By Edmund Wan and Alex Ma  King & Wood Mallesons’ Hong Kong office.

The 21st century can arguably be described as an era of collaboration and cooperation.  A tear-down of a smartphone or personal computer for example would reveal that its components are sourced and manufactured in multiple countries. These parts are then assembled into the final product and sold worldwide. This is international business at its absolute finest. 

Powering such international businesses are sophisticated technologies which have opened the doors for global advertisement of products, near-instant worldwide communication and prompt product and services delivery. In short, technology has redefined the term “globalism”.

There are however elements of globalism where technology cannot assist (at least not yet).  Due to the nature of international businesses, the contracts entered between the parties are generally quite sophisticated, containing a wide-range of heavily negotiated clauses pertaining to each side’s commercial requirements.   Aside from commercial terms, parties are increasingly aware of the need to have a well-drafted dispute resolution clause.

As with the evolution of technology, the mechanisms for dispute resolution have not remained static and have evolved to cater to globalism as much as possible. In this regard, businesses have found arbitration an excellent alternative to the traditional court proceedings. Arbitrations are generally thought of as being more efficient and flexible than courts, while offering confidentiality to the parties. Another huge benefit of arbitration is that the awards are more readily enforceable than judgments from foreign courts (see our article on the “considerations when enforcing arbitral awards between Hong Kong and PRC”).

The question however is, are we at the end of the evolution for dispute resolution clauses?  Can arbitration clauses (or indeed any alternative dispute resolution clauses) still be improved upon?  The Singapore International Mediation Centre (“SIMC”) and Singapore International Arbitration Centre (“SIAC”) certainly thinks so. Together, the SIMC and SIAC have proposed to introduce a new dispute resolution option combining the benefits of arbitration and mediation clauses.  It is called the Singapore Arb-Med-Arb Protocol (“ AMA Protocol”).

The multi-tiered AMA Clause allows for parties opting to resolve disputes by way of arbitration to resolve their differences by mediation before resorting to arbitration. A multi-tiered clause is seen as a form of arbitration agreement which merges mediation and arbitration procedures so as to enhance the chance of resolving disputes between the parties through meaningful and constructive discussions and to encourage peaceful negotiations before a full blow arbitration proceeding.

In this article, we will highlight our thoughts on the benefits and pitfalls of the AMA Clause.  But first, we think it would be helpful to briefly set out the principles on arbitration and mediation (for the readers who want to go directly to the discussion of the AMA Clause, please skip to sections 2 and 3 below).

Basic principles of arbitration and mediation

1. What is arbitration?

Arbitration is an alternative form of dispute resolution which parties can resolve their disputes in private and no submissions are required in the courts. It is a consensual process as parties would have agreed before or after the dispute arises before the disputes are referred to arbitration.

Arbitration is referred as “a process used by agreement of the parties to resolve disputes. In arbitration, disputes are resolved, with binding effect, by a person or persons acting in a judicial manner in private, rather than by a national court of law that would have jurisdiction but for the agreement of the parties to exclude it.”[1]

The arbitration agreement is usually incorporated as part of the contract from which the dispute arose. However, absence of an arbitration clause in the contract does not bar the parties from choosing this form of dispute resolution as an arbitration agreement can also be made after a dispute has arisen. Arbitration agreement can also be replaced by mutual agreement.

In Hong Kong, arbitral awards made can be enforced in all state parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. For arbitral awards related to the Mainland China, they are covered by an arrangement between Hong Kong and the Mainland for reciprocal enforcement of arbitral awards and an arrangement between Hong Kong and Macao for reciprocal recognition and enforcement of arbitral awards.

2. What is mediation?

Mediation is often referred as a structured process where two or more parties to a dispute attempt to resolve the dispute by themselves, on a voluntary basis, to reach an agreement on the settlement of their dispute with the attendance of a mediation.[2] Often a professional mediator will be engaged to help both sides to reach compromise or settlement. In Hong Kong, after the Civil Justice Reform in 2009, parties to court litigation are commonly required to attempt mediation.

Mediation can take any format, as long as parties attempt to reach settlement. The most common format is that:

  • The parties sign a confidentiality agreement to agree to that mediation.
  • The mediator usually asks the parties to prepare a confidential mediation statement that outlines their cases and their supporting evidence, and their goals of settlement.
  • All parties (usually together with their legal representatives) and the mediator would then meet in a conference. Both sides are given an opportunity to make a statement in the presence of all parties.
  • Parties may then be separated to discuss in private with the mediator, who then help the parties to identify and align their common interests or issues, understand the parties’ respective concerns, and explain the next steps (arbitration or litigation) if mediation is unsuccessful.
  • If the parties achieve resolution, a settlement agreement will be drafted and signed by the parties. If the parties fail to reach a settlement / resolution, they will be entitled to start or continue with any arbitration or litigation.

A mediated settlement agreement is no different from any other commercially negotiated agreement, and hence may include commercial terms which a court or arbitral tribunal cannot award.  For example, it may include terms which provide for the parties’ future dealings or cooperation.

3. What are the key differences?

In an arbitration, the arbitrator(s) look into the legal rights and wrongs of a dispute and makes a binding decision on the parties. An arbitral award is enforceable like a court judgment handed down by a judge, except that the proceedings are confidential.

In a mediation, the mediator helps parties to resolve and settle their disputes by listening to the respective interests and concerns of the parties and help narrow the differences. The mediator does not make any decision in respect of the dispute.

A successful mediation would result in two parties signing an agreement between themselves, agreeing to terms reached by consensus. If such terms provide for the parties future dealings/cooperation, then they may well fall outside the boundaries of what a party is entitled to at law.  This allows the mediator and the parties to be more “creative” in terms of reaching an acceptable solution.

SIAC-SIMC Arb-Med-Arb Protocol

1. What is the SIAC-SIMC Arb-Med-Arb Protocol?

Under the AMA Protocol, parties who have commenced arbitration are mandatorily required to refer their disputes to mediation. If the mediation is successful, parties can then record their settlement agreement before the arbitral tribunal as an enforceable covenant award.

The AMA Protocol is available to all dispute submitted to the SIAC for resolution under the Arb-Med-Arb Clause (“AMA Clause”) and/or any dispute which parties have agreed to submit for resolution under this AMA Protocol. Under the AMA Protocol, parties agree that any dispute settled in the course of the mediation at the SIMC shall fall within the scope of their arbitration agreement.

2. How does Arb-Med-Arb work?

Arb-Med-Arb under the SIAC-SIMC Arb-Med-Arb Protocol works as follows:

Mediation will not interrupt the progress of an arbitration as the arbitral proceedings will be stayed.

3. What is the Singapore Arb-Med-Arb Clause?

In order to submit to the AMA Protocol, parties would need to incorporate the AMA Clause to their commercial contracts. The standard wording for the AMA clause is as follows:

“All disputes, controversies or differences (dispute) arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (SIAC) for the time being in force.

The parties further agree that following the commencement of arbitration, they will attempt in good faith to resolve the dispute through mediation at the Singapore International Mediation Centre (SIMC), in accordance with the SIAC-SIMC Arb-Med-Arb protocol of the time being in force. Any settlement reached in the course of the mediation shall be referred to the arbitral tribunal appointed by SIAC and may be made a consent award on agreed terms.”

The AMA Clause provides that in the case of disputes, the parties have agreed to resolve the matter by arbitration in Singapore. Also, after the commencement of the arbitration, the parties should attempt to reach settlement through mediation at the SIMC. For any settlement reached under the mediation, it shall be referred to the SIAC appointed arbitral tribunal and made as a consent award.

The AMA Clause does not necessarily need to be contained in the original contract between parties. Parties can adopt the AMA Protocol after a dispute has arisen. Both parties’ consent would be required.

The arbitrator and mediator in the AMA proceedings are separate persons to ensure the impartiality of the arbitration and mediation proceedings. The AMA Protocol however does allow the parties to agree on the appointment of one individual to conduct both the arbitration and mediation proceedings. This is not recommended as there is a risk of prejudice from the arbitrator who may have formed his own judgment by being a witness of the discussion and negotiation of the parties during mediation.

The SIMC and SIAC encourages parties to adopt the AMA Clause, which is effectively a multi-tiered clause in their contracts so as to enhance the dispute resolution mechanism built into the contract.

Our take on the AMA Protocol

Like the advancement of technology, the legal field is keen on developing to cater for the ever-changing commercial world.  The AMA Protocol is one such example and represents the latest development to meet the demands of global businesses.

In our opinion, the combination of mediation and arbitration is an attractive proposition for any party contemplating utilizing alternative dispute resolution.  The most appealing benefit to the AMA Protocol is that any settlement reached by the parties in a mediation would be enforceable as it is recorded as a consent award by the arbitral tribunal.  This is particularly beneficial for parties seeking enforcement in a foreign country as the award would be recognized as SIAC awards and enforceable in contracting states under the New York Convention. However, it is worth noting that typical arbitration awards include only monetary awards, injunctive reliefs and specific performance orders. Whereas for mediation, as it is a consensual process where parties are free to agree and negotiate what they would like to achieve, it is not necessarily the case that the mediation results would be in line with the typical arbitration awards.

Consider the following scenario where, by the mediation process, the parties come to an agreement which include certain commercial arrangements concerning the future dealings between the parties. This may include the procurement of third parties to carry out certain acts or that a particular company should be wound up or deregistered.  If this AMA Protocol is to be followed, the arbitral tribunal would then be required to convert such commercial arrangement into a consent arbitral award.  This will not be possible for such a commercial arrangement because this is not something which a party is entitled to at law and the tribunal simply has no power to make such an award.  To do so would render the award open to challenge and be set aside or unenforceable or liable to be set aside.

In conclusion, we think that the AMA Protocol is viable as an alternative option to the current selection of alternative dispute resolution mechanisms and provides a real prospect for parties to negotiate in a commercially friendly and constructive manner before a full blown arbitration. However, the parties should bear in mind that in order to have a settlement which can be turned into a consent award and hence enforceable, there will be limitations as to the terms of the settlement.  Nevertheless, the parties should not let this become a bar to discussions on other commercial terms which may lead to settlement, but just be mindful that they may not be made into a consent award.

[1] Halsbury’s Laws of England

[2] Article 3 of the Directive on Cross Border Mediation in the European Union, Directive on Certain Aspects of Mediation in Civil and Commercial Matters, European Parliament and of the Council Directive 2008/52/EC (21 May 2008), [2008] OJ L 136/3.

 

King & Wood Mallesons LLP is a foreign law practice and is not qualified to advise on the laws of Singapore. This publication is intended to highlight potential issues and provide general information based on our understanding, and not to provide legal advice. You should not take, or refrain from taking, action based on its content. If you have any questions, please speak to your King & Wood Mallesons contact.