Negotiating enforceable settlement
The referral of a dispute to arbitration does not mean parties have to be stuck on a straight track to a hearing with an award issued by the tribunal. Very often, arbitration can lead to or support parties in reaching a negotiated settlement in advance of any hearing or award. In some cases, commencing arbitration can be used as a strategy to encourage parties to negotiate. The fact of arbitral proceedings getting underway should certainly not lead parties to automatically forgo all hopes of settling the dispute.
Arbitration is, of all the alternative methods of dispute resolution, one of the most similar to court-based litigation. Commercial arbitration proceedings often take, from commencement to issuing a final award, as long as and sometimes longer than court proceedings. Of these methods, arbitral proceedings also tend to involve the greatest costs. In similarity with a court based process, the facts and evidence in dispute will typically be scrutinised to a far greater degree than in mediation or other methods of dispute resolution.
Often that passage of time or the scrutiny of evidence can lead parties to reach a negotiated commercial settlement without having to conclude the arbitral proceedings. Provided the proceedings do not have the effect of further entrenching a party’s position, parties may be brought closer together because perhaps, for example, expert evidence has made the outcome of the proceedings more obvious or evidence has come to light which either undermines or bolsters one party’s position. Settlement may also come about for reasons outside the arbitral proceedings, perhaps as part of an overall or ongoing commercial relationship between the parties.
There are also circumstances where arbitration might be commenced for strategic reasons – to be used to encourage or support settlement negotiations for example. The fact of being in arbitration, perhaps combined with the ensuing costs, might encourage a previously reluctant party to engage in settlement discussions.
For whatever reason the parties reach a commercial settlement, they will want to ensure that there is a binding settlement agreement in place before terminating the arbitral proceedings. Both the settlement agreement and the termination need to be binding and enforceable. Of particular note at this point are any cross-border aspects to the dispute or the parties involved.
Ending or terminating the arbitral proceedings
The various arbitral institutions’ rules provide for the settlement of matters before a final award. Generally, this is by way of an order or award, often in a format agreed by the parties as part of a settlement agreement.
Each of the institution’s rules differ slightly.
- UNCITRAL Arbitration Rules
Settlement of a dispute under an UNCITRAL arbitration is dealt with under Article 36 of the 2013 UNCITRAL Rules. Where the parties agree on settlement, the tribunal can either issue an order for the termination or, if requested by the parties and accepted by the tribunal, make an award recording the settlement of the dispute and ending the proceedings.
- ICC Arbitration Rules
As with other institutional rules, there are no express provisions under the 2021 ICC Rules dealing with the particular mechanism for settlements made in arbitration. However, guidance can be found in Appendix IV which sets out various case management techniques that can be used by the tribunal and the parties for controlling time and cost. One technique is the encouragement of settlement through negotiation or other methods (e.g. mediation). If the parties and the tribunal agree, the tribunal may take steps to facilitate settlement provided that every effort is made to ensure that any subsequent award remains enforceable. Often parties may want a stay of the proceedings for a period of time in order to accommodate settlement discussions. Provision for this is reflected in the ICC report on “Controlling Time and Costs in Arbitration” which suggests that parties may request the tribunal to suspend the arbitration proceedings for a specific period of time while settlement discussions take place.
If settlement is reached, Article 33 of the ICC Rules provides that a consent award can be obtained where it is requested by the parties and if the tribunal agrees.
- LMAA Arbitration Rules
The 2021 LMAA Terms provide a slightly stricter regime for the parties regarding settlement. Under Article 19, the parties are under a duty to notify the tribunal immediately if the arbitration is settled or otherwise terminated. The parties must also make provision in any settlement for payment of the fees and expenses of the tribunal and to inform the tribunal of the parties’ agreement as to the manner in which such payment will be made.
- LCIA Arbitration Rules
Similarly to the ICC Rules, Article 26.9 of the 2020 LCIA Rules provides that the tribunal may make a consent award where the parties have reached commercial settlement. To obtain the award the parties must make a joint request in writing and the award must contain an express statement on its face that it is an award made at the parties’ joint request and with their consent. The award need not contain reasons or a determination in relation to the costs of the arbitration and legal costs (per Article 28 of the LCIA Rules). Where the parties do not require a consent award, they must provide written confirmation to the LCIA Court that a final settlement has been reached. The LCIA Court will then discharge the tribunal and deem the arbitration proceedings terminated, subject to payment by the parties of any outstanding costs.
- Stockholm Chamber of Commerce Arbitration Rules 2017
Article 45 of the SCC Rules 2017 provides for the making of a consent award in the event of settlement before a final award. This is similar to the provisions of the ICC Rules.
The terms of settlement
Parties will also need to ensure that the underlying settlement agreement is enforceable. Along with any case specific factors, parties will need to ensure that the following are dealt with:
- Jurisdiction – where are the parties based? If relevant, where are their assets?
- Third parties, particularly where the arbitration was multi-party.
Is settlement contingent upon something? Payment from one party to the other perhaps.
- Does settlement deal with the entirety of the issues in arbitration and under the tribunal’s jurisdiction? Similarly, a consent order or award can only deal with matters under the tribunal’s jurisdiction.
- How will the costs already incurred in the arbitral proceedings be dealt with?
- Are there any parallel proceedings? What will happen with them?
- Is either party subject to requirements to report the settlement? For example, to shareholders.
These are not issues that are usually insurmountable but they should not be forgotten whilst negotiating the terms of a settlement.
If parties are able to benefit from the scrutiny and pressures of arbitration to bring about a negotiated settlement, they should ensure that nothing is lost and that the negotiated settlement is as enforceable as the arbitral award that they will forgo.