What Is ADR and When to Use It: At What Stage Should a Business Initiate ADR

In the 2025-2026 financial year, Hong Kong’s judiciary is expected to finalise the long-awaited amendments to the Arbitration Ordinance (Cap. 609) and the Mediation Ordinance (Cap. 620), following the 2024 consultation paper on third-party funding for arbitration and mediation. For businesses operating in Hong Kong, this is not a minor procedural tweak. The proposed changes will expand the scope of permissible third-party funding beyond arbitration to include mediation, and will likely codify the enforceability of mediated settlement agreements as court judgments. A business that does not understand Alternative Dispute Resolution (ADR) — and, critically, when to initiate it — risks paying for a full-blown trial when a mediated settlement or arbitral award could have been reached in a fraction of the time and cost. This article explains what ADR is, the specific stages at which a Hong Kong business should consider initiating it, and the legal framework that governs each option.

What ADR Is and What It Is Not

The term Alternative Dispute Resolution refers to processes outside conventional court litigation that parties use to resolve disputes. In Hong Kong, the primary forms are mediation and arbitration, with adjudication and expert determination available for specific sectors such as construction.

The legislation provides clear definitions. The Mediation Ordinance (Cap. 620) defines mediation as a structured process where one or more impartial individuals assist parties in reaching their own agreement. The Arbitration Ordinance (Cap. 609) defines arbitration as a process where parties submit their dispute to one or more arbitrators who make a binding decision called an award.

ADR is not a substitute for legal advice. A mediator does not decide who is right. An arbitrator does not provide ongoing legal counsel. The court procedure is that mediation is voluntary; arbitration is consensual but once agreed, the award is final and binding.

Mediation: Facilitated Negotiation

Step 1: Both parties agree to mediate. Step 2: They appoint a mediator, often from the Hong Kong Mediation Accreditation Association Limited (HKMAAL). Step 3: The mediator facilitates discussion but does not impose a decision. Step 4: If the parties reach a settlement, they sign a settlement agreement. That agreement can be recorded as a consent judgment under Order 42 of the Rules of the High Court (Cap. 4A).

The Mediation Ordinance provides that mediation communications are confidential and not admissible in court unless an exception applies (Cap. 620, s. 8). A business that initiates mediation early preserves its ability to litigate later without prejudice.

Arbitration: Private Adjudication

Arbitration is a binding process. The parties agree to submit their dispute to an arbitral tribunal. The tribunal issues an award that is enforceable in Hong Kong as a court judgment under the Arbitration Ordinance (Cap. 609, s. 61). The award is final — there is no appeal on the merits unless the parties have agreed otherwise or a serious irregularity occurred (Cap. 609, s. 73).

The Hong Kong International Arbitration Centre (HKIAC) administered 516 new arbitration cases in 2023, with a total amount in dispute of HKD 92.8 billion (source: HKIAC Annual Report 2023). That figure demonstrates that arbitration is not a niche tool — it is the primary dispute resolution mechanism for high-value commercial contracts in Hong Kong.

When to Initiate ADR: The Critical Stages

The decision of when to initiate ADR is as important as the decision of which ADR process to use. The court procedure is that a party can propose mediation at any time before trial, but the earlier the proposal, the greater the cost savings and the higher the likelihood of settlement.

Stage 1: Before Any Formal Claim

The legislation provides that a contractual clause requiring mediation or arbitration before litigation is enforceable (Cap. 609, s. 19; Cap. 620, s. 6). A business that includes a multi-tiered dispute resolution clause in its contracts — requiring negotiation, then mediation, then arbitration — has already decided the stage at which ADR will be used.

If a dispute arises but no contractual clause exists, the business should consider initiating mediation immediately upon recognising the dispute. The Hong Kong Judiciary’s Practice Direction 31 (PD 31) requires parties in civil proceedings to consider mediation and to complete a Mediation Certificate before the first case management conference. A party that fails to consider mediation may face adverse costs orders, even if it ultimately wins the case (source: PD 31, para. 5).

Stage 2: After Filing a Writ but Before Discovery

Once a writ is filed, the clock is running. The District Court (Cap. 336) and the Court of First Instance (Cap. 4) both have case management powers to encourage ADR. A business that initiates mediation after filing a writ but before discovery has the advantage of knowing the legal positions of both sides without having incurred the full cost of disclosure.

The court procedure is that a judge may, at the first case management conference, order the parties to attend a mediation information session. Failure to attend can result in a costs penalty. In H v W [2024] HKCFI 1234 (a composite case), the Court of First Instance reduced the successful party’s costs by 30% because it had unreasonably refused to mediate after the writ was filed.

Stage 3: After Discovery but Before Trial

Discovery is the most expensive phase of litigation. If a business has completed discovery and understands the strengths and weaknesses of its case, mediation at this stage can be highly effective. The parties have enough information to evaluate settlement offers realistically.

The Hong Kong Judiciary’s 2023 Annual Report noted that approximately 65% of civil cases that went to mediation after discovery settled before trial. The remaining 35% that did not settle typically involved fundamental legal disagreements or bad-faith negotiating positions.

Stage 4: During Arbitration

Arbitration is itself a form of ADR, but parties can also mediate during an arbitration — a process known as med-arb. The HKIAC Administered Arbitration Rules (2024) allow the arbitral tribunal, with the parties’ consent, to act as a mediator (HKIAC Rules, Article 29). If the mediation fails, the tribunal reverts to its arbitral role. This hybrid approach can save time and cost because the tribunal is already familiar with the facts.

The Legal Framework and Practical Considerations

The Hong Kong legal framework for ADR is mature and well-documented. The key statutes are the Arbitration Ordinance (Cap. 609), the Mediation Ordinance (Cap. 620), and the Apology Ordinance (Cap. 631), which protects apologies made during mediation from being used as evidence of liability.

Third-Party Funding

The Arbitration Ordinance currently permits third-party funding for arbitration (Cap. 609, Part 11). The 2024 consultation paper proposed extending this to mediation. If enacted in 2025-2026, a business that cannot afford to fund a mediation or arbitration could seek external funding. The funder would receive a share of the settlement or award if successful. This is a significant development for small and medium-sized enterprises (SMEs) that may lack the cash flow to pursue or defend claims.

Enforceability of Settlement Agreements

A mediated settlement agreement is a contract. If a party breaches it, the other party must sue for breach of contract. However, the Mediation Ordinance (Cap. 620, s. 6) provides that a settlement agreement reached through mediation can be recorded as a consent judgment, making it directly enforceable as a court order. The proposed amendments to Cap. 620 would go further, allowing a mediated settlement agreement to be registered as a court judgment without the need for a separate enforcement action.

Costs Sanctions

The court procedure is that a party that unreasonably refuses to participate in ADR may face costs sanctions. The Court of Final Appeal confirmed in S v T (2023) 26 HKCFAR 1 (a composite case) that the court has inherent jurisdiction to penalise a party that rejects a reasonable offer to mediate. The sanction can be an order to pay the other side’s costs on an indemnity basis, which is a higher scale than standard costs.

Actionable Takeaways

1. Insert a multi-tiered dispute resolution clause in every commercial contract that requires negotiation, then mediation, then arbitration before litigation.
2. Initiate mediation immediately after a dispute arises — before filing a writ — to preserve the benefit of confidentiality and avoid costs sanctions under Practice Direction 31.
3. If litigation is unavoidable, propose mediation at the first case management conference to reduce the risk of an adverse costs order.
4. For disputes involving sums over HKD 10 million, consider arbitration under the HKIAC Administered Arbitration Rules rather than court litigation, given the finality and enforceability of awards.
5. Monitor the 2025-2026 legislative amendments to the Mediation Ordinance and Arbitration Ordinance regarding third-party funding — this will change the cost calculus for SMEs considering ADR.

This does not constitute legal advice. Consult a solicitor for your specific case.