Without Prejudice to the Spirit of Arbitration Settlement Privilege in International Arbitration

Parties to an arbitration must be encouraged to settle their disputes. However, the lack of a settlement privilege acts as a deterrent to genuine settlement.

Introduction

Settled rather than decided outcomes increase the efficiency of dispute resolution.¹ Indeed, it is said that the settlement of a dispute through the agreement of parties “is of the essence of the spirit of arbitration”.² Attempts to settle entail the exchange of proposals for settlement by the parties. Such proposals contain vital concessions of either party’s respective position in the dispute. Attempts to settle may fail. A party may feel inclined to introduce into subsequent arbitration admissions made by the other party during the settlement negotiations. The latter will object to such an endeavour. If well advised, it will argue that its statements made during settlement negotiations should not be admitted as evidence in the subsequent arbitration because they are privileged.³ “Settlement privilege” or “without prejudice” privilege excludes evidence of negotiations containing admissions against a party’s interests when those negotiations were aimed at the settlement of a dispute between the parties to those negotiations.⁴

The paper proceeds in five parts. Part II provides an overview of the state of law and practice in civil and common law jurisdictions. While tracing its origins in England and Wales, settlement privilege is now well established in common law jurisdictions. However, it is rarely addressed and developed in civil law jurisdictions. Part III highlights possible issues given the conflicting understanding of the principle in these jurisdictions. Part IV discusses various approaches to resolving the issue. Part V concludes the analysis by submitting that a transnational settlement privilege exists and is desirable for a fair and efficient running of arbitral proceedings.

The state of law and practice

Arbitration is not bound by the trappings of litigation procedure. However, parties‘ legitimate expectations from arbitral procedure may be gauged based on their common or civil law origin. Set out below is a brief overview of the treatment of settlement privilege in the civil procedure in common and civil law jurisdictions.

1. Common law

Common law jurisdictions follow the adversarial legal system. Lord Denning described the adversarial system as one where “…the judge sits to hear and determine the issues raised by the parties, not to conduct an investigation or examination on behalf of society at large…”.⁵ In effect, this entails each party submitting all documents in support of their case, and occasionally being compelled to produce documents that may not support its case. Settlement privilege is used as both a sword⁶ and a shield⁷ to repel the disclosure of settlement-related documentation. It is therefore a byproduct of the adversarial system.

Settlement privilege emanates from English and Welsh law.⁸ Other common law jurisdictions too have adopted the principle.⁹ Broadly, in common law, settlement privilege suggests that parties may convey in the context of good faith and genuine settlement negotiations, written or oral information, admissions and concessions with the assurance that the counter-party will not be able to disclose and use it against them in subsequent proceedings should the settlement not be reached.¹⁰ The communication must constitute or involve an admission against the maker’s interest.¹¹ A dispute must genuinely exist but the parties need not be amid litigation. It suffices that during negotiations the parties contemplated, or might reasonably have contemplated litigation.¹² The mere labelling of a document “without prejudice” is not enough.¹³ Equally, a document may still be privileged even without proper labelling.¹⁴ Of course, labelling it appropriately is advisable.¹⁵ The privilege applies to the whole document, and the court is not required to dissect out identifiable admissions and withhold protection from the rest, without prejudice communications.¹⁶

The privilege is, however, not absolute and as such is subject to certain exceptions.¹⁷ Without prejudice, communications may be relied on if the existence of the terms of settlement are disputed by one party;¹⁸ by a party defending itself against allegations of fraud, misrepresentation or undue influence;¹⁹ to explain any delay in proceedings or an apparent consent by the counter-party; and when an offer is expressly made “without prejudice save as to costs”.²⁰

2. Civil law

The inquisitorial system governs court procedure in civil law jurisdictions. For instance, French or Italian civil procedure do not contemplate documentary discovery or disclosure. The parties must produce their own bundle of exhibits on which they rely, which will be served on the other side and in court.²¹ Further, in Germany and Switzerland, there appear to be limited means to obtain documents from the counter-party.

A recent report by the International Bar Association Arbitration Task Force concludes that settlement privilege is absent from most civil law jurisdictions. The report concluded that although settlement privilege is an important institution, which may positively impact international arbitration, the introduction of uniform rules appears to be difficult due to the inexistence of settlement privilege in civil law jurisdictions.²²

Having said the above, communications exchanged between attorneys, whether oral or written regarding settlement cannot be produced in court in France.²³ This rule appears to be one of legal privilege. However, this rule does not seem to apply to communications exchanged between parties that were not created by their attorneys.²⁴ Switzerland bears a similar position.²⁵ Critically, France and Switzerland recognise a general mediation privilege;²⁶ such proceedings are considered confidential and not to be produced in subsequent proceedings. The conflicting understandings of the privilege in civil and common law jurisdictions give rise to various issues. These are explored in the next section.

The issue

Some reasons for the issues relating to settlement privilege arising in practice are: the nature and concept of evidentiary privileges being different in civil law and common law; the differences in the qualification of privileges as substantive or procedural matters in civil law and common law; and the lack of established conflict-of-laws rules for the determination of the law applicable to privileges in international arbitration.²⁷

Certain situations where conflicts as to the treatment of privilege claims may arise are inter alia: the parties to the arbitration are in different jurisdictions; the parties have not determined the rules applicable to privileges; the allegedly privileged communication originates from one jurisdiction and was received in another jurisdiction; and those jurisdictions may be different than those of the domicile of the parties and the seat of the arbitration.²⁸

To illustrate, consider a software services agreement between an Indian software services provider and a Swedish sports apparel manufacturer for the development of an app and a website. The agreement is governed by Indian law. The parties have agreed to resolving disputes by arbitration by the International Chamber of Commerce (ICC), seated in Paris. Disputes arise between the parties for non-payment of invoices. With a view to settle matters, parties engage in settlement discussions and arrive at a reduced figure for settlement. However, no final settlement agreement is signed between the parties. In the circumstances, the Indian service provider now commences arbitration for recovery of the original invoiced amount. The Swedish party wishes to rely on the settlement discussions between the parties as evidence of the reduced sum agreed by the service provider. It states that a settlement agreement was concluded by conduct. Signing of the settlement agreement was a mere formality. Accordingly, it is liable to only pay the reduced sum and not the originally invoiced amount. The Indian party objects. It states that the discussions are covered by “without prejudice” privilege under Indian law. No agreement was concluded between the parties. The settlement discussions cannot be relied on by either party in the arbitration unless the privilege is expressly waived. The Swedish party states that no such privilege exists under Swedish law (law of its domicile) and/or under French law (law of the seat). In this situation—which is the applicable law for determining whether the settlement discussions ought to be excluded from the record of the Tribunal?

Possible approaches to resolving the issue

In practice, there are three approaches adopted by international tribunals, to determine which rules apply to an issue of privilege: 1) the application of a single national law determined through a choice of law approach, 2) the application of the law of the seat of the arbitration, and 3) an autonomous approach.²⁹ Each of the above approaches are discussed briefly in turn.

1. Choice of law approach

All major arbitration laws and rules contain general choice of law provisions with respect to the subject-matter of the arbitration.³⁰ However, it is generally acknowledged that there is no established choice of law rule that governs the determination of the law applicable to privileges in international arbitration.³¹

Any classical conflict-of-laws analysis (before a court) begins with characterising the relevant issue, as being procedural or substantive. Procedural issues are typically governed by the law of the forum.³² If a matter is classified as substantive, then the ordinary choice of law rules or approaches of the forum with respect to cases involving a foreign element will be employed to determine the applicable law.³³

However, some common law jurisdictions tend to qualify evidentiary privileges as a substantive matter. Civil law jurisdictions favour its qualification as a procedural issue.³⁴ Therefore, the characterisation of settlement privilege itself may be complicated.

Depending on the characterisation of settlement privilege, either the lex arbitri (if characterised as procedural) or the lex causae (if characterised as substantive), may be applicable. The ultimate choice of law applicable is therefore indeterminate and will depend on the facts and circumstances of each case. This leads to unpredictability.

Certain other theories have been developed to resolve the issues with the classical conflict-of-law analysis. Some of these are the “law most closely connected”, the “most favoured nation” regime, and the “least favoured nation” regime.³⁵ However, given the possibility of the application of different laws with different privilege standards, prima facie, it appears that these approaches may not satisfy the requirements of predictability and equal treatment of parties in the arbitral process. Equal treatment of parties is a fundamental principle of commercial arbitration. It finds ample recognition in almost all national arbitration laws. Similarly, predictability is one of the hallmarks of the arbitral process. Permitting the application of these conflict-of-laws rules may result in the application of the law of one nation being preferred over the other. This may mean that one parties‘ assertion of the application of a rule being given preference over another, depending on the discretion of the Arbitral Tribunal. This, it is submitted would fall foul of the basic guarantees of equal treatment of parties and predictability in the arbitral process.

Due to size constraints these issues are not detailed any further. It is submitted that the policy of the conflict of laws should be the uniform reference of a situation, regardless of the forum, to the “law which most satisfies general social and economic demands.”³⁶ In any case, the choice of law analysis in arbitration, especially in procedural matters is different from litigation, due to the absence of a “lex fori” and the interplay between Arbitral Tribunals and the courts.³⁷

2. Law of the seat

Alternatively, an Arbitral Tribunal could apply the law applicable to the arbitral procedure to the question of the existence of a settlement privilege. Usually, this would be the arbitration law at the seat of the arbitration, the lex loci arbitri. Such an approach “…has the beauty that a single law could be applied to the issue of evidentiary privileges immaterial of which party raises the privilege….”, and “…puts parties on an equal footing”.³⁸

One justification for this may be that applying the law of the arbitration is the methodologically safe approach. Adopting the procedural law of the seat to determine applicability of privilege ensures that the award will be enforceable not only at the seat of the arbitration but also abroad. One author suggests that, “arbitrators are often anxious to assure the parties that their procedural rulings and generally, the conduct of the proceedings, comply with the procedural law of the seat of the arbitration, even if the relevant rules are not mandatory or, in some cases, not applicable to international arbitrations at all”.³⁹

This approach is, however, criticised for not taking into account the legitimate expectations of the parties.⁴⁰ For instance, when the settlement discussions took place, decades after the seat was chosen (for mere purposes of convenience).⁴¹ The seat is typically chosen for efficient administration of the arbitral process. It is unlikely that parties‘ legitimately expected treatment of their settlement communications to be based on the law of the seat. Therefore, whilst resolving the issue of equal treatment of parties, this approach may not satisfy the requirement of taking into account the expectations of the parties and their advisors at the time, the settlement privilege may have arisen.⁴²

3. Autonomous approach

In keeping with the overriding principle of party autonomy in arbitration, national arbitration laws and institutional rules frequently leave the parties with the freedom to agree on applicable evidentiary rules, including any issue of the admissibility of evidence.⁴³ Parties could agree that any statements made within settlement negotiations cannot be used against a party in the ensuing proceedings.⁴⁴ In such a situation, settlement privilege would apply and render inadmissible any such settlement related documents. In practice, this is rare.

In the absence of such agreement, national arbitration laws and institutional rules generally afford tribunals considerable discretion in evidentiary matters.⁴⁵ Often, an Arbitral Tribunal may expressly stipulate being “guided by” the International Bar Association Rules on the Taking of Evidence, 2020 (IBA Rules) in its Procedural Order 1. Parties could agree to this stipulation in the terms of reference. This gives the Tribunal some flexibility to decide peculiar questions of privilege. To illustrate, the IBA Rules under Articles 9(2)(b) and 9(3)(b) expressly envisage exclusion of any document, statement or oral testimony for reasons of privilege created for the purpose of settlement negotiations. Article 9(2)(b) makes provision for evidence to be excluded based on a legal impediment or privilege under any mandatory legal or ethical rules that are determined by the Arbitral Tribunal to be applicable.⁴⁶

Given the wide discretion afforded, an Arbitral Tribunal may apply its own independent standard to the claimed privilege. Adopting this approach, the Tribunal does not need to apply the precise rules of any national system of law.⁴⁷ However, this must be subject always to its overall duty to act fairly and treat the parties equally.⁴⁸

In principle, it is submitted that a transnational settlement privilege exists which protects settlement negotiations both with and without the presence of a third neutral.⁴⁹ A seminal article by Professor Klaus Peter Berger argues that there is a unanimous view in international alternative dispute resolution (ADR) that a general mediation privilege exists that renders all evidence, whether written or oral, stemming from mediation, conciliation and similar ADR processes between the parties inadmissible as evidence in subsequent arbitration proceedings.⁵⁰

The rule is expressed in the following terms:

Statements, views, admissions, proposals, suggestions, indications of readiness to accept a certain proposal for settlement, whether written or oral, submitted by a party during settlement negotiations, mediation/conciliation or any other ADR proceedings, or statements made or views expressed by a third neutral involved in such proceedings, and any document, witness statement and expert report submitted in or prepared solely for these negotiations or stemming from settlement negotiations, mediation/conciliation or any other ADR process between the parties are inadmissible as evidence in subsequent arbitration or court proceedings between the same parties, provided that the privilege objection is raised in the arbitration or court proceedings in good faith and does not relate to facts which one side would have been able to prove had there been no settlement negotiations.

One can have very little quarrel with the above proposition. Parties to an arbitration must be encouraged to settle their disputes. However, the lack of a settlement privilege acts as a deterrent to genuine settlement. Widespread recognition of the principle and adoption of guidelines defining its meaning and scope will incentivise frank exchanges between the parties and genuine attempts at settlement. Accordingly, arbitrators may consider excluding all documents forming part of the settlement discussions between disputing parties. This may be made subject to the common law exceptions highlighted above.

To the best of this author’s knowledge, no arbitral institution contains any express rules concerning settlement privilege. Indeed, some commentators have noted that institutional rules do not presently contain any provisions for an arbitrator to facilitate a settlement.⁵¹ Without commenting on the utility of permitting arbitrators to facilitate settlement, one approach may be to incorporate the principle of settlement privilege in institutional rules.

In any case, a clear expression of the rules of settlement privilege and the principles governing its application are necessary and will best serve the guarantees of equal treatment of parties and predictability of the arbitral process highlighted above.

Conclusion

Settlement privilege plays a critical role in fostering open and honest settlement negotiations by protecting sensitive admissions made in the course of settlement discussions. However, the lack of uniformity across jurisdictions creates challenges when parties from different legal backgrounds engage in arbitration, where the determination of applicable privilege standards becomes a contentious issue.

Various approaches, viz. applying the law of the seat, a choice-of-law analysis, or an autonomous standard — have emerged to address this issue. However, each comes with its limitations. The choice-of-law approach, while rooted in established legal principles, can lead to unpredictability. Applying the law of the seat offers consistency but may not reflect the parties‘ expectations. The autonomous approach, while flexible, requires tribunals to strike a careful balance between fairness and practicality.

Moving forward, the adoption of a transnational approach to settlement privilege, grounded in principles common to both civil and common law systems would be beneficial. This will require clear guidelines defining the scope of the rule, its exceptions and procedures for asserting this privilege.

The recognition and widespread application of settlement privilege in international arbitration would enhance trust in the arbitration process, promote the resolution of disputes through settlement, and ensure fair treatment of all parties involved. Ultimately, enabling settlement will be without prejudice and entirely consistent with the spirit of arbitration.