In Part I of this article last issue, we discussed how mediation, in the form most commonly practised in Hong Kong and other jurisdictions, is beneficial to parties. In Part II, we use a case study to illustrate how mediation can help parties to resolve conflicts.

Let us take an example of a manufacturer’s action against a customer for $X in unpaid garments sold and delivered, bearing the latter’s trade mark. The customer’s argument was that the garments were defective, allowing it to reject them or alternatively counterclaim $Y for damages. It would only pay $X less $Y. The parties negotiated through their lawyers, but were unable to find a number at which to settle.

Underlying interests. During mediation, it transpired the parties had the following underlying interests:

The manufacturer wanted a greater number of buyers and more orders. If the garments were rejected, it would first need to remove the trademark before reselling them. Besides not being paid $X, this process would result in further losses. Without the $X, the entire business would be affected due to cashflow problems.

The customer needed a quick supply of garments for a seasonal market. Maintaining a high standard of garments was vital for its reputation. However, rejecting defective garments carried an inherent risk of their flowing into the market and damaging its reputation if the manufacturer did not remove the trademark prior to resale. Keeping an eye on the market for defective goods would be painful and counter-productive. Its long-term interest was to find a reliable source of supply of high-quality garments. It agreed $X was a fair price for the garments, if they were of the right quality.

Settlement and win-win. Once the parties were willing to move away from their respective positions on being paid $X or $Y, the mediator was able to help them formulate a solution, whereby the customer gave the manufacturer a new order, but at a discounted price to take into account $Y.

The customer would send a representative to provide training to the manufacturer to improve future quality standards. With regard to the existing order, the customer paid $X and arranged for the defective garments to be sold in some remote market.

The final settlement was a win-win situation for both and satisfied the parties’ underlying interests.

The manufacturer:

1. Was paid $X, solving the cashflow problem.

2. Got a new order to keep the factory engaged.

3. Would receive $X-$Y on the new order.

4. Improved the quality of its garments and made it a better supplier.

5. Retained the goodwill of the trademark owner to be in the running for more orders in future.

6. Avoided the costs and litigation risk of going to trial to get a judgment for $X.

The manufacturer was better off than just receiving $X, which was its initial position.

The customer:

1. Paid the aggregate of $X + ($X-$Y).

2. In return, it received one shipment of good garments and another of defective garments.

3. Has hope that, with training, future supplies would be of the right quality.

4. Sees good long-term prospects for the manufacturer to become a reliable supplier, paving the way for a steady supply of garments.

5. Saved the time and effort to find and cultivate a new supplier.

6. Avoided the costs and litigation risk of going to trial to get a judgment on $X-$Y.

The customer finished in the better position than its initial one of either rejecting the shipment, or paying $X-$Y.

Comparison with court judgment. Had the parties gone to trial instead of mediating, they would have spent many months to go to trial, during which time the manufacturer might have faced cashflow problems, and the customer would have probably lost sales as it searched for a new supplier.

No matter how wise and sympathetic the judge, it is not within his power to mandate the parties to enter into a new manufacturing order. Instead, the range of possible court orders are limited to:

1. Customer pays $X (manufacturer wins), or

2. Customer pays nothing (manufacturer loses; customer is entitled to reject the garments), or

3. Customer pays $X-$Y (manufacturer wins; customer also wins counterclaim for damages), and

4. Legal costs to be paid by the losing party.

How mediation help the parties. The above illustrates how flexible and creative mediation is. The process enables parties to discuss with an objective third party to gain a wider perspective than their initial positions and to think more creatively, to generate new options, so that their own underlying interests may be satisfied. As the process is less acrimonious, the parties’ relationship is maintained.

Furthermore, by spending a few days in mediation, the parties avoided months preparing for a trial, and then going through trial where all evidence and legal arguments need to be rigorously presented and challenged, with an expensive lawyers’ bill at the end. Instead of going through the risks of losing their court case, they sensibly decided on a settlement in accordance with their respective underlying interests.

CW Ling, a barrister, is the honorary secretary of Hong Kong Mediation Council (a division of the Hong Kong International Arbitration Centre) and an accredited mediator; Stephanie Cheung, a solicitor, is a council member at Hong Kong Mediation Council and an accredited mediator