Med-Arb – an Alternative Dispute Resolution practice

The practice of combining the mediation and arbitration processes (referred to as “med-arb” below) is known as both “med-arb” and “arb-med”, depending on which process was initiated first. This process involves the same person acting both (i) as a mediator in seeking to facilitate a settlement between the parties, and (ii) as an arbitrator to determine the issues in dispute and issue a final and binding award.

Med-arb is a relatively familiar practice in civil law jurisdictions, where both judges and arbitrators are used to taking on the role of mediator to encourage settlement between the parties during the proceedings. In contrast, the practice is viewed with great suspicion in common law jurisdictions, as highlighted by reaction to the decision in December last year of the Hong Kong Court of Appeal in the Gao Haiyan case (Gao Haiyan and another v. Keeneye Holdings and another CACV 79/2011. For further details, please see our Hong Kong office's arbitration update on 8 December 2011).

In this post, we summarise the med-arb process and consider its advantages and disadvantages, and highlight the different expectations of the process that parties to international contracts may have depending on their particular legal and cultural backgrounds.

Mediation – different approaches

Mediation is sometimes confused with arbitration as a dispute resolution process, since both involve the resolution of a dispute outside the national court system by a third party chosen by the parties. To a certain extent, the confusion can be explained by the fact that there are in general two very different approaches to conducting a mediation:

1. The facilitative approach

The facilitative approach is often favoured in Western jurisdictions, and involves bringing parties together in a neutral setting in order to reach settlement. The mediator (who will not necessarily have a legal background) will first hold separate meetings with each of the parties in which he or she will encourage the parties to focus on the commercial issues at stake, in particular the commercial outcome they would like to reach, and to consider points on which they might be willing to compromise. After this initial stage, involving moving back and forth from one room to the other, a joint meeting will be held in which the parties will consider together whether, as a result of their separate discussions with, and exchanges through, the mediator, they are able to find a compromise position acceptable to all parties. It is usually the case that several such mediation sessions will be required before a settlement is reached and suitably documented. The advantage of this approach is that it allows the parties to understand their respective commercial concerns and directly exchange their concerns regarding the dispute in the presence of a neutral, independent third person, 'without prejudice' to their formal legal position in any parallel litigation or arbitration, thus making it easier to find a compromise position acceptable to all parties.

2. The evaluative approach

The evaluative approach to meditation is more similar to the settlement meetings that are sometimes convened by judges in some civil law jurisdictions, such as Japan. The mediator may, as with the facilitative approach, hold separate meetings with each of the parties, encouraging the parties to perform a cost vs. benefit analysis of their claims and to make proposals and compromises leading to a settlement. However, significantly, an evaluative mediator (who does usually have a legal background) will point out the relative strengths and weaknesses of each party's legal position, indicating how he or she thinks the judge or tribunal is likely to decide the case, and may also make suggestions as to what he or she would consider to be a suitable settlement position.

Med-arb – the combination of mediation with the arbitration process

In an arbitration, the tribunal or arbitrator is neutral and has no additional knowledge of the dispute or the parties' positions beyond the facts presented in the case. By contrast, a mediation process (certainly a facilitative mediation process) requires the parties to disclose additional information, that would otherwise be private and confidential. For this reason, the position taken in most international arbitration rules (such as the ICC and SCC rules) is that any mediation process should be kept entirely separate from arbitration or litigation proceedings, in order to maintain the neutrality and fairness of the proceedings. Due to such concerns about disclosing confidential information and the potential impact on the fairness of existing arbitration or litigation proceedings med-arb is less commonly used in common law and Western jurisdictions.

In Asia, however, med-arb is a relatively familiar practice. Although parties in Asian jurisdictions will still commence formal arbitration or litigation proceedings at the beginning of a dispute as a strong message of their intent, the same parties are often willing to engage in informal or formal mediation processes, since the commercial culture tends to favour a negotiated settlement. Indeed, arbitral tribunals and courts in Asian and other civil law jurisdictions often strongly encourage settlement, and in particular mediation, during the course of the formal proceedings.

In Japan, for example, a positive attitude towards med-arb is reflected in Japan's Arbitration Law of 2003 and the JCAA Arbitration Rules, which allow an arbitrator to attempt to settle the dispute subject to the proceedings over which he is presiding, subject to the parties' consent (See Article 38(4) of the Arbitration Law (Law No.138 of 2003), and Rule 47 of the JCAA Commercial Arbitration Rules). Similarly, under the JCAA Mediation Rules, the mediator in a dispute may go on to act as arbitrator in any subsequent arbitral proceedings arising from the same dispute, and any mediation settlement may be incorporated into an arbitral award (JCAA International Commercial Mediation Rules, Rules 8 and 11).

Advantages of med-arb

The key advantages of combining mediation and arbitration are usually said to be the following:

• An arbitrator or judge will already be familiar with the case, the parties and their counsel, and so should be well-placed to help settle the matters in dispute. An arbitrator or judge is also often best-placed to identify the most appropriate time in the proceedings to hold a mediation.
• It can be an efficient way of reaching an early settlement, avoiding substantive hearings and the significant legal fees these incur – either by bringing the parties closer together (under the facilitative approach) or by giving an early indication of the likely outcome of the formal proceedings, and thereby encouraging the parties to settle.
• Any settlement reached during med-arb can subsequently be recorded in the form of a final award by the tribunal, which would then benefit from the enforcement regime under the New York Convention.
• A mediation under the facilitative approach can be particularly beneficial where there is an on-going business relationship which the parties would like to preserve. Indeed, a mediated settlement can cover issues outside the scope of the immediate dispute, and can therefore have a positive outcome on the relationship between the parties going forward.
• There is evidence that med-arb is being used successfully in Asia. For example, in a recent interview with the Global Arbitration Review, the secretary general of the China International Economic and Trade Arbitration Commission, Yu Jianlong, said that 20 to 30 per cent of CIETAC's caseload is resolved by this method each year. Similarly, a study of JCAA arbitrations from 1999 to 2008 showed a successful outcome in 25 cases out of 48 in which arbitrators assisted the parties in reaching a settlement (See JCAA newsletter No.22).

Disadvantages of med-arb

However, there are also a number of potential disadvantages to combining mediation and arbitration, such as the following.

• There is a risk that an arbitrator's impartiality may be affected by overseeing a facilitative mediation. It may be difficult for an arbitrator not to be influenced by supposedly "without prejudice" disclosures or proposals made by the parties during the course of settlement negotiations.
• Similarly, a party may be reluctant to discuss its position openly with the mediator if that mediator is also the arbitrator of the dispute and may go on to issue a final award against that party's interests, influenced by such earlier mediation discussions.
• It is important to check whether the arbitrator is under any duty (pursuant to the applicable arbitration rules or legislation in the seat of the arbitration) to disclose to the other parties all information material to the arbitration, including information exchanged during the mediation on a supposedly confidential basis. For example, in jurisdictions such as Japan which do not recognise 'without prejudice' privilege, parties may be deterred from discussing their position openly, or participating at all, in mediation.
• In an evaluative mediation which does not lead to a settlement, there is a risk that the parties will use the mediator's comments on the strengths and weaknesses of parties' positions to improve their arguments and submit additional evidence, and thereby gain an advantage they would not otherwise have had.
• If the mediation does not lead to a settlement, it is possible that a party might seek to challenge a subsequent arbitral award on public policy grounds, on the basis of some alleged irregularity or lack of due process at the mediation stage (as in the Gao Haiyan case).

Conclusion

Parties often have different expectations about the processes by which their disputes should be resolved, depending on their cultural and legal backgrounds. Thus, although med-arb is a relatively familiar practice in Asia, some parties (particularly those from common law jurisdictions) are likely to have some reservations about the concept of med-arb and its impact on parallel arbitration or litigation proceedings. In order to address such reservations, and to ensure that med-arb is an effective process that is less likely to be challenged by a dissatisfied party, it is important for the parties to try to reach agreement (either at the contract drafting stage, or once the dispute has arisen) on matters such as the precise format of any mediation, and the privileged or confidential status of information disclosed in the course of a mediation.

Guidance on such issues may be found in international mediation rules (such as those of the ICC, SCC, HKIAC and JCAA). Should you require further assistance, Herbert Smith has considerable experience of handling alternative dispute resolution processes such as med-arb, and we have successfully advised clients on mediations and med-arbs based in London, China, Hong Kong and elsewhere.

Herbert Smith also produces training materials and guidance in relation to mediations and other ADR procedures in Japan or overseas, such as our ADR Toolkit – a guide intended to assist in-house counsel in improving the way that their organisation uses ADR. Our report The inside track - how-blue-chips are using ADR, shares the practical experiences of in-house counsel in leading international organisations across various industry sectors, giving unique insight to their views on the effective use of ADR in managing business disputes.