On 12 April, the Hong Kong Court of First Instance of the High Court refused, on public policy grounds, to enforce an arbitration award made by the Xi’an Arbitration Commission in which one of the arbitrators acted as both arbitrator and mediator.
In Gao Haiyan and another v Keeneye Holdings Ltd and another, the court held that events that transpired at a dinner at the Xi’an Shangri-La Hotel three months before the arbitration award was issued would cause a fair-minded observer to apprehend a real possibility of bias on the part of the arbitral tribunal. Following case precedent, the court therefore ruled that the award made by the Xi’an tribunal should not be enforced.
Gao Haiyan and her husband had signed a share transfer agreement agreeing to transfer shares to Keeneye Holdings. Gao subsequently claimed the agreement was void due to duress and misrepresentation. Keeneye commenced arbitration proceedings and two arbitration hearings took place, in December 2009 and May 2010. After the first hearing, the parties agreed to have members of the tribunal act as mediators as well as arbitrators, in a so-called arb-med process.
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The tribunal ultimately found in favour of Gao, ordering that the share transfer agreement be revoked and making a non-binding recommendation that Gao pay Keeneye RMB50 million (US$7.7 million)in compensation. Gao sought to enforce the award in Hong Kong, but Keeneye applied to set aside the court order enforcing the award on the grounds of bias, citing the dinner in the Shangri-La.
At the hotel, in March 2010, the secretary general of the Xi’an Arbitration Commission and the arbitrator nominated by Gao had dined with a representative of Keeneye. Keeneye’s representative was informed that the tribunal intended to find in Gao’s favour, and thus suggested that Keeneye pay compensation amounting to RMB250 million to settle the case. Keeneye refused, following which the tribunal issued the award in favour of Gao.
In the Court of First Instance in Hong Kong, Keeneye argued that the meeting in the Shangri-La amounted to improper interference by the secretary general with the tribunal, and that the tribunal had wrongly shown favouritism in its award in Gao’s favour.
In its judgment, the Hong Kong court emphasized that there is no problem, in principle, with one person acting both as a mediator and an arbitrator in the same proceedings. However, the circumstances of this case would cause a fair-minded observer to conclude “that the underlying message being conveyed … was that the tribunal favoured the applicants” (i.e. Gao and her husband).
In the course of its judgment, the court noted that there will always be a high risk of a mediator-turned-arbitrator appearing to be biased. This may be one reason why combined arbitration and mediation remains relatively rare in common law jurisdictions. The above case serves as a timely reminder of this, given that the new Hong Kong Arbitration Ordinance, which allows for arb-med in Hong Kong, came into effect on 1 June.
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