Settlement Facilitation by the Arbitral Tribunal – a Swiss Perspective
Given the costs involved in pursuing an arbitration through to a final merits hearing, settlements at an earlier stage have the advantage to significantly reduce parties' costs and to allow a swifter resolution of disputes. A settlement can be reached either between the parties alone or with the assistance of the arbitral tribunal.
Traditionally, there have been varying views – depending on the legal background of the arbitrators involved – on whether the role of arbitral tribunals also encompasses the duty of assisting the parties in settlement discussions. While arbitrators coming from common law jurisdictions have generally been more reluctant to (actively) encourage settlement in adversarial proceedings, in some civil law systems it has been accepted that arbitrators have an inherent duty to assist parties in reaching a settlement where possible.
Early Case Assessment ("Vergleichsverhandlung")
In Switzerland, especially in the German-speaking cantons such as Zurich, Swiss arbitral tribunals' readiness to be involved in a settlement process derives from a century-old court procedural technique developed by the Zurich commercial state court whereby the judge in charge convenes the parties to a hearing (so-called "Vergleichsverhandlung")[1] – usually after the first round of written submission – in which he or she expresses his or her preliminary and without prejudice views on the entire case or individual issues, following which the judge would invite the parties to engage in settlement discussion in his or her presence. In practice, such hearings have proven to be a useful tool in light of the high rate of successful settlement they entail. Further, even if no settlement is reached, the judge nevertheless provides helpful guidance on factual and legal points on which he or she would like to hear more, which contributes to the expeditious conduct of the proceedings. Since an arbitrator's stance is more often than not shaped by his or her national legal and procedural background, early neutral assessments of a case are quite often provided to the parties by arbitral tribunals chaired by Swiss arbitrators.
This settlement facilitation technique first made it into the Arbitration Rules of the Zurich Chamber of Commerce, and was then introduced in more general terms in the Swiss Rules of International Arbitration (Swiss Rules) as part of their 2004 revision. In their current version, the Swiss Rules expressly allow arbitrators to take (pro)active initiatives before the final award is made. Article 15(8) of the Swiss Rules provides that "[w]ith the agreement of each of the parties, the arbitral tribunal may take steps to facilitate the settlement of the dispute before it. Any such agreement by a party shall constitute a waiver of its right to challenge an arbitrator’s impartiality based on the arbitrator’s participation and knowledge acquired in taking the agreed steps".[2]
Importantly, as set out in the above provision, before the tribunal is involved in any settlement facilitation process, it is essential under the Swiss Rules to acquire all parties' consent. In terms of form, the agreement may be concluded orally or even impliedly, i.e. demonstrated by any acts indicating the party's assent to the proposed settlement efforts. This includes the participation without reservation of a party in any settlement facilitation activities.
From an evidentiary standpoint, arbitral tribunals are advised to always record the parties' consent by exchange of correspondence or in the minutes of any settlement facilitation hearing in light of the ever-increasing number of challenges and sometimes the misuse of that right by some parties. In practice, experienced tribunals systematically request the parties to give their express agreement to the tribunal's involvement in any settlement facilitation and waive any right to challenge an arbitrator based on his or her involvement.
Concerns have been expressed about such tribunal's participation in settlement facilitation because any arbitrator involved in settlement discussions is likely to become part of confidential information about the commercial realities of the dispute as well as the strengths and weaknesses in the parties' cases. This same is true for early neutral assessments (i.e. Vergleichsverhandlung or similar concepts) since the arbitrators would express a preliminary opinion on the outcome of the case. In both scenarios, either one or both of the parties are likely to be tempted to challenge the arbitrators in question for a perceived lack of impartiality, especially in cases were the arbitrators' attempt to reach a settlement failed and the proceedings continue.
However, these concerns regarding the parties' due process rights and arbitrators' bias can be cured by the proper conduct of the settlement facilitation procedure. First, cases in which parties divulge sensitive information that were not included in their previous (written) submissions are not frequent. Second, a preliminary case assessment does not necessarily mean that the arbitrators are prejudging the case. Indicating preliminary opinions at a certain stage of the proceedings does not prevent arbitrators from reaching entirely opposed views in their final award, since their decision-making is an evolving process. To avoid any appearance of bias, experienced arbitrators would expressly state that they reserve their right to revisit their views on the factual and legal situation after the preliminary case assessment hearing and that they would remain open to hear parties' further submissions.
In any event, Article 15(8) of the Swiss Rules eliminates – or at least significantly reduces – the risk of a challenge to an award on the ground of alleged bias. Indeed, this provision explicitly provides that by agreeing to any settlement facilitation process, the parties are barred from any challenges for alleged lack of impartiality so long as the challenge is based on the arbitrator's participation and knowledge it acquired in his or her involvement in the agreed settlement efforts. In other words, pursuant to the Swiss Rules, the parties assume the risk of what the arbitral tribunal may learn in the context of any agreed settlement process. Of course, challenges based on other circumstances that would impinge on the arbitrators' impartiality remain open.
There is no one size fits all approach with regard to the timing and the procedure of any settlement facilitation process given that each case turns on its own facts. However, it could be considered best practice to hold the early case assessment once the arbitral tribunal has received and digested the parties' substantive submissions. It may seem obvious but settlement facilitation makes sense only if the arbitrators are well-versed in the parties' arguments and the evidence on record thus also encouraging them to attentively study the case file already at an early stage.
In terms of costs, the Swiss Rules provide at their Article 39(1) that the fees and expenses of the tribunal shall be fixed with due regard to "relevant circumstances of the case, including the discontinuation of the arbitral proceedings in case of settlement". In fixing its fees, the arbitral tribunal must consider how far the arbitration progressed when the settlement occurred. In that context, it may be justified to fix the arbitrators' fees below the minimum amount set out in the schedule of fees. Moreover, the Swiss Chambers' Arbitration Institution may, in its discretion, decide not to charge all or part of the administrative costs in case of settlement.
Conclusion
Most stakeholders have realized that a considerable decrease of the time and costs in international arbitration is required. There appears to be a broad agreement that a decisive and proactive arbitral tribunal can play an essential role in ensuring procedural efficiency. An effective means to reach this goal – both in Switzerland and elsewhere – is to allow arbitrators to participate in settlement facilitation activities, which may take a variety of forms, provided that adequate safeguards are built into the procedure. And even if no immediate settlement is brought about, the arbitrators will provide guidance on factual and legal points on which they would like to hear more. This technique thus considerably streamlines the remainder of the proceedings and helps to avoid lengthy and costly rounds of briefs on topics that the tribunal is not interested in. Importantly, under no circumstances may the arbitral tribunal impose the holding of or its involvement in any settlement facilitation process. If such safeguards are in place, there should be no ground for concern in connection with the parties' due process rights and for the award to be safe from any challenge. The Swiss arbitration practice inspired by the Vergleichsverhandlung and the Swiss Rules go a long way towards providing users with the flexibility they need to include bespoke settlement facilitation tools geared towards an expeditious and efficient resolution of disputes.
Anna Kozmenko, Partner,
Luka Groselj, Senior Associate,
Schellenberg Wittmer Ltd, Zurich
[1] Before the unified Swiss Code of Civil Procedure entered into force on 1 January 2011, this hearing was known as "Referentenaudienz".
[2] The Swiss Rules are readily available at https://www.swissarbitration.org/Arbitration/Arbitration-Rules-and-Laws (last access on 23 November 2020).