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PD 31
outlines the new duties on parties and the new mediation procedures they
need to follow. This e-bulletin highlights PD 31 and six key points you
will need to be aware of when mediating in Hong Kong under the new
rules. This e-bulletin also discusses the new scheme in effect
from 1 January 2010 for voluntary mediation in s.168A (unfair prejudice)
and 177(1)(f) (just and equitable) petitions where there is no
allegation of insolvency concerning the company and no allegation that
the affairs of the company would require full investigation in the
public interest.
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Duty to explore Alternative Dispute Resolution (ADR)
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Costs consequences of failing to engage in mediation
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Preliminary case management
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The new mediation procedure
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Stay of legal proceedings
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Without prejudice communication and confidentiality
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Practice Direction 3.3 – voluntary mediation in s.168A
and 177(1)(f) petitions
Click
here for our conclusion.
1. Duty to explore ADR
A
series of implicit objectives which underlie the procedural rules (known
as the "underlying objectives") were introduced on 2 April 2009. One of
the underlying objectives of the new rules is to facilitate the early
settlement of disputes. The court has a duty, as part of active case
management, to further that objective by encouraging parties to use ADR
where appropriate and facilitating its use ie, helping parties to settle
their case. It is important to note that the parties and their legal
representatives have a general duty to assist the court to further these
underlying objectives.
2. Costs consequences of failing to engage
in mediation
The
court may make an adverse costs order where a party "unreasonably" fails
to engage in mediation. No adverse costs order will be made where there
has been a minimum level of participation or a party has a reasonable
explanation for not engaging in mediation, such as progressive without
prejudice settlement negotiations. It is not yet clear what will
constitute "unreasonable" conduct. The courts are likely to look at case
law developments in England and Wales where, in the absence of written
rules, court judgments illustrate in what circumstances an outright
refusal to mediate may be regarded as unreasonable. Parties should,
nevertheless, be aware of the risk as to costs where a party fails or
refuses to engage in mediation.
3. Preliminary case management
Parties will need to consider and ascertain whether a case is suitable
for mediation at an early stage in the proceedings. Note that the
timetabling questionnaire, which must be filed and served within 28 days
after the close of pleadings, requires the parties to indicate whether
they have attempted ADR and if not, whether any of the parties are
willing to engage in ADR. Regardless of whether parties wish to engage
in mediation, they will need to follow at least part of the procedure
outlined in paragraph 4.
4. The new mediation procedure
The
Mediation Certificate
Each party must file a Mediation Certificate at the same time as the
Timetabling Questionnaire (i.e., within 28 days after the close of
pleadings). The Mediation Certificate must be signed by the parties and
their solicitors. The Mediation Certificate should state whether a party
is willing to attempt mediation and if not, why not. The Mediation
Certificate should also confirm that the solicitors have explained to
the client (i) the availability of mediation to settle the dispute and
the respective costs positions of mediation as compared with the costs
of the litigation; and (ii) the contents of PD 31.
The Mediation Notice
If a party wants to attempt mediation, he must serve a Mediation Notice
on the other party (or parties) in the dispute as soon as possible after
filing the Mediation Certificate. In the Mediation Notice, the applicant
should (i) state that he wishes to attempt mediation; and (ii) make
proposals for the conduct of a mediation.
The Mediation Response
The respondent must then serve and file at court a Mediation Response
within 14 days. The Response should state whether the respondent agrees
to mediate the dispute, and if not why not. If the respondent is willing
to mediate, he should confirm whether he agrees with the applicant's
proposals and, if not, he should suggest alternatives.
The Mediation Minute
Where the parties put forward differing proposals in the Mediation
Notice and Response, they should attempt to reach agreement and put this
in the form of a Mediation Minute signed by the applicant and the
respondent or their solicitors. The Mediation Minute should be filed at
court within 3 days after it has been signed.
Where the parties are unable to reach agreement on certain proposals
they may make a joint application (or any party may apply) to the court
for directions to resolve the points of difference. The court will only
try to resolve differences concerning the process of mediation. The
court should not, for example, be asked to direct a party to engage in
mediation or appoint a particular mediator over the opposition of the
other party.
5. Stay of legal proceedings
The
court may, either on application by one of the parties or on its own
motion, stay legal proceedings for a short time to allow parties to
mediate, provided the stay does not imperil any "milestone dates".
Milestone dates were introduced as part of the CJR reform in April 2009
with the aim to reduce delays. These are major dates in any proceedings
and include the case management conference, pre trial review and the
trial date/period. A stay which has the effect of postponing a milestone
date will only be granted in exceptional circumstances.
If the parties agree a settlement during the stay period, they must
inform the court and take steps formally to conclude the proceedings. If
no agreement is reached through mediation, the legal proceedings will
continue after the stay period has expired.
6. Without prejudice communication and
confidentiality
PD 31
states that the court cannot compel the disclosure of or admit materials
so long as they are protected by privilege in accordance with legal
principles, including legal professional privilege and the privilege
protecting without prejudice communications. Moreover, it states that
communications during the mediation process, being without prejudice
communications, are protected by privilege and are therefore
confidential. Case law developments in England, however, demonstrate
that this is an area not without debate and exceptions apply in certain
instances.
The courts have, for example, allowed parties to adduce evidence in
court of what happened in the later stages of mediation in order to
decide whether or not a valid settlement had been concluded. Moreover,
in the recent case of
Farm
Assist Limited (In Liquidation) v The Secretary of State for the
Environment, Food and Rural Affairs (No. 2) [2009] EWHC 1102 (TCC),
the court compelled a mediator to provide evidence about what took place
in a mediation over which she presided despite her contentions of
privilege and the fact that the mediation agreement reached between the
parties contained an express provision of confidentiality. It is worth
noting, however, that neither party to the case objected to the mediator
being called to give evidence about the mediation (including her private
conversations with the parties).
Confidentiality is central to the mediation process and it is held up as
one of the key reasons why the mediation process is successful. However,
the Farm Assist case makes clear that there may be exceptional
circumstances where the confidentiality provisions of the settlement
agreement between the parties and the mediator can be set aside in the
interests of justice. Several factors made this an exceptional case
including the allegation of economic duress at the mediation, and
therefore the conduct of the parties during the mediation had to be
assessed in order to determine whether the settlement agreement should
be set aside.
In relation to privilege, the court recognised that privilege in
mediation proceedings may exist in many forms (e.g. legal advice
privilege, litigation privilege and without prejudice privilege), but it
is yet to be definitively determined whether there is a privilege
attaching to the whole mediation process. In Farm Assist,
the mediation was covered by without prejudice privilege. Since without
prejudice privilege existed as between the parties as opposed to being
the privilege of the mediator, the parties could waive the privilege and
did so by not objecting to the mediator being called to give evidence.
The Farm Assist case shows that mediation may be, at most, a form
of assisted without prejudice negotiation and that the limits of without
prejudice negotiations probably apply equally to mediation. In addition,
the decision warns potential parties to mediation that confidentiality
provisions in a settlement agreement need to be carefully structured.
There may be circumstances, however, in which even the most cautiously
worded agreement may not protect the parties' confidentiality where
allegations are made of serious misconduct, which the court might choose
to examine. Whilst we remain warned of such circumstances, it is also
right to observe that it would be rare for an experienced mediator to
allow the mediation process to be abused in a way that would or could
give rise to such a claim.
It will be interesting to see how the Hong Kong courts will interpret PD
31 and decide on the issues of privilege and confidentiality in relation
to mediations in Hong Kong, and importantly whether or not Hong Kong
will follow the recent UK decisions on mediation discussed above. We
will keep you informed of any developments in this area.
7. Practice Direction 3.3 – voluntary
mediation in s.168A and 177(1)(f) petitions
The Judiciary in Hong Kong has solidified the existing pilot scheme for
voluntary mediation in petitions presented under s.168A and s.177(1)(f)
of the Companies Ordinance. Practice Direction 3.3 (PD 3.3) came into
effect on 1 January 2010 upon the expiry of the related pilot scheme for
voluntary mediation introduced by the old Practice Direction 3.3. PD 3.3
provides for voluntary mediation in s.168A and s.177(1)(f) petitions
where there is no allegation of insolvency concerning the company and no
allegation that the affairs of the company would require full
investigation in the public interest.
Where the petitions are purely disputes between shareholders, not
involving the interest of the general body of creditors of the company
or affecting the public interest, the court seeks to encourage the
parties to consider the use of mediation as a possible means of
resolving their disputes in a cost-effective and more expeditious
manner. S. 177 CO specifies grounds on which a petition may be presented
to the court for an order that a company be wound up under the control
of the court. S. 177(1)(f) CO, on just and equitable grounds, is raised
where (i) the main object of the company has failed; (ii) the company
was formed to carry out a fraud or to carry on an illegal business; or
(iii) the members have formed a company on the basis of a relationship
involving mutual trust, understanding, and confidence which no longer
exists. S.168A CO provides members of a company with an alternative
remedy to winding-up against unfairly prejudicial conduct in relation to
the affairs of the company and s.168A CO is raised where the intention
is for the company to continue business.
Mediation under PD 3.3 is voluntary in nature. Nevertheless, there are
costs sanctions for refusing or failing to mediate if another party
suggests it. Unlike PD 31, no party is required to file a Mediation
Certificate, and potential costs consequences for unreasonably refusing
or failing to mediate do not arise until one party, of its own volition,
files a Mediation Notice stating that he wishes to attempt mediation. At
this point, the others are at risk if they reject the suggestion of
mediation.
Conclusion
Mediation, until now, has not really been part of the litigation culture
in Hong Kong. It is anticipated that new rules will bring important
changes to the way disputes are dealt with in Hong Kong. We expect the
following changes in attitude to occur once the new system has had time
to bed in:
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The court's power to make adverse costs orders where a party
"unreasonably" refuses to mediate should ensure that parties pay
more attention to ADR than has commonly been the case.
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The use of mediation is expected to increase as public confidence in
the process grows and Hong Kong's pool of trained and experienced
mediators grows. This in turn should lead to more cases being
settled at an earlier stage.
The
success of mediation in Hong Kong will largely depend, at least
initially, on whether the judges themselves become more pro-active in
encouraging the process, but more importantly and in the long run will
depend on whether the clients perceive the benefits of mediation and
view the mediation process as an effective means of settlement.
This message was sent by Herbert Smith,
23/F Gloucester Tower, 15 Queen's Road Central, Hong Kong. Tel: +852
2845 6639. Email.
這個信息是由史密夫律師事務所發出。地址：香港皇后大道中15號告羅士打大廈23 字樓，電話：+852
2845 6639，電郵
The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.
Herbert Smith, Gleiss Lutz and Stibbe are three independent firms that have a formal alliance.
© Herbert Smith 2010
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Gareth Thomas 
