PD 31 was issued by the Hong Kong Judiciary as part of the Civil Justice Reform with the objective of assisting the Hong Kong Court to discharge its duty of active case management in facilitating the settlement of disputes by encouraging parties to use ADR where appropriate. The effect of PD 31 is that all parties involved in civil proceedings  begun by writ in the Hong Kong Courts, with the exception of proceedings in specialist lists, must explore mediation before pursuing litigation. A party who does not wish to engage in mediation will be required to explain the reasons why.

As a means of ensuring compliance with the directions, the Court has a discretion to make an adverse costs order against a party who has unreasonably failed to engage in mediation. This means that a successful party in a litigation may not be awarded all or any of his costs if the Court considers that his failure to mediate was unreasonable.

As to what amounts to "unreasonable" failure to engage in mediation is not defined in the practice direction. However, the Court will not make an adverse costs order against a party on the ground of unreasonable failure to engage in mediation where the party has engaged in mediation to the minimum level of participation agreed to by the parties or as directed by the Court, or alternatively the party has a reasonable explanation for not engaging in mediation.

The guidelines to PD 31 suggest that a minimum level of participation in mediation requires an agreement between the parties as to the identity of the mediator and the terms of his or her appointment, agreement as to the rules applicable to the mediation and participation by the parties in the mediation up to and including at least one substantive mediation session (of a duration determined by the mediator) with the mediator.

In the mean time, the proceedings may be temporarily stayed to allow parties to mediate as long as it does not disrupt "milestone dates" in the proceedings, i.e. major dates in the proceedings as set by the Court for, inter alia, case management conference, pre trial review and the trial.

Voluntary Mediation for Petitions under Companies Ordinance

Between 1 October 2008 and 30 September 2009, under an old PD 3.3 the Judiciary ran a pilot scheme for voluntary mediation in respect of petitions presented under Section 168A or petitions for winding up under section 177(1)(f) of the Companies Ordinance.

A petition under section 168A is presented by a member of a company who seeks an alternative remedy to winding up of the company against conduct which is unfairly prejudicial to the interests of its members. A petition under section 177(1)(f) seeks an order for winding up based on just and equitable grounds, such as when the objects for which a company was formed have either become impossible to achieve or have been abandoned, or where the company that was formed as a quasi-partnership from which the shareholder/partners expected to financially benefit but which expectation has been defeated.

The scheme only applies to petitions where there is no allegation of insolvency concerning the company and no allegation that the affairs of the company would require full investigation in the public interest.

With the expiry of the scheme, a new PD 3.3 is issued to supersede the old PD 3.3. With effect from 1 January 2010, the regime for voluntary mediation for petitions under sections 168A and 177(1)(f) of the Companies Ordinance under the new PD 3.3 is now firmly established.

Thus, where the petitions are purely disputes between shareholders, not involving the interest of creditors or affecting public interest, parties are encouraged to use mediation as a possible additional means of resolving their disputes in a cost-effective and more expeditious manner.

As with PD 31, PD 3.3 also provides that an adverse costs order may be made against a party who has unreasonably refused or failed to attempt mediation.

Conclusion

Both PD 31 and PD 3.3 will change the litigation culture in Hong Kong. The Court's power to make adverse costs orders will likely encourage parties to seriously consider mediation as a means of alternative dispute resolution. In any event, it is tactically advantageous and sensible to explore mediation even early in the litigation process because most commercial disputes are suitable for mediation. A fruitful mediation will bring about huge savings in terms of cost and time for all parties.