As we have previously reported on Global Arbitration News [here], arbitral tribunals most often start their decision-making process for the allocation of costs with the principle that the unsuccessful party has to pay for the successful party (so-called “costs follow the event”). That is the result of the ICC Commission Report “Decisions on Costs in International Arbitration” (“ICC Report”).1 From this starting point, the ICC Report suggests, tribunals factor in other elements before they reach a final decision on the allocation of costs. One of those factors influencing the allocation of costs may be that the successful party inflated its submissions with unnecessary arguments over the course of the arbitration [as we have posted here]. Another adjustment factor may be that the overall successful party declined a settlement offer – a so-called “sealed offer” or “Calderbank offer”. This article presents the concept of Calderbank offers, discusses the results of the ICC Report, and outlines guidelines which might be considered when using Calderbank offers in international arbitration.
“Sealed Offers” and “Calderbank Offers” and their Use in International Arbitration
“Sealed offers” or “Calderbank Offers” are confidential settlement offers which can be disclosed to the tribunal in the cost allocation process, should the offeree reject the offer.2 The tribunal will ignore the Calderbank Offer if the final award proves the offeree right, i.e. if the final award is more beneficial to the offeree than the settlement offer. The tribunal will, however, take the Calderbank Offer into consideration if – with the benefit of hindsight – the offeree should have accepted the settlement offer because it was as good or even better than the final award. The reason why the offeree has to bear the costs of the arbitration proceedings is simple: if the offeree had accepted the settlement offer, the arbitration and the costs of the arbitration could have been avoided. For example, in an arbitration where the claimant sued the respondent for 10 million USD, the respondent offered 5 million USD as settlement sum and – after a lengthy arbitration – the tribunal awarded 5 million USD to the claimant, the claimant should bear the consequences of rejecting the settlement offer. The arbitration proceedings following the settlement offer could have been avoided. Accordingly, a possibly overall successful claimant might get ordered to pay the costs of the arbitration, or at least a part of it.
Although sealed offers or Calderbank offers have their origin in English law, they may also be applied in international arbitration.3 This approach is confirmed by the ICC Report which acknowledges that arbitral tribunals may take into account whether and why settlement negotiations have failed when they eventually decide on the costs.4
The Report does, however, not provide for any empirical numbers, e.g. in how many of the 500 examined cases/awards a party disclosed a settlement offer to the tribunal or was that information eventually taken into account by the tribunal in its decision on costs. However, the fact that Calderbank Offers have moved into the spotlight of international arbitration5 suggests that arbitral tribunals increasingly take them into account in the cost allocation process. Calderbank Offers can be an effective case management tool. If a party runs the risk to bear the costs of the arbitration, a party has a strong incentive to accept a settlement offer. At the same time, if a party sees a chance that it could avoid to bear the costs of the arbitration, a party has an incentive to make a reasonable settlement offer. Therefore, Calderbank Offers could help to avoid lengthy and expensive arbitration proceedings.
Guidelines for the Parties to the Arbitration
So what should parties and arbitral tribunals do if they want to make use of sealed offers or Calderbank Offers either as case management tool or as a factor in the allocation of costs?
(i) Firstly, a party intending to make a settlement offer should use the terms of reference meeting to incorporate the use of Calderbank Offers into the terms of reference.6 Thereby, the consideration of rejected settlement offers by the arbitral tribunal in the decision on costs stands on a sound footing. Surprise decisions shall be prevented. It is not clear if a tribunal could take into consideration Calderbank Offers if the parties have not agreed to their use.
(ii) Secondly, a party intending to make an offer should ensure the offer is labelled as “without prejudice save as to costs” in order to evidence the limited confidentiality of the document.7
(iii) Thirdly, the settlement offer has to be sufficiently precise. The offering party needs to put the tribunal in a position in which it can assess whether the settlement offer was equal or even better for the successful party than the final decision by the tribunal on the merits.8
(iv) After a settlement offer was rejected by the other party, the offering party may ask itself when it should disclose this information to the tribunal. The ICC Report and other authorities are unanimously of the opinion that it should be disclosed after the tribunal has rendered a decision on the merits, but before the decision on costs.9 But how does a party know when the tribunal has reached a decision on the merits, but has not yet decided on the costs? It may either request notice from the tribunal as to when it has decided the merits of the case.10 Or – as the ICC Report suggests – a party may approach the arbitral institution (if it is an institutional or administered arbitration) for it to deliver the offer in a sealed envelope to the tribunal once it has reached a decision on the merits.11
Guidelines for Arbitral Tribunals
The ICC Report suggests that arbitral tribunals may, at their own initiative, suggest at the terms of reference meeting that Calderbank Offers are incorporated into the terms of reference, if the parties themselves do not do so.12 Thereby, tribunals exclude the risk that one party might be taken by surprise that the tribunal considered the Calderbank Offer in its decision on costs. Such an approach is usually also in line with the arbitration rules by most arbitral institutions which encourage tribunals to incentivize the parties to settle.13