Practitioners of international arbitration, whether as party counsel or arbitrators or institutions, are all aware of growing concerns amongst some participants about the increasing (and sometimes disproportionate) costs involved in the process. At the same time, there has been a tendency towards costs being awarded to the successful party, whether the tribunal comes from a civil law, US or English common law or mixed background. There is also a growing recognition of an obligation on tribunals and parties to manage arbitrations efficiently. This is also reflected in some institutional rules and guidelines. This Article suggests that arbitrators should encourage and parties could and should consider as part of the process of the efficient management and cost control of arbitration a greater use of sealed offers. The object of a Sealed Offer will be to be pitched at a level which puts the recipient under real pressure to settle (or risk paying the offeror's costs if the offer isn't beaten in the arbitration).

WHAT IS A "SEALED OFFER"?

In English court proceedings, where it is a principle that the loser pays its own costs and the costs of the winning party, the Courts developed a mechanism forty years ago in the Court of Appeal case of Calderbank v Calderbank [1975] 3 All ER 333, to enable a party, who believed it was likely to have some liability at the end of the day or had other commercial reasons to settle, to make an offer to settle on the basis that this offer was made "without prejudice save as to costs" ("Calderbank Offer"). If the offer was rejected the Judge would not be made aware of it until he had decided the merits of the case (including quantum). The parties would then make submissions on costs. If the offer was the same as the sum adjudged due or more the Court would order the party making the offer (the offeror) to pay the costs only up to the date of the offer and the offeree would be ordered to pay the costs after that date. The rationale for this is that if the offer had been accepted all the subsequent costs could have been saved.

The Calderbank Offer concept was subsequently embodied in the rules of the English Courts and is now found in Part 36 of the Civil Procedure Rules (CPR). Similar provisions are found in other common law court rules including in Singapore, Hong Kong, Australia, New Zealand and in the rules of the Dubai International Financial Centre (DIFC) Courts. They are not found in the United States, where the parties (unless they have agreed otherwise) each pay their own costs, nor in Continental European jurisdictions, nor (except in the DIFC Courts) in most Courts of the MENA region where courts award against the losing party purely nominal legal costs (often only a few hundred dollars) plus court fees (which can be very substantial for large claims in some jurisdictions).

This does not mean that a similar mechanism to the Calderbank Offer cannot be used in international arbitrations seated in jurisdictions with no "Part 36" equivalent. In most international arbitrations the parties have either specifically agreed to legal and other costs being awarded by the tribunal either pursuant to terms in the Arbitration Agreement or subsequently (e.g. in Terms of Reference) or because (most frequently, but not always) the institutional rules to which the arbitration is subject gives the tribunal a discretion or an obligation to award legal and other costs.

So for instance, in Asia, KCAB's International Rules now provide that the Arbitration costs (i.e. arbitrator's fees and expenses and institution's administrative fees) shall in principle be borne by the unsuccessful party, but give the tribunal, taking into account the circumstances of the case, the discretion to apportion such costs (Article 47). Article 48 provides that "unless otherwise agreed by the parties" the tribunal shall similarly decide on the allocation between the parties of necessary costs and expenses including attorney fees. HKIAC and SIAC Rules both give the tribunal a broad authority to award costs.

On the other hand in the Middle East there is a mixed bag of possible options. Both the ADCCAC Procedural Regulations and the DIAC Rules only give the tribunal power to award the Arbitration costs but not to allocate legal fees and the non-tribunal, non-institutional expenses which the parties will inevitably incur. Care needs to be taken by parties, therefore, in dealing with this, possibly by agreement in Terms of Reference. Failing agreement tribunals will be unable to award costs (except those of the institution and the tribunal) and the sealed offer procedure will have no potential application.

In the DIFC, Dubai, DIFC-LCIA Rules follow the principles of the LCIA Rules, so that not only does the tribunal have the power to award the Arbitration costs and legal and other costs but such award "should reflect the parties' relative success and failure…." (Article 28.4).

In Qatar, the position is similar to the Asian Rules referred to above. The QICCA rules (which are loosely based on the UNICTRAL rules) provide that the costs of the arbitration shall in principle be borne by the unsuccessful party. The Tribunal however is given the discretion to otherwise apportion costs if, taking into account the circumstances of the case, it is reasonable to do so (Article 47.1).

ICC and Swiss Rules also give the tribunal discretion to award all costs amongst the parties.

The mechanism that has been developed to give effect to the Calderbank Offer in international arbitration is the "sealed offer". The party making the offer writes to the other side "without prejudice save as to costs" setting out the terms of its offer. The terms must be sufficiently clear and capable of acceptance without needing further details and clarification and must give the other party a reasonable time limit in which to consider and accept the offer. The offeree is, of course, free to accept the offer within the time limit, reject it or ignore it!

General guidelines to make the terms sufficiently clear and capable of acceptance are set out below.

It is probably a good idea to spell out the offeror's intention to bring the letter to the attention of the tribunal in the event that it is not accepted (and after the hearing but before the costs award) and to seek an award of all the legal and other costs of the arbitration against the offeree, if the substantive award does not beat the offer made. It is also a good idea to consider Part 36 CPR when drafting the details to be included in the offer since the notes and provisions of Part 36 have been developed over many years. A quick summary of what else needs to be in the offer is as follows:

  • It must state if it relates to the whole claim or part of it or to an issue or issues and then specify which part or issues.
  • It must state whether it takes into account any counterclaim.
  • It must state that it is in full and final settlement and deal with all costs (e.g costs to be paid by the offeror up to the date of the offer for acceptance of the offer and thereafter by the offeree)
  • It must state whether it includes or excludes interest

PRACTICAL ISSUES AND HOW TO DEAL WITH THEM

When to Make the Offer

It is usually suggested that sealed offers should be made as early in the proceedings as possible and this is good advice because the earlier the offer is made the more costs it may save. On the other hand, a party's perception of its chances of success or the commercial realities may change at different stages of an arbitration and there is nothing to prevent the first sealed offer being made or a new sealed offer or offers being made at any stage at which significant costs could still be saved.

How Much?

Obviously this depends on the offeror's assessment of the merits and quantum of the case. It is probably best to err on the slightly generous side given that the objective ultimately is to make a very substantial costs saving.
Sealed offers can become very complex in cases which involve a number of claims and counterclaims. Such complexity should not, in the writer's view, deter consideration of the making of a sealed offer.

How to Make the Offer

In traditional English Court proceedings out of which the sealed offer process evolved, the Part 36 offer would be drawn to the Judge's attention only on the handing down of the merits and quantum judgment. This is because in English Court proceedings the main judgment is issued first and then the Parties are invited to make submissions on costs. Thereafter submissions would be made and the Judge's attention drawn to the offer. That option does not usually arise in international arbitration because tribunals will often make a final award which includes the costs award. Once the tribunal has issued its award it will be too late for a sealed offer to be considered. Whilst that situation may be capable of redress where the seat is a common law jurisdiction familiar with the Calderbank Offer, that is unlikely to be so in other seats, and in any event, results in a proliferation of the proceedings and further costs.
In Chinney Construction Co Ltd v Po Kwong Marble Factory Ltd [2005] HKEC1042 the offeror had made four Calderbank Offers during the course of the arbitration, none of which were accepted. The tribunal made its award (including costs) unaware of those offers. They were therefore not taken into account. Chinney then asked the arbitrator to reconsider his costs award in the light of the Calderbank Offers. He refused because his mandate had come to an end (he was "functus officio"). Chinney therefore applied to the Hong Kong Court and the Court remitted the award to the arbitrator for reconsideration of the costs award. The Judge decided that under the Hong Kong Arbitration Act the failure of Chinney to bring the Calderbank Offers to the arbitrator's attention in time was a "procedural mishap". Although Chinney were fortunate in securing the outcome achieved, the case emphasises the need to ensure that the tribunal is aware of the offer before it has rendered its final award.

Perceived Issues of Delivering a Sealed Offer to a Tribunal & Suggested Solutions

It is of the essence of the original Calderbank Offer and Part 36 type procedure that the Court is only made aware of the fact of and the terms of the offer at the point when it has already determined the merits and quantum of the claim (except for costs).

That should ideally also be the case in relation to a tribunal's award. In England and some other common law jurisdictions the parties will often request that costs submissions should only be made after the tribunal has delivered the substantive award on the merits and quantum and that costs submissions should then be made. This can lead to delay as well as some additional expense and it is a fact that by far the majority of awards rendered under current international arbitration practice include the tribunal's award on costs i.e. there is usually one final award which covers the substantive case and the costs.

That being so, there is no option but to bring to the attention of the tribunal the fact that a sealed offer has been made and to hand it to the tribunal at the end of the hearing in an envelope containing a copy of that offer. This is done on the basis that the envelope is only to be opened after the tribunal has determined the merits and quantum and is to be taken into consideration in relation to the costs award. The words "without prejudice save as to costs and only to be opened by the tribunal after its determination of the substantive award and immediately prior to its determination of costs" should appear prominently on the front of the envelope.

In a case where there are no counterclaims, it would usually be obvious to the tribunal when the sealed offer is handed up that it is an offer made by the Respondent (although "reverse" Calderbank offers are possible). Concerns are therefore sometimes expressed that a tribunal may interpret this either as some sort of admission of liability or as an indication of some weakness in the Respondent's case. An offeror then worries that this may influence the determination of the outcome of the arbitral proceedings.

In jurisdictions where there is no concept of without prejudice communications I have often seen, both in arbitrations and in Court proceedings, without prejudice communications containing offers which have been made before the appointment of lawyers who knew better, being gleefully drawn to the attention of the tribunal or the judge. In my experience this rarely has any significant impact.

The fact that a sealed offer has been made by a party is in the writer's opinion even less likely to have any real impact on how any reasonable tribunal will determine the substantive issues in the arbitration. A reasonable and experienced tribunal will fully understand that the purpose of a sealed offer is to mitigate risk in relation to the award of costs. It is, unfortunately, a truism, that there are many cases both in Courts and in arbitration where the costs tail wags the dog i.e. ultimately the costs can be almost as substantial or more substantial than the real sums in dispute. Experienced arbitrators will also know that a sealed offer can also help to draw a line in the sand and discourage a Claimant (or counterclaiming Respondent) from running multiple claims and causes of action of dubious merits as a speculative addition to any real claims.

Of course, ultimately a party considering making a sealed offer in international arbitration will need to decide whether to do so or not having taken into account its assessment of the tribunal's background and experience.

The law of the seat does not recognise without prejudice communications

This is a particular problem in most Gulf and other countries in the Middle East (except the DIFC and QFC jurisdictions). As a result, hearing bundles regularly contain without prejudice correspondence and, in the absence of special arrangements, a sealed offer could become an "open offer" because the offeree could choose to reveal it to the tribunal at any time.

This issue can be resolved in a number of ways which include having an agreement between the parties and counsel to respect without prejudice communications (and such agreement can be reflected in a Procedural Order or in the Terms of Reference).

SHOULD TRIBUNALS AND INSTITUTIONS ENCOURAGE THE USE OF SEALED OFFERS?

A sealed offer can and often does cause a Claimant (or counterclaiming Respondent) to consider very carefully the scope of its claims or counterclaims, how to plead them and whether it may be possible to settle the arbitration.

It is and should be the role of tribunals to help the parties to disputes bring them to an economical conclusion. This can, of course, be by rendering final and enforceable awards, but any process which encourages early settlement or at least encourages a reduction in the proliferation and scope of the proceedings in each dispute has to be worth serious consideration.

A number of institutional rules (such as HKIAC, ICC, LCIA and its sister institutions) now place obligations on the tribunal and/or the parties to adopt suitable procedures to avoid unnecessary delay or expense. However, in the more than 100 arbitrations in which the writer has sat as an arbitrator since 2008 in Europe, the Middle East and Asia with both common law and civil law seats, he has seen little evidence of this procedure being embraced by the participants. In cases where he has been counsel, he has seen it used a number of times, but probably not as often as it might have proved to be a potentially effective technique. If tribunals were at least to remind parties of this procedure early on in arbitrations it might cause more serious thought to be given to the process and could therefore be a useful mechanism in managing and controlling the expenses of arbitration.

The article first appeared in Korean Arbitration Review in December 2015