International Commercial Arbitration Q3 2023

In the evolving landscape of Norwegian arbitration, the use of “sealed offers” has emerged as a hot topic. In this edition of our newsletter, we delve into the mechanics and merits of sealed offers, advocating for their expanded role in PO1 frameworks to incentivize parties to consider reasonable settlement proposals.

Furthermore, we provide an overview of the latest NOMA News – before we give you an overview of upcoming events in What’s On the Agenda.

Sealed Offers

Starting points

Imagine you’re a defendant in an arbitration, facing a EUR 20 million claim for breach of contract. Although you acknowledge some merit to the claimant’s case, you believe the justified amount is closer to EUR 8 million. Accordingly, you make an early settlement offer for this sum. The claimant, however, dismisses this proposal, opting instead to pursue the full EUR 20 million, along with interest and litigation costs. After two weeks of hearings, the arbitral tribunal ultimately rules in favor of the claimant, but awards only EUR 7 million. If your early settlement offer is presented to the tribunal, the pressing question becomes: What impact will the claimant’s rejection of your settlement offer have on the allocation of costs?

The general rule and starting point in both Norwegian civil procedure and arbitration is “the loser pays”-principle. However, according to the Norwegian Civil Procedure Act § 20-2 (3) the losing party may be relieved of its obligation to cover the winning party’s reasonable litigation costs if the winner has rejected “a reasonable settlement offer”. Consequently, had the case in our example above been handled by the ordinary courts, the losing party would have been relieved of the obligation to pay the winning party’s litigation costs. However, the losing party would still in most cases have to bear its own cost.

The Norwegian Arbitration Act § 40 lacks explicit provisions concerning the implications of rejecting reasonable settlement offers. Instead, it grants the arbitral tribunal wide-ranging discretion, as outlined in § 40 (2):

“The arbitral tribunal may at the request of a party order another party to pay all or part of the costs of the first-mentioned party if it sees fit.”

According to our informal research, this approach appears to align with the majority of arbitration statutes globally. The few exceptions we have identified include New Zealand’s Arbitration Act 1996, Schedule 2, Section 6(2) and Malaysia’s Arbitration Act 2005, Sections 44(2) and 44(3) – which both explicitly mentions rejections of settlement offers as relevant for the arbitral tribunal when exercising its discretion regarding allocation of costs (always subject to the parties agreement to the contrary).

Echoing the sentiments expressed by Ristvedt and Nisja in their article “Voldgiftsloven og tvister i forretningsforhold” [1], we concur that the Norwegian Arbitration Act § 40 grants excessive discretion to the arbitral tribunal.

Numerous international arbitrations operate under institutional rules, which may offer more specific guidelines about the ramifications of rejecting settlement offers. This is not true for the OCC Arbitration Rules of 2017. However, the NOMA Arbitration Rules (both 2017 and 2021) do address this matter. Article 37, under the section titled “Allocation of Costs,” explicitly states:

“The arbitral tribunal shall also take into account whether a party has rejected a reasonable offer of settlement.”

In the scenario we previously outlined, the outcome under the NOMA Arbitration Rules should align with what would occur if the Norwegian Civil Procedure Act was applicable.

However, there is a significant caveat to consider. This outcome relies on the tribunal being made aware of any potentially reasonable settlement offers that were rejected. Many parties are hesitant to disclose their settlement offers, fearing it may influence the tribunal’s ultimate decision on the merits of the case.

While this newsletter will not delve into the merits of such concerns, we believe it is virtually impossible for a decision-maker to completely ignore information related to settlement offers once received. As a result, the disclosure of a settlement offer could have an adverse impact – either directly or indirectly – on the tribunal’s final ruling.

To encourage early resolution of disputes within the arbitration process, mechanisms should be implemented to incentivize parties to accept reasonable settlement offers from their opponents. This is where the concept of “sealed offers” comes into play, a mechanism we will explore below.

Sealed offers – what’s the key characteristics for ensuring “success”?

The aim for both the parties and the tribunal when arbitration is initiated is to achieve a transparent and efficient process to a final, enforceable resolution – be it through mutual agreement or a formal award. Even after arbitration proceedings have commenced, it remains crucial for parties to either revisit or begin considering negotiated solutions. As we discussed in our Q1 2023 Newsletter, one effective approach is to incorporate a mediation window into the procedural timetable. Another potent tool is the integration of a sealed offer mechanism within the PO1 framework.

A sealed offer is essentially a settlement proposal that, if not accepted by the opposing party, is disclosed to the arbitral tribunal after the award on the merits has been issued and the time has come for determining the allocation of costs. The practicalities on this point should be easy to handle.

More challenging is putting in place mechanisms to ensure transparent and efficient management of the separate process that leads up to the cost ruling. During this phase, the tribunal may face complex questions, particularly if there are claims and counter-claims and both parties have made – and rejected – settlement offers at different times. An illustrative example of this complexity can be found in case HR-2020-252-U, where the Norwegian Supreme Court overturned a cost ruling from the Court of Appeal.

The remaining question then pertains to the specific mechanisms that should be incorporated into the PO1 or terms of reference to align with international best practices.

Sealed offer mechanisms – what’s international best practice?

Although the concept of sealed offers is gaining traction in Norway and the Nordic countries, there exists, in our view, no established best practice for defining specific mechanisms to be included in the PO1 or terms of reference in international arbitration. From our standpoint, the following three sources offer valuable insights for crafting regulations around the use of sealed offers:

First, when developing best practice mechanisms for sealed offers in international arbitration, the “UK Civil Procedure Rules Part 36 – Offers to Settle” serves as a useful guideline. Essentially, the Part 36 offer is based on the concept of sealed offers, where a party may present a settlement offer to the other party. This offer will only be disclosed to the courts after the case has been decided on its merits, but before a cost decision has been rendered. The benefits of the Part 36 offer vary depending on whether it was made by the claimant or the defendant.

We shall not delve into the potential outcomes of a Part 36 offer herein, but it is noteworthy to point out that if a defendant rejects a Part 36 offer which was better than the outcome of the court order, the claimant may be entitled to claim not only its legal costs including interest, but also an additional compensation of up to GBP 75,000 as well as interest of up to 10% on the damage claim. In the opposite case, where a claimant rejects a Part 36 offer better than the outcome of the court order, the claimant will have to cover the defendant’s legal costs including interest on such costs from the date the offer expired.

However, it is worth emphasising that the benefits of a Part 36 offer are limited if the offer made does not beat the awarded claim and further that it is subject to certain strict formal requirements which need to be satisfied for a party to reap the benefits.

The UK Arbitration Act does not contain any provisions similar to the Part 36 offer. In practice, the law on privilege, and more specifically the exception from the law by presenting a settlement offer on a “Without Prejudice Save as to Costs” basis, is frequently used and serves both as a practical alternative to the Part 36 offer in both English arbitration and litigation.

The use of “Without Prejudice Save as to Costs”-offers is a more flexible regime with the same objective as the Part 36 offer, where a party presents a settlement offer to put pressure on the receiving party. If the offer is rejected, the offering party may disclose the settlement offer to the tribunal after it has decided on the merits of the case, but before it has rendered its decision on costs. The “Without Prejudice Save as to Costs” regime is however not as stringent as the Part 36 offer and does not necessarily safeguard the offering party against the receiving party’s costs if the offer was better than the awarded claim unless the parties have agreed on specific mechanisms of how such offers shall be dealt with through the arbitration agreement or in the PO1. Nonetheless, a “Without Prejudice Save as to Costs” offer will incentivise the tribunal to take the offer into consideration when deciding on the costs issue, which in turn may provide the same pressure on the receiving party as a Part 36 offer.

Second, inspiration can be drawn from the Society of Maritime Arbitrators (SMA) Arbitration Rules as of June 2022 (SMA Rules 2022) which incorporate the concept of sealed offers in Section 31(d):

“If the Settlement Offer is refused, the Offeror may notify the Panel that a binding Settlement Offer was made but declined by the Offeree. The details of the last Settlement Offer shall then be delivered in a sealed envelope to the Chair or Sole Arbitrator who shall not open the envelope until such time as the Panel or Sole Arbitrator has arrived at a final decision. Should the rejected Settlement Offer be equal to or more favorable to the Offeree than the Panel’s Award, the Panel shall, subject always to the provisions of Section 30 and taking into account the terms and timing of the Settlement Offer, award the reasonable legal fees and expenses as well as such arbitrator fees and expenses that would have been saved had the offer been accepted at the date by which acceptance was required.”

Given the SMA’s status as the leading shipping arbitration society in New York – and considering New York’s influential role in U.S. arbitration – it is noteworthy that regulations concerning sealed offers have been integrated into their arbitration rules. Since SMA awards are generally published[2], we may anticipate interesting decisions on cost allocations related to the use of sealed offers in practice.

Third, it is noteworthy that the International Chamber of Commerce (ICC) in its recent publication “Effective Conflict Management”[3], published July 2023, dedicates a separate section to the use of sealed offers. Section 119 specifically highlights that sealed offers “promote settlement by exerting pressure on the receiving party to consider settling, rather than risk incurring additional arbitration costs.”

However, the ICC stops short of offering specific regulatory suggestions to be incorporated into the terms of reference. Instead, Section 123 states:

The arbitral tribunal should also consider consulting the parties at an early stage (e.g. at the first case management conference pursuant to Art. 24, ICC Arbitration Rules) and inviting them to agree on a procedure for the possible use of sealed offer(s) in the arbitration.

This implies a need for additional considerations and collaborative discussions to effectively implement sealed offers within the arbitration context, and we will update you when we see further noteworthy developments on this topic.

NOMA News

Updated Recommended Dispute Resolution Clause

On 7 August 2023, NOMA introduced an updated dispute resolution clause which incorporates the NOMA Fast Track Arbitration Rules as well as the NOMA Mediation Rules. Read more here.

It is significant to highlight that this clause marks the first product generated by the newly formed NOMA Standing Revisions Committee (SRC).

In our perspective, NOMA’s revised dispute resolution clause aligns with prevailing clauses in the maritime industry, notably by not designating mediation as an obligatory preliminary step. This approach concurs with what many consider international best practices – ensuring a definitive commencement of arbitral proceedings, thereby preventing any ambiguities around time bars. Moreover, this clarification helps in determining when mediation concludes and when arbitration may be initiated.

Reiterating from our 2023 Q1 newsletter, the distinct “NOMA approach” encourages parties to allocate a mediation window within the arbitration schedule. This strategy aims to foster an environment where more disputes might find amicable resolutions, potentially guided by the NOMA Mediation Rules.

Short report from the first NOMA-Day in Gothenburg and Copenhagen Arbitration Day

On 28^th September 2023 the first ever NOMA-Day was held in Gothenburg. The main theme was “Ways to achieve an efficient Arbitration” – focusing on the role the role of mediation and the role of the Arbitral Tribunal / Chair within the framework of the NOMA Mediation and Arbitration Rules. The event was well attended and underscores the increased popularity of NOMA and the framework it provides for transparent and efficient international arbitration within the maritime industry in the Nordics.

The Danish Institute of Arbitration (DIA) and ICC Denmark hosted the Copenhagen Arbitration Day 2023 (CAD) on 5 October at the historical Børsen building. This event is a highlight in the Danish arbitration community’s calendar, offering opportunities to explore international arbitration issues, network, and stay updated on global trends. Two of our arbitration lawyers, Bastian Sundling and Nora Anker-Rasch, participated on CAD, together with over 200 participants from both domestic and international background. The day was filled with inspiring speeches from leading arbitration figures like Juliet Blanch, Mika Savola, Fredrich Rosenfeld, and Professor Giuditta Cordero-Moss, to name a few.

What’s On the Agenda?

To our delight, Arbitration Lunch Match has developed from a yearly event to twice a year. The international success that gathers women in arbitration to meet up for a “blind date” to network, was held 25 – 29 September. As always, the lunch match was a success!

On the international commercial arbitration scene there are many events to choose from. We recommend considering the following upcoming events:

• 12 October 2023: ICC FIDIC Conference on International Construction Contracts and Dispute Resolution (Paris), organised by ICC Arbitration
• 23 to 27 October: SCC Arbitration Week 2023, organised by SCC
• 7 December 2023: GAR Live: Women in Arbitration 2023 (Paris), organised by Global Arbitration Review
• 7 February 2024: Young event in connection with Norwegian Arbitration Day, organised by YAPN.
• 8 February 2024: Norwegian Arbitration Day, organised by UiO et. al.

[1] Tidskrift for forretningsjuss (TFF-2005-3), section 9.2

[2] SMA Arbitration Rules 2022 Section 1

[3] The ‘Effective Conflict Management’ Guide is a product of the ICC Commission on Arbitration and ADR (‘Commission’). The Guide was prepared by the Task Force ‘ADR and Arbitration’ and was approved at the Commission’s meetings of 12 December 2022 (virtual) and 28 March 2023 in Paris.