Shreya Gajbhiye*
Introduction
A growing popularity of multi-tiered clauses has resulted in its own array of issues and nuances which arise in practice. This paper focuses on the practical implication brought by an ambiguous position of law, particularly with respect to the practical implications of arb-med-arb clauses. In the event that the parties happen to reach a settlement within the mediation window provided between the arbitral proceedings, an award on the agreed terms can be issued by the tribunal upon request by the parties, provided that the tribunal finds no objections therein.[1] The motive behind such an award, also termed as a consent award, is to give an identical status and effect on the merits of the case to the MSA as any other award. Many arbitral institutions contain rules which permit the recording of a settlement agreement as an arbitral award in a dispute which would otherwise be within the subject matter of arbitral proceedings.[2] The parties to arbitration hence are incentivized to settle amongst themselves.
However, consent awards are well-known to be strategically used as a tool to avail the benefits of the enforcement mechanism under the New York Convention (NYC) for the MSAs.[3] The initiation of arbitration proceedings under multi-tiered clauses, particularly arb-med-arb, are done only to move on to the mediation window, and bring the resultant MSA within the garb of an arbitral award.[4] The intention of the parties behind the very commencement of the process was to suspend it, and in case the mediation does not result in settlement, the arbitration can be resumed. However, certain issues arise out of the question of enforcement of MSAs as Arbitral awards have been flagged – the most significant of which arguably being subjecting the outcome of a facilitative process (which is essentially a contract) to standards of an order resultant of an adjudicatory process.
Unspecified time of ‘differences’ between the parties
One concern with this common strategy is that the extent of the application of the NYC on mediated or conciliated settlement agreements recorded as consent awards is unclear. When a settlement agreement has been formulated already, and the parties subsequently attempt to record it as a consent award through either [1] entering into an arbitration agreement or [2] invoking a prior agreement appoint an arbitrator for the same, the NYC may exclude it.
The reason for this is that several jurisdictions require the subsistence of a dispute atleast at the time of the appointment of the arbitrator, based on the reference made by the NYC to awards coming out of “differences” amid the parties to the dispute.[5] The jurisdiction of the arbitrator would fail otherwise, and the arbitration agreement would be rendered invalid for the purposes of the resolution of the differences. For example, the consent award arising out of the process entailed in the hybrid med-arb clause can be possibly problematic. The arbitration procedure intended to record the award, having begun after the parties had settled the dispute, could not be considered to potentially settle the “differences between the parties”.
Article I(1) of the NYC mentions the term ‘difference’[6] but omits to mention when exactly this ‘difference’ should have arisen and subsisted, with respect to the arbitrator’s appointment. Thus, no express bar exists on an award given after the settlement of the dispute by the appointed arbitrator. The other provisions of the Convention also do not seem to expressly bar the enforcement. The enforcement may be objected to by the country where it is sought, due to the fact that the appointment of the arbitrator took place after the settlement, Even in this case, it has been noted that “such a legal difference ought not to rise to the level of being contrary to such a fundamental public policy of any country as would preclude enforcement of such an award under the public policy exception of Article V(2)(b) of the Convention”.[7]
Arbitrability vs ‘Mediatability’
The procedure entailed in the multi-tier arb-med-arb clause is initiated only after invoking arbitration and subsequently, suspends in the favour of mediation by the order of the tribunal. Hence, the initial ‘gate’ of the process needs to be unlocked by fulfilling the standards of arbitrability, only after which a chance of mediation would be available. Many jurisdictions, including India have an exhaustive criteria of which disputes can be referred to arbitration. However, such a corresponding threshold is not found in mediation. The illegality of a non-arbitrable dispute in an arb-med-arb process would adversely affect the mediation process as the illegality would transfer from the initial arbitration. For instance, mediation and conciliation is encouraged in labour disputes and consumer disputes in India, however, these have been established to be non-arbitrable.
Further, it is common practice for parties to discuss future relationships and make future plans within a mediation process, which would fall outside the scope of the initial dispute referred to in the agreement. These characteristic outcomes of an ordinary mediation process would fall out of the ambit of the arbitral award and hence suffer from being subjected to a standard tailored for arbitration.
Conclusion
It is seen that multi-tiered clauses are an opportunistic and strategic mechanism to gain the advantages of the expanse of the complementary and co-inciding nature of arbitration and mediation. But similar to any up and coming practice, it is not free from its fair share of concerns. The ambiguity surrounding the exact ‘time’ that the dispute should have had arisen has led to much uncertainty regarding its validity. Admittedly, it is subject to the jurisdiction that the claim is sought to be enforced in, however, any clarity or test regarding the time of the dispute in reference to the time of the appointment of arbitrator would go a long way in clearing the muddy waters. Conversely, a separate and robust mechanism specific to MSAs will simplify and solve the concerns once and for all, creating its own enforcement regime tailored to its own requirements. An analysis of the intended use, nature, formulation and importance that the parties attribute to an MSA and an arbitral award reveals that the complementary nature of the two as assumed is actually quite limited. Many nuances related to the an MSA are not envisaged in the regime of an arbitral award – which raises concerns about this prevalent practice of conceding some fundamental characteristics in favour of obtaining a powerful enforcement of the settlement agreement. Over time, the consequences of transferring the attributes and the nature of the arbitral award to an MSA will evolve and gain more traction in legal regimes. If this happens, there is a possibility that such practices will come under stronger scrutiny and will be regulated, while on the other hand, the MSAs may be securely given effect as valid contracts and a more sincere and bonafide invocation of multi-tiered clauses is encouraged.
[1] Arbitration and Conciliation Act 1996, Article 30(2).
[2] Vienna International Arbitration Centre, Vienna Rules 2013, Article 38; Singapore International Arbitration Centre Rules 2016, Rule 32; London Court of International Arbitration Rules 2014, Article 26; Hong Kong International Arbitration Centre 2013 Administered Arbitration Rules, Rule 36.
[3] H. Meidanis, International Enforcement of Mediated Settlement Agreements: Two and a Half Models – Why and How to Enforce Internationally Mediated Settlement Agreements, I J Arb Med & Disp Management 49, 56.
[4] Bobette Wolski, Enforcing Mediated Settlement Agreements (MSAs): Critical Questions And Directions For Future Research (2014) 7 Contemp. Asia Arb. J. 87, 103.
[5] Natalie Y. Morris-Sharma, ‘Chapter III: The Courts, The Changing Landscape Of Arbitration: UNCITRAL’s Work On The Enforcement Of Conciliated Settlement Agreements’, in Christian Klausegger, Peter Klein, et al. (eds), Austrian Yearbook on International Arbitration Volume (2018) 123, 136.
[6] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958), Article I(1).
[7] Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, 473 U.S. 614, 629, 639.