– Written by Dmitry Davydenko*

A Settlement Agreement is usually defined as an agreement by which parties settle a dispute or a legal uncertainty in their relations, normally through reciprocal concessions. It is expressly governed in the civil codes of France, Italy, and several other states as a sui generis contract. Its causa, therefore, consists in the settlement (extinguishing) of a dispute or legal uncertainty.

The issue of determining the law applicable to an international settlement agreement becomes relevant when a dispute arises out of or in connection with such agreement, or its validity is challenged. Then it may become necessary to interpret the agreement and determine the rights and duties of the parties.

Applicable law turns out to be relevant and even crucial in the context of enforcement of the settlement agreement. For instance, United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention) provides in Art. 5(1)(b)(i) that the competent authority of the Party to the Convention may refuse to grant relief at the request of the party relying on the settlement agreement if the other party furnishes to the competent authority proof that the settlement agreement is null and void, inoperative, or incapable of being performed under the law to which the parties have validly subjected it or, failing any indication thereon, under the law deemed applicable by the competent authority of the Party to the Convention where relief is sought.

Meanwhile, the issue of law applicable to the international settlement agreements is studied insufficiently compared to various other issues of private international law/conflict of laws.

This article proposes a brief analysis of basic principles of conflict-of-laws analysis to determine law applicable to settlement agreement with a foreign element (resulting from cross-border relations).

Connecting factors analysis should start from lex voluntatis. Indeed, express or implied choice of law by the parties should be respected. However, parties sometimes do not choose applicable law in settlement agreement for various reasons, e.g. such agreement is concluded at the “eleventh hour” after difficult talks when the parties’ negotiators are
exhausted and wish to quickly conclude the agreement before any of them changes their mind. They may also consider choice-of-law clause unimportant on the ground that dispute is already settled. If no law is chosen, then several other connecting factors need to be considered.

Law of the place of conclusion of the settlement agreement (lex loci contractus) may be considered relevant presuming that the parties should reasonably take into account the law of the jurisdiction where they enter into their agreement. However, such a place may be simply random and chosen merely out of convenience. It hardly has any bearing on the parties’ relations. Furthermore, an agreement may be concluded through electronic communication, without a personal meeting of parties. Therefore, this
connecting factor appears not satisfactory.

Another approach would be to rely on characteristic performance of the parties. Such test underlies, e.g., Article 4(2) of Rome I Regulation:

“Where the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence.”

However, then a question arises what kind of performance should be considered characteristic of a settlement agreement. Its purpose consists in extinguishing a dispute: a claimant party usually waives their right of claim in exchange for some reciprocal step from the other party, such as accord and satisfaction. Therefore, waiver of rights/claims may often be characteristic of such agreement. Indeed, for instance, the United States tends to consider the settlement agreement as a special contractual type with consideration granted specifically for termination of a legal dispute.
However, both parties may undertake to waive certain rights to settle the dispute. Consequently, application of characteristic performance test will not always be appropriate.

Third option to explore would be lex loci solutionis (place of performance). Unlike the previous approach, this one features not the place of the performer, but the place of the performance itself.

However, both parties may undertake to make certain steps to perform a settlement agreement. The agreement may also consist in refraining from actions (e.g. recognition of certain property title of the other party; a non-compete obligation) rather than active performance. Therefore, the test may not always be possible to apply.

Fourth option relies on accessory nature of settlement agreement. Indeed, it is a derivative agreement, which is always based on some previous relations of the parties. Consequently, it appears to be logical to apply the same law as to the underlying relations (contractual or other).

The same legal regulation of previous and subsequent relations, e.g., a contract and its modification by settlement agreement, gives the parties greater confidence in the existence, exact content and enforceability of their rights.

Where a settlement agreement creates completely new obligations, rather than modifies previous relations, it would be more appropriate to apply the closest connection test. For instance, Article 4(4) of Rome I Regulation provides that

“Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.”

To determine the law most closely connected to the settlement agreement one should consider the subject and circumstances of the conclusion and performance of the settlement agreement, both previous and subsequent, e.g. place of negotiations; in which state the main part of the obligations under the terms of the settlement agreement is to be fulfilled (lex loci solutionis); parties’ places of residence/center of business; other relevant factors.

Based on the forgoing the author’s conclusion is that, unless the parties agreed otherwise, and unless otherwise follows from the settlement agreement, it shall be subject to the law applicable to the relations which gave rise to the settled dispute.

However, the settlement agreement may deal with a complex conflict. That is, the underlying relations may be complex and include several contracts and/or non- contractual claims, e.g. unjust enrichment. In such a situation, the closest connection test appears to be the most relevant tool.

As a final point, the most adequate approach consists in applying to the settlement agreement the same law as to the relations which gave rise to the settled dispute. Where such relations are complex, or where the agreement provides for completely new rights and duties of the parties, the closest connection test should apply.

*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]

The author thanks Ms. Sneha Rath (National Law University Odisha, India) for assistance with research on the topic of this post.