuing litigation.
Kenix Yuen, a consultant at Gall, Hong Kong’s leading dispute resolution law firm, said mediation was more or less compulsory once a civil action had been commenced by way of a Writ of Summons, as PD 31 meant that avoiding mediation would likely lead to the court imposing adverse costs.
She added: “In such an event, bypassing mediation would not be ideal. If it is clear that the parties are unwilling to settle – mostly in cases involving allegations of fraud – we would still recommend making a minimal attempt to mediation as the court will not easily accept any reason to avoid a mediated outcome.”
A softer approach
Commercial disputes often head to court because the two parties do not trust one another or have a fundamental difference of opinion over the facts of the case. In these instances, mediation allows for greater bipartisan communication and an increased focus on the underlying objectives.
While mediation involves an impartial intermediary helping all sides reach a negotiated settlement, the mediator has no power to enforce the final agreement.
Yuen said mediation was particularly useful when a commercial dispute could potentially damage a company’s reputation. She pointed to a case where one of her clients was defending a civil action involving email fraud where it had been an innocent third party.
Yuen said: “The plaintiff’s email account was hacked by a fraudster, who purported to be the plaintiff and sent instructions to our client to transfer around HK$1mn (US$128,000) to a bank account which was said to be held in the name of the plaintiff. It was later found out that the bank account was not held by the plaintiff but the transfer was successful.”
Yuen said in view of the claim’s small amount and the potential reputational damage caused by a published judgment the client had been keen to settle on reasonable commercial terms and at an early stage and maintain the business relationship with the plaintiff. It was, she said, a “win-win” result.
With cyber-attacks on the rise, mediation offers companies the chance not only to mitigate the reputational fallout from cyberattacks, with proceedings remain confidential, it also allows both sides to find a middle ground and preserve their working relationship.
The success of any mediation does lie in several key factors, however. These include the mediator’s skill; the parties’ willingness to settle; the attitude of the parties’ legal representatives; the respective strengths of the parties’ case, and whether there are any other consequences that are not within the control of both parties.
While the involvement of an intermediary can filter out emotion from the parties’ communication, Kenix said ultimately that emotion along with both sides’ financial status and risk/benefit analysis would play a key role in the success of mediation.
She warned: “Mediation can save time and costs, and avoid the stress involved in litigation, but it should only be attempted at the right time and when the parties are both genuinely willing to mediate.”
What often shapes the desire to engage in mediation, as well as determining when that “right time” has arrived, is the parties’ own exposure to the time and cost pains that accompany all commercial disputes. But, while mediation can help ease some of these pains, it is not a cure-all.
In cases involving regulatory matters, parties will be more likely to embrace litigation, preferring to let the court determine the outcome. Yuen said that having a judgment in place may allow the parties to insulate themselves from possible regulatory consequences.
Moreover, Hong Kong has established itself as a centre for international dispute resolution, with businesses attracted the city by the promise of being able to resolve cross-border disputes. This is an area that mediation cannot compete in.
Yuen said: “For cross-border disputes, it would be even harder to resolve by way of mediation. In view of cultural differences and differences between the law of the jurisdictions in which the parties reside, it would be difficult to find a suitable mediator.”
Noting that litigation in Hong Kong had other advantages that mediation could not offer, she said: “Litigation allows the parties to fully explore the disputes by way of discovery and exchanging evidence. Perhaps after such procedures which allow the parties to fully assess the merit of their case, the chance of success for mediation would be higher.”
This, she said, could open the door to mediation and litigation being conducted in parallel at a certain stage, helping to avoid an expensive trial at the end.
In need of momentum
Hong Kong launched the Mediate First campaign in May 2009, with more than 100 companies and trade organisations pledging to consider the use of mediation before resorting to other means of dispute resolution. Since then, however, the number has only grown to just over 480, suggesting that the commercial sector has been slow to embrace mediation as an ADR.
Yuen believes that the slow uptake was not because companies were reluctant to engage in mediation before commencing litigation, but that the campaign had lacked promotion.
She said: “Companies have very often attempted various kinds of alternative dispute resolutions before litigating the disputes. The appetite for mediation depends on the knowledge of the process of mediation, whether there is a suitable mediator and the respective costs involved in litigation and mediation.”
This article was written by Andrew Kemp for Conventus Law in association with Gall.
For further information on mediation in Hong Kong, please contact:
Kenix Yuen, Consultant, Gall