– Written by Dmitry Davydenko*

It is always important to find ways to settle disputes amicably. This is especially true nowadays when numerous obstacles hinder the proper performance of contracts, especially international ones. In particular, pandemic-caused restrictions lead to numerous situations where a party becomes unable to perform a contract or such performance becomes impractical. Apart from that, for instance, in Russia – West or Iran – US context, business relations meet severe challenges. If parties solve a dispute through a court procedure, it becomes especially difficult to get a judgment or an award recognized and enforced internationally. Arbitrating a dispute remains an option but it may take much time and effort and the result sometimes, unfortunately, proves unenforceable for various reasons, even though some positive recent cases do exist. Therefore, the ideal solution for the parties consists in showing wisdom and cooperating in the spirit of good faith, doing as much as possible to keep the contract, or if it gets impossible, terminating relations in a way that no one feels offended and wants to retaliate. One of the most appropriate legal instruments for that is the settlement agreement.

I. The settlement agreement in domestic and international law

Although many people have an idea about settlement agreements, still understanding of this legal instrument in various legal systems differs. The substantive laws of many States of continental Europe contain provisions for a settlement agreement. For example, the French Civil Code expressly governs “Contrat de transaction”, and the Italian Civil Code has similar (but far from identical) rules on the transaction. In some post-Soviet States, only procedural law expressly governs settlement agreement, rather than substantive law. Many other jurisdictions provide for no express regulation of this contract, so it just exists in practice. 

Unfortunately, parties sometimes fail to fulfill a settlement agreement. When parties decide whether to conclude such an agreement, they often have serious concerns about how to ensure its performance. This becomes especially relevant in the international context when the parties locate their enterprises or businesses in different states, with the result that the assets of one party appear hardly accessible to the other. Summing up, the parties who take the decision “to settle or not to settle” have a legitimate interest in ensuring the cross-border enforceability of the agreement. 

International law contains scarce regulations on the cross-border enforceability of the settlement agreement. The only universal instrument has become the Singapore Convention, but it governs only the cross-border enforceability of settlement agreements reached as a result of mediation. Meanwhile, if a settlement agreement is reached as a result of mediation properly conducted then normally its content corresponds to the interests of the parties. Ensuring its expedient performance is praiseworthy but the Singapore Convention will likely need much time to become effective and universally accepted. 

Another problem with the convention remains in the fact that it constitutes the fruit of international compromise; otherwise, it would not be possible to reach a mutually acceptable solution while negotiating and drafting the convention. As such, it does not establish expedient enforceability. It just specifies uniform rules pursuant to which a party may ask the competent court to enforce the agreement, but the other party has quite plenty of opportunities to oppose the enforcement, much more than the party opposing the enforcement of the arbitral award under the New York Convention 1958. For instance, under the Singapore Convention, the opposing party may allege that the content is contrary to applicable law, that it is not operative, void on some grounds, and that there may be several other reasons. As a result, the court procedure concerning enforceability will likely take quite some time and thus become burdensome. Therefore, other ways to ensure cross-border enforceability of settlement agreements apart from the Singapore Convention need exploration. 

II. Legal opportunities for enforcement of settlement agreements

Currently, the common denominator consists in enforcing the settlement agreement as an ordinary contract. As a result, the respective procedure will be judicial and, likely, more or less lengthy. If the settlement agreement contains an arbitration clause, the enforcement may perhaps become more expedient, as in many jurisdictions arbitration normally takes less time and resources than court litigation.

It also frequently remains a good option to consider including in the settlement agreement a mediation clause in addition to an arbitration clause so that it will increase the chance of voluntary compliance with it and then, if necessary, of its enforceability by arbitration. 

III. Differences in the governing law matter when drafting a settlement agreement

The method of enforcing a settlement agreement will often depend on the legal system concerned in the said agreement. These differences require consideration when choosing law applicable to the substance of the settlement agreement. The remedies in case of non-performance of the settlement agreement would depend not only on the content of the agreement itself but also on the applicable law. In civil law countries, a more likely legal remedy will consist of specific performance of the agreement if it contains a duty to take some actions, e.g. to surrender the property. In common law countries, the primary remedy will include damages. For example, under Australian law in case of breach of contract normally a court or tribunal would award damages, while specific performance would become an applicable remedy only in relation to some unique objects for example real estate objects which are not something that cannot be required in the market. A similar approach exists in Swiss law.

On the contrary, usually in civil law jurisdictions, specific performance would constitute an ordinary remedy and the court or tribunal would award damages only if specific performance proves impossible in a particular case. 

Furthermore, the way how in case of litigation a judge or an arbitral tribunal will interpret the mutual rights and duties of the parties will also depend on the applicable law.

Again, different legal traditions exist as regards the legal doctrine of force majeure. Thus, common law generally contains no default rule on force majeure so what parties include in the settlement agreement will become their force majeure event. In contrast, civil law normally contains default legislative rules about force majeure. 

Many other examples of differences between common law and civil law exist. For instance, the duty of the parties to act in good faith features in civil law. UNIDROIT Principles formulate it in Article 1.7(1) (Good faith and fair dealing): “Each party must act in accordance with good faith and fair dealing in international trade”. Meanwhile, English law has no general doctrine of good faith. As a result, English law does not establish a general obligation to act in good faith during the negotiation of commercial contracts. This may of course become directly relevant to settlement agreements.

Legal practitioners indicate some other important issues to consider when drafting a settlement agreement. Consider including a duty to sign necessary documents for the performance of the agreement. Where appropriate, think about using an escrow mechanism for dealing with money because one of the parties may remain reluctant to transfer the money to another before the other party performs their part of the obligation. In that case, the respective party may put money in the escrow account of a third party and that may avoid the deadlock. 

IV. Notarisation

Expedient enforcement of a settlement agreement may become possible through notarization. For example, if a Russian notary public certifies a settlement agreement upon the parties’ request, then it becomes directly enforceable in Russia; the interested party may submit it at the court bailiff service or foreclose the other party\’s assets or to the bank to seize money on its account. Such opportunity creates more certitude of compliance of the Russian party with the settlement terms, favorably for the amicable resolution of cross-border disputes. However, the opportunity for direct enforcement of the agreement in the country where the other party keeps its assets remains problematic because it depends on the recognition of foreign notaries’ authorities and the status of notarized agreements outside the country. The problem in many jurisdictions remains in the fact that notarized agreements may be directly enforceable in the country of their origin but not necessarily in another country. This may create incentives to settle for one party to the agreement but not to the other; that depends on the existence of an international treaty between the relevant countries and other mechanisms with similar effects. Some groups of states like the European Union have their regime of international enforceability of the so-called “authentic instruments” which encompasses notarized settlement agreements. If parties conclude a settlement agreement and have it notarized in one EU Member state, such an authentic instrument would be enforceable in any other EU member state under the Brussels Regulation. 

That said, the EU Mediation Directive provides that each Member state of the European Union must ensure that the settlement agreement reached in mediation is enforceable in other EU member states unless its content is contrary to the law of this state or unless this law considers this agreement unenforceable. Such a simplified regime exists in some regions. 

A general overview of the European legislation shows that in several jurisdictions if the settlement agreement gets notarized or recorded by the court or as an arbitration award then it becomes directly enforceable. Notarized agreements enjoy a direct enforceability regime in Spain, Germany, and Austria. In England and Wales three ways to enforce a settlement agreement exist. First, one can have it enforced as a general contractor. Second, it can become enforceable as a settlement deed which in fact constitutes expedited enforcement. Third, Tomlin Order also allows the interested party a more favorable regime of enforcement of such an agreement. 

From a purely practical viewpoint, if a party needs to ensure the direct enforceability of the settlement agreement in a certain jurisdiction it should explore the option to notarize this agreement in that jurisdiction. The national notary would just record it. Alternatively, in some jurisdictions such as France, a party may apply to a court for approval of the settlement without initiating a full-scale court procedure. The requested judge would record it as a directly enforceable agreement by its order. 

V. Settlement within litigation and arbitration

When the parties reach a settlement agreement within litigation and the court upon their request records it by its order, then such agreement becomes enforceable as a court judgment. However, no universal cross-border enforceability of court judgments exists nowadays. Unfortunately, such opportunity is limited only to several states. It depends on the existence of the international treaty, reciprocity, and international comity. One can praise in that respect the adoption of the Hague Convention on Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters of 2019.  But again, it needs time to become effective. To date, very few State parties have signed it, but have not yet ratified it. Also, unfortunately, this convention does not provide for the enforceability of authentic instruments. It would be helpful if the same convention governed not only court judgments and court-recorded settlement agreements but also authentic instruments. For some reason, it is not included in the convention. 

Arbitration

An interested party may also enforce the settlement agreement by means of arbitration. The most straightforward approach consists of the parties reaching a settlement agreement in the course of arbitration; then the arbitral tribunal upon their request records it as an arbitral award on the agreed terms. As a result, it becomes enforceable as any arbitral award under the New York Convention 1958. There is a general understanding that an arbitral tribunal should render the consent award if the parties request so unless it finds some violation of applicable law, or that the content of the agreement contravenes public policy. For instance, if the tribunal finds clear traces of a money laundering scheme behind the agreement. However, this remains an exceptional situation. Normally it would constitute an award enforceable under the New York Convention. However, arbitration often remains a rather expensive procedure. One must pay the arbitration fee just for recording the agreement into the award.

Praiseworthily, some arbitral institutions already provide a simplified procedure with a reduced fee namely for the purpose of recording a settlement to accommodate the demands of the parties who do not need a full-scale arbitration but just wish to ask the tribunal to merely render a consent award based on their agreement (see Article 14 “Confirmation of a Settlement Agreement in an Arbitral Award” of the  Mediation Rules of the Arbitration Institute Stockholm Chamber of Commerce; Article 76 \”Arbitration to Confirm a Mediation Agreement in the form of an Arbitral Award on Agreed Terms” of the Arbitration Rules of Russian Arbitration Center under the Russian Institute of Modern Arbitration). 

However, unfortunately, no international consensus exists on whether this award would enjoy a regime of recognition and enforcement in countries that are signatories to the New York Convention. This follows from the fact that strictly saying, to start an arbitration you need an unresolved dispute. So, from the formal point of view if the parties reach a settlement agreement, there will no more be an outstanding dispute, and therefore, no legitimate reason to arbitrate remains. At least in one published case in 2019 in the United States (Castro v. Tri Marine Fish Co., No. 17-35703 (9th Cir. 2019)), the court refused to recognize and enforce an arbitral award made in the Philippines on the ground that the parties first settled the dispute by their agreement and only then asked the arbitrator to record it as an arbitral award. The US judge found it unenforceable under the New York Convention because no arbitration as such took place. So, a consent award reached without arbitration might face rejection in domestic courts.

Such an approach deserves criticism. The spirit of favoring the settlement of the parties (favor conciliation) calls for the enforceability of such arbitral awards. Parties have a legitimate interest to settle their dispute and to make it enforceable through an arbitral award unless the settlement’s content contravenes the applicable law. The parties can help themselves to solve this problem by including in the settlement agreement a condition precedent that the agreement will acquire legal force only if the arbitral tribunal approves it. So the agreement will remain ineffective unless and until the arbitral tribunal approves it. This means that the dispute will remain outstanding, the agreement non-operative, and therefore a valid ground to apply to arbitration will exist. However, some parties might not accept such a solution, although elegant, – to make the legal effect of the agreement dependent on the approval of the arbitral tribunal.

VI. Proposals de lege ferenda

The problem needs action on a global level. The proper authority here is the United Nations Commission on International Trade Law (UNCITRAL). The author proposes to develop a recommendation on the application of the New York Convention in that regard: to recommend to the contracting parties to apply the convention to those arbitral awards on agreed terms which the tribunal rendered because the parties resort to arbitration solely for making such an award under the conditions when they have already amicably settled the dispute. In other words, the New York Convention should apply to the arbitral awards made by an arbitrator whose mandate merely consisted in recording the settlement (in the spirit of favor conciliation). 

Apart from that, UNCITRAL should consider amending Article 30 of the Model Law on International Commercial Arbitration: to supplement the first paragraph with a sub-paragraph that the arbitral tribunal may render an arbitral award on agreed terms also if the parties, without resorting to arbitration, settled the dispute by the settlement agreement and then applied to arbitration solely to make such an award by the arbitral tribunal. So, to expressly provide for such an opportunity in the model law to legitimize it could help in ensuring proper enforceability of cross-border settlements. 

Apart from that, it appears worthwhile to include the provision of authentic instruments in the Hague Convention on Recognition and Enforcement of Foreign Judgments. Also, for the various jurisdictions to provide for enforceability of notarized settlements in their international treaties and national legislation would help to strengthen the cross-border enforceability of settlement agreements. 

* Ph.D. in Law, MGIMO University, Department of Private International and Civil Law, Higher School of Economics, Department of Legal Regulation of Business. Recommended arbitrator at the HKIAC, Shenzhen Court of International Arbitration, International Commercial Arbitration Court, and Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry. Email: [email protected].