This is the second part of an article written by Poupak Anjomshoaa that appeared originally in International Disputes Quarterly (Winter 2008), available at http://www.whitecase.com/idq/winter_2008_tips/. The first part of this article appeared in the February 2011 issue of this newsletter.

Tip 1: Make the sealed offer as early in the proceedings as possible

The winner will generally be entitled to its costs up to the date when the offer can be accepted; any costs protection that the loser derives from the offer will apply only to those costs that are incurred after that date. Accordingly, the sealed offer should be made as early in the proceedings as possible to derive maximum protection on costs.  

Tip 2: Set out the sealed offer in writing

The sealed offer should be set out in writing in a letter which should be clearly marked “Confidential and Without Prejudice Save as to Costs.” The effect of these words (which should be explained in the letter) is that the letter should not be revealed to the tribunal, save with respect to the question of the costs of arbitration after the merits of the substantive claims have been decided.

Tip 3: State the intended cost consequences of the offer

Any ambiguity in the offer may prevent the tribunal from determining the terms of the offer and thus, whether or not the loser has “beaten the offer”; this could render the sealed offer ineffective. The sealed offer letter should therefore contain an express statement as to the intended costs consequences of the offer, so that there can be no argument subsequently as to whether the sum offered was inclusive or exclusive of costs.

Tip 4: State whether interest and counterclaims are taken into account

For the same reason, to avoid any ambiguity in the terms of the offer, which would risk the tribunal disregarding the offer, the sealed offer should state whether or not it takes interest and any counterclaims into account.

Tip 5: State the period during which the offer remains open for acceptance

The offeree must be given a reasonable period to consider the offer before it is hit by the costs penalty generally attached to a sealed offer. On the other hand, in order to place pressure on the offeree to accept the offer and cease incurring further costs, the offer should not be left open for acceptance indefinitely. Accordingly, the sealed offer should state a reasonable period during which it remains open for acceptance. This will also permit the tribunal to determine the date from which to impose the said costs penalty.

Additional Tips

In addition, the sealed offer should include the date of the offer, the method of acceptance and the deemed date of acceptance, to avoid subsequent argument as to whether it was accepted within the permitted period for acceptance.

Conclusion

In international arbitration, the award of costs is left largely to the discretion of the tribunal and it is difficult to state with confidence exactly how the tribunal will allocate costs between the parties. However, the costs of international arbitration can be significant, with losing parties often having to bear not only their own costs, but also a considerable proportion of the other side’s costs. In this context, the sealed offer can provide powerful ammunition for parties to international arbitration who are forced to defend inflated or exaggerated claims.

The cost consequences of sealed offers in England are largely a matter of logic and common sense; they go to the reasonableness of the conduct of the offeree in declining to accept the offer. The reasonableness of the conduct of the parties is also an important consideration for an international arbitral tribunal when exercising its discretion on costs, therefore it is to be hoped that a tribunal in an international arbitration will similarly give effect to a sealed offer made.

Parties who are at the contract negotiation stage may wish to consider drafting their arbitration clauses in such a way as to anticipate the use of the sealed offer mechanism. For those who are already at the dispute stage, there is no harm in making any “without prejudice” offer of compromise in the form of a sealed offer, so that it can be brought to the attention of the tribunal at the appropriate time and used in argument as to whom should be responsible for the costs of the arbitration, where it was reasonable for the offeree to accept the offer.