ADR IN ASIA – Arbitrating for Settlement
Reporters: Lester Fung & Dennis Wu, Sidley Austin
The seminal event of Arbitration Week 2019, the “ADR in Asia – Arbitrating for Settlement” conference, was held on 22 October 2019 at the Four Seasons Hotel in Central. This year’s conference brought together prominent figures of the international arbitration community to explore, as Mr. Matthew Gearing QC noted in his opening remarks, the interplay between formal final dispute resolution on one hand, and mediation and settlement techniques on the other.
Mr. Gearing QC also noted in his opening remarks that the conference’s impressive turnout was a sign of Hong Kong’s resilience despite recent local difficulties. This is underpinned by the strong year that the HKIAC has had, including administration of a record number of 221 cases. HKIAC has also received a flood of enquiries after the “Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region” came into force. Finally, HKIAC has recently been licensed by the Russian Ministry of Justice to administer certain types of disputes in Russia which would hopefully provide Hong Kong a new line of opportunities as an international arbitration center.
Mr. Karl Hennessee, Senior Vice-President and Head of Litigation, Investigations and Regulatory Affairs at Airbus Group, delivered the keynote speech.
Mr. Hennessee pointed out that when arbitration is conducted properly, parties are more likely to achieve settlement thus preserving their business ties. However, counsel and the arbitral tribunal are often insensitive to the actual needs of the end clients who have little experience in arbitration. From the end clients’ perspective, arbitration is but one of the many methods of dispute resolution by which to achieve settlement, and they rely on counsel and the arbitral tribunal to help them navigate the arbitral process.
The arbitral tribunal and counsel can both play a role in driving settlement, even though the process of arbitration is inherently contentious. One area to focus on is the conduct of proceedings. In this connection, Mr. Hennessee noted that there is value in getting end parties together in a single room even at the procedural stage so as to allow them to observe the “darker” side of arbitration and choose another way to settle their disputes. Where appropriate, the Tribunal may also suspend the case and allow parties to conduct settlement discussions.
Counsel are also well advised not to burn any bridges for settlement. Mr. Hennessee noted an unfortunate incident where counsel on both sides ran into each other in a pub after a tough hearing but found themselves unable to share a round of drinks. This ultimately led to resentment between the parties. The arbitration process is designed to resolve a dispute and it is not worth it if the process itself drives long-term hatred.
When properly conducted, arbitration can preserve long-term relationships even if it does not result in a settlement in the immediate case. Mr. Hennessee recalled an example where parties agreed to append a well-written award to their contract to guide interpretation of their contract on an on-going basis.
Ultimately, the purpose of arbitration is to achieve settlement and nothing else. The attainment of that goal however is not confined within the four walls of the hearing room, and users of arbitration need the guidance of counsel and tribunal to achieve that goal.
Plenary Session – Arbitrating for Settlement
Mr. Hennessee then joined Ms. Susan Dunn, Co-founder of Harbour Litigation Funding and Mr. Jun Hee Kim, partner at Arnold & Porter and previously General Counsel at Hyundai Heavy Industries, for a panel discussion titled “Arbitrating for Settlement”. The session was moderated by Professor Chin Leng Lim of Chinese University of Hong Kong.
Mr. Kim kicked off the discussions noting that Mr. Hennessee’s insightful comments echoed his own views. What parties truly want from an arbitration is the resolution of a dispute. Winning in the arbitration is one way to achieve that, but that is far from the only way. On the other hand, Mr. Kim also observed that while end clients invariably prefer settlement to arbitration, this is often hindered by their inaccurate understanding of the potential outcome or the amount of time and money that would have to be spent. In-house counsel are often also wary of recommending a settlement for a sum less than what was originally claimed. It is important in these circumstances for external counsel to have honest and open discussions as to case prospects and the potential costs involved. Counsel should also be prepared to think about future business opportunities outside of the immediate case in formulating a settlement proposal.
Ms. Dunn then shared her perspective. As a funder, her paramount concern is the predictability of the process. While settlement by mediation is to be commended and encouraged, she noted that the practice of arb-med is not something that funders are used to seeing. Any impression that something untoward is happening behind the closed doors of arbitration would devalue the process. In this regard, arbitration lags behind litigation in certain jurisdictions where courts would compel parties to attempt mediation before an independent mediator.
Mr. Hennessee highlighted the importance of approaching arbitration with humility. Counsel tend to over-celebrate successful cross-examination which could destroy an opportunity for settlement. Mr. Hennessee also reminded the audience that one should not view a settlement offer as an admission of fault. Likewise, one should not be impeded from making an offer because of such fear.
The panel then addressed an interesting question from the floor as to the role of arbitrator in driving settlement. Mr. Kim observed that there are rules as to what an arbitrator can do in terms of expressing their views. However, subject to those rules, arbitrators can provide feedback in a more subtle way, such as in terms of questions to be addressed in post-hearing briefs, so that parties know where they stand.
Exploring Settlement: The Tribunal’s Perspective
The question from the floor segued nicely into two heated debates moderated by Dr. Michael Moser which explored the theme of settlement from the tribunal’s perspective. The first debate pitted Mr. Arthur Ma (Partner, DaHui Lawyers) against Ms. Andrea Menaker (Partner, White & Case LLP). The second debate saw Ms. Domitille Baizeau (Partner, LALIVE) take on Sir Bernard Rix, former Lord Justice of Appeal and currently an independent arbitrator.
Debate 1 – “The arbitrator’s mandate to resolve the parties’ dispute includes actively facilitating the parties’ settlement of the dispute. This debate will include an examination of different approaches adopted in the East (China) and the West”
Mr. Ma noted that arbitrators in PRC arbitration cases would often ask whether parties wish to attempt settlement and then put on their mediator hats upon parties’ request. Mr. Ma observed that the worst settlement agreement is better than an award and advocated strongly for the practice of arb-med or med-arb. The very purpose of commercial arbitration is for businessmen to find a way to resolve their differences. Arb-med or med-arb, if properly handled, is extremely effective in achieving that goal.
Concerns over due process are overblown, Mr. Ma argued. Arbitration involves applying laws to the facts at hand, while mediation focuses more on helping parties find a middle ground in terms of business proposals. But both involve an assessment of relevant facts. There is no reason why an arbitrator would lose the ability to decide a dispute fairly just because he has assisted in the parties’ settlement process. Procedurally, it is also more convenient as the arbitrator / mediator would have already read into the case material.
Ms. Menaker disagreed. There are fundamental differences between the objectives of arbitration and mediation. In order to have a successful mediation, a mediator needs to know the respective bottom lines of the parties to determine how the gap could be bridged. However, it is not clear how the arbitrator / mediator can remain impartial once he obtains that knowledge, especially if there is a significant difference between the bottom line on one hand, and amount claimed on another. On the other hand, it is also doubtful how effective mediation would be if the arbitrator / mediator is unable to elicit such information from the parties. While certain legal systems (for instance PRC law) provide that an arbitrator / mediator may not consider privileged information he received during mediation once he puts his arbitrator hat back on, this is really a legal fiction as one cannot simply unlearn what one has learned. Ms. Menaker concluded that for these reasons, arbitration and mediation should remain distinct and separate processes. Indeed, there have been cases in the United Kingdom where awards were refused enforcement because the courts found that the arbitrator had played a mediation role in the proceedings which tainted the arbitration. That would certainly be a most undesirable outcome.
Debate 2 – “The common law versus the civil law approach: which one is more effective for achieving settlement”
At the outset, Ms. Baizeau noted that the common law / civil law divide is a slightly out-of-date distinction in view of the harmonisation and standard approaches often adopted in international commercial arbitration.
Be that as it may, in a typical civil-law approach, the tribunal’s general willingness to engage and readiness to provide preliminary views are factors that are conducive to settlement. A civil law tribunal is more likely to encourage the presence of party representatives at the initial case management conference (“CMC”), as well as to actively engage the parties at the CMC on various substantive issues, such as areas of agreement between the parties and the evidence required for each party. The front-loading of proceeding highlights the tribunal’s expectations and also gives the parties an idea of what they have to deal with. At subsequent CMCs, a civil law tribunal is more likely to visit the substantive questions with the parties in order to narrow down the issues and identify areas where there is insufficient evidence. This ensures that the parties know what is left to be done and gets a flavour of the relative strengths and weaknesses of the parties’ cases.
At the hearing itself, a civil law tribunal typically takes on a more inquisitorial role. Civil law tribunals are also more inclined to, with the consent of the parties, provide preliminary views of the case. Through the tribunal’s engagement, the parties get hints as to where the tribunal is going which would inform their decisions on whether to settle.
Sir Bernard Rix echoed Ms. Baizeau’s sentiments. Civil law and common law systems are successful in their own right, and how successfully is a system practiced ultimately depends on the quality of lawyers, the tribunal, and the parties. Nonetheless, he noted that on a theoretical level, there are 5 features of a common law system that support and encourage settlement. First, common law adopts a rigorous costs approach which is applied on a principled basis. This serves as a great restrainer of litigation or arbitration. By contrast, indemnity for costs is less common in civil law. Second, common law encourages disclosure of documents. This allows parties to get a measured conception of the dispute. Third, in contractual interpretation, common law looks more intensely at the language of a contract and is slow to import concepts such as good faith. Interpretation of contracts under common law is therefore more predictable. Fourth, common law follows the doctrine of precedent which provides predictability that is relatively lacking in civil law. While civil law is elegantly clear in the abstract, there is often little insight on how it applies to a particular case. Fifth, there is greater predictability in terms of damages assessment under the common law tradition, which scrutinizes causation and indemnification more intensely.
Dr. Moser then asked the panelists for their experience in preliminary views. Ms. Baizeau noted that parties often do not know what is on the tribunal’s mind until the very end, as tribunals are too scared to provide their views on what is bothering them. The practice of providing preliminary views actually provides a window for parties’ counsel to assist the tribunal. In this connection, Ms. Menaker observed that the themes and questions that a tribunal tells the parties to focus on in their opening or closing submissions often provide a good indication as to the tribunal’s views. On the other hand, Sir Bernard Rix noted that it is important for an arbitrator to keep his mind as balanced as he possibly can during the proceedings, as he may change his mind as he hears more.
“Practical considerations and implications of the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region”
After the networking luncheon, the conference reconvened for a discussion on the recent the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”). Ms. Teresa Cheng, SC, the Secretary for Justice of Hong Kong, gave opening remarks detailing the Arrangement itself, after which a panel comprised of Mr. Ing Loong Yang (Partner, Latham & Watkins) as chair, Mr. Friven Yeoh (Partner, Sidley Austin), Mr. Victor Dawes SC (Barrister and Independent Arbitrator), Ms. Amy Yao (COFCO Packaging) and Ms. Ling Yang (Deputy Secretary-General, HKIAC) discussed the following practical considerations and implications of the Arrangement:
- Differences between the interim measures in the Mainland and Hong Kong
Ms. Yao explained that the courts in the Mainland generally adopt a broad-brush approach in determining applications for interim measures. In practice, the courts in the Mainland are prepared to grant interim measures upon the applicant providing security.
As regards the Hong Kong regime, Mr. Dawes SC noted that under section 45 of the Arbitration Ordinance, an applicant will have to meet the American Cyanamid standard, i.e. by showing that it has a good arguable case, that there is a serious issue to be tried, that there is a real risk of dissipation of assets and that the balance of convenience tilts in favour of the applicant.
Mr. Dawes SC then examined certain differences between the two regimes. He observed that interim measures in Mainland China are commonly driven by the courts, whereas interim measures are usually enforced in Hong Kong by an applicant being a party to the proceedings. Also, while it is common for applicants in Hong Kong to seek a worldwide injunction that would cover the respondent’s assets outside Hong Kong, such extra-territorial injunction is rarely seen in Mainland China. Mr. Dawes SC and Mr. Yeoh both further noted that interim measures granted in Mainland China are mostly in rem targeted at properties, whereas interim measures granted in Hong Kong are usaully in personam against the respondent.
- Scope of the Arrangement
Ms. Yao considered that the Arrangement was intended to place Hong Kong arbitral institutions on equal footing as their counterparts in Mainland China. In this connection, there is consensus amongst practitioners that ad hoc and investor-state arbitrations are excluded from the Arrangement. Mr. Yeoh added that the Arrangement covers a wide range of institutions, such as the HKIAC, ICC and specialist arbitral institutions like eBRAM and Hong Kong Maritime Arbitration Group, each of them having different characteristics. Therefore, even though ad hoc arbitrations are excluded, there are still plenty of institutions to choose from for parties that wish to take advantage of the Arrangement.
The panel also explored whether it is possible to obtain interim measures after an award has been granted by the tribunal but before enforcement. Ms. Yang cautioned that there are conflicting decisions on this issue (and in that connection, the proper interpretation of Article 100 of the PRC Civil Procedure Law) by different intermediate courts in Mainland China and that practitioners should await further clarification by the Supreme People’s Court.
- Practical issues to consider when applying for interim measures
Ms. Yao noted that there is no uniform set of documents for applications for interim measures in Mainland China. It is therefore advisable for practitioners to reach out to local lawyers located in the city of the court to which the application for interim measures is intended to be made.
It is often not straightforward to determine which court an application for interim measures should be made to, as the respondent may have assets situated in various places. In that connection, Ms. Yao advised practitioners to consider the number of properties held by the respondent in each place, in order to determine which court is the most appropriate and advantageous forum to hear an application for interim measures. Generally speaking, under Chinese law, it is difficult for a respondent to dispute jurisdiction of the court on the basis that he also has assets in other places.
Ms. Ling and Ms. Yao told the audience that security could be provided for interim measures in Mainland China by way of cash, third party guarantee, bank guarantee and by a liability insurer. As regards applications for property preservation, such interim measure is usually granted upon provision of security by the applicant. In terms of timing, the panellists observed that the Mainland courts have recently granted an order for interim measures within 5 days of the application, which was implemented forthwith.
- Tips in drafting arbitration clauses
The phrase “Arbitral proceedings in Hong Kong” used in the Arrangement refers to arbitrations that are seated in Hong Kong and administered by certain institutions in Hong Kong. To that end, Mr. Yeoh recommended that parties choose an arbitral institution that falls within the scope of the Arrangement and an arbitral seat of Hong Kong. In order to avoid the risk of the tribunal determining otherwise, parties should ensure that the arbitration clause provides for a Hong Kong seat at the outset.
One-on-One Session with Neil Kaplan, QC, CBE, SBS
The conference then turned into a light-hearted affair, with Ms. Sarah Grimmer (Secretary-General, HKIAC) putting Mr. Kaplan, QC, CBE, SBS into the hot seat.
As most of us are aware, Mr. Kaplan QC started out as a barrister in England and subsequently moved to Hong Kong. He later served as a judge of the then Supreme Court of Hong Kong as head of the Construction and Arbitration List, and was also the founding Chairman of the HKIAC.
Interestingly, it was entirely fortuitous for Mr. Kaplan to encounter arbitration. He first joined the Chartered Institute of Arbitrators as a fellow at his then legal assistant’s urging, despite having no knowledge of arbitration at all. Nonetheless, over the years, Mr. Kaplan QC developed a strong passion for the practice. What impressed him most is the diversity of interesting people whom he sat with as an arbitrator and whom he came across as advocates, as well as the cultural aspects of arbitration (not least the opportunity to visit many nice places). Investment treaty arbitrations also allowed Mr. Kaplan QC to better understand how government works and appreciate the public interest element involved.
Having sat as an arbitrator on numerous occasions, Mr. Kaplan QC told the audience that he had seen aggressive behavior from advocates from time to time and that written submissions nowadays are getting intolerably long. His advice for advocates is to behave courteously and keep their written submissions succinct, as the art of persuasion is not about making lengthy submissions.
Mr. Kaplan QC is impressed by how the HKIAC started in a small office on Hollywood Road and how it has grown exponentially throughout the years. He also relishes the opportunity of working with many young people over the years, some of whom are now renowned arbitration practitioners. Mr. Kaplan QC then shared with the audience some of his personal interests, including his love for Shakespeare and Beethoven work, as well as his hope that he will be able to beat Roger Federer in tennis (with Federer’s hand tied behind his back!).
The role of pervasive psychology in negotiating settlement
Mr. Christopher Moore (Partner, Cleary Gottlieb Steen & Hamilton) chaired the panel discussion on the role of pervasive psychology in negotiating settlement with Mr. Ranse Howell (Director of International Operations, JAMS) and Ms. Ula Cartwright-Finch (Managing Director, Cortex Capital).
In his presentation, Mr. Howell identified different biases that are commonly seen in negotiations, for example, unconscious bias and cognitive bias. Biases often arise due to emotional intelligence factors and tactical empathy. Ms. Cartwright-Finch shared some tips for negotiation and stressed the importance of listening during negotiations: listening to the other party, listening to yourself and listening to what was not said in negotiations. It is also important to bear in mind that, in the context of negotiations, being right is not the key; instead, it is the right mindset that is crucial.
Closing remarks by the Honourable Mr. Justice Geoffrey Ma, GBM
The audience was also privileged to have the Honourable Mr. Justice Geoffrey Ma, GBM, deliver closing remarks at the conference. Justice Ma commented that court proceedings are not designed to facilitate settlement and settlement could be better achieved via arbitration, where amicable resolution achieved prior to formal adjudication is very much part of the culture. To that end, it is important to have the infrastructure in arbitration that could facilitate settlement, such as interim measures. In his view, the Arrangement greatly enhances the effectiveness of arbitration and encourages settlement. Justice Ma also stressed the importance of the rule of law, integrity of the judicial system and the independence of the judiciary in maintaining the integrity of Hong Kong’s legal system, particularly during the difficult times that Hong Kong is currently facing.