REUTERS | Pascal Rossignol

“Settlement farm”: should some settlement agreements be more equal than others? The UNCITRAL’s proposed new instrument on the enforcement of international commercial settlement agreements resulting from conciliation

It is a truism that amicable negotiations without recourse to litigation or arbitration have many advantages and should generally be encouraged as a preferred method of dispute resolution. In this context, conciliation procedures (which include mediation), whereby a third party facilitates settlement negotiations without the power to impose any particular resolution on the parties, provide important means of achieving a settlement.

Whilst there are many obvious advantages to conciliation, a significant disadvantage is the difficulty that parties may face in enforcing any resulting settlement agreement. Without more, a settlement agreement is merely a contract to be enforced in the usual way. However, enforcing a settlement agreement might be just as laborious and costly as trying to enforce the underlying claims in the first place. This potential drawback can discourage parties from settling through conciliation.

In 2014, the United Nations Commission on International Trade Law (UNCITRAL) commenced work on a proposed instrument on enforcement of international commercial settlement agreements resulting from conciliation in order to address this problem and encourage further international development of conciliation. The broad aim is to make it easier to enforce international commercial settlement agreements resulting from conciliation through an international instrument, such as a convention, a model law or a guidance text. The inspiration is the New York Convention.

Similar efforts have also been made at EU level. The adoption of Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters seeks to promote mediation and enforcement of settlement agreements resulting from mediation.

The UNCITRAL Secretariat has recently published a note on the results of the work undertaken to date by Working Group II, which is in charge of this task. One of the issues that the Working Group identified is whether the proposed instrument should extend to settlement agreements concluded in the course of judicial or arbitral proceedings. This issue is of considerable importance, as many arbitrations settle without going to final hearing and award stages.

According to the Secretariat’s note, the Working Group’s current approach seems to be based on a distinction between those settlement agreements that have been recorded in a judicial decision or an arbitral award, and those that have not. In short, the latter should fall within the scope of the proposed instrument, whereas there are views both in favour and against the proposed instrument applying to the former.

In particular, extending the application of the proposed instrument to settlement agreements recorded in a judicial decision or an arbitral award could lead to overlap or conflict with the Judgments Project of the Hague Conference on Private International Law and the New York Convention.

An alternative view, however, is that exclusion of such settlement agreements from the scope of the proposed instrument would deprive the parties of the opportunities to make use of the enforcement regime established by the proposed instrument.

The better view, it seems, is that the distinction giving rise to this debate and the resulting “exclusion” approach are difficult to justify in principle. The act of recording the terms of the settlement agreement in a judicial decision or an arbitral award does not extinguish the parties’ agreement, which continues in force. This is certainly the position under English law:

“The contract of the parties is not the less a contract, and subject to the incidents of a contract, because there is superadded the command of the Judge.” (Wentworth v Bullen (1829) 9 B. & C. 840, at 850.)

If the parties’ agreement continues in force, why should it lose its protections when a judicial decision or arbitral award are “superadded” to it?

Indeed, the “exclusion” approach seems to go against the overall aim of the proposed instrument. Arguably, having an additional means to hold a party to its bargain should be encouraged, whereas the “exclusion” approach seems to force upon a party a choice between two enforcement regimes. Having to make that choice and forego a set of alternative protections will lead to an overall weakening of the innocent party’s position. There is nothing in principle preventing a party from being able to enforce a settlement agreement as a contract, as an award, and under the instrument. Any potential conflicts could well be resolved by the authorities in the enforcing state.

Moreover, in practical terms, a party will most likely opt for a well-established route of enforcing under the New York Convention, rather than a lesser established new regime. This might have the effect of limiting the parties’ use of the proposed instrument.

The question over the proposed distinction between the agreements recorded in an order or an award and those not so recorded also points to the more fundamental question of whether the proposed instrument should apply to all settlement agreements irrespective of whether they result from conciliation. As a matter of principle, it should not matter how the parties came to conclude a settlement agreement. The essence of a settlement agreement is the compromise of the claimant’s claims; this remains true irrespective of the method used to negotiate that compromise. There are therefore, theoretically, good principled arguments to extend the scope of the instrument to all settlement agreements.

There may also be practical difficulties in distinguishing between agreements resulting from conciliation and those that do not. Consider this example: the parties to an on-going arbitration engage in mediation after the first round of submissions, but it is unsuccessful. Several months later, just before the final hearing, the parties, without any further involvement of the mediator, settle their dispute. In the course of the negotiations, they use the materials created for the purposes of the earlier mediation and focus on the issues that they had identified as key. Does their settlement agreement result from mediation? Even assuming that the answer is yes, if the parties then ask the tribunal to record the agreement in a consent award, their settlement agreement might not fall within the scope of the instrument. This seems somewhat unexpected, and shows the difficulties and confusion that will likely arise in practice from imposing distinctions based on process rather than substance (particularly where the process itself is inherently flexible).

Nevertheless, at this stage, the Working Group’s position is that the instrument should be limited to agreements resulting from conciliation only. There may well be good policy reasons for that approach, but the drafters will have their work cut out for them.

King & Spalding Grigori Lazarev

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