“Without Prejudice Save as to Costs” under English Law verses the Process of “Sealed Offers” under ICC’s Assistance

The possibility of parties settling their dispute by means of amicable settlement can be initiated at any point during the legal proceedings, be it court or arbitration. Indeed, amicable settlement is a commercially sensible and viable route if parties are ever able to see past the acrimony and personal vendetta they may possess against each other after the dispute crystalises. Heated international construction despites, for example, will usually have one side refusing to pay for works carried out on site arguing that works were not carried out to a sufficient level and/or levying delay damages, whilst the other side will be arguing non payment, delay and disruption. For international cases, in some locations it may be particularly challenging to advance the project, and where contractors defeat the odds by carrying out the works notwithstanding these obstacles, any ensuing dispute, especially arising from non payment, fuels the animosity between the parties, hindering any fruitful negotiation process. This is when the parties will be keen to have its ‘day in court’ regardless of the costs at stake.

At some point, a party may wish to present a settlement offer to the other party. In doing so, the offeror may seek to be indemnified against any costs from that point should the other party reject its offer by fail to beat it at court or in the arbitration. In this case, there are a few factors that must be considered by the parties. These considerations vary, however, depending on the platform in which the offer is being made – i.e. whether it is being made in court or in arbitration proceedings.

Under the English legal system offers to settle are governed by Part 36 of the Civil Procedural Rules, which sets out the rules for making offers, withdrawing or changing offers and accepting offers, as well as the rules for disclosing such offers. A Part 36 offer may be made at any time, including before the commencement of proceedings. (1) The conditions of a Part 36 offer are broadly that the offer must (2);

• Be in writing.
• Make clear that it is made pursuant to Part 36.
• State whether it relates to the whole claim or to part of it or to an issue that arises in it and if so to which part or issue and
• State whether it takes into account any counterclaim.

Once served on the other Party, an offer may only be withdrawn if the receiving party has not previously served a notice of acceptance.(3)

A Part 36 offer is accepted by serving a written notice of acceptance.(4) There are also certain circumstances in which the court’s permission would be required to accept a Part 36 offer, such as a trial is in process.(5) Where a Part 36 offer is accepted, the claim will be stayed.(6)

The CPR provides that a Part 36 offer will be treated as “without prejudice expect as to costs”.(7) This is a phrase used to indicate that the marked correspondents contain privileged information as to settlement negotiations and is not to be disclosed to the court until the issue of costs is to be considered at the end of the merits phase of the case.

The phrase “without prejudice” is also used to indicate that the correspondence includes privileged information regarding settlement negotiations and is not to be disclosed to any third party or the court, but this phrase does not attach any cost liability or any consequence of accepting or rejecting the same as the phrase “without prejudice expect as to costs” would do. Taking these phrases in turn;

Without Prejudice:

Under English law there was a floodgate of litigation on the issue of whether a particular letter or correspond must be marked specifically with the words “without prejudice” for the restriction on disclosure to apply. The current rule, which has been enforced for some time is that where a letter or correspondence contains any offer to settle or negotiation for the same this will be treated as ‘without prejudice’ and therefore should not be disclosed even if the said letter or correspondence is not specifically marked with the words ‘without prejudice’.

Without Prejudice except as to costs:

This phrase carries a different type of importance as it will affect the parties for the indemnification of costs upon the final award. Where a party makes an offer marked without prejudice except as to costs they are seeking to be indemnified for costs from the date of the offer in the event that the offeree rejects the offeror’s offer but is subsequently awarded a sum by the court at a figure less than that offered by the offeror. In that case, the offeror will be indemnified against costs from the date of its offer – even if the award is in its favour of the other party. This is on the proviso that the conditions for making a Part 36 offer set out above are met. The idea behind the principle is to encourage parties to settle their disputes if there is a serious possibility to do so, particularly when considering the cost implications.

In ICC arbitrations under the ICC Rules there are no specific rules for indemnification of costs in the same manner as a Part 36 offer under English law, however, there is a similar process that could be followed with the agreement of the parties that is set out in Part XXII- C of the ‘ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration’. This is referred to as ‘Sealed Offers’. The Note sets out that the ICC Secretariat may assist the Parties to put information relating to certain unaccepted settlement offers and related correspondences (Sealed Offers) before the arbitral tribunal at the appropriate stage of the proceedings.(8) The operative words here are “may assist” – meaning that this is not a mandatory process such as the one under English law. To further this concept the Note expresses that the arbitral tribunal should consider consulting the parties at an early stage, such as the first case management conference, and inviting them “to agree” on a procedure for the possible use of Sealed Offers in the arbitration. The Note states that “[a]bsent initiative by the arbitral tribunal in this respect, any party is free to raise this issue.”(9) Whilst this is an incentive for tribunals to encourage parties to make use of the assistance the ICC may offer in facilitating confidentiality of offers during the arbitration process, it is clearly not a process that can be enforced on the parties without their consent. Likewise, it is also not a process that can be used by one party against the other party in the absence of agreement.

Sealed Offers are held by the ICC Secretariat on a confidential basis and may only be transmitted to the tribunal after the tribunal has resolved all issues of liability and quantum and is ready to consider the allocation of costs. The provision of costs is governed by Article 38 of the ICC Rules. At that stage, once the Secretariat informs the tribunal of the existence of Sealed Offers, the tribunal is invited to inform the Secretariat whether it accepts to receive the Sealed Offers. Even if the tribunal decided to accept to receive the Sealed Offers and opens the same, the Note makes it clear that the tribunal “retains discretion to decide the weight, if any, should be given to the correspondence...”.(10) Therefore, distinct from the English law process of Part 36 Offers, Sealed Offers do not dispense with the arbitral tribunal’s discretion on costs and therefore the same risk of cost indemnification is not present in the ICC.

Accordingly, whilst the level of confidentiality secured under the well-rooted English legal system of offers made ‘without prejudice’ or ‘without prejudice save as to costs’ is reflected in the ICC Assistance process of Sealed Offers, the mandatory cost implication does not follow. It can therefore be said that the ICC Assistance with Sealed Offers is a positive step of the ICC of encourage parties to present offers to the tribunal on the issue of costs, which, if applied more frequently may result in a high number of cases settling sooner rather than later. In complex international construction cases this may be a good tool to introduce to the parties at an early stage to allow the parties to contemplate the potential cost implications in going forward with the arbitration.

References

(1) CPR 36.7 (1)

(2) CPR 36.5(1)(a)-(e)

(3) CRP 36.9(1)

(4) CPR 36.11(1)

(5) CPR 36.11(3)

(6) CPR 36.14 (1)

(7) CRP 36.16 (1)

(8) Part XXII- C – Assistance with the Conduct of the Arbitration - ¶ 227

(9) Part XXII- C – Assistance with the Conduct of the Arbitration - ¶ 228

(10) Part XXII- C – Assistance with the Conduct of the Arbitration - ¶ 230 g

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