United States: Arbitration Jiu Jitsu: Increasing The Pressure To Settle With A "Sealed Settlement Offer"

Last Updated: May 24 2018
Article by Gilbert Samberg

The cost of arbitration, including attorneys' fees, can be substantial, commensurate with the matters in dispute. Your desire to settle a dispute that is going to arbitration is often as or more substantial. But sometimes your adversary is not willing to settle at your very rational number. What next — increase your settlement offer or reduce your demand? How about using the anticipated arbitration costs to your advantage? Consider incentivizing your adversary with a "sealed settlement offer," which could eventually make a settlement offeree pay a heavy price in such costs for miscalculation or intransigence.

The principal models for this mechanism are (i) an Offer of Judgment under the Federal Rules of Civil Procedure, Fed. R. Civ. P. 68, and (ii) a "Calderbank offer" under English law and practice, Civil Procedure Rules, Part 36. In U.S. federal court practice, if an Offer of Judgment is accepted by an offeree, then there is in effect a settlement. If the Offer of Judgment is not accepted, then

"[i]f the judgment that the offeree finally obtains is not more favorable then the unaccepted offer, the offeree must pay the costs incurred after the offer was made." Fed. R. Civ. P. 68(d).

Of course, the "costs" that are thus affected in federal litigation are relatively minor. (Under the even less punishing New York State law analog, a plaintiff-offeree that rejects such an offer merely loses the right to recover certain costs that it incurs from the date of the rejected offer to compromise. See N.Y. CPLR 3221.)

The "costs" that are affected in English law and practice, on the other hand, are far broader and more substantial. A "Calderbank offer" of settlement is "made without prejudice save as to costs." In practice, the details of a rejected settlement offer are described in a sealed document that is deposited with the court until the conclusion of proceedings other than the court's determination of the costs for which the respective parties will be responsible. Hence, the term "sealed settlement offer." In essence, however, it is the confidentiality of the rejected settlement offer vis-à-vis the adjudicator until the costs allocation stage of proceedings that is important. Then, if a rejected Calderbank offer was as or more favorable to the offeree than the court's eventual judgment, the court would order the offeree to pay all costs of both parties incurred after the date of the offer. (The English rule typically is loser pays, and so this is a potentially robust cost-shifting tool.)

In connection with an arbitration, by analogy, rejection of a settlement offer could be made to affect the arbitral tribunal's allocation of the costs of arbitration, including administrative fees, arbitrators' fees, and attorneys' fees. Such an offer too should be made expressly "without prejudice save as to costs," and should be clear and detailed enough to be accepted or rejected without the need for further clarification. And the offeror should describe its intended use of the offer, if it should be rejected, in connection with seeking an award of costs from the arbitral tribunal. Other suggested offer details are: (i) whether it is in full and final settlement of all claims and counterclaims, or some claims or counterclaims; (ii) whether it is in full settlement also of all costs responsibilities to the date of the offer; (iii) whether interest of any kind was included in the offer; (iv) the duration of the offer (which should be a reasonable period); and (v) that the offer is unconditional.

If the offeree fares less well in the tribunal's award on the merits than it would have if it had accepted the offer, then the offeror could argue that its post-offer costs could have been avoided if the offeree had accepted an inferredly reasonable offer, and that the offeree should be liable for all of the offeror's arbitration costs after the offer date. Thus, the potential cost consequence — often substantial — creates pressure on a settlement offeree.

There remains the question of when and how to deliver a sealed settlement offer to the arbitrators. An arbitral tribunal most often issues an award that includes an allocation of costs. It may be necessary, therefore, (a) to bring the sealed settlement offer to the attention of the tribunal during its deliberations, while proposing to deliver the offer itself to the tribunal when it indicates it has made its decisions on the merits and regarding a money damages award, but before its deliberations regarding an allocation of costs; or (b) to deliver a sealed copy of the rejected settlement offer to the administering organization (or to the tribunal itself) at the commencement of deliberations with an instruction on the sealed envelope regarding its contents and when the envelope is to be opened — i.e., after the tribunal's determination of an award on the merits, including money damages, and before deliberations on the allocation of costs.

It is noteworthy that there are virtually no institutional rules regarding the use of a sealed settlement offer in arbitration. The ICC has acknowledged a sealed settlement offer procedure for this purpose. See ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (March 1, 2017), at ¶¶ 193-196. The ICC Secretariat would take custody of a sealed offer, and would only disclose it to the arbitral tribunal after the tribunal had determined the merits of the case, including the damages to be awarded in that regard, but before it had made a determination regarding an allocation of the costs of arbitration. However, the ICC appears to be alone among the principal administering organizations in acknowledging or formalizing this mechanism.

In circumstances where the controlling arbitration rules do not include a "sealed settlement offer" procedure, or even if they do, the parties can nonetheless themselves agree to a procedure regarding such a settlement offer, including requiring the tribunal to consider a rejected offer in its allocation of arbitration costs.

It would also be reasonable to deter gamesmanship concerning such a mechanism — e.g., it could be agreed that if an offer were rejected, but the offeror had failed at the time of the offer to produce requested evidence (a) that was unavailable to the offeree at the time the offer was open, and (b) that the arbitral tribunal determines was dispositive or substantially important in its determination on the merits, then the offeree should not be penalized by this mechanism.

In any case, an arbitral tribunal arguably may take a rejected sealed settlement offer into account even if it is not compelled to do so by the parties' agreement or by the rules or other guidance of an administering organization. Institutional rules generally give the arbitrators discretion to allocate the burden of the costs of arbitration, including attorneys' fees, among the parties in the absence of a different scheme of cost allocation agreed by the parties. In the exercise of their discretion, the arbitrators are not limited in the factors that they may consider. For example, the LCIA Arbitration Rules (2014) enable an arbitral tribunal to "take into account the parties' conduct in the arbitration, including . . . any non-cooperation [in facilitating the proceedings as to time and cost] resulting in . . . unnecessary expense." LCIA Arbitration Rules 28.4.

Conclusion

While the costs of arbitration generally end up being less than the costs of litigation of the same claims, those costs may be substantial nonetheless. When aiming for a settlement before having to incur such costs, if counsel has made a realistic calculation of the settlement value of the matter, then he/she may leverage the weight of such arbitration costs in the settlement negotiation by means of a sealed settlement offer to put additional pressure on a counterparty to be realistic as well. Ideally, the parties will have agreed on the terms of a sealed settlement offer procedure, even if ad hoc after the commencement of arbitration, but such a mechanism, can in any case be utilized in any arbitral proceeding, likely with significant effect.

Published in Law 360 (May 22, 2018)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Gilbert Samberg
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions