How Not To Do Arb-Med-Arb

The recently reported Australian case of Ku-ring-gai Council v Ichor Constructions Pty Ltd [2018] NSWSC 610  (8 May 2018) provides a useful lesson in how not to conduct the hybrid Arb-Med-Arb process, from which (I hope) we might learn how to make it work properly.

Ichor contracted in 2011 to build a swimming pool for the Council. Both parties claimed damages from the other. An arbitrator was appointed in March 2016. The hearing began in March 2018 and ran for 12 days. To quote the judgement: “It would seem that a very considerable bulk of documentary material was inflicted on the Arbitrator”. Before lunch on the last day the Arbitrator asked whether the parties would consent to his putting forward a proposal for settlement “under the cloak of mediation”. They agreed. After lunch, as the Judge found, the Arbitrator drew attention to and obtained the parties’ written consent for him to act as mediator, as required by s.27D of the Commercial Arbitration Act, 2010 (NSW).

In “a less formal room”, the Arbitrator said the matter was complex and that he would be very busy with other commitments before he could render a decision. He suggested to both parties that they drop their claims and that each walk away and “stomach its cost”. This was rejected. The arbitration hearing then resumed with closing submissions.

The parties, their lawyers and, so it appears, the Arbitrator had overlooked the need under the legislation for further written consent to be given after the termination of the mediation before the arbitrator may continue to arbitrate and that, in the absence of such written consent, the arbitrator’s mandate is terminated and a substitute arbitrator must be appointed.

Ichor did not know of the requirement for further written consent until 4 days after the last day of the hearing and it then protested. In seeking to salvage the arbitration so as to avoid having to start all over again with another arbitrator, the Council contended that what took place did not constitute mediation; if it did, the transcript of the resumed arbitration amounted to written consent; alternatively that the parties could and did derogate from that requirement; and that Ichor waived its right to object to the Arbitrator’s having resumed the conduct of the arbitration or was estopped from asserting that the requirement for written consent was not met. The judge rejected all these contentions and, in doing so, made some interesting comments on what mediation is.

The Council submitted that the Arbitrator had not acted as mediators frequently do. He had not held discussions with one party in the absence of the other nor had he received any confidential information from either party. What he put to them was no more than a judge might say in open court in urging them to settle. The judge noted that the legislation contemplates that the mediator may communicate with the parties collectively or separately and may but will not necessarily obtain confidential information from a party during mediation proceedings. Also, that in s.27D “mediator” includes “a conciliator or other non-arbitral intermediary between parties”, so the essential contrast between the functions of arbitrator and mediator is that the mediator is acting in a non-arbitral capacity, as the judge found was the case when the Arbitrator put his specific proposal to the parties.

The judge noted that mediation has been defined by the National Alternative Dispute Resolution Advisory Council as:

 “a process in which the parties to a dispute, with the assistance of a neutral third party (the mediator), identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, but may advise on or determine the process of mediation whereby resolution is attempted.”

 My own preferred definition is simply “a process whereby a neutral person helps disputants to reach their own uncoerced agreement”. This works well even where the mediation is court-ordered or required by legislation, since the essential feature is that the outcome, as distinct from entry into the process, is voluntary.

The judge found that, before they went into the less formal room, the parties were aware that they were going to attempt mediation with the Arbitrator as mediator and that what happened thereafter did not follow the course that mediations frequently do, in that there were no individual sessions and the Arbitrator did not convey proposals from one side to the other. Nonetheless the Arbitrator put a specific proposal to the parties and because it was rejected the mediation came to an end. The judge said it was very difficult to conclude that everyone was mistaken as to what was to happen and did happen, once the consent to mediate had been signed and before the Arbitrator purported to resume acting as arbitrator.

S.27D of the NSW Commercial Arbitration Act was designed to address legitimate concerns about neutrals “switching hats” so that enforceable arbitral awards may be rendered even though an arbitrator has mediated in the way most of us do, including meeting separately with the parties and receiving confidential information. The requirement of parties’ written consents after the mediation terminates before the arbitration may resume and the requirement, if such consents are given, of disclosure to all parties by the arbitrator of relevant confidential information, are critical to this. Clearly, no-one sensible would give consent unless they know what confidential information the arbitrator intends to disclose. This leads to the conclusion that any mediation conducted by the arbitrator should take place as early as possible in the process, so as to reduce the quantum of costs at risk of being wasted if the required consents are not forthcoming.

In the Ku-ring-gai case the Arbitrator was the one to draw attention to the need for consent before he mediated but neither he nor anyone else noted the need for the second consent before he resumed the arbitration. In the result, the dispute has been set back to where it was in March 2016 when the Arbitrator was appointed; the parties have incurred significant costs and must start all over again with another arbitrator; and the Arbitrator has been relieved of the burden of having to render a decision.

As happened in relation to the notorious Hong Kong case of Gao Haiyan & Anor. v Keeneye Holdings Ltd & Anor CACV No.79 of 2011, this case plays into the hands of those who cannot bear the idea of arbitrators mediating and mediators arbitrating. I suggest this is because few arbitrators are trained as mediators and few mediators are trained as arbitrators. They inhabit different worlds and arbitrators may see their market shrinking as mediation takes off. For some interesting comments on that case see The Arb-Med hybrid in Hong Kong – Much ado about nothing?

Hybrids and Inadmissibility

The practice of combining mediation and arbitration by the same neutral has been traced back to ancient Greece and Ptolemaic Egypt.

Facilitative (as distinct from evaluative) mediation uncovers the underlying interests of the disputants and allows them to craft their own solution. Arbitration determines the legal issues but may leave those interests unaddressed. Combining the two processes can bring a definite end to the dispute, save time and money, achieve creative solutions, and preserve or restore relationships.

Combining arbitration and mediation with the same neutral

Legislation in Australia, Hong Kong and Singapore allows arbitrators to mediate in the same dispute (including by holding separate private sessions with the parties) and, if the mediation is unsuccessful, to resume the arbitration. The legislative framework involves the following:

  • the disputants must consent in writing to refer their dispute to arbitration;
  • they must consent in writing to the arbitrator mediating;
  • if the dispute is not settled entirely in mediation, they must give their further consent in writing to the arbitrator resuming the arbitration; and
  • if the disputants do consent to the arbitrator resuming the arbitration after having mediated, the arbitrator must disclose to the disputants any confidential information learned during the mediation which the arbitrator considers material to the arbitration.

While this last point may at first fill people with horror, the legislation is designed to ensure that disputants know the case they have to meet and that any arbitral award following this procedure will be enforceable. Hence, disputants may opt out after the mediation phase if they feel uncomfortable with the arbitrator resuming the arbitration, in which case someone else will be appointed to arbitrate. This “opt-out” idea and other safeguards to ensure an enforceable arbitral award were put forward by Lord Woolf in the Final Report of the CEDR Commission on Settlement in International Arbitration, November 2009.

The following rules of thumb might assist disputants and their advisers in making this hybrid process work best.

Finding the right dispute

Choose the kind of dispute which has discrete legal issues to be arbitrated (such as intellectual property infringement and validity) and which also holds out the possibility of creative solutions that no arbitral award could provide (such as licensing the intellectual property with territorial and product restrictions – often permissible under competition laws). It is these creative possibilities that should be the primary focus of attention in the mediation phase. As so often in the field of ADR, it is a question of what Harvard Emeritus Professor Frank EA Sander calls “fitting the forum to the fuss”. The credibility of mediation participants should not be at issue in the arbitration and, when mediating, a facilitative rather than an evaluative approach is essential.

Timing

Do not go too far down the arbitration path before agreeing to the arbitrator mediating. The best time is as soon as the issues to be arbitrated have become clear. This avoids unnecessary costs of the arbitration should the mediation be successful and prevents a party from getting rid of an apparently unsympathetic arbitrator by agreeing to mediate, refusing to settle and then refusing to consent to the arbitrator resuming the arbitration.

Laying down the issues

Ensuring the issues to be arbitrated are clear before the mediation begins will enable the arbitrator to appreciate whether or not any confidential information learned in the mediation is material to the arbitration.

Keeping information confidential

Most important: before deciding after the mediation whether or not to consent to the arbitrator resuming the arbitration, find out in private session what confidential information of yours, if any, the arbitrator proposes to disclose to the other parties and obtain the answer in writing. If the answer makes you uncomfortable, refuse to consent to the arbitrator resuming the arbitration. The information will remain confidential and someone else will arbitrate.

Although there has been little resort to hybrid processes in Australia hitherto, the legislation should prompt more disputants and their advisers to put their toe in the water, knowing they can withdraw after the mediation phase if they feel uncomfortable with the mediator arbitrating. The legislation should also prompt facilitative mediators to learn to arbitrate, arbitrators to learn to mediate and advisors to learn to choose the process to suit the dispute and the disputants. The outcome should be the swifter, cheaper and more complete resolution of disputes, as distinct from the mere settlement of cases.

The mediation “black hole”

In their enthusiasm to support the use of mediation for the resolution of disputes, Australian state and federal legislatures have frequently enacted provisions designed to prevent evidence being given of communications made at court-ordered mediation, often in terms that override both the common law exceptions to the “without prejudice” rule and statutory provisions designed to codify that rule, with consequences that may not have been intended.

The twin policies said to underlie such legislation are to encourage use of mediation and to discourage “satellite litigation”. Both appear seriously flawed by allowing mediation in court-ordered mediation (as distinct from private mediation) to become an evidentiary “black hole” in circumstances which prevent justice being done.

The common law has long encouraged parties to attempt to resolve their disputes by according “without prejudice” privilege to communications made in the course of settlement negotiations. The public policy justification for this rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability. The rule is no longer limited to admissions and is now very much wider than it was historically.

Over time, the courts have developed, and continue to develop, numerous judge-made exceptions to the rule, designed to enable justice to be done and to avoid mediation and bilateral settlement negotiation becoming an evidentiary “black hole” on the basis that the privilege arising from the cloak of “without prejudice” must not be abused for the purpose of misleading the court. Thus, mediation under the common law “without prejudice” rule is not a “no-go area” for all purposes.

Circumstances in which Australian courts have recognised the common law exceptions include:

  • where the court would otherwise be misled, for example by excluding evidence which would rebut inferences upon which a party seeks to rely;
  • where a party seeks to rely on what was communicated during mediation in order to prove that a settlement was reached, or that a settlement that was reached should be set aside, for example by reason of alleged misrepresentation, oppression or unconscionable conduct;
  • where a party sues his or her solicitors over their conduct in the mediation; or
  • where those solicitors join counsel and the mediator seeking contribution as joint tortfeasors.

The same approach has been applied when holding admissible communications within mediation alleged to constitute misleading and deceptive conduct in contravention of statutory competition and consumer protection law, on the basis that a party cannot, with impunity, engage in misleading or deceptive conduct resulting in loss to another under the cover of “without prejudice” negotiations.

It is difficult to see how justice can be done when such matters are in issue, unless all the evidence is available to the court. It is also difficult simply to brush aside as “satellite litigation” the circumstances recognised in common law as exceptions to the “without prejudice” rule, as if no issue of injustice warranting judicial remedy could ever arise in the course of mediation.

It therefore appears that, contrary to the policy of encouraging mediation, the legislation governing court-ordered mediation, by placing parties in a worse position than in privately agreed mediation or bilateral negotiation, could have the opposite effect of discouraging resort to court-ordered mediation.

It is hard to argue with the proposition that misbehaviour should see the light of day, whether occurring in mediation or not. As John Locke put it in 1690: “Wherever law ends, tyranny begins.”

Another example of the problems that can arise from a legislated mediation “black hole” is the California Evidence Code, which prohibits evidence of what transpired in any mediation, not solely court-ordered mediation. It has been found by the California Supreme Court to preclude evidence in a legal malpractice action of private communications between attorney and client in the course of mediation.

In February 2011 an Australian advisory committee, the National ADR Advisory Council, recommended that there would be significant benefit in having uniform federal, state and territory legislation that clearly provides for the inadmissibility of ADR communications as the general rule, subject to leave being granted by a court in the public interest. In deciding whether leave should be given, a court or tribunal should be required to take into account:

  • the general public interest in favour of preserving the confidentiality of ADR communications; and
  • whether leave is being sought to advance a party’s interests or rights with respect to a matter falling within an exception to confidentiality.

In other words, in order to eliminate mediation “black holes” and allow judges to continue to develop and apply exceptions to the “without prejudice” rule in the interests of justice, statutory attempts to codify and override the common law rule should be replaced by such provisions.

This would enable judges to strike the right balance between competing public interests by continuing, where appropriate, to protect the integrity of mediation and other ADR processes, while at the same time avoiding injustice by granting leave, where appropriate, to introduce evidence of what happened.

In Hong Kong, the Mediation Ordinance achieves this result by providing that mediation communications are confidential and may be disclosed or admitted into evidence only with the prior leave of the Court or tribunal, which must take into account, inter alia, the public interest or the interests of justice.

It would be unethical for a lawyer to recommend court-ordered mediation to enable a client to engage in improper conduct with impunity. Yet avoiding court-ordered mediation may enable clients to invoke the court’s assistance when the other party engages in such conduct.