Procedural Flaws in Mediation During Arbitration: Can They Jeopardize an Award's Enforcement? The Gao Haiyan Case

Japanese Attorney at Law - Bengoshi L.L.

• 10 min read

The landscape of international dispute resolution is continually evolving, with parties and practitioners increasingly exploring hybrid processes that combine elements of different mechanisms to achieve efficient and tailored outcomes. One such hybrid is "Med-Arb," where mediation is attempted within the framework of an ongoing arbitration, often with the arbitrators themselves taking on the role of mediators. While potentially offering a faster route to settlement, Med-Arb introduces unique procedural complexities and ethical considerations. A crucial question that arises is whether flaws or perceived improprieties in the mediation phase can taint the subsequent arbitral award to such an extent that its enforcement is jeopardized. The Hong Kong Court of Appeal's decision in Gao Haiyan and Xie Heping v. Keeneye Holdings Limited and New Purple Golden Resources Development Limited (CACV 79/2011), delivered on December 2, 2011, provides significant insights into this issue, particularly concerning the doctrines of waiver and public policy.

I. The Underlying Dispute and the Shift to Med-Arb

The dispute originated from a share sale agreement concerning a Hong Kong company. The sellers, Ms. Gao Haiyan and Mr. Xie Heping (the "Claimants" in the enforcement proceedings, appellants in the Court of Appeal), and the buyers, Keeneye Holdings Ltd. and New Purple Golden Resources Development Ltd. (the "Respondents"), disagreed on the validity of this agreement. The agreement contained an arbitration clause stipulating arbitration before the Xi'an Arbitration Commission in mainland China.

The Respondents initiated arbitration, asserting the agreement's validity, while the Claimants contended it was invalid. A three-member arbitral tribunal was constituted, comprising Mr. Jiang Ping (as Chair), Mr. Zhou Jian (nominated by the Claimants), and Mr. Liu Chuntian (nominated by the Respondents).

During the course of the arbitration, after the first hearing, the tribunal inquired if the parties were amenable to mediation. Subsequently, a mediation attempt was undertaken. This is where the procedural complexities began. The arbitral tribunal reportedly decided that Mr. Pan Jun Xin, the Secretary-General of the Xi'an Arbitration Commission (who was not an arbitrator in this specific case), along with Mr. Zhou Jian (the Claimants' nominated arbitrator), would present a settlement proposal. This selection was ostensibly because both Mr. Pan and Mr. Zhou were based in Xi'an, whereas the other two arbitrators were based in Beijing.

This mediation effort involved a dinner meeting at the Shangri-La Hotel in Xi'an between Mr. Pan, Mr. Zhou, and a Mr. Zeng Wei, who was described as being on friendly terms with the Respondents and a shareholder in an entity related to the underlying transaction. At this dinner, a settlement was proposed whereby the share sale agreement would be upheld, and the Respondents would pay the Claimants RMB 250 million. Mr. Pan and Mr. Zhou reportedly asked Mr. Zeng to persuade the Respondents to accept this proposal. However, the Respondents ultimately rejected this payment, and the Claimants later also informed the tribunal that they would not settle on those terms.

II. The Arbitral Award and Initial Challenges at the Seat

Following the failed mediation, the arbitration resumed. The tribunal eventually issued an award that, in a significant turn, found the share sale agreement to be invalid—aligning with the Claimants' original contention and contrasting with the thrust of the settlement proposal. The award also included a non-binding recommendation that, on grounds of equity and reasonableness, the Claimants should pay RMB 50 million to the Respondents as compensation.

The Respondents were dissatisfied and applied to the Xi'an Intermediate People's Court (the court at the seat of arbitration) to set aside the award. One of their key arguments was that Mr. Pan, a non-arbitrator, had improperly controlled or manipulated the mediation process, constituting a serious violation of law and arbitration rules. The Xi'an Court, however, dismissed the application. It found that the involvement of the Arbitration Commission's Secretary-General in mediation was consistent with Article 37 of the Xi'an Arbitration Commission Rules and that there was no evidence to substantiate the claim that Mr. Pan had manipulated the arbitral decision.

III. Enforcement in Hong Kong: From Refusal to Acceptance

Armed with the award validated at the seat, the Claimants sought its enforcement in Hong Kong. They initially obtained an ex parte order from the Hong Kong Court of First Instance (CFI) granting leave to enforce the award as if it were a Hong Kong judgment. The Respondents applied to set aside this enforcement order, primarily arguing that the manner in which the mediation was conducted demonstrated apparent bias on the part of the arbitral tribunal (or at least Mr. Zhou, one of its members, and by extension, the tribunal) and that enforcing such an award would be contrary to Hong Kong's public policy.

A. Court of First Instance (CFI) – Refusal of Enforcement

The CFI sided with the Respondents and set aside the enforcement order. Its reasoning was multifaceted:

  1. Procedural Irregularities in Mediation: The CFI found that the mediation process had not strictly complied with the Xi'an Arbitration Commission Rules. Specifically, it noted that the mediation was not conducted by the full tribunal or its Chair, there was no clear evidence of party agreement for Mr. Pan's specific role in proposing terms, the timing and venue of the mediation meeting were not clearly agreed by all, the settlement proposal advanced by Mr. Pan and Mr. Zhou had not been pre-approved by the Claimants (whose nominee Mr. Zhou was), and conducting such a sensitive discussion at a hotel dinner with only one side's indirect representative present was "odd."
  2. Apparent Bias: The CFI concluded that a fair-minded and informed observer would have legitimate concerns that the Shangri-La hotel dinner meeting, and the manner in which the settlement proposal was conveyed through Mr. Zeng, implied that the tribunal (or at least elements of it involved in the mediation) was predisposed towards the Claimants. While Med-Arb itself was permissible, the judge emphasized that arbitrators who also act as mediators must be scrupulously careful to avoid any impression of bias, a standard not met here.
  3. No Waiver of Objections: The CFI excused the Respondents' failure to immediately and formally object to these procedural irregularities during the arbitration. It reasoned that raising such objections might have antagonized the tribunal, and if actual bias existed, any objection would likely have been futile and potentially detrimental to the Respondents' case on the merits. Thus, their continued participation was not deemed a waiver of their right to raise these issues at the enforcement stage.

Consequently, the CFI held that enforcing an award tainted by such apparent bias and procedural flaws would be contrary to the public policy of Hong Kong.

B. Court of Appeal (CA) – Enforcement Granted

The Claimants appealed to the Hong Kong Court of Appeal, which, on December 2, 2011, unanimously allowed the appeal, overturned the CFI's decision, and restored the order for enforcement of the award. The CA's reasoning differed significantly from the CFI's on the key issues of waiver and apparent bias.

  1. High Threshold for Public Policy: The CA began by affirming the high threshold for refusing enforcement on public policy grounds, citing the leading Hong Kong case of Hebei Import & Export Corp v. Polytek Engineering Co Ltd (1999). Refusal is justified only if enforcement would "violate the most basic notions of morality and justice" of Hong Kong. Courts should adopt a pro-enforcement stance and be deferential to foreign arbitral awards.
  2. Waiver of Objections – The Decisive Factor: The CA's primary ground for reversal was its finding that the Respondents had waived their right to object to any irregularities in the mediation process.
    • It noted that the Xi'an Arbitration Commission Rules included a provision deeming a party to have waived its right to object if it knew of a rule violation but continued with the arbitration without raising a prompt objection. This was similar to a principle discussed in Hebei.
    • The CA disagreed fundamentally with the CFI's assessment of the Respondents' conduct post-mediation. After the Shangri-La meeting, the Respondents had not only continued to participate in the arbitration by filing further submissions on the merits but had also, in those submissions, made a settlement counter-offer (proposing to pay RMB 60 million, a reduction from the RMB 250 million suggested by Mr. Pan and Mr. Zhou). The CA viewed this active engagement and negotiation as conduct entirely consistent with a waiver of any objections to the earlier mediation process. Merely criticizing the Claimants' alleged bad faith in their written submissions was not a substitute for a clear and timely objection regarding the conduct of Mr. Pan, Mr. Zhou, or the tribunal concerning the mediation.
    • The CA also placed significant weight on the fact that the Xi'an Intermediate People's Court, the supervisory court at the seat of arbitration, had already considered and rejected the Respondents' challenge to the award, which included arguments about the mediation. While not creating a formal estoppel, the CA felt that the CFI should have given greater deference to the seat court's findings, particularly as that court was better positioned to understand and assess local Chinese mediation practices.
    • The CA concluded there was "clear evidence of waiver" by the Respondents.
  3. Apparent Bias – A Secondary (and Negative) Finding: Although the waiver point was dispositive, the CA also expressed its view that, even in the absence of waiver, the circumstances of the mediation did not rise to the level of apparent bias that would render enforcement of the award contrary to Hong Kong's fundamental public policy.
    • It noted that the CFI itself accepted the Shangri-La meeting was part of a mediation attempt and that Mr. Zeng was, in effect, acting as a conduit for the Respondents.
    • The CA was not persuaded that the disparity between the RMB 250 million mediation proposal (a payment by the Respondents) and the RMB 50 million compensation figure in the award's non-binding recommendation (a payment to the Respondents) was a sound basis for inferring bias, as these figures related to different contexts and potential outcomes.
    • Regarding the propriety of the mediation venue (hotel dinner) and the indirect communication through Mr. Zeng, the CA suggested that the Xi'an court, being familiar with mainland Chinese practices, was better placed to judge their acceptability. Significantly, no objection about the venue was apparently raised before the Xi'an court.
    • While acknowledging that Hong Kong mediation practices might differ, the CA concluded that the conduct described did not violate Hong Kong's "most basic notions of morality and justice," especially given the Xi'an court's prior validation of the award.

IV. Key Principles from the Gao Haiyan Decision

The Hong Kong Court of Appeal's judgment in Gao Haiyan offers several important takeaways for participants in international arbitration, particularly where Med-Arb processes are involved:

  1. The Robustness of the Waiver Doctrine: This case powerfully underscores the principle that a party with knowledge of a procedural irregularity in an arbitration must raise a specific and timely objection. If the party fails to do so and continues to participate actively in the proceedings (especially by taking steps inconsistent with an objection, like making counter-offers), it will likely be deemed to have waived its right to challenge the award or resist its enforcement on that ground at a later stage. "Keeping one's powder dry" is a perilous strategy.
  2. The Extremely High Bar for Public Policy Refusal: The decision reaffirms the internationally accepted standard that enforcement of a foreign arbitral award will be refused on public policy grounds only in truly exceptional circumstances. The alleged defect must be so fundamental as to offend the enforcing state's most basic notions of justice and morality. Mere differences in procedural approaches or perceived imperfections that do not meet this high threshold will generally not suffice.
  3. Assessing Apparent Bias in Med-Arb: While arbitrators who also assume the role of mediators must tread with exceptional care to maintain both actual and apparent impartiality, the assessment of apparent bias is highly fact-specific. The Gao Haiyan CA was less inclined than the CFI to find apparent bias from the described mediation activities, particularly when considering local practices and the prior endorsement by the supervisory court at the seat.
  4. Deference to Seat Court Decisions (Limited but Relevant): While an enforcement court is not bound by the decisions of the courts at the seat of arbitration concerning the validity of an award, the fact that the seat court has already reviewed and rejected challenges to the award can be a significant factor weighing in favor of enforcement. This is especially true for allegations of procedural irregularity that the seat court is arguably better positioned to assess within its local legal and cultural context.

V. Navigating Med-Arb: Best Practices for Parties and Arbitrators

The Gao Haiyan case, while ultimately leading to enforcement, highlights the potential pitfalls of informally conducted Med-Arb processes.

For Parties:

  • Clear Protocols for Med-Arb: If agreeing to a Med-Arb process, especially one where arbitrators will also act as mediators, strive to establish clear protocols at the outset. These should cover confidentiality, the use (or non-use) of caucusing (private meetings between the mediator and one party), how information disclosed in mediation will be treated if arbitration resumes, and the precise mechanism for transitioning back to the adjudicative phase.
  • Prompt and Specific Objections: If any procedural irregularities, or concerns about an arbitrator's impartiality or conduct during the mediation phase arise, these must be raised clearly, specifically, and without undue delay to the arbitral tribunal and/or the administering institution. Failure to do so risks a finding of waiver. Documenting such objections is crucial.

For Arbitrators Engaging in Mediation:

  • Upholding Impartiality: The paramount duty is to maintain both actual and apparent impartiality. This requires extreme caution when shifting between the facilitative role of a mediator and the adjudicative role of an arbitrator.
  • Informed Consent: Obtain explicit, informed consent from all parties before undertaking a mediative role. Parties should understand the process, the rules of engagement, and the implications for the ongoing arbitration.
  • Transparency and Procedural Fairness: Ensure clarity regarding ex parte communications (caucusing) during mediation and the confidentiality of information shared. If mediation fails, be transparent about how the arbitration will proceed and ensure that no party is prejudiced by information disclosed in confidence during the mediation phase.
  • Consider Recusal with Care: In some situations, after an intensive mediation effort involving private caucuses and candid disclosures, an arbitrator might consider whether they can genuinely continue to adjudicate impartially or if the appearance of impartiality has been compromised to an extent that recusal might be appropriate. However, recusal itself can cause delay and expense, so this is a complex judgment. Many modern institutional rules and guidelines provide frameworks for arbitrators managing this dual role.

Conclusion

The Hong Kong Court of Appeal's decision in Gao Haiyan v. Keeneye Holdings serves as a critical reminder of the robust nature of the waiver doctrine in international arbitration. Parties cannot afford to remain passive in the face of perceived procedural defects or potential bias, hoping to leverage these issues as a 'silver bullet' at the enforcement stage. Prompt and clear objections are essential to preserve rights.

Furthermore, the judgment reinforces the consistently high threshold that must be met to successfully resist enforcement of a foreign arbitral award on public policy grounds. For those involved in the increasingly popular field of Med-Arb, Gao Haiyan highlights the procedural sensitivities inherent in the process. While offering potential benefits of efficiency and tailored solutions, it demands meticulous attention to due process, transparency, and the unwavering impartiality of those tasked with the dual roles of mediator and arbitrator, to ensure that the resulting arbitral award remains robustly enforceable.