ARTICLE: CONSENT AWARDS IN INTERNATIONAL ARBITRATION: FROM SETTLEMENT TO ENFORCEMENT

* Dr. Yaraslau Kryvoi, LLM (Harvard) is an Associate Professor at the University of West London (United Kingdom) and a Senior Advisor to International Courts Committee, ABA Section of International Law.

+ Dr. Dmitry Davydenko is a Visiting Fellow at Max Planck Institute for Foreign and Private International Law in Hamburg (Germany), an attorney and senior associate with Muranov, Chernyakov & Partners law firm in Moscow (Russia).

The authors wish to thank Raymond Cox QC, Philip Ells, Natalia Ivanova, Liisa Lahti, Andrey Kalimanov, Maria Kiskachi, Dilyara Nigmatullina, Noah Rubins and Sergey Usoskin for their comments on earlier drafts of this paper. The paper also benefited from comments of participants of seminars organised by the Centre for Cross-Border Commercial Law in Asia of the Singapore Management University in May and Nagoya Graduate School of Law in June 2015. (c) Yaraslau Kryvoi, 2015. The author has not granted rights to reprint this article under a Creative Commons Attribution-Non-Commercial license. Please contact the author directly for reprint permission.

* Dr. Yaraslau Kryvoi, LLM (Harvard) is an Associate Professor at the University of West London (United Kingdom) and a Senior Advisor to International Courts Committee, ABA Section of International Law.

+ Dr. Dmitry Davydenko is a Visiting Fellow at Max Planck Institute for Foreign and Private International Law in Hamburg (Germany), an attorney and senior associate with Muranov, Chernyakov & Partners law firm in Moscow (Russia).

The authors wish to thank Raymond Cox QC, Philip Ells, Natalia Ivanova, Liisa Lahti, Andrey Kalimanov, Maria Kiskachi, Dilyara Nigmatullina, Noah Rubins and Sergey Usoskin for their comments on earlier drafts of this paper. The paper also benefited from comments of participants of seminars organised by the Centre for Cross-Border Commercial Law in Asia of the Singapore Management University in May and Nagoya Graduate School of Law in June 2015. (c) Yaraslau Kryvoi, 2015. The author has not granted rights to reprint this article under a Creative Commons Attribution-Non-Commercial license. Please contact the author directly for reprint permission.

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 [*828]  INTRODUCTION

Consent awards, being effectively settlement agreements recorded by arbitration tribunals as awards, raise a number of difficult legal questions, ranging from the right of arbitrators to refuse recording of the settlement as a consent award to the possible use of consent awards to cover illegal activities. Understanding what makes consent awards different from "normal" arbitration awards will help successfully navigate from settlement to enforcement. This Article presents the first major study of the legal regime governing consent awards in international arbitration.

According to some estimates, settlements before or after arbitration proceedings amount to up to 30 percent of all administered arbitrations. 1 Another study suggests that over 40 percent  [*829]  of settlements were reached before the first arbitration hearing. 2 Subsequently, many of these settlement agreements are recorded as consent awards. 3 However, despite this impressive popularity of settlements and the complex legal questions they pose, very little has been written on the legal issues related to settlement agreements and consent awards. In 2014, the United Nations Commission on International Trade Law ("UNCITRAL") agreed to authorize its Working Group to consider the issue of enforcement of international settlement agreements. 4 In 2015 the Working Group reported to UNCITRAL a summary of its findings and recommendations, and was instructed to commence work on the enforcement of settlement agreements resulting from international commercial conciliation. 5

The practice of recording settlement agreements in the form of arbitral awards dates back to Ancient Greece. The Greek philosopher Isocratus (436-338 BC), in a court speech on behalf of the respondent in "Against Callimachus," argued that the case was already settled in an arbitral award on agreed terms. 6  [*830]  The ancient Greeks used to fix arbitral awards on agreed terms on the most vital disputes in stone or bronze. 7 For example, a surviving stela dating back to 363 B.C. indicates the terms of settlement of a dispute regarding the division of a plot of land. 8

Nowadays, a number of international instruments encourage mediation and conciliation, 9 both of which specifically aim at helping parties reach an amicable settlement. 10 The World Bank established the International Centre on Settlement of Investment Disputes ("ICSID") to encourage settlement of investment disputes through mediation and arbitration. 11 The  [*831]  UNCITRAL urged national courts to regard settlement as a desirable outcome of civil procedure. 12

This Article begins by demonstrating that settlement remains a preferred outcome of disputes because it helps the parties to reduce costs, save face, and retain good business relations. Additionally, parties often prefer the certainty of settlement to the uncertainty of an arbitration award. Furthermore, parties may also want to have additional enforceability of their settlement by asking an arbitral tribunal to record it as an arbitration award. Whether enforced under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (also known as the "ICSID Convention") or the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"), a consent award is treated as a normal arbitration award by the enforcing courts.

Part I of this Article analyzes various arbitration rules in order to demonstrate that, despite their occasional ambiguity, it remains for an arbitral tribunal to decide whether it will record a settlement agreement as an arbitration award. The tribunal must ensure that it renders an enforceable award, in particular by determining whether there was a genuine dispute within its jurisdiction. Failure to do so may result in an arbitration award being set aside by a court in the seat of arbitration or refusal to recognize and enforce the award in domestic courts.

Part II examines consent awards as a cover for illegality. Parties to an arbitration proceeding may not have a genuine dispute but instead try to get an arbitration award to cover improper activities such as tax evasion or money laundering. In case of a consent award, the "losing" party may have no incentive to challenge the award in the courts. In such situations, responsibility to identify and uncover illegal transactions lies with the arbitrators. On the other hand, judges will need to ensure that the award did not breach not only any applicable law, but also transnational public policy.

 [*832]  Part III discusses issues related to the enforceability of consent awards rendered as a result of mediation or alternative dispute resolution methods, which typically do not result in a binding decision. The authors argue that the enforceability of the award will depend upon whether the arbitral tribunal resolved a genuine dispute or merely rubber-stamped a settlement agreement reached in mediation. The Article concludes by highlighting instances where tribunals and enforcing courts are likely to treat consent awards differently from "normal" arbitration awards and its implications for designing an effective dispute resolution procedure.

I. THE LEGAL REGIME GOVERNING CONSENT AWARDS

A. The Purpose and Nature of Consent Awards

Consent award (also known as award on agreed terms) is essentially an arbitral award recording a settlement agreement reached by the parties in dispute. What makes them different from "normal" arbitration awards is that the arbitral tribunal does not consider the dispute on the merits, but instead puts the parties' agreement into shape of an award.

To understand the legal issues arising out of consent awards, it is important to establish what drives parties to settle their dispute, the legal nature of settlement agreements, and the reasons for seeking consent awards. Even though most arbitration rules and national laws provide for the possibility of recording a settlement as a consent award, it is not always clear how much discretion arbitrators have to do so. The law and practice is even less uniform on whether arbitrators can play a proactive role in helping parties reach a settlement, which they can subsequently record as a consent award.

1. Why Settle?

Although the legal effect of a settlement agreement may vary in different legal systems, 13 it remains essentially a contract. 14  [*833]  "Settlement" can be described as a legally enforceable contract, by which parties terminate their dispute, usually by mutual concessions. 15 It often involves a promise of payment or other consideration and an agreement not to pursue any further claims.

Settlement also serves as a risk-management tool. In many cases arbitrating parties cannot predict how the arbitral tribunal will evaluate the merits of their legal position and interpret the applicable legal rules. Consequently, the outcome of the dispute resolution by arbitration usually remains uncertain. A party may prefer the certainty of settlement to the uncertainty of an arbitration award in the future. Desire to reduce costs, avoid time-consuming arbitral proceedings and to remain on friendly terms with the other party can serve as additional incentives to settle. 16 Amicable settlement of disputes facilitates restoration of the atmosphere of mutual trust, even after a difficult  [*834]  dispute. Additionally, settlement helps to promote further cooperation. 17

If parties discontinue proceedings at any time prior to the rendering of an arbitral award, 18 they will not be charged the full administrative fees of the arbitrators. Arbitrators' fees usually depend on how much work the arbitrators did prior to the settlement. If parties decide to opt for an award by consent, then arbitrators will spend additional time examining or drafting the award. On the other hand, parties may decide to draft the award themselves and then propose it to the arbitrators for approval and rendering. 19

Starting arbitration proceedings may also serve as a bargaining tool to motivate an opposing party to come to an agreement. 20 A request to arbitrate a dispute may become a wake-up call for management to understand that the other party is serious about pursuing legal remedies. 21 Also, for interested third parties an arbitral award issued by a neutral tribunal may look as a more respectable basis for payment than a mere agreement of the parties. 22 Parties may withdraw from the arbitral proceedings either separately or as part of a settlement agreement. If a settlement agreement provides for some conditions preceding its entry into force, an arbitral tribunal issues a consent award after the parties' confirmation that such conditions have been satisfied and the settlement agreement has taken effect. 23

 [*835]  2. Why Seek a Consent Award?

Terminating arbitral proceedings does not necessarily result in a consent award. Parties may prefer not to obtain a consent award but to instead keep their settlement agreement confidential. They may also decide to suspend the proceedings until the settlement agreement has been complied with. 24

Domestic or international enforceability is the main reason why parties may wish to have their agreement recorded as an arbitral award. 25 Where under applicable national law settlements may constitute directly enforceable titles, consent awards aim to achieve or enhance their international enforceability. 26 The additional costs of having the settlement agreement  [*836]  recorded as an arbitration award are likely to be minimal, compared to the resources already spent on arbitration. 27

All major international arbitral institutions establish a favourable regime for the parties' settlement allowing parties to discontinue their arbitration proceedings at any time by mutual consent. Additionally, many sets of arbitration rules explicitly support the possibility of fixing settlements in consent awards. These rules include the International Court of Arbitration of the International Chamber of Commerce ("ICC") rules, 28 the American Arbitration Association rules, 29 London Court of International Arbitration ("LCIA") rules, 30 UNCITRAL Arbitration rules, 31 among others. 32

However, even where national law does not expressly provide for arbitrators' power to issue consent awards, such power inherently belongs to arbitrators. This follows from the general principle favor conciliationis (that is, favouring conciliation of  [*837]  disputing parties) existing in any developed legal system. 33 This also follows from the principle of autonomy of the parties' will. An arbitral tribunal decides how to conduct the arbitration, but the substance of the dispute always rests within the parties' discretion: they may dispose of the dispute by their mutual agreement.

Unlike in a typical arbitration, the tribunal does not resolve the dispute on the merits, but instead reflects the agreed settlement terms of the parties. An arbitral tribunal may not issue an award on agreed terms without such a request from both parties of the settlement agreement. 34 As mentioned above, parties may decide not to have a consent award once settlement is reached. 35 Consent awards may contain statements confirming that the parties do not admit any liability by entering into such awards, 36 denying all liability and wrongdoing in connection with the settled dispute, 37 or discharging and releasing each other from all claims in litigation and arbitration. 38 Parties may also agree on a conditional settlement upon the issuance of a consent award. In this case if the consent  [*838]  award is not rendered, the proceedings will continue and the tribunal will issue a final award. 39

A consent award is normally considered final, as it ends the dispute submitted to arbitration in its entirety and brings the proceedings to an end. 40 Parties may reach either partial or total settlements. Portions of the dispute that are settled will be regarded as res judicata and future action on those issues will be barred, while those unresolved will still be open to future action. Even where no payments are due, the consent award will serve as a shield against future claims.

B. Responsibilities of the Arbitral Tribunal

1. Rendering a Consent Award: A Right or an Obligation of the Tribunal?

To render a consent award, an arbitral tribunal must first decide on its competence to hear the dispute in question. When arbitrators record the settlement, they do not decide the case on the merits but they dispose of the dispute. Therefore, if for instance, a dispute is nonarbitrable or the arbitrators lack authority to resolve it for another reason, they may not proceed to consider the settlement of the parties. 41 Where a tribunal finds itself competent to hear a dispute, it must decide which law is applicable to the substance of the parties' relations. 42 Both the  [*839]  applicable law and the agreement between the parties determine the powers and responsibilities of the arbitral tribunal. In particular, the very possibility of making a consent award will depend on whether the settlement terms contradict some mandatory rule of applicable law. 43

Nearly all major arbitration rules give discretion to a tribunal on whether or not to render a consent award based on a settlement agreement. This reflects a modern trend in arbitration rules. For example, under the 1988 ICC Rules of Arbitration, arbitrators were under an obligation to accept the parties' request to sign an award by consent. 44 The current 2012 Rules however, provide that the signature of an award by consent is subject to the arbitrators' discretion. 45 In this respect, the wording of World Intellectual Property Organization ("WIPO") arbitration rules differs because the rules do not appear to give discretion to the tribunal whether or not to render a consent award. 46 However, the authority of the arbitral tribunal to refuse  [*840]  to render the consent award if they consider the settlement terms unlawful may follow from applicable procedural law.

The UNCITRAL Model Law expressly authorises the tribunal to object to recording a settlement in the form of an arbitration award. 47 Various grounds may give reason to arbitrators to reject such a request. For example, a settlement document itself may not look like a genuine expression of the will of the two parties. 48 An arbitration tribunal is under an obligation to both satisfy itself that the parties have settled a genuine dispute and to bear in mind the risk that the consent award may be used for an improper purpose. 49

Following the UNCITRAL Model Law, most national laws expressly provide for the possibility of arbitrators to reject the recording of a settlement agreement as a consent award. In practice, however, arbitrators have little discretion if requested by the parties to issue a consent award. They should render such an award if they find both the dispute genuine and the settlement terms lawful or they must refuse rendering such an award if they find proper grounds to believe the settlement  [*841]  terms to be unlawful. 50 Failure to do so may even result in the award being unenforceable. 51

In the United States, parties may agree to settle a dispute at any stage prior to the issuance of the award and request the endorsement of the settlement agreement by a tribunal in the form of a consent award. 52 Under the English Arbitration Act 1996 if, during arbitral proceedings the parties settle the dispute, "[t]he tribunal shall terminate the substantive proceedings and, if so requested by the parties and not objected to by the tribunal, shall record the settlement in the form of an agreed award." 53 The German Code of Civil Procedure provides that upon the parties' request an arbitral tribunal shall record the settlement in the form of an arbitral award on agreed terms, unless the substance of such agreement contradicts the ordre public. 54 Such an award shall have the same effect as any other award on the merits of the case. 55

In contrast, French law is silent as to consent awards. 56 It is likely that legislators believed that such power of the arbitrators is self-evident given that the arbitration procedure is determined by the parties' agreement. Yet some recent arbitration laws of other countries, which historically follow the  [*842]  French legal tradition, expressly mention consent awards. 57 According to a general consensus, it is not an arbitrator's discretion but an arbitrator's duty to render an enforceable award. 58 In the context of recording a settlement agreement as a consent award, this means making sure that the settlement terms are not unlawful. 59

Timing is important for a settlement agreement to become an award. Usually a consent award becomes possible after a tribunal has been constituted. For instance, the ICC Rules of Arbitration require that a settlement be recorded in the form of a consent award only after the file has been transmitted to the arbitral tribunal. 60 Otherwise the tribunal will have no right to  [*843]  render a consent award. However, such a possibility relates only to current disputes. 61

2. Can an Arbitrator Mediate?

Unlike legally binding arbitration, mediation is a non-binding interest-based method of dispute resolution. 62 Mediation aims to identify the parties' interests underlying their legal positions, and to find a solution mutually satisfying such interests. A mediator renders no binding decision but rather only manages the negotiation process. As result, an outcome of a successful mediation always embodies the parties' agreement. In contrast, in arbitration the process is evaluative and an outcome usually constitutes an adjudicatory decision of a neutral third party rather than the parties' agreement.

Engaging a tribunal in settlement negotiations may benefit the parties as the tribunal has knowledge about the dispute to guide the parties towards settlement. However, if settlement negotiations fail, the parties' settlement proposals may influence the final award.

According to the International Bar Association Guidelines on Conflict of Interest in International Arbitration ("IBA Guidelines"), even if parties expressly agree that an arbitrator will assist them in settlement of the dispute, the arbitrator must resign if, as a consequence of settlement efforts, he or she develops doubts as to their ability to remain impartial or independent in the future course of arbitration proceedings. 63 The IBA Guidelines allow arbitrators to assist parties in reaching a settlement of the dispute at any stage of the proceedings, but only upon an express agreement by the parties. 64 Otherwise such relationship would constitute an impermissible conflict of  [*844]  interest. In other words, the award being on agreed terms does not reduce the importance of the requirements of impartiality and independence. 65 UNCITRAL Notes on Organising Arbitral Proceedings warn arbitral tribunals to be cautious while making proposals to amicably settle disputes. 66 However, at the same time they recommend scheduling arbitral proceedings so as to facilitate settlement. 67

Civil and common law jurisdictions differ on the issue of an arbitrator's involvement in settlement negotiations. Arbitration rules in civil law jurisdictions often provide that arbitrators are expected to facilitate settlement discussions. For example, in Germany under the Rules of German Institution of Arbitration (die Deutsche Institution für Schiedsgerichtsbarkeit -- DIS) "at every stage of the proceedings, the arbitral tribunal should seek to encourage an amicable settlement of the dispute or of individual issues in dispute." 68 WIPO Arbitration Rules contain similar provisions. 69

At the same time in common law jurisdictions originating from English law, judges and arbitrators are not supposed to play a proactive role. 70 For example, the Code of Ethics for Arbitrators of the American Arbitration Association provides that  [*845]  it is not improper for an arbitrator to suggest to the parties to discuss the possibility of settlement, but the arbitrator should not be present or otherwise participate in settlement discussions. 71 Even in situations when facilitation by arbitrators is expected, there are certain limits on their involvement in settlement negotiations. 72

Parties will be estopped from challenging the arbitrator's impartiality where they expressly allowed him or her to participate in settlement discussions. Therefore, whether in a common or civil law jurisdiction, in order to minimize the risk of subsequent challenges the tribunal needs to obtain express consent from the parties to engage in settlement discussions. Quite frequently parties will approve such activity of arbitrators because it can increase the probability of reaching a fair settlement agreement. However, some parties may be reluctant to advance and discuss settlement proposals with the arbitrator because they may fear that such discussion may affect his or her opinion on the merits of the case and consequently the award on the merits, should they fail to reach an amicable settlement. Furthermore, a party may fear that if they decline a settlement proposal made by the arbitrator such conduct itself may displease the arbitrator which can have an adverse effect on the future award. As result, sometimes parties do object to exercising a conciliatory function by arbitrator.

3. Can a Mediator Become an Arbitrator Merely for the Purpose of Issuing a Consent Award?

As discussed above, unlike an arbitrator, a mediator has no authority to decide on the merits of the dispute. When parties wish to appoint as arbitrator the same individual who acted or will act as a mediator, this may endanger the enforceability of the parties' consent award. Mediation has a number of features, which may become inconsistent with the principles of due process applicable to the arbitration procedure. 73 In arbitration,  [*846]  an arbitrator normally does not meet with the parties separately. 74 In mediation, most rules authorise a mediator to hold private caucuses with each of the parties separately. 75 Private caucuses serve various purposes, including serving as a source to obtain additional information or to assist a party in safely exploring existing options for settlement or alternatives to agreement.

In arbitration, all information provided by a party to an arbitral tribunal must be communicated to the opposing party in a timely fashion. 76 In contrast, in mediation, a mediator may disclose information confidentially given by one party in private caucuses to the opposing party, only where the former expressly authorises the mediator to do so. 77 Parties may also request  [*847]  the arbitrator to make a consent award where they resolve their dispute through another technique called mediation-arbitration ("med-arb"). 78 In med-arb parties usually 79 appoint a neutral person as a mediator and arbitrator from the outset of a dispute-resolution procedure so that they can arbitrate the dispute should the mediation not bring about a settlement. 80 Can using such techniques lead to the refusal to enforce the resulting arbitral award because it "was not in accordance with the agreement of the parties? Failing such agreement, was the procedure not in accordance with the law of the country where the arbitration took place"? 81

Generally an arbitrator can mediate the same dispute only upon express request of the parties. 82 The UNCITRAL Model Law on International Commercial Conciliation provides that parties may agree to appoint a mediator as arbitrator in the  [*848]  same dispute on which he mediated, or in a relevant dispute. 83 In the absence of such express agreement, a mediator must not be an arbitrator in such disputes. The purpose of this rule is to provide greater confidence in the conciliator (mediator) and in mediation as a method of dispute settlement. 84 That is, parties are likely to speak more candidly with the mediator if they know that he or she will not render a binding decision on their dispute should they fail to reach a settlement agreement. 85

Similarly, the IBA Guidelines provide that before assisting the parties in reaching a settlement, the arbitrator should obtain their express agreement that such assistance shall not disqualify him or her from continuing to serve as the arbitrator in the same or a relevant dispute. 86 Such express agreement will serve as an effective waiver of any potential conflict of interest that may arise from the arbitrator's participation in a settlement or from getting access by the arbitrator to certain information during the process of settlement. 87 This explains the prohibition for a mediator to become an arbitrator in the same or a relevant dispute--such a person would lose impartiality because of what he learnt in the course of the mediation procedure. 88

 [*849]  In some jurisdictions courts and legislatures allow parties to waive their procedural rights. 89 A party cannot successfully challenge the neutrality of an arbitrator if the parties waived their rights to challenge for lack of impartiality resulting from an arbitrator's double status of mediator and arbitrator. 90 Also, the parties cannot challenge the arbitral award referring to ex parte meetings with the neutral arbitrator where they expressly agreed to such meetings. 91 In some countries, however, waiver of the right to procedural fairness may be regarded as contrary to public policy. 92 Only by carefully examining the relevant arbitration rules and laws governing arbitrators' conflict of interests applicable in the country where arbitration takes place or where the parties seek enforcement of the arbitral award, parties can minimise the risk of challenges of their consent award.

 [*850]  C. Enforcing Consent Awards

Consent awards are covered by the general definition of awards 93 and therefore general rules governing the enforcement of arbitral awards also apply to them. 94 The main reason why parties are interested in recording settlements as a consent award is to enforce it without having to launch new arbitral or court proceedings. However, neither the New York Convention nor the ICSID Convention mentions the enforceability of consent awards. 95 This raises a number of issues related to the legal nature of consent awards and possible enforcement challenges.

1. Enforcement under the New York Convention

The New York Convention neither defines the term "arbitral award" nor mentions consent awards. This silence raises the question of whether consent awards qualify as arbitral awards under the Convention. The answer to this question may depend on whether a consent award is a genuine arbitral award, or whether it remains merely a contract. Indeed, consent awards differ from usual arbitral awards in several respects. As discussed above, in a consent award, an arbitral tribunal records the agreement of the parties, rather than their own decision on the merits. 96 Some scholars even argue that consent awards should not be enforceable under the New York Convention because strictly speaking, consent awards are not arbitral awards and are only treated as such. 97

The travaux préparatoires of the New York Convention do not clarify the extent to which the Convention applies to consent  [*851]  awards. 98 To interpret the notion of "award" one can refer to the UNCITRAL Model Law on International Commercial Arbitration, 99 which provides that an award on agreed terms "has the same status and effect as any other award on the merits of the case." 100 In other words, recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only on limited grounds. 101

Under the New York Convention, consent awards can be challenged at the enforcement stage for the excess of mandate of the arbitrator in the jurisdiction where enforcement is sought. 102 A competent authority of the country in which, or  [*852]  under the law of which, it is rendered can also set the award aside. 103 As mentioned above, some national laws, such as French law, do not expressly provide for the power of the arbitral tribunal to render consent awards. Some authors believe that this creates a risk of arbitrators issuing consent awards that exceed their mandate, even where the applicable arbitration rules allow it. 104 There is also a concern that arbitrators who make consent awards in the absence of statutory regulation might be overstepping their mandate. 105

Some jurisdictions explicitly give consent awards the "same status and effect" as arbitral awards, 106 while others simply identify consent awards as arbitral awards. According to the prevailing view, consent awards can be enforced "as any other award." 107

A legal provision of a settlement agreement may break legal rules of one jurisdiction and remain legal under rules of another jurisdiction. For example, certain payments may be regarded as commercially acceptable and necessary in one jurisdiction, but as corruption or bribery in another jurisdiction, and in addition as contrary to transnational public policy. 108 The New York Convention does not make recognition and enforcement of the arbitral award in other jurisdictions a valid ground for challenging recognition and enforcement. In other words, as  [*853]  long as the award has not been set aside or suspended in the place where it was rendered, courts will be guided by their domestic law in deciding whether to recognise and enforce an arbitral award.

Some jurisdictions such as the United Kingdom allow parties to arbitral proceedings a limited right of appeal on a point of law in domestic courts. 109 However, a consent award cannot be appealed on a point of law, 110 because such award normally does not contain the tribunal's reasoning on the merits of the dispute. 111 Moreover, the parties' request to record a settlement as an arbitral award may be regarded as a waiver of the parties' right to challenge the award, except in relation to matters of public policy. 112 This follows from the principle of prohibition of contradictory behaviour of each party to arbitral proceedings. 113 The same principle is embodied in the UNCITRAL Model Law on International Commercial Arbitration. 114 Therefore when parties have actively participated in the arbitral proceedings and submitted their settlement agreements to the arbitral tribunal for recording in a consent award, they should be estopped from challenging the award by referring to procedural violations. 115

 [*854]  If the settlement agreement covers issues not covered by the arbitration agreement, an arbitral tribunal will have no jurisdiction to render an award on these matters and enforcement will be refused. 116 Parties may try to rectify this by an additional written agreement. 117 Even if the settlement covers issues that lie outside the scope of arbitration, a partial enforcement is possible under article V(c) of the New York Convention. Whatever procedure the parties decide to follow, the tribunal must be dealing with a genuine disagreement to have jurisdiction. Where parties appoint an arbitral tribunal after a settlement to merely record the settlement in the consent award, there is no "difference" between the parties to resolve; the parties have already settled the dispute. A "difference" is a necessary precondition of an "award" in the sense of the New York Convention. 118 Additional issues arise with regard to international enforceability under the New York Convention of consent awards resulting from mediation. 119

2. Enforcement under the ICSID Convention

The ICSID Convention does not specifically mention the power of the arbitral tribunal to render awards on agreed terms or their enforcement. However, ICSID Arbitration Rules allow such awards. 120 Although some awards have been published 121  [*855]  most settlement agreements remain unpublished, including those that were adopted by tribunals in the form of a consent award. 122

Under the ICSID Convention, the settlement agreement approved by the tribunal in effect transforms into an award, which according to Article 54(1) has the same status as a final judgment of domestic courts. Therefore, consent awards rendered by an arbitral tribunal within proceedings under the ICSID Arbitration Rules are enforceable in the same way as any other ICSID arbitral award. Failure to enforce the award would be a breach of the Convention and trigger diplomatic protection under Article 27 of the ICSID Convention.

The possibility of annulment is a crucial consideration in the enforceability of ICSID awards; therefore it is important to understand the various grounds on which the annulment of consent awards may be granted. 123 While most grounds for annulment are no different when applied to consent awards as compared to usual awards, one ground requires brief explanation. Under Article 5 (1)(e) the award can be annulled if it "has failed to state the reasons on which it is based." 124 However, in the context of consent awards this ground should not apply because the ICSID Arbitration Rules specifically allow consent awards.

II. ILLEGALITY IN CONSENT AWARDS

Since consent awards record agreements drafted by the parties, they are more likely to hide some kind of illegality as compared to situations when a neutral arbitrator drafts the award. 125 As discussed earlier, the arbitrator should reject a request to record a settlement agreement as an arbitration award if he finds that the award may be used for an improper or illegal purpose. This section examines possible illegal activities,  [*856]  which could be concealed under the mask of consent awards, sources of law that apply to determine illegality, and the consequences of establishing illegality.

A. Consent Awards Tainted by Illegality

Nearly all arbitration rules allow a tribunal to decline recording a settlement agreement as a consent award only if a tribunal has a good reason to believe that the arbitration or the settlement agreement is used for an improper cause. For instance, such improper cause can consist of an abuse of one's rights, 126 money laundering, 127 bribery, 128 financing terrorism, 129 and breaches of competition law or covering other illegal activities. 130

It may be particularly difficult to uncover illegal activities hidden by consent awards. In one scenario, only one party commits illegal activities and the other party is unaware of it, and subsequently challenges the award. In this respect, challenges will not differ from those raised in relation to "normal" arbitral awards. However, a more likely scenario in the context of consent awards is when both parties know the settlement agreement is illegal. For example, one of the parties may bring a claim before the tribunal, which looks superficially genuine, but arises out of a sham agreement. The other party will not contest it. The parties settle the "dispute," and the tribunal records the settlement award. The "winning party" then receives an internationally recognized award, under which it gets  [*857]  a payment, which appears legitimate on its face. 131 Alternatively, a contract may be real, but "the price at which it is entered might be inflated." 132 In this scenario none of the parties have an incentive to reveal improper conduct and it might be difficult to uncover fraudulent or illegal activities. It is particularly challenging to understand responsibilities of the arbitral tribunal in this situation.

B. Determining What Conduct is Illegal

Two broad categories of transactions can be regarded as illegal in the absence of any widely agreed definition: any transaction that in its formation, purpose or performance involves the commission of a legal wrong (other than breach of the transaction itself); and conduct which is contrary to public policy. 133

A wide variety of acts can be regarded as illegal: transactions that interfere with the administration of justice, are prejudicial to the status of marriage or involve or promote sexual immorality, or constitute a restraint to trade or the doing of an illegal act in a friendly foreign country. Additionally, transactions which encourage such conduct, can also be illegal. 134

1. Domestic Law

Several domestic legal systems usually come into play in international arbitration: the chosen substantive law, the law of the seat of arbitration, and the law governing the arbitration clause. In addition, an applicable company law, law of the status of the natural person, or the place of the contract performance, may also play a role.

In most cases parties agree upon the applicable substantive law in their contract. If not, the issue is decided on the basis of applicable procedural law, in particular relevant arbitration rules. For instance under UNCITRAL Rules, if parties fail to  [*858]  agree on the applicable law, a tribunal will apply the law which it determines to be appropriate. 135 A tribunal will also take into account the contract provisions and any usage of trade applicable to the transaction. 136 ICC Arbitration Rules follow a similar approach. 137 The ICSID Convention stipulates that in such situations the law of the host State and applicable international law come into play. 138

National laws vary on what constitutes unlawful activity. Under the United Kingdom Proceeds of Crime Act 2002, it is a criminal offence to "become concerned in" an arrangement which the person charged knows or suspects to facilitate (by whatever means) the acquisition, retention, use, or control of "criminal property" by or on behalf of another person. 139 Criminal property is broadly defined as property that "constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly)." 140 For the purpose of the Act, it is immaterial who carried out the conduct and who benefited from it. 141 Albeit in an obiter dictum, the English Court of Appeal explained that if the settlement does "not reflect the legal and practical merits of the parties" it could be subject to the Proceeds of Criminal Acts Act. 142

In New South Wales, Australia, prosecution for failure to disclose information about a "serious indictable offence" may be commenced with the approval of the Attorney-General where the person learns of the information "in the course of practicing or following a profession, calling or vocation" prescribed by the regulations. 143

In the United States, the Money Laundering Controls Act of 1986 criminalizes the conduct of financial transactions involving the proceeds of "specified unlawful activity." 144 The Act does not establish a minimum monetary threshold, and defines "financial transaction" broadly, and need not involve a financial  [*859]  institution, or even a business. The statute requires the specific intent of an individual in making the transaction to conceal the source, ownership, or control of the funds. Passing money from one person to another with the intent to disguise the source, ownership, location or control of the money, has been deemed a financial transaction under that law. 145 Therefore, if the arbitrator has the requisite intent he or she can be held liable under this statute.

2. Public Policy

The UNCITRAL Model Law on International Commercial Arbitration permits setting aside an award on grounds of public policy. 146 Most developed national arbitration statutes are broadly similar to the Model Law. 147 The International Law Association interprets the notion of pubic policy as an international public policy of a particular State. 148 Therefore the award is subject to the public policy of the seat of arbitration.

In addition, breach of transnational public policy could render the award unenforceable in most jurisdictions around the world. 149 Transnational public policy refers to the principles of universal justice, jus cogens in public international law, and the general principles of morality accepted by civilised nations. 150 Unlike international public policy, transnational public policy is not tied to any particular national law, but rather, refers  [*860]  to values shared by all civilised nations. The International Law Association report on public policy stipulates that transnational public policy overrides national laws that otherwise may apply, according to the relevant conflict of laws rules. 151

To sum up, in order to determine whether the settlement agreement serves an improper purpose and should not be recorded as a consent award, a tribunal needs to consider public policy, the law of the seat of arbitration, the substantive law of the transaction and perhaps the law of the jurisdiction in which enforcement is likely to be sought. Nonetheless, the consent award may be challenged either in the seat of arbitration or in jurisdictions where enforcement is sought for excess of mandate and violating the agreed rules of procedure.

C. Consequences of Illegality

Tribunals and courts may follow different approaches on consequences of illegality. Usually they just refuse to recognise suspicious settlement agreements, rather than revisit the merits. 152 In a well-known ICC case, Judge Lagergen, acting as sole arbitrator, ruled on a case, which involved a contract contemplating bribery of public officials. The judge held that by entering into such an objectionable contract, the parties "have forfeited any right to ask for assistance of the machinery of justice (national courts or arbitral tribunal) in settling their dispute." 153 According to this logic, a court or tribunal does not constitute a proper arena for wrongdoers to resolve their disputes.

Although Judge Lagergen declined jurisdiction to consider the merits of the dispute, the modern trend in international arbitration is to assert jurisdiction over such disputes to determine whether the alleged illegal activities have in fact occurred. 154 [*861]  If the arbitrator concludes that the proceedings are being conducted for an illegitimate purpose, arbitrators are expected to take appropriate steps, such as resignation or dismissing the proceedings sua sponte. 155 The Chartered Institute of Arbitration recommends that,

if an arbitrator knows or suspects that a request for an agreed award is, or may be, a prelude to an arrangement by which criminal property is to be acquired, retained, used or controlled, he should of course refuse to issue such an award. 156

A tribunal must also be aware that a number of jurisdictions make it a criminal offence to facilitate or even to know about transactions that involve unlawful activities, and require reporting them to relevant authorities. If an arbitrator has reliable knowledge that the parties were conducting the proceedings to further a criminal purpose, he or she may be either obliged or justified to report such criminal intent to the relevant authorities. 157 For instance, under the United Kingdom Proceeds of Crime Act a person can avoid responsibility by making a disclosure to the relevant authorities, unless that person has a legitimate excuse for not doing so. 158 Failure to do so may result in committing a criminal offence. 159 This is particularly important in the context of consent awards, when none of the complicit parties will be willing to challenge the award.

 [*862]  It is sometimes suggested that one of the purposes of refusing remedies arising out of illegal contracts is to punish the wrongdoer. 160 For the same reason domestic courts often impose exemplary or aggravated damages. 161 Punishment, however, remains a goal of criminal law rather than international arbitration, which is quintessentially a private system of dispute resolution devoid of any public authority. Therefore it is not the arbitrators' role to punish the parties.

This analysis suggests that tribunals have two main options when it comes to settlement agreements tainted by illegality. First, they may decline jurisdiction without a detailed examination of the evidence. Secondly, they may assess jurisdiction, examine the evidence, resign and then dismiss the proceedings. In addition, they might be under an obligation to report illegal activities to the relevant authorities.

III. CONSENT AWARDS RESULTING FROMMEDIATION

A. What Makes Such Awards Different?

As in arbitration, parties may want to endow their agreement resulting from mediation with additional enforceability to avoid the necessity and expense of suing on the settlement agreement when the other party fails to fulfil it. 162 Expedited enforcement of a mediated settlement may become important for the parties, especially in international disputes. 163 The parties may agree to appoint the mediator or another person as arbitrator, only to formalise their settlement in an arbitral award.  [*863]  The question is whether such agreements should be enforced as arbitration awards.

According to the International Council for International Arbitration ("ICIA"), not all dispute resolution methods qualify as arbitration and the New York Convention does not cover mediation or expert determination. 164 The ICIA guide defines arbitration as "a method of dispute settlement in which the parties agree to submit their dispute to a third person who will render a final and binding decision in place of the courts." 165 Some argue that a consent award reached in mediation is a trick of legal fiction. 166 Indeed, the arbitrator is not presented with a current dispute. The dispute is already extinguished and there is nothing to resolve but to grant the settlement as a form of an arbitral award. However, some procedural rules, including rules of the Arbitration Institute of Stockholm Chamber of Commerce, expressly provide that the parties may appoint the mediator as arbitrator to record their settlement in a consent award. 167 Most other jurisdictions remain silent on this matter. When the parties wish to enforce their consent awards in one of multiple foreign jurisdictions, this raises the question of whether such consent awards are enforceable under the New York Convention.

B. Enforceability of Consent Awards Resulting from Mediation

The United Nations Commission on International Trade Law has already approved preparation of a new international legal instrument, possibly a convention dedicated to the enforcement  [*864]  of international mediated settlement agreements. 168 However, currently there is no special mechanism to enforce settlement agreements resulting from mediation. Domestic legislation of a number of States allows parties who have settled a dispute through mediation to appoint an arbitrator specifically to render a consent award. 169 In some jurisdictions the national law expressly provides that settlement agreements reached through mediation upon the parties' agreement shall be enforceable in the same way as arbitral awards. 170 At the same  [*865]  time, some jurisdictions require that the arbitration commence before the settlement is reached; otherwise the mediated settlement will not enjoy the status of arbitral award. 171 In India, any settlement agreement signed by the parties is final and binding on them and persons claiming under them respectively, and has the same status and effect as arbitral award. 172

It appears from the text of the New York Convention that it does not apply to mediated settlements reached before the commencement of arbitral proceedings. Article I provides that the Convention applies to "the recognition and enforcement of arbitral awards" 173; this article also states that the term "arbitral awards" shall include "not only awards made by arbitrators appointed for each case, but also those made by permanent  [*866]  arbitral bodies to which the parties have submitted." 174 This implies that the Convention covers only the awards of arbitrators or arbitral institutions. Indeed, unlike an arbitrator, a mediator is not deciding the dispute on the merits and not rendering a binding decision. 175

When parties appoint an arbitral tribunal merely to record a settlement in a consent award, there is no "difference" between the parties to resolve: the parties already negotiated or mediated such difference. From the plain text of the New York Convention it follows that a "difference" is a necessary precondition of an "award" in the sense of the convention. 176 The parties appoint the arbitrators merely to obtain a consent award submit to the arbitration their agreement rather than difference. Notably, the UNCITRAL Model Law on International Commercial Arbitration does not cover to a situation where a mediated settlement was reached before the commencement of arbitration; this article provides only for a settlement reached within an arbitration procedure. 177

Therefore, it appears that where a mediated settlement is reached before the initiation of the arbitration procedure, it cannot be regarded as an arbitral award as defined in the New York Convention because it was reached not in arbitration, but by means of a fundamentally different process. 178 However,  [*867]  there is a practical solution to this problem. Where the parties reached a mediated settlement after the commencement of the arbitration procedure, no matter how short the arbitration part was, it would fall within the meaning of arbitral award under New York Convention. Thus, such settlement would be internationally recognizable and enforceable as any other arbitral award. 179

To conclude, mediated settlements recorded as consent awards are enforceable under the New York Convention under certain conditions. If the parties initiate arbitration first and then use mediation, there will be a genuine unresolved dispute between the parties by the time of commencement of arbitration. A settlement reached after the arbitral tribunal has been appointed and arbitration proceedings began may be recorded as an arbitral award and enforced under the New York Convention. However, if the settlement agreement was concluded before the start of arbitral proceedings, then such agreement should not fall within the notion of arbitral award under the New York Convention. Such settlement agreement should have the status of a contract and be internationally enforceable as such rather than as an arbitral award.

CONCLUSION

Consent awards are effectively settlement agreements recorded by arbitral tribunals as awards. The consensual nature of consent awards raises a number of issues related to the conduct of arbitral proceedings, including the possible use of consent awards to cover illegal activities and enforcement of consent awards domestically and internationally under the New York Convention.

Although many jurisdictions allow tribunals to render consent awards resulting from mediation, their enforceability will  [*868]  depend on whether the tribunal dealt with a genuine dispute or an already settled disagreement. This Article illustrates that in most cases consent awards will be enforced as any other arbitral award, but it is important for the parties to demonstrate that not only the underlying settlement agreement was lawful, but also that the dispute was unresolved when the tribunal asserted its jurisdiction. Arbitrators have a duty to issue enforceable awards and should keep these considerations in mind.

Arbitration combined with mediation to reach an enforceable award can be an effective dispute resolution technique. Parties and arbitrators should, however, make sure that conciliation efforts by the arbitrators do not create the risks of nonenforceability of the arbitral awards. Parties and arbitrators should also consider possible conflicts of interest arising in case the same person serves both as arbitrator and mediator. In this regard, it may be important to secure the explicit consent of the parties to allow the same individual to act both as arbitrator and mediator.

Consent awards will remain a preferred choice to amicably settle disputes and to obtain an internationally enforceable award. Understanding what makes consent awards different from "normal" arbitration awards will help the parties successfully navigate from settlement to enforcement.