Sealed offers in international arbitration

Frequently asked questions

If properly drafted, a sealed offer can be a major incentive for parties to settle cases at an early stage of proceedings, as well as protecting them against the costs consequences of arbitration. A sealed offer can therefore be a valuable tool in arbitral proceedings. We answer frequently asked questions about sealed offers.

01 | What is a sealed offer?

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; under English common law it is commonly known as a ‘Calderbank offer’.

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 deciding how to allocate costs. Therefore, aside from the obvious benefit of possibly achieving early settlement, a well-pitched offer can prove to be an important tactical device.

02 | What are the advantages of a sealed offer?

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 party making the offer with a level of protection from costs consequences. The widely followed rule in many jurisdictions is that ‘costs follow the event’ and the “winner” of the arbitration will be awarded its reasonable costs. Failure to accept a reasonable offer, however, 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.

03 | What are the disadvantages of a sealed offer?

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 not disclosed. 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 amongst experienced arbitration practitioners, it is not common to all jurisdictions. Where 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 need to be sought before making such an offer. A party making the offer should set out the intended consequences of the offer when making and/or seeking to rely on it.

04 | What are the consequences of accepting or rejecting a sealed offer?

If an offer to settle the dispute is accepted, the proceedings are brought to an end on the terms agreed. If, however, the issue of costs has not been settled as part of that agreement, the parties may ask the tribunal render an award in respect of costs only, and the parties will make submissions on both the allocation and quantum of costs. Where 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 succeeded in its claim and obtained an award more favourable than the terms of the offer, the tribunal should apply the normal 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 succeeded in its claim but failed to obtain an award more favourable than the terms of the offer, this may be a reason for the tribunal to depart from the usual rule – the tribunal may instead order the winning party to pay the other side’s costs from the last date on which the offer was open for acceptance.

05 | How is a sealed offer made?

Sealed offers are usually made by a 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, such 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 most often communicated to the tribunal at an appropriate time. Alternatively, parties may agree that the sealed offer is to 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 cost consequences
• set out the terms of the offer, including the date by which any settlement payment would be made
• be unconditional (not, for example, subject to subsequent board approval)
• state a time limit within which the offer must be accepted (generally at least 21 days)
• state whether the offer includes legal costs up to the date of the offer, including arbitrators’ fees/expenses and institutional costs.

Parties should also consider requesting separate awards on merits and costs.

06 | Is the tribunal obliged to take a sealed offer into consideration?

The question of costs is usually within 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 will not be obliged to take a sealed offer into consideration when deciding how to allocate costs.

Arbitration agreements are often silent on the allocation of costs of arbitration. Most major institutional rules do no more than allow the tribunal to consider parties’ conduct when allocating costs. There are few arbitration laws that expressly refer to sealed offers – one example is the New Zealand Arbitration Act 1996 (section 6(2)(a)). Some local civil procedural rules for litigation deal with sealed offers (such as the English Civil Procedure Rules, Part 36). These may be persuasive on a tribunal.