If properly drafted, a sealed offer can be a major incentive for parties to settle cases at an early stage of proceedings and can protect them against the costs consequences of arbitration. A sealed offer can therefore be a valuable tool in arbitral proceedings. This update answers some frequently asked questions about sealed offers.
A 'sealed offer' is an offer from one party to another to settle a dispute that is made on a "without prejudice save as to costs" basis.
Parties cannot disclose the details of a sealed offer to the tribunal until after its decision on merits, when the question of costs is to be decided. Although generally not binding on a tribunal, a party's unreasonable failure to accept a settlement offer may be a factor considered by the tribunal when allocating costs. Therefore, aside from the benefit of possibly achieving an early settlement, a well-pitched offer can be an important tactical device.
A sealed offer presents the parties with an opportunity to settle the dispute without fear that the terms of the offer will be disclosed to the tribunal and negatively affect their case in the proceedings.
It may also provide the offering party making the offer with a level of protection from costs consequences. The general rule in many jurisdictions is that costs follow the event and the winner of the arbitration will be awarded its reasonable costs. However, failure to accept a reasonable offer may be grounds for the tribunal to depart from the general rule.
Parties can be incentivised to reach a settlement. Potential costs consequences stated in the offer will oblige the recipient to take the offer seriously, as well as to consider carefully the strength of the parties' respective cases.
Some parties fear that their position may still be weakened if the tribunal becomes aware that an offer to settle the claim has been made – even if the terms of the offer are undisclosed. This concern can be avoided by bifurcating the merits award from the award on costs. The existence of the offer will therefore not be disclosed to the tribunal until after the merits award.
Although the concept of sealed offers is now relatively well known among experienced arbitration practitioners, it is not common to all jurisdictions. If a party's legal representatives or members of the tribunal come from jurisdictions in which such offers are not common, the impact of a sealed offer may be diminished. Advice from local counsel may be needed before making an offer. A party should set out the intended consequences of the offer when making or seeking to rely on it.
If an offer to settle the dispute is accepted, the proceedings are brought to an end on the terms agreed. However, if the issue of costs has not been settled as part of the offer, the parties may ask the tribunal to render an award in respect of costs only and will make submissions on both the allocation and quantum of costs. If a sealed offer is rejected, the parties may refer to that offer in their submissions. The effect of a sealed offer will depend on the tribunal's ruling on merits.
If the party which rejected the offer succeeds in its claim and obtains an award more favourable than the terms of the offer, the tribunal should apply the general rule that costs follow the event. In such a case, the party is viewed as justified in rejecting the settlement offer.
If the party which rejected the offer succeeds in its claim but fails to obtain an award more favourable than the terms of the offer, this may be a reason for the tribunal to depart from the general rule. Instead, the tribunal may order the winning party to pay the other side's costs from the last date on which the offer was open for acceptance.
A sealed offer is usually made by the respondent to the claimant, although a claimant may wish to make a sealed offer in particular circumstances. There is no formal procedure for making sealed offers in arbitration. Traditionally, offers were made by passing a sealed envelope to the tribunal, to be opened once the tribunal had made its decision on merits. This is no longer common practice. Instead, sealed offers are often communicated to the tribunal at an appropriate time. Alternatively, parties may agree that the sealed offer be held by a trusted third party, such as an arbitral institution, which will disclose the offer to the tribunal once a decision on merits has been reached.
Generally, a sealed offer should:
- be in writing and state that it is "without prejudice save as to costs";
- state that the offer is intended to have costs consequences;
- set out the terms of the offer, including the date by which any settlement payment would be made;
- be unconditional (eg, not subject to subsequent board approval);
- state a timeframe within which the offer must be accepted (generally at least 21 days); and
- state whether the offer includes legal costs up to the date of the offer, including arbitrators' fees and expenses and institutional costs.
Parties should also consider requesting separate awards on merits and costs.
The question of costs is usually at the tribunal's discretion. Unless the parties have expressly agreed or are arbitrating under procedural rules or law which provide that sealed offers will have costs consequences, a tribunal is not obliged to take a sealed offer into consideration when allocating costs.
Arbitration agreements are often silent on the allocation of arbitration costs. Most major institutional rules do no more than allow the tribunal to consider the parties' conduct when allocating costs. Few arbitration laws expressly refer to sealed offers (eg, Section 6(2)(a) of the New Zealand Arbitration Act 1996). Some local civil procedural rules for litigation deal with sealed offers (eg, the English Civil Procedure Rules, Part 36). These may be persuasive on a tribunal.
For further information on this topic please contact Matthew Kirtland at Norton Rose Fulbright LLP's Washington DC office by telephone (+1 202 662 0200) or email ([email protected]). Alternatively, contact KC Lye or Tim Robbins at Norton Rose Fulbright LLP's Singapore office by telephone (+65 6223 7311) or email ([email protected] or [email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
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