Arbitrators Do (Not Always) Know Best: Consent Awards and Due Process

Russian Supreme Court

Arbitral awards on agreed terms (consent awards) by their very nature rarely face problems with enforcement. However, in late 2015 the Russian Supreme court upheld the ruling of the Saint Petersburg Commercial Court refusing enforcement of a consent award rendered by the International Commercial Arbitration Court at the Russian Chamber of Commerce (the “ICAC“).

The dispute concerned two construction companies, a Latvian claimant, Latvijas Tilti, and a Russian respondent, Vozrojdenie, whose contract included an arbitration clause providing for any disputes to be heard by the ICAC.

After having referred the dispute to the ICAC, the parties successfully concluded a settlement agreement and submitted it to the arbitral tribunal with a request to render an award on agreed terms. The parties noted that they wish to proceed without a hearing.

Having reviewed the settlement agreement, the tribunal found that the agreement concerned not only the dispute submitted to the tribunal, but also other disputes arising from other contracts between the same parties. The arbitration at issue did not concern such other disputes. The tribunal decided to render an award only on those agreed terms which related to the claims submitted within the arbitral proceedings and did not include other terms of the settlement agreement in the consent award.

The Respondent did not perform the agreement and the Claimant submitted a request for enforcement to the Saint Petersburg Commercial Court. The Respondent argued that it was not able to present its position on the consent award at the ICAC. The Claimant in response argued that the provisions of the settlement agreement not included in the consent award consisted of promises of the Respondent to pay money for settlement of other disputes.

Failure to include such provisions into the award nowise infringed upon the Respondent’s interests. The Court agreed with the Respondent and refused to enforce the award. In the Court’s opinion, the arbitral tribunal may not record a settlement agreement in part: if it objects to the terms of the settlement, the tribunal should either continue the arbitral proceedings or (even if the parties waived its right to a hearing) discuss with the parties an amendment to terms of the agreement.

As the tribunal failed to discuss such amendment with the parties, the Court refused to enforce the award.

Consent awards: Nature, purpose and role of the tribunal

To understand the intricacies of rendering consent awards, it is necessary to look deeper into their nature and differentiate them from arbitral awards on the merits. It is also important to underline the specific role of the arbitral tribunal.

A great number of cases get settled at various stages of arbitral proceedings. Amicable settlement reduces costs and can benefit both parties. Moreover, it helps retain business relationships.

An overview of major arbitration rules (ICAC, ICC, LCIA) shows that the tribunal may accept or reject the parties’ mutual request to submit a settlement agreement for recording.

The Russian Law on International Commercial Arbitration (the “Law on ICA“) allows the tribunal to refrain from recording the settlement agreement, e.g. if the agreement settles a fake dispute or includes unlawful terms (see in more detail). The tribunal might also find that the settlement agreement does not represent the genuine will of the parties. The German Law on Civil Procedure states that the arbitral tribunal may refuse to record a settlement agreement if it is contrary to ordre public. Such right of the tribunal follows from their duty to render an enforceable award.

Due process and consent awards

The consensual nature of the awards on agreed terms raises some specific procedural issues. Thus, what if the request of the parties for rendering a consent award includes matters outside the scope of the arbitration agreement?

A relevant issue is whether the tribunal may include some but not all terms of the settlement agreement when recording it in the award.

As for the first question, if a consent award covers issues outside the scope of the arbitration agreement, the arbitral tribunals lacks mandate to issue a consent award. Otherwise, the award will remain unenforceable fully or partially.

Russian case law confirms that the lower courts have the obligation to check whether the consent award remained within the scope of the arbitration agreement.

However, when determining this issue, the inherent nature of settlement agreements comes into play. Since mutual concessions represent the core of settlements, recording only a part of the agreement would deprive the settlement agreement of its essence.

Therefore, Russian state commercial courts record or refuse to record settlement agreements in their entirety. The Supreme Commercial Court of Russia confirmed such practice in 2014 by emphasizing the principle of optionality and stating that the court may not amend the settlement agreement on its own motion, and excluded the possibility of partial recording of settlement agreements. However, the Ruling empowers the court to suggest amendments to the parties to the settlement agreement.

In the case Latvijas Tilti v Vozrojdenie, the Supreme Court employed the same logic and emphasized the role of party autonomy and the principle of optionality in international commercial arbitration. The Court upheld the refusal of enforcement as the party against whom the award was rendered couldn’t present its case.

In conclusion, having in mind the approach of the Russian courts to the “inseparability” of settlement agreements, and the fact that the tribunal in the present case did not record the agreement fully and did not notify the parties nor gave them chance to present their case, it does not come as a surprise that the award was not enforced.

This case might serve as a warning to arbitrators to proceed with caution when recording settlement agreements.

Saba Sekulovic

LL.M candidate at Europa Institut, Saarland University

Intern at CIS Arbitration Forum

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