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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
What is hybrid Arb-Med?
The hybrid process of Med-Arb is said to have originated in connection with collective bargaining.2 After proving to be a useful dispute resolution device in domestic commerce, it has now acquired a place of some importance in the international business context too. 3
The expressions 'hybrid', 'Arb-Med' and 'Med-Arb' are sometimes used synonymously to refer to any process in which arbitration and mediation are in some way interrelated. However, these terms are sometimes used to refer to distinct processes subject to different conditions. Although in the traditional Med-Arb process the same person serves as both mediator and arbitrator, 4 some Med-Arb rules provide that the same person cannot mediate and arbitrate in one and the same dispute. 5 Med-Arb is also often regarded as a two-stage process in which mediation precedes arbitration. 6
In the present text the terms 'hybrid', 'hybrid Arb-Med' and 'Arb-Med' will be used to denote a process whereby, subject to the parties' agreement, an arbitrator will try conciliation or mediation (these two terms being used interchangeably) on one or more occasions within the course of the same proceedings in order that those proceedings can end successfully either with a settlement agreement or other constructive agreement, or with an arbitral award.
Traditionally, such mixing of methods has been frowned upon in England and Commonwealth countries, 7 whereas in the Asia/Oceania region an increasing number of countries have endorsed this hybrid technique.[Page30:]
Natural justice objection
New Zealand law has taken a stance against hybrid methods, unlike Australia, where the law is more liberal. Under New Zealand law, an arbitral award may be set aside if the High Court finds that it is in conflict with New Zealand public policy. 8 An award is regarded as contrary to public policy if the rules of natural justice have been breached. 9 As the mixing of arbitration and mediation is thought to constitute a breach of natural justice in New Zealand, hybrid techniques are not tolerated there. Under the law of New South Wales, Australia, on the other hand, parties may authorize arbitrators to act as mediators, although the arbitrators remain 'bound by the rules of natural justice' unless otherwise agreed in writing by the parties. 10 Hence, the parties may choose to waive a breach of natural justice and allow the arbitrator to mediate, although there seems to be some unease about making such a waiver.
As for the meaning of natural justice, the following dialogue during a panel discussion on hybrid Arb-Med is of some interest:
Mr Mnookin: Would this not violate natural law in your view?
Mr Shilston: I would have thought it would violate national law in England.
Mr Mnookin: I was saying natural law.
Mr Shilston: Oh, natural law! I don't know what natural law means. I think I know what the rules of procedural natural justice are but if you are talking about natural law in the abstract I really don't know what that means. 11
The renowned twentieth-century jurist, Dr Wu, known for correspondence with Justice Oliver Wendell Holmes, Jr. and other splendid philosophical works, suggested that natural justice and natural law are not immutable, since natural law is 'only an imprint of the eternal law on the natural reason of man, which is finite . . .', 12 and that natural law can be 'couched in such terms as "natural justice and equity", "just and reasonable" or in some other terms, [and] has assumed the humbler role of a supplementary source for filling the gaps of the positive law'. 13
Waiving a breach of natural law is therefore not as outrageous as it may sound.
The IBM-Fujitsu and 'Machinery Joint Venture' cases
The IBM-Fujitsu case
During an interview in February 2003, the then head of Fujitsu's legal and intellectual property division, who had been involved from start to finish in the settlement of the dispute between IBM and Fujitsu, confirmed that the famous IBM-Fujitsu arbitration was in fact an Arb-Med that ended with an arbitral award based on settlement, which defined the parties' future relationship.
The dispute was generated by Fujitsu's creation of IBM-compatible operating-system software in the 1970s. Following developments in US law designed to protect computer software, IBM claimed hundreds of millions of dollars in damages, alleging [Page31:] that Fujitsu's software violated IBM's copyrights. The parties signed a settlement agreement in 1983, under the terms of which Fujitsu was to make a lump sum payment in exchange for a licence from IBM. However, this agreement did not fully cover all details and in 1986 IBM commenced arbitration proceedings on the basis of the arbitration clause in the 1983 settlement agreement.
IBM nominated an arbitrator who, according to Fujitsu, was a railway company director, while Fujitsu chose a professor who taught family law. These two nominated a member of the Canadian parliament as the neutral chairman.
Mediation techniques were employed during the conduct of the arbitration. After the resignation of the chairman of the arbitral tribunal in 1987, the co-arbitrators continued private discussions with each of the parties. They were remarkably successful in creating bases on which the parties were able to decide details relating to performance, including exchanges of programme data. The dispute was brought to an end and the regime created by the arbitrators and the parties became a page of history in 1995.
The Fujitsu officer interviewed favoured arbitration and felt that if mediation alone had been provided for, complex and costly litigation would ultimately have been unavoidable. In this case the parties were wise to have chosen arbitration rather than mediation: their awareness that the arbitrators had the power to render a binding decision if the mediation attempted during the arbitration proceedings failed, was an incentive to make the mediation work. According to the aforementioned officer, the arbitrators were particularly effective in preparing the way for discussions by helping the parties to find common ground and occasionally offering useful suggestions. 14
The 'Machinery Joint Venture' case
Following negotiations lasting more than one year, the representative of an American company, A, and the managing director of an Asian company, B, signed a letter of intent for each party to buy the machinery produced by the other. B was also to grant a licence to A entitling the latter to manufacture two types of B's products. The 35-page document was unusually long for a letter of intent and in places contradicted itself as to the nature of the document. In the preamble to the letter of intent was the statement: 'This is merely a letter of intent.' However, the definitions included the following clause: '"Agreement", when used herein, shall mean this document and the Exhibits attached hereto.' Sentences such as 'A hopes to place orders for products from time to time' and 'It has been discussed that the Agreement might contain the following warranty clauses' could not be considered as giving rise to binding obligations, whereas statements such as 'B shall pay within ten days of the receipt of each shipment' and 'Any dispute, difference and controversy arising out of or relating to this Contract shall be resolved by arbitration under the UNCITRAL Arbitration Rules' presupposed a binding agreement.
A's ultimate purpose was probably to receive a licence to produce the machines K-11 and K-13 developed by B, and it wished to buy certain quantities of those machines only for a limited period of time. According to the letter of intent, A 'will manufacture . . . as they have already fully agreed . . .', although B was under the impression that it was entitled to a long-term (export) supply agreement to sell K-11 and K-13 to A. [Page32:]
C, a third-party European financial institution, wished to intervene in this business between A and B for reasons that were not at all clear. The letter of intent contained a provision entitling C to a certain portion of A's profit and any damages that A might collect from B in the event of a breach by B. C likely wished to dictate certain terms of settlement, although it was not opposed to arbitration.
Relations between A and B were cordial for the first few months but quickly deteriorated thereafter. B insisted that it suffered loss due to A's refusal to receive shipments of K-11 and K-13 that had been specifically manufactured in conformity with A's orders. A denied ever having issued firm orders and claimed damages in excess of US$ 10 million, asserting that B's engineers who had been granted access to A's factories had stolen trade secrets and useful technologies. (This amount was considerably reduced later presumably in order to limit the arbitrator's fee.)
An American lawyer and specialist in resurrecting companies that are no longer going concerns recommended an Asian lawyer, S, to be the sole arbitrator. S accepted and spent more than ten hours going over the documents. At the first meeting between A, B and S, at a peaceful country club, A's lawyer insisted that a statement made by B in one of its faxes, namely 'We are very happy to commit ourself [sic]', reflected B's agreement to grant a manufacturing licence, whereas B cited A's statement 'Do as you please' to deny that B was in any way liable to A.
S felt that the business needs of A and B, as well as the economic environment, had not changed. After some meandering, A and B agreed to let S try mediation. S made two business plans with a local certified public accountant who was skilful in local and international tax planning. He twice tried to mediate, meeting separately with the executive officers of A and B, but those meetings were not successful and he resumed his work as an arbitrator after each meeting. At an early arbitration session, C's representative, speaking as A's advisor, vehemently questioned the impartiality of an Asian arbitrator in a case involving an Asian party. This diatribe paradoxically caused A to become more cooperative with S. The atmosphere gradually improved, even during the resumed arbitration sessions, and A and B eventually executed a document entitled 'Heads of Agreement' with a view to jointly preparing an agreement to buy each other's products and to create a modest joint venture in the spirit of mutual trust and cooperation. The dispute thus ended neither with a formal 'settlement' agreement nor with an 'award' on agreed terms, but with a constructive forward-looking agreement saying nothing about the past.
Advantages and disadvantages
Below is a summary and assessment of views hitherto expressed in many quarters on hybrid Arb-Med.
Advantages
Through mediation, parties can expect to achieve a gentler solution as compared with a black-and-white court decision or arbitral award. It could be thought that such a [Page33:] consideration is of little importance when legal entities (as opposed to natural persons) are involved. The reverse is often true, for parting individuals often never meet again and do not care whether a dispute ends amicably or not, whereas the continuation of commercial relations is an important consideration for legal entities. By using hybrid techniques, arbitrators can try mediation on one or more occasions during the proceedings in an attempt to achieve a constructive and value-creating solution. The benefits of such an approach were seen in the IBM-Fujitsu case. To revive or create cooperative relations is far more satisfying than to decide on the winner and the amount of money receivable. Experience shows that the parties' awareness that a binding award will be rendered if mediation fails tends to increase the chances of success of mediation in Arb-Med as opposed to when mediation is conducted alone.
If the parties are likely to want mediation, hybrid Arb-Med will enable them to save time, effort and money, as compared with separate mediation proceedings before or after arbitration, or mediation proceedings conducted concurrently with arbitration by a mediator who is not the arbitrator.
Even if mediation undertaken in the course of an arbitration fails, the arbitrator is well placed to make a more reasonable and balanced award on the basis of all that has been learned, for instance from separate discussions with each of the parties.
There are times when mediation, which does not require the application of a governing municipal law, could lead to more reasonable solutions, especially when international agreements are involved.
Disadvantages
The following statement reflects a commonly-held view:
The conciliator acquires, in the course of the conciliation proceedings, an intimate knowledge of the dispute at issue, including the strengths and weaknesses of each party's case. Therefore, the willingness of parties to conciliate and, in particular, to confide in the conciliator might be adversely affected if it were possible for the conciliator, in arbitral or judicial proceedings about the same dispute, to act in a capacity where his knowledge could be prejudicial to the interests of a party. 15
Some say that the parties cannot open up to the arbitrator and others that there is a great danger that the arbitrator will use information disclosed in mediation inappropriately in arbitration. In various Asian countries, the tendency of judges to conciliate and decide as part of litigation have happily influenced the conduct of arbitration, proving the highly theoretical claim that hybrid distorts arbitration and mediation to be unfounded. While a scientific study of the history of all cases arbitrated in the past is impossible, it is relatively easier to scrutinize the records of a small but reputable arbitral institution. At the Tokyo Maritime Arbitration Commission, 'arbitrators may mediate between the parties during the course of [Page34:] arbitration . . . [and hybrid] came into practice because arbitrators could be good mediators for the same dispute', 16 and no complaints would appear to have been made regarding their conduct of arbitration.
The view is sometimes expressed that arbitration and mediation, as two entirely different systems, should not be mixed. However, a good marathon runner may be equally successful in triathlon. Mixing is not blending. In hybrid Arb-Med, the arbitrator, with the consent of the parties, acts as an arbitrator or a mediator for distinct periods, announcing clearly when he or she is changing hats.
It is true that mediation is not controlled by the strict rules of evidence that apply to civil procedure. However, this is part of their inherent differences. For those who want strict rules of evidence, litigation is there to oblige.
Related issues: one or more attempts; enforceability
Resorting to mediation after arbitration is rare, although possible. Mediation before arbitration is more common and envisaged in various sets of rules. However, the subject of this article is not the use of mediation and arbitration as separate successive proceedings. Neither the UNCITRAL Model Law on International Commercial Conciliation nor the ICC ADR Rules state that conciliation or mediation can be tried only once for the same dispute, but both presuppose rather formal mediation by providing that mediation is terminated, for instance, by written notification by the neutral that, in his or her opinion, the mediation proceedings would not lead to an amicable resolution. 17 In the IBM-Fujitsu case, many different techniques were tried and in the 'Machinery Joint Venture' case mediation was tried and given up twice and was successful on the third attempt. To achieve such results, a reasonable path to follow would be to start the case under, say, the ICC Rules of Arbitration and try mediation (not under any particular mediation rules), which the ICC Rules of Arbitration do not forbid. 18
Enforceability has sometimes proved problematic. The Guide to ICC ADR contains a lucid statement that 'ADR, as used by ICC, . . . does not include arbitration but only proceedings [such as mediation] which do not result in a decision or award of the Neutral which can be enforced at law'. 19 This is how mediation should be. It is somewhat unfortunate that the Chinese arbitration statute provides that 'a written mediation statement and a written arbitration award shall have the same legal effect'. 20 In the summer of 2003, the Japanese government revealed a plan to make mediation protocols enforceable like arbitral awards, in exchange for the creation of a new regime for government control of ADR activities. 21 Mediation should remain as a device that could lead to enforceable agreements, but not enforceable awards, although notarized deeds, as in the meaning of the German notarielle vollstreckbare Urkunde, used to make the content of settlements enforceable, could be tolerated.[Page35:]
Western and Eastern approaches
As noted earlier, English-law countries have historically been opposed to hybrid techniques that allow arbitrators to use mediation flexibly in one and the same case, with the parties' consent. The German Code of Civil Procedure provides for an award to be made on the basis of a settlement between the parties, but is silent on ending disputes by hybrid techniques, which does not necessarily involve awards. 22 The UNCITRAL Model Law on International Commercial Conciliation basically rules out the possibility of a conciliator acting as an arbitrator in the same case. 23 Such attitudes may be conveniently, although not very accurately, referred to as the 'Western approach'.
More positive attitudes are found in Asian countries. A noteworthy example is the Indian Arbitration and Conciliation Act of 1996, which states:
It is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute and, with the agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement. 24
Chinese law basically approves hybrid. 25 Under the Hong Kong Arbitration Ordinance,
(1) If all parties to a reference consent in writing, and for so long as no party withdraws in writing his consent, an arbitrator or umpire may act as a conciliator . . .
(2) An arbitrator or umpire acting as conciliator (a) may communicate with the parties to the reference collectively or separately . . .
(4) No objection shall be taken to the conduct of arbitration proceedings by an arbitrator or umpire solely on the ground that he had acted previously as a conciliator in accordance with this section. 26
The representatives who gathered in Tokyo in September 2003 for the ADR session of a conference organized by the Law Association of Asia and the Pacific (LawAsia) remarked that hybrid techniques are traditionally accepted or tolerated in Thailand and Indonesia. 27 In those countries, judges freely resort to mediation and arbitrators have no difficulty following such practice. Japan, which did not amend its arbitration statute of 1890 for over 110 years, is expected to have a new arbitration law in 2004, following its acceptance by the Diet in July 2003. Arbitration will thus become a separate statute, breaking the spell of German law, which keeps arbitration law in the Code of Civil Procedure. The Tentative Plan (shian) prepared by the scholars and lawyers of the Arbitration Law Study Group had provided that the law of civil procedure would apply where the arbitration statute is silent, but this provision was fortunately removed towards the very end of the discussions amongst the Group members, before the government began to prepare the official bill. 28 The government drafters used the UNCITRAL Model Law on International Commercial Arbitration as their basis and added many provisions not found in the Model Law. One welcome addition is an article recognizing that 'in the case where both parties consent, the arbitral tribunal or one or two or more arbitrators appointed by them may attempt a settlement of the disputes of a civil nature that have been submitted to the arbitration proceedings'. 29[Page36:]
Conclusion
Up to now, Asian countries rather than countries in the West have created laws more broadly positive to hybrid Arb-Med. This is a sound and welcome tendency, as it enables the use of more constructive and value-creating approaches than pure arbitration or mediation. This paper does not suggest that Arb-Med should be the only desirable method. It simply recommends that hybrid Arb-Med should be more widely recognized as a legitimate and sophisticated method capable of bringing happiness and new values. It cannot be denied that hybrid techniques can still be risky in some countries, due to traditional resistance. As pointed out by Brewster and Mills: 'Events may occur during the mediation phase that could cause the parties later to question the fairness of the process.' 30 As a safeguard, it helps to obtain the parties' consent in writing, although this cannot be entirely foolproof. Those who want to try hybrid Arb-Med are well advised to ascertain that the laws governing the proceedings and possible enforcement are not hostile to Arb-Med. They, for instance, should check that the law does not require formal termination of mediation each time mediation comes to an end in one and the same dispute, although the tribunal and the parties who conduct all basic phases of arbitration in country X, whose law is archaic or objectionable, may well be able to avoid the application of such law by agreeing that a place in country Y, whose laws are more Arb-Med-friendly, is the notional place of arbitration.
In addition to gaining greater legal recognition for Arb-Med, it is especially important to train arbitrators capable of conducting hybrid proceedings, since 'it all depends on the personality of the neutral who needs a very rare skill and a strong character and absolutely needs a very high degree of confidence from both parties'. 31 In mediation, the principal players and negotiators are often the parties. Yet the mediator too negotiates, for instance in discussions with each of the parties separately. This is what happened in the 'Machinery Joint Venture' case, where the mediator prepared the gist of an agreement for the parties. It has been said that '[i]n order to negotiate successful international contracts, the participants need to transcend national and cultural boundaries to forge collaborative relationships'.32 When creating collaborative relationships between people from different backgrounds, an understanding of the business practices, history and literature of the countries of the people involved also proves to be most helpful.
1 The views expressed in this article are those of the author alone and in no way bind ICC or the ICC International Court of Arbitration.
2 J.M. Nolan-Haley, Alternative Dispute Resolution in a Nutshell (St. Paul, Minn.: West Pub. Co., 1992) at 200.
3 More disputes were settled by conciliation than by arbitration in the early days of the ICC Court (see International Chamber of Commerce, Arbitration Report No. 6 (supplement to Journal of the International Chamber of Commerce, No. 10, June 1926) at 1; O. Glossner, 'Zur Vollstreckbarkeit von Schlichtungsergebnissen im internationalen Bereich' in K.H. Böckstiegel & O. Glossner, eds., Festschrift für Arthur Bülow zum 80. Geburtstag (Cologne: Heymann, 1981) at 69), but conciliation then passed into general disuse, not only at ICC. Only 20 years ago, it was discussed as a new method (see G. Herrmann, 'Conciliation as a new method of dispute settlement' in New Trends in the Development of International Commercial Arbitration and the Role of Arbitral and Other Institutions, VIIth International Arbitration Congress, Hamburg, 7-11 June 1982, ICCA Congress Series No. 1 (Deventer: Kluwer, 1983) 145.
4 J.M. Nolan-Haley, supra note 2 at 200.
5 e.g. The Singapore Mediation Centre - Singapore International Arbitration Centre (SMC-SIAC). The SMC-SIAC Med-Arb Procedure, 11, provides: 'The Chairman of the SIAC shall not appoint as arbitrator any person who has served as a mediator in the dispute.'
6 e.g. ibid., 2: 'The parties will proceed to arbitration on the merits of the dispute only when the mediation does not result in settlement.'
7 In the panel discussion appended to R.H. Mnookin, 'Creating Value Through Process Design' (1994) 11:1 J. Int. Arb. 125 at 143, Mr Shilston, explaining English law, said: 'I cannot reconcile the position of a mediator (who had caucused) translated to arbitrator as being compatible with observing the rules of natural justice - or due process.' Mr Mnookin responded: 'In the United States, the AAA Rules permit, with the parties' consent, for one person to play both roles.'
8 New Zealand Arbitration Act (1996), Art. 34(2)(b)(ii).
9 ibid., Art. 34(6)(b).
10 New South Wales Commercial Arbitration Code (1984), s. 27(3). See also L. Nottage, 'Comparing Alternative Dispute Resolution: Australia and New Zealand' (Report to the conference mentioned infra note 25) [unpublished].
11 Panel discussion, supra note 7 at 143.
12 J.C.H. Wu, Fountain of Justice (New York: Sheed and Ward, 1955) at 17.
13 ibid. at 102. As to the Holmes-Wu correspondence, M.D. Howe refers to many letters reprinted in H.C. Shriver, ed., Justice Oliver Wendell Holmes: His Book Notices and Uncollected Letters and Papers (1936) (M.D. Howe, ed., Holmes-Pollock Letters (Cambridge: Belknap Press, 1960) at 120).
14 Readers may care to peruse R.H. Mnookin, 'Creating Value Through Process Design: The IBM-Fujitsu Arbitration' (1992) 47:3 Arbitration Journal 6.
15 G. Herrmann, supra note 3 at 161.
16 T. Tateishi, 'Inquisitorial v. Adversarial Approaches in Japanese Dispute Resolution' (Paper presented at the XIVth International Congress of Maritime Arbitrators, New York, 2001) at 3.
17 UNCITRAL Model Law on International Commercial Conciliation (2002), Art. 11; ADR Rules of the International Chamber of Commerce (2001) [hereafter ICC ADR Rules], Art. 6 (the ICC ADR Rules and Guide to ICC ADR are published in ICC Publication 809, available from ICC, 38 cours Albert 1er, 75008 Paris, France and on the web site www.iccadr.org). The ICC ADR Rules do not contemplate repeated suspension and resumption of mediation. Although these rules can be modified by agreement of the parties (Article 1), substantial modification would need to be made, except to Article 5, which sets forth basic principles applicable both to arbitration and mediation.
18 Commencing arbitration first is often wise to stop time running under an applicable statute of limitation.
19 Guide to ICC ADR, Part 1, Introduction
20 Arbitration statute of the People's Republic of China (1994), Art. 51.
21 Shihôseido Kaikaku Suishin Honbu, Sôgôteki na ADR no Seidokiban no Seibi ni tsuite (2003) at 46.
22 Zivilprozeßordnung, § 1053.
23 UNCITRAL Model Law on International Commercial Conciliation, Art. 12.
24 The Arbitration and Conciliation Act, 1996, s. 30(1).
25 supra note 18 and S.C. Wang, 'Combination of Arbitration with Conciliation and Remittance of Awards' (Report at the Second Symposium on International Commercial Arbitration in the Asia-Oceania Region, Meijo University, 2000).
26 Hong Kong Arbitration Ordinance (2000), s. 2B.
27 Reports of M. Hwang (Singapore) and J. Bunnag (Thailand) at the ADR session of LawAsia's 18th Biennial Conference, Tokyo, 1-5 September 2003, chaired by the author [unpublished].
28 Chusaiho Shian 2001 nen Kaitei (2002) [provisional draft of arbitration law (2001 revision)], pp. 23-24.
29 Chusaiho [Arbitration Law] (2003), Art. 38(4).
30 T.J. Brewster & L.R. Mills, 'Combining Mediation & Arbitration' Dispute Resolution Journal (November 1999) 33 at 35.
31 C. Bühring-Uhle, Arbitration and Mediation in International Business (The Hague: Kluwer Law International, 1998) at 386.
32 L.M. Hager & R. Pitchard, 'Deal Mediation: How ADR Techniques Can Help Achieve Durable Agreements in the Global Markets' (1999) 14:1 Foreign Investment Law Journal 1.