Member Article

A new feature of the civil justice reform system came into effect on 1 January 2010, nine months into the revamp. Steven Yip and James Yeung report that the introduction of mediation, as prescribed by Practice Direction 31 ('PD 31'), is expected to have a profound impact on the way parties conduct cases.

Coverage of Mediation

Basically, PD 31 applies to all civil proceedings in the Court of First Instance and the District Court which have begun by writ or through originating summons but were ordered to continue as if the cause or matter had been begun by writ. PD 31 does not apply to the proceedings in the Construction and Arbitration List or the Personal Injuries List as these courts have had their own mediation procedures for many years (ie PD31, paragraph 2).

Key to Avoid Losing Costs

If the parties are legally represented, they are required to file a Mediation Certificate with the Court at the same time as the time tabling questionnaire – shortly after the close of the parties' pleadings (paragraph 9).

The Mediation Certificate consists of three parts. Under Part I of the Mediation Certificate, the parties have to state whether they are willing to attempt mediation with a view to settling these proceedings. If the answer to the above question is negative, the parties have to state the reasons why they are not willing to attempt mediation.

Part II of the Mediation Certificate requires the solicitors to sign a statement certifying that the signing solicitor has explained to his/her client the availability of mediation, the respective costs of mediation as compared with the costs of the litigation, and that to the best of his/her knowledge and belief that the information stated in Part I of the Mediation Certificate is true and correct.

Part III of the Mediation Certificate requires the parties to sign acknowledgment that the parties understand PD 31 and the availability of mediation to resolve the dispute instead of litigation. The parties also acknowledge that the information set out under Part I is true and correct.

Mediation Notice

A party (the Applicant) may serve a Mediation Notice on the other party (the Respondent) as soon as the Mediation Certificate is filed (paragraph 10). The Mediation Notice should contain information such as:

• whether the Applicant wishes to attempt mediation to resolve all or parts of disputes
  
• the mediation rules the Applicant proposes to adopt
  
• the proposed mediator and the estimated costs of the mediator
  
• the proposed venue of the mediation and the estimated costs of renting such venue
  
• the proposed minimum level of participation to qualify as a sufficient mediation attempt 
  
• the proposed time frame of mediation
  
• whether the Applicant requests or opposes an interim stay of the legal proceedings pending the mediation process
  
• whether the Applicant's willingness to pursue mediation is dependent upon an interim stay of proceedings being granted, and
  
• the proposed payment of fees and costs for the mediation, and whether the same could be recoverable as costs of the proceedings if mediation fails (optional).

In the case Chun Wo Construction & Engineering Co Ltd & Anor t/a Chun Wo-Fujita-Henryvicy Joint Venture v China Win Engineering Limited [2008] HKCU 904, Hon Lam J looked at the question as to whether costs of the mediation can be recovered by the successful party as costs in the proceedings. Hon Lam J held that costs of mediation are generally costs incidental to the proceedings and therefore recoverable by the successful parties. This is however subject to any prior agreement between the parties as to costs of mediation. In this case, the parties adopted the HKIAC Mediation Rules, which provide that each party shall bear its own costs regardless of the outcome of the mediation or of any subsequent proceedings. Hon Lam J therefore found that the parties are bound by their prior agreement on the costs of mediation.

One may take from this case that if a party intends to recover costs of mediation at the conclusion of the proceedings, the relevant costs of mediation clause must be expressly ousted from the mediation rules when the party fills out the Mediation Notice.

Mediation Response

Within 14 days of receiving the Mediation Notice (or such other time as the parties may agree or as the Court may direct), the Respondent should serve a Mediation Response (paragraph 11). Basically, the Respondent should make corresponding responses to the proposals stated in the Mediation Notice. If the Respondent does not agree to any particular items contained in the Mediation proposal, the Respondent should set out his/her own counter proposals in respect of such items for the Applicant's consideration.

It is important that the Respondent should seriously consider the mediation proposal and avoid rejecting the proposal without a convincing reason. In a recent case (Leung Catherine v Tary Ltd [2009] HKEC 1669), the defendants had rejected the plaintiff's invitation to mediate on the basis that "the proceedings had reached an advanced stage" and "the issue of liability is in dispute". The Honourable Mr Justice Fung rejected both arguments and reiterated that an unreasonable refusal to attempt mediation, especially when the other party has made the request, is relevant conduct in litigation in exercising discretion on costs. The consequences of unreasonably refusing to mediate will be discussed in the latter part of this article.

Mediation Minute

The parties should attempt to resolve any differing proposals and record the agreement in a Mediation Minute. The Mediation Minute should be signed by both the Applicant and the Respondent or their respective solicitors (paragraph 12).

Court Directions

If the parties cannot resolve their differences during mediation, they can either make a joint application to the Court for directions or apply individually. The Court is empowered to resolve the differences between the parties as appropriate.

It should be noted that the Court cannot force a party into mediation if that party is not prepared to mediate. The Court is only empowered to order directions as to the logistics of the mediation such as the venue, dates and minimum level of participation etc (paragraph 13).

Interim Stay of Proceedings

In appropriate circumstances, the Court may order an interim stay of proceedings for the purpose of mediation. Having said that, any interim stay ordered should avoid disruption to the milestone dates and postponement of the trial dates (paragraph 16).

Where One or More Parties are Not Legally Represented

The Court may, upon application of either party or by its own motion, give directions that the parties should follow the procedure above to mediate with necessary modifications (paragraphs 18-20).

Unreasonable Failure to Mediate

One of the key features of the introduction of mediation in PD 31 is the costs consequences for parties who unreasonably refuse mediation.

It is expressly stated in the Practice Direction that in exercising its discretion on costs, the Court takes into account all relevant circumstances. This includes any unreasonable failure by a party to engage in mediation where established by admissible materials. Legal representatives should advise their clients of the possibility of the Court making an adverse costs order where a party unreasonably fails to engage in mediation (paragraph 4).

It is expressly stated that the Court will not make any adverse costs order against a party who has engaged in mediation to the minimum level of participation agreed to by the parties or directed by the Court prior to mediation (paragraph 5).

The Court will also not make any adverse costs order if a party has a reasonable explanation for not engaging in mediation. Active 'without prejudice' settlement negotiations, or other forms of engaged alternative dispute resolutions (ADR), may provide for reasonable explanations. Although if such negotiations have broken down, the parties should consider the appropriateness of mediation (paragraph 5).

The UK Court of Appeal decision in Halsey v Milton Keynes General NHS Trust (2004) provides some guidance on what is considered "unreasonable" in the eyes of the Court. The case states that all circumstances need to be considered when determining if a party has unreasonably refused to mediate, including:

• the nature of the dispute
  
• the merits of the case
  
• whether other methods of settlement have been attempted
  
• whether the cost of mediation is disproportionately high
  
• whether mediation will cause delay to the trial, and
  
• whether mediation has a reasonable prospect of success.

For cases listed in the Construction and Arbitration List (where Practice Direction 6.3 applies), it is stated clearly that the court will use its discretion in deciding what constitutes an unreasonable refusal to mediate, however it will not take into account:

1. what happened during the mediation
   
2. why the mediation failed, or
   
3. whether any failure in the mediation may be ascribed to unreasonable conduct by any party.

There is no such section provided in PD 31, however it recognises that the Court will only look at admissible evidence in determining the reasonableness of a party which refuses to mediate. In other words, the Court will not look into evidence protected by legal profession privilege or without prejudice communications between the parties (paragraph 6).

Conclusion

Since 1 January 2010, it has become essential that all parties seriously consider attempting mediation, unless there are strong and compelling reasons not to. In that case, it would be prudent for the legal representatives of the party refusing mediation to set out clearly the reasons for not being willing to mediate. This will invariably be an important element that the Court will take into consideration when the issue of costs arises.

To avoid the awkward situation where you win the case but lose the costs, it is important to treat any mediation proposal put forward by your opponent very seriously.