Notes. Can a Mediated Settlement Become an Enforceable Arbitration Award?

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Loraine Underwood
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1 Notes Can a Mediated Settlement Become an Enforceable Arbitration Award? THE MEDIATION Institute of the Stockholm Chamber of Commerce has recently adopted a new set of Rules. 1 Article 12 of these Rules provides that: Upon reaching a settlement agreement the parties may, subject to the approval of the Mediator, agree to appoint the Mediator as an Arbitrator and request him to confirm the settlement agreement in an arbitral award. The concept of a mediator subsequendy acting as an arbitrator is not new. 'Med-arb' is an established ADR technique, particularly in the United States. The usual case of 'med-arb', however, involves one person being appointed as mediator and, if mediation fails, either the mediator or another person subsequendy arbitrating the dispute. The novelty of the new Stockholm Rules is that the mediator does not become an arbitrator following a failed mediation, but rather following a successful mediation. It is easy to see why the Stockholm Chamber of Commerce's idea would be attractive to parties in a dispute. Not only would tiiey benefit from the speed and costefficiency of a mediation, but they would also have the chance to come out of the mediation with an arbitral award which would be internationally enforceable under the New York Convention. The New York Convention is, indeed, a major reason for parties to international disputes to select arbitration over litigation in national courts. The enforceability of arbitral awards in most corners of the globe under the New York Convention is the reason why it has become standard for arbitration rules to provide for the possibility of setdements to be confirmed in an award. The UNCITRAL Model Law 2 provides, at Article 30, that 'if, during arbitral proceedings, the parties setde the dispute, the Arbitral Tribunal shall terminate the proceedings and, if requested by the parties and not objected to by die Arbitral Tribunal, record the settiement in the form of an Arbitral Award on agreed terms'. Article 31 provides that'... such an award has the same status and effect as any other award on the merits of the case'. Rules of the Mediation Institute of the Stockholm Chamher of Commerce adopted on 1 April UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law 21 June ARBITRATION INTERNATIONAL, Vol. 16, No. 1 LCIA,

2 82 Arbitration International Volume 16 Number 1 Article 26 of me International Chamber of Commerce Arbitration Rules 3 provides that: 'if the parties reach a settlement after the file has been transmitted to the Arbitral Tribunal in accordance with Article 13, the settlement shall be recorded in the form of an award made by consent of the parties if so requested by the parties and if the Arbitral Tribunal agrees to do so'. Rule 43(2) of the Arbitration Rules of the International Centre for Settlement of Investment Disputes 4 provides that: 'If the parties file with the Secretary-General the full and signed text of their settlement and in writing request the Tribunal to embody such settlement in an award, the Tribunal may record the settlement in the form of its award'. This trend is reflected in section 51 of the English Arbitration Act 1996, which provides that: (1) if during arbitral proceedings the parties settle their dispute, the following provision shall apply unless otherwise agreed by the parties. (2) the Tribunal shall terminate the substantive proceedings and, if so requested by the parties and not objected to by the Tribunal, shall record the settlement in the form of an agreed award. (3) an agreed award shall state that it is an award of the Tribunal and shall have the same status and effect as any other award on the merits of the case. It is therefore not uncommon for an arbitral tribunal to make an award in circumstances where it does not itself decide the case on the merits. In such circumstances, however, the arbitrator is merely exercising the jurisdiction which has been conferred upon him by the parties. Does it make any difference that, in the case of the Stockholm Mediation Rules, this authority is not given until the parties have, in effect, resolved their dispute? The key to this question lies in the requirement under the New York Convention and under the Arbitration Act that there be an agreement to arbitrate. Article 2 of the Convention provides that 'Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration'. Section 6 of the Arbitration Act provides that '... 'arbitration agreement' means an agreement to submit to arbitration present or future disputes (whether they are contractual or not)'. Rules of Arbitration of the International Chamber of Commerce in effect from 1 January Rules of Procedure for Arbitration Proceedings under the International Centre for Settlement of Investment Disputes revised on 26 September 1984.

3 Notes 83 In the Stockholm case, however, the appointment of the arbitrator only arises once the difference has been resolved. There is therefore no agreement to submit a dispute to arbitration. The Stockholm approach is, however, not without some support. Karl Mackie and others have suggested that: Where arbitration proceedings have not been commenced, it is still possible to use the Arbitration Award to record a mediated settlement. This may be a useful technique where concern over enforcement exists. The parties, having reached agreement in the mediation, appoint the mediator as arbitrator, purely for the purpose of recording the terms of settlement. Once appointed, the mediator (now arbitrator) can issue and publish a consent award encompassing the agreed terms of the settlement'. J Stephen York suggests that: Given that arbitration awards are... the subject of international recognition treaties (for example, the 1958 New York Convention of the Recognition of Foreign Arbitral Awards), it may be useful to consider whether the [mediation] settlement should be embodied in an arbitration award by consent; this should be straightforward in those jurisdictions where the mediator can be the arbitrator without objection (i.e. Bermuda, Singapore, Hong Kong and Australia), and the parties may wish to agree that the laws of one of those jurisdictions should be the law of the settlement agreement. As an alternative, an administrative body could be asked to supervise the giving of an arbitral award by a person other than the mediator following such a mediation settlement. 6 Neither of these suggestions, however, address the following point identified by Mustill and Boyd: 7 It now appears to be setded law that a procedure cannot be an arbitration unless there is a formulated dispute in existence at the time when the arbitrator is appointed; nor, equally, can an agreement be an arbitration agreement unless it contemplates that a dispute will already exist when the appointment is made. In other words, one cannot validly agree to appoint an arbitrator where there is nothing for him to arbitrate. Accordingly, Mustill and Boyd also state that: Where a dispute was at one time in existence, but has subsequendy been resolved by agreement, the arbitrator's jurisdiction to award upon it depends upon the timing of the agreement. If it took place before the arbitrator was appointed, he has no jurisdiction, for this appointment relates only to current disputes. 9 Accordingly, while the matter does not appear to have been direcdy addressed in case law, it is submitted that enforcement of an award made in the circumstances envisaged by Article 12 of the Stockholm Rules would be susceptible to challenge on the basis that the newly-appointed arbitrator had no jurisdiction since the dispute had been resolved before the arbitration agreement was either entered into ' Mackie, Miles and Marsh, Commercial Dispute Resolution (Butterworths 1995), p Practical ADR (FT 1996), p Mustill and Boyd, Commercial Arbitration (Butterworths 1989, 2nd ed.). 8 ibid. p ibid. p. 128.

4 84 Arbitration International Volume 16 Number 1 or invoked. If recognition and enforcement of an award is to be obtained under the New York Convention, the party applying for such recognition and enforcement must produce both the award and the original arbitration agreement. 10 Recognition and enforcement may be refused under Article V of the New York Convention where the arbitration agreement is not valid under the law to which the parties have subjected it. The other main criteria on which recognition and enforcement of arbitration awards may be refused under the New York Convention, as set out in Article V, are procedural illegality and public policy objections. Article V(2) of the Convention provides that: recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (a) the subject matter of the difference is not capable of settlement by arbitration under the law of that country... Here again there is an obvious objection to the type of award envisaged by the Stockholm Rules. Although the purpose of this provision is to address the arbitrability of the subject-matter of the difference, it is implicit that a 'difference' exists. A settlement agreement, by definition, is not 'a difference' and as such is arguably 'not capable of settlement by arbitration'. It may indeed be asked whether an agreement made as a result of mediation procedures should be given any higher status than an agreement made between the parties by themselves. One reason which may be suggested, as outlined earlier in this note, is that in many arbitrations the parties come to an agreement which is subsequendy turned into a consent award. Why should there be a distinction between an award made by consent by an arbitrator and an agreement reached by consent before a mediator? Alan Redfern 11 has suggested that the answer to this lies in the fundamental difference between arbitration and other means of dispute resolution, such as conciliation. Arbitration is a judicial or 'quasi-judicial' process, which is intended to lead to a determination of the dispute. The task of the arbitral tribunal is to make a decision, which is expressed in the form of an award, and which is binding upon the parties. The conciliator, by contrast, does not set out to give a binding decision, but rather tries to persuade the parties to reach an agreed settlement. This is not to say, however, that it is impossible for parties to mediate and still obtain the benefits of an arbitral award. As noted above, arbitral awards are commonly made in circumstances where the outcome has been agreed between the parties rather than imposed by the arbitrator. There is no reason why such an agreement should not have been reached by the parties with the assistance of a mediator. The same is true of litigation. It is common for parties to litigation to settle their dispute and for the Court to make a consent order recording the terms 10 New York Convention, Article IV(l)(b). 'Enforcement of International Arbitral Awards and Settlement Agreements', Arbitration, May 1988.

5 Notes 85 of their settlement. 12 Indeed, the English Commercial Court has for some time ordered stays of proceedings to enable the parties to go away and mediate. Where that mediation is successful the Court will embody the agreement in a consent judgment. However, in both cases the judicial or arbitral body is appointed before the settlement is reached, and therefore has been given authority to give judgment or make an award in respect of the dispute. Appointing an arbitrator after reaching a settlement agreement is perhaps analogous to asking a judge to give judgment by consent where no proceedings have been issued, or rather issuing proceedings after compromising a dispute, which would be an abuse of process, since there would be no cause of action. THE SOLUTION If parties wish there to be an arbitral award to reflect a settlement agreement reached by mediation, they should appoint an arbitrator prior to commencing their mediation. This conclusion says something about the nature of mediation itself. Whereas litigation and arbitration are alternatives to one another, mediation has the capacity either to be a dispute resolution method in its own right or to be used in conjunction with litigation or arbitration. Mediation, ultimately, is negotiation, and negotiation is used either to avoid litigation or arbitration, or to short-circuit it. If no judgment or award is required, mediation can help the parties to avoid litigation or arbitration. If a court order or arbitral award is desirable, mediation does not pretend (or should not pretend) to offer these outcomes, butit can short-circuit the processes and help parties to get their order or award much more quickly and at a fraction of the cost of proceeding to a trial or arbitral hearing. Staffing the Dispute Resolution The Stockholm Rules envisage that the mediator himself will be appointed arbitrator. This raises the 'med-arb' question of whether a mediator should become an arbitrator, or whether a different individual should be used. Putting it another way, if, as we suggest, parties appoint an arbitrator first and then commence mediation, can their appointed arbitrator himself conduct the mediation? The answer to this second question must be 'y es '- The parties are free to appoint whomever they like as a mediator, and the fact that he has been appointed arbitrator but taken no steps as an arbitrator should not preclude him from mediating. The key questions which do arise, however, are: (1) If the mediation succeeds, could there be any objection to the arbitrator (who has acted as mediator) making a consent award; and Commonly called a Tomlin order in the English litigation context.

86 Arbitration International Volume 16 Number 1 (2) If the mediation fails, could there be any objection to the arbitrator making an award on the merits, having acting as mediator?

6 86 Arbitration International Volume 16 Number 1 (2) If the mediation fails, could there be any objection to the arbitrator making an award on the merits, having acting as mediator? It is unlikely that a challenge to a consent award as suggested by the first question above would succeed. The arbitrator has the authority to make an award since the arbitration agreement has appointed him to do so, and he is empowered to embody a settlement of the parties in a consent award. Although he has acted as mediator, the settlement remains a settlement of the parties. If, however, the mediation fails, can the arbitrator (who has acted as mediator) continue as arbitrator and make an award on the merits? This is a topic which has been written about at length. Section 33 of the English Arbitration Act requires an arbitral tribunal to act fairly and impartially. It remains unclear whether the English courts would determine that an arbitrator's award was made impartially if the arbitrator had attended private caucus sessions as a mediator. Furthermore, section 24 of the Arbitration Act provides for the removal of an arbitrator where 'circumstances exist which give rise to justifiable doubts as to his impartiality'. Such considerations may have an effect on the international enforcement of an award made by a mediator-arbitrator. Article V(2)(b) of the New York Convention provides that recognition and enforcement of an award may be refused in a country where 'the recognition or enforcement of the award would be contrary to the public policy of that country'. It may well be argued that a mediator making a binding decision is contrary to natural justice, and hence to public policy. If, however, it is desired that the same individual be both arbitrator and mediator, the best way to prevent such questions of impartiality and public policy arising is for the parties to confirm, following the failure of the mediation but before the arbitration is begun (or strictly speaking resumed, since the arbitrator will already have.been appointed),-that'they remain happy-for"him 'to-act as arbitrator. Such a right of veto should ensure that the parties are willing to confide fully in the mediator, knowing that he will only become the arbitrator if tiiey agree for him to do so at the time. It may, however, be more desirable to appoint a separate individual as mediator and to return to the appointed arbitrator to obtain a consent award following a successful mediation, or an award on the merits following a failed meditation. This avoids any question of impartiality. It also avoids the possibility that, notwithstanding the parties' right of veto, a mediator who might later become an arbitrator might not gain the same level of trust from the parties, resulting in the mediation being less likely to succeed in achieving a settlement. A further advantage of using two individuals arises from the fact that the arbitrator's power to confirm the agreement as an award is subject to his consent. This 'health-check' of the settlement by someone other than the mediator is perhaps particularly valuable where the mediator is not a lawyer but rather an expert in the particular field with which the dispute is concerned. The obvious disadvantage of using two individuals, however, is that the costs of doing so are likely to be higher than if only one person needs to consider the case.

7 Notes 87 Summary of 'med-arb' possibilities The 'Stockholm' Option: mediate successfully and then appoint the mediator as arbitrator to make a consent award. As outlined above, such an award seems unlikely to be effective at least for the purposes of international enforcement under the New York Convention. The settlement would rather fall to be enforced in the same way as any other mediation agreement, or for that matter, any agreement. Med-Arb: mediate and appoint the mediator as arbitrator in the event of a failure to reach a settlement. This does not present the same problems regarding the arbitration agreement, since there is an existing dispute capable of arbitration at the time the arbitrator is appointed. There may however be potential difficulties regarding impartiality and natural justice if the same individual is used, though these can be overcome by appointing the arbitrator or confirming his appointment following the failed mediation. In any event, this does not achieve what the Stockholm Rules aim to provide for, namely an award in circumstances where the mediation has succeeded. Co-Med-Arb: As above, but with a different person becoming arbitrator in the event of a failed mediation. This avoids any question of impartiality or natural justice, but again does not provide for an award in circumstances where the mediation has succeeded. Arb-Co-Med-Arb: In our view this is the only safe way of providing for the possibility of embodying a successful mediation settlement in an arbitral award. The arbitrator should be appointed, a mediation should then take place either with the arbitrator or another individual acting as mediator. If the mediation succeeds, the arbitrator can reflect the agreement in a consent award. If the mediation fails, the arbitrator can make an award, his appointment'hawng been confirmed by consent following the failed mediation. Christopher Newmark * and Richard Hill * * ' Partner of Baker & McKenzie, London; Registered Commercial Mediator with Centre for Dispute Resolution. * * Associate of Baker & McKenzie, London.

Thought on Developing Convention on Enforceability of Settlement. Agreements Reached Through Conciliation

Thought on Developing Convention on Enforceability of Settlement Agreements Reached Through Conciliation Audry Hong Li, Partner of Zhong Lun Law Firm * The UN Commission on International Trade Law ( UNCITRAL