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When Is a Settlement a Settlement? What the Agreement Needs to Be Binding
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January 11, 2010
(This paper first appeared in the December 2009 edition of Decisions, Decisions, Howrey’s dispute resolution and international arbitration newsletter.)
By Markus Esly
Howrey LLP
This article concerns a recent arbitration award, Azpetrol v. Republic of Azerbaijan, by an International Centre for the Settlement of Investment Disputes tribunal. 1/ The decision serves as a cautionary tale for negotiators and, as a case study, offers some useful reminders of basic principles of offer and acceptance and contract formation – principles that, as we will see, can pose practical problems when negotiating a complex commercial settlement.
Azerbaijan and the Energy Charter Treaty
Since at least December 1998, the Republic of Azerbaijan has been bound by the Energy Charter Treaty (ECT). Part II of that treaty is a multilateral investment treaty under which each state party undertakes certain obligations regarding investments by investors of the other states that are party to the treaty. In terms of the protections provided, the treaty is comparable to NAFTA or standard bilateral investment treaties, requiring that each state afford the other state’s investors:
 | Fair and equitable treatment, the most constant protection and security, the minimum standard of protection under international law, observance of any obligations entered into with an investor. (Article 10)
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| National treatment and most favored nation treatment. (Article 10)
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| Protection from expropriation. (Article 13)
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| The right to transfer capital (Article 26)
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The ECT provides that disputes may be referred to a number of arbitration forums, including ICSID.
Background to the Claims Against Azerbaijan
The September 8, 2009, award concerns whether the parties reached a binding settlement. It deals only with the settlement correspondence exchanged between the parties’ lawyers and does not reveal much about the underlying claim. The following, therefore, is taken from what was reported in the press at the time and subsequently in an academic paper. 2/
The three Azpetrol companies were owned by an Azerbaijani national not identified in the arbitration award. (Award, ¶3) They had, however, been incorporated in the Netherlands. This practice – investing through a Dutch “letterbox” company – is a way for investors to obtain protection under the many investment treaties to which the Netherlands is a party. Azpetrol International Holdings BV was the parent and owned the other two companies, whose assets in Azerbaijan (reportedly worth in more than $300 million) included a chain of gas stations and an oil terminal. These appear to have been state assets that were acquired by the Dutch companies after a privatization.
A certain Rafik Aliyev is described in the press as having been, until 2005, “the head of Azpetrol.” Whether this means that he was the owner of the Dutch companies is unclear. His brother, Farhad Aliyev, formerly was Azerbaijan’s minister of economic development. In 2005 both were arrested and charged with conspiracy to overthrow the government. Accused of tax evasion and of having obtained assets by bribery, the Dutch companies’ assets in Azerbaijan were seized.
Also seized were the assets of another Dutch company called Fondel Metal Participations BV. Azerbaijan terminated Fondel’s 25-year concession to operate Azerbaijan Aluminum. According to the award, Azpetrol and Fondel Metals had a common owner.
Azpetrol and Fondel Claims
In August 2006, the Dutch Azpetrol companies began an ICSID claim under the ECT against Azerbaijan, followed in May 2007 by Fondel claim. 3/ The two claims were before different panels. The claimant companies were represented by different lawyers, but Azerbaijan had the same lawyers in each claim:
| Fondel: Clyde & Co
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| Azpetrol: McDermott Will & Emery
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| Azerbaijan: Allen & Overy
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In the Azpetrol arbitration, Azerbaijan raised preliminary objections on jurisdiction and on the admissibility of the claims. A preliminary hearing followed. The Award states in ¶6:
On 1 July 2008, Mr. Peter Booster, a director of the Claimant companies, gave evidence. In the course of cross-examination, he testified that he had provided funds to bribe officials in Azerbaijan in early 2006. His evidence was that these bribes were paid in order to protect unnamed individuals in Azerbaijan. Following that testimony, the parties jointly applied, on 2 July 2008, for a general adjournment of the proceedings.…
On August 28, 2008, Azerbaijan filed an application (referred to as ‘the Bribery Application’) asking that the claims be dismissed on grounds of “international public policy.” Since the Award does not deal with the point, it is not clear quite how Mr. Booster’s admissions gave rise to such grounds or what principle of international law (or what provision of the ECT or ICSID Convention) was to be relied on. The tribunal set a procedural timetable for hearing this application, which provided for Azpetrol to file a counter-memorial to the application on December 19, 2008.
Footnote 1 in the Award reveals that Mr. Booster’s statements were referred to the prosecuting authorities in Azerbaijan and that the prosecutor had approached authorities in England and the Netherlands. On November 18, Mr. Booster wrote to the tribunal stating that the evidence he had given was untrue and that he wished to retract it. (Award, Fn. 2) It was in the month following this letter that correspondence between counsel concerning settlement was exchanged.
Settlement Correspondence
The Award sets out in detail the correspondence between the parties. Key passages are set out below to illustrate how and when the agreement was reached.
Briefly, Mr. Swangard of Clyde & Co was authorized to conduct negotiations on behalf of both Fondel and Azpetrol. There were exchanges between the parties, but the critical e-mail was sent on December 16, 2008, from Mr. Jagusch (counsel for Azerbaijan) to Mr. Swangard. It read:
Thank you for your email of earlier today. Our client appreciates the efforts being made but requires certainty in relation to the headline terms (of course we will need time for drafting). As to the settlement figure you have proposed something “in the region” of US$2 million.
Our client counteroffers as set out below. Upon receipt of your acceptance (which should expressly state your authority on behalf of all Fondel and Azpetrol claimants) Azerbaijan is prepared immediately to inform the Fondel and Azpetrol Tribunals that a standstill is agreed until 31 December 2008. The settlement is conditional upon on [sic] all documentation being executed by 31 December 2008, such condition being for the benefit of (and thus can only be waived by) Azerbaijan.”
The email then set out the numbered points of the counteroffer:
| 1. | Withdrawal of claims
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| (a) | Withdrawal of Azpetrol proceedings by the Claimants
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- All parties to bear their own costs; any outstanding costs of ICSID and the Tribunal to be divided 50% Claimants, 50% Respondent
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| (b) | Withdrawal of Fondel proceedings by the Claimant and withdrawal of Counter-claim by Azerbaijan
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- Each party to bear its own costs; any outstanding costs of ICSID and the Tribunal to be divided 50% Claimants, 50% Respondent
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| 2. | Nuisance payment by Azerbaijan of US$1,500,000 in respect of the Fondel claim
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| 3. | No admission of liability by Azerbaijan
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| 4. | Confidentiality
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- Azerbaijan to be able to disclose publicly the terms of this settlement (in addition to or separately from a joint press release confirming no admission of liability)
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| 5. | Scope of settlement – claims
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- The settlement is in full and final settlement of any claim, counter-claim, demand, cause or right of action or proceedings, whether at law or in equity, of whatsoever nature and howsoever arising, in any jurisdiction whatsoever, whether secured, proprietary, by way of tracing, priority or otherwise, whether by way of contribution or subrogation or otherwise, whether known or unknown to the parties, whether or not presently known to the law and whether arising before, on or after, the date of this agreement arising in any way whatsoever from any matter connected directly or indirectly with the subject matter of the Fondel and Azpetrol actions
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| 6. | Scope of settlement – parties
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- The settlement shall be executed by: (1) McDermott Will and Emery, for and on behalf of and representing Azpetrol International Holdings B.V., Azpetrol Group B.V. and Azpetrol Oil Services Group B.V., together with any of their direct or indirect subsidiary, parent, sister, or affiliated companies, as well as their employees, directors, officers, consultants, agents, trustees, representatives and ultimate beneficial owner(s); and (2) Clyde & Co for and on behalf of and representing Fondel Metal Participations B.V., together with any of its direct or indirect subsidiary, parent, sister, or affiliated companies, as well as their employees, directors, officers, consultants, agents, trustees, representatives and ultimate beneficial owner(s).
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| 7. | Allegations concerning personal or professional conduct
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| - [There then followed a clause providing for the withdrawal and non-repetition of allegations of conflict of interest and personal and professional misconduct against certain individuals and firms. This clause was to remain confidential in all circumstances.]” |
Mr. Swangard responded by email on December 19, 2008, saying:
I refer to your email dated 16 December 2008 containing your without prejudice offer of settlement on both the Fondel and Azpetrol arbitrations.
I can now confirm that we hereby accept the offer set out in your 16 December 2008 email.
As you can see Juliet Blanch who has conduct of the Azpetrol matter has been copied in on this email and, for the avoidance of doubt, will confirm Azpetrol’s acceptance by separate email.…”
Ms. Blanch sent an e-mail 15 minutes later stating: “I confirm the Azpetrol companies accept the offer set out in your email of 16 December 2008 to Clyde & Co.” (Award, ¶31) There followed a “light hearted exchange of emails” between Ms. Blanch and Mr. Jagusch (not reproduced in the Award) in which each expressed regret that they would not now have the opportunity to argue the bribery application. That same evening, a lawyer from McDermott, Will & Emery met with lawyers from the Allen & Overy team for what the A&O lawyers described as a “celebration” to mark the settlement of the case (Id., ¶32)
A little later that same day, Azpetrol’s lawyers wrote to the tribunal:
.…the parties have agreed an in principle settlement of the arbitration. The parties have therefore agreed an immediate procedural standstill until close of business in London on 31 December 2008 in order to finalize the in principle agreement.
(Id., ¶8)
Subsequently, Allen & Overy sent the claimants a more detailed draft settlement agreement “by which to document the settlement of the two cases as agreed.…” When the claimants did not respond, Allen & Overy wrote, stating:
As you are aware, a settlement agreement between the parties was reached by exchange of emails on 16 and 19 December 2008. In our client’s offer, it was stated: “[t]he settlement is conditional upon on [sic] all documentation being executed by 31 December 2008, such condition being for the benefit of (and thus can only be waived by) Azerbaijan. Our client hereby fully and finally waives that condition. The settlement is therefore effective. The parties must now proceed to request the Tribunals in the above-referenced proceedings to discontinue their proceedings, pursuant to the parties’ settlement. We shall shortly be writing to the Tribunals accordingly and expect you to do likewise.
In response, the claimants wrote to Azerbaijan, denying that there had been a settlement and contending that differences in the more detailed draft provided subsequently constituted a counteroffer.
Azerbaijan replied, saying that any differences were irrelevant because it had waived the need to memorialize the settlement in a single document. Azerbaijan then wrote to the tribunals, informing them that a binding settlement had been agreed, that the need to memorialize the agreement had been waived and asking that the tribunals discontinue both sets of proceedings.
Azpetrol accepted that an agreement had been reached as a result of the December 16 and 19 e-mails but claimed that this was only an agreement to a stay of proceedings pending further negotiation – not an agreement to settle the claim. So, it fell to the tribunal to decide whether there was a settlement agreement.
Principles of English law – Contract Formation
Before turning to the decision of the Azpetrol tribunal, it is helpful to summarize the basic principles of offer and acceptance, or contract formation, particularly with regard to compromising claims. English law does not require any particular formalities in a contract to settle proceedings. For example, such contracts do not need to be signed or in writing. A contract could be concluded in an exchange of e-mails, and there is no requirement, for example, that the agreement be reduced to a single formal document in order to be binding. For there to be an agreement to settle proceedings, the requirements are the same as for any other contract:
| Consideration for the promise made.
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| An intention to create legal relations.
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| Sufficient certainty as to the terms of the agreement.
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| A “meeting of minds” / consensus ad idem – an offer by one party and an acceptance of that offer by the other.
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A compromise of a claim that is legally invalid, and which the party asserting it knows is invalid, is not binding. This may be because of a want of consideration or (more likely) a rule of public policy. Giving up a claim that is doubtful in law, though, or that is invalid but is reasonable and is asserted in good faith is good consideration. 4/
It is unknown, or at least rare, for agreements made in the course of settlement negotiations between lawyers acting for commercial parties to be found wanting because of an absence of an intention to create legal relations. 5/ Unlike the other components of a binding contract, an intention to create legal relations is not something that a party relying on the contract has to prove. Rather, it is for the party who claims there is no contract to prove that there was no such intention.
While there must be sufficient certainty as to terms, this does not prevent parties concluding a binding contract as to some matters while leaving other, related matters to be worked out later. The question is whether the things left over are things that would be “essential” for the contract to be legally and commercially workable. 6/ There is no legal obstacle to parties agreeing to be bound now while deferring important matters to be agreed later. 7/ It is possible to have a binding contract even when significant matters such as the price to be paid or the time for completion have been left over to be discussed later. 8/ A contract also may be found to be sufficiently certain when what is to be provided has been described only in very broad, general terms. 9/
Similarly, parties can reach a binding agreement through some informal exchange even while agreeing that the agreement is to be reduced to more formal written terms later. The critical question is whether the parties intended that the future document referred to would serve to record the deal they had struck or that it would itself constitute a contract, no binding agreement yet having been entered. 10/ The way to avoid arguments on such issues is, of course, to state clearly in the pre-agreement correspondence that it is “subject to contract” if that is the intention.
English law applies an objective test to determine whether parties have reached an agreement. If a reasonable observer would have concluded that an offeree had accepted an offer, then there is an agreement, even if the offeree’s state of mind was such that he did not intend to accept and did not consider that he had done so. This is qualified to the extent that if an offeror is aware of the offeree’s state of mind, then he cannot rely on the outward appearance of acceptance. 11/
When it comes to the interpretation of a contract, English law was summed up in the much quoted passages from the judgment of Lord Hoffmann in Investors Compensation Scheme v. West Bromwich and recently reaffirmed in Chartbrook v. Persimmon Homes, where Lord Hoffmann summarized the question to be asked when interpreting a contract as:
.…what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. 12/
Evidence of pre-contractual negotiations and post-contract events are, however, excluded from the “background” that may be considered in this regard. 13/ In the course of his judgment, Lord Hoffmann considered all arguments that had been advanced for abandonment of this approach and then concluded:
The rule may well mean, as Lord Nicholls has argued, that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention.
The Hearing, the Award and the Tribunal’s Reasoning
The Award considers a number of arguments advanced by Azpetrol’s lawyers, attempting to show that there was no agreement. Azpetrol’s lawyers gave evidence as to what they / their clients had really intended and as to their own beliefs in this regard, with one of the McDermott, Will & Emery lawyers even testifying to deny that the drinks on December 19 had been a “celebration” of a settlement but rather:
at that stage I believed it was highly likely that the parties would conclude a settlement but I did not (and do not now) believe that they had already done so….
(Award, ¶¶32, 94)
Among the arguments made was a submission that there had been no intention to create legal relations. This was based on the fact that the agreement had been referred to as an “in principle agreement” in pre- and post -agreement correspondence. Ms. Blanch of McDermott Will and Emery testified that she understood this was a term of art used to refer to a non-binding agreement. The tribunal found that it was not a term of art. The tribunal also pointed out that the term was not actually used in the exchanges constituting the agreement and that there must have been an intention to create legal relations since Azpetrol’s own case was that the exchange gave rise to a binding an agreement – just an agreement for a stay rather than a settlement.
Azpetrol also sought to argue that the agreement was insufficiently certain to be enforceable. That was said to be the case because the agreement did not contain a choice of law clause, a dispute resolution clause or a clause granting Mr. Booster immunity from prosecution – and so it was said to be insufficiently certain as to its core terms. The tribunal had no difficulty in dismissing that argument. (Award, ¶¶82-88) Many contracts omit choice of law and choice of forum clauses – that is why there are laws (even international conventions) for determining applicable law and jurisdiction in the absence of choice. Only Azerbaijan and Azpetrol’s rights were in issue in the arbitration. A grant of immunity to Mr. Booster was not an essential precondition to the effective settlement of that dispute.
Azpetrol urged the tribunal to consider prior negotiations between the parties when interpreting the exchanges of December 16 and 19, 2008. These earlier negotiations were said to favor Azpetrol’s argument that the agreement should not be interpreted as constituting a binding settlement but only an agreement to stay proceedings to permit negotiation of a binding settlement. This was because the correspondence had begun with proposals for just such a two-stage process. In this regard, Azpetrol relied on a lecture Lord Nicholls gave to the Lords Appellate Committee (the same lecture Lord Hoffmann refers to in the passage from Persimmon Homes quoted above) and also to the Vienna Convention. 14/ When they made the award, the arbitrators in Azpetrol did not have the benefit of Lord Hoffmann’s judgment in Persimmon Homes. The tribunal’s conclusion was, nonetheless:
The Tribunal is far from satisfied that it is entitled to have regard to the evidence of the prior negotiations or subsequent practice of the parties. While these would be admissible under international law, the parties have agreed that the Tribunal should apply English law to determine whether or not there was a binding settlement agreement and the Tribunal is therefore bound to apply English law in good faith. There is little doubt that the present position under English law is that recourse to the negotiations and the subsequent conduct of the parties is not admissible as an aid to the interpretation of their agreement. While that approach has been subjected to some telling criticism, the Tribunal’s duty is to apply in good faith English law as it is, not as it ought to be or might become.
(Award, ¶90)
The tribunal concluded, however that even if the prior negotiations had been admissible, it would have made no difference. There was an offer both to settle the proceedings and agree a stay and there was an acceptance of that offer. The fact that previous proposals had envisaged a different, two-stage process did not change the meaning of that exchange.
A further inventive (but unmeritorious) argument was as follows. As noted above, there is no agreement if it can be established that the offeror knew that the offeree did not actually intend to accept, even if an objective observer would take offeree to have done so. Azpetrol sought to argue that the same is true even if the offeror does not know of the offeree’s state of mind but is merely indifferent as to that state of mind. This line of argument was supported by certain comments in Chitty. The tribunal did not feel any need to decide the point, holding instead that the evidence showed Mr. Jagusch and his colleagues had turned their minds to the question whether the acceptance of their agreement was intended to be binding and had concluded, as they were entitled, that it was.
Conclusion
The tribunal’s decision and the arbitrator’s application of the law are doubtless correct, and the legal principles that were applied are hardly controversial. While it may not advance jurisprudence in any particular way, the Azpetrol award is of interest for a number of reasons.
It serves as a useful reminder that English contract law does not require that every last item on the parties’ shopping list has to be addressed in full or in writing before a binding agreement can exist. When looked at in the cold light of day, the exchanges between counsel of 16 and 19 December 2008 contain all that is needed for the parties to operate their compromise of the claims without any great difficulties.
The award also illustrates the objective approach English contract law takes when it comes to offer and acceptance. If a party gives the “‘outward appearance of acceptance,” then that party (or even counsel for that party) cannot be heard to say that privately they did not intend to enter into a fully binding agreement – because they believed that all they were doing was negotiating an agreement in principle. Looking strictly at the evidence that was presented to the tribunal as to whether there was a contract and what it meant, much of it was irrelevant. The subjective views and beliefs of those negotiating the deal (if not communicated to the other party) are irrelevant as a matter of law. Even before Persimmon Homes, it was well-settled that pre-contractual exchanges are inadmissible.
Perhaps the most interesting feature of the award is that it tells a story but probably not the whole story. The e-mails of December 16 and 19, 2008, seem pretty clear-cut evidence of a settlement. That begs the question of why Azpetrol later tried so hard to escape from a compromise, deploying a number of arguments that seemed to have had little prospect of succeeding. Perhaps there were conflicting instructions as to what counsel should do. Perhaps circumstances changed after the deal was struck so that Azpetrol’s lawyers were asked to mount a last-ditch effort to escape from the contract. Neither, however, quite fits with the evidence of Azpetrol’s counsel that they did not believe at the time that the December e-mails would lead to a binding agreement.
The lessons for settlement negotiators are to mark things “subject to contract” if that is the intention, to read everything carefully (however innocuous) before agreeing to it, and always to pause and think how a judge or arbitrator might view what is being sent and received.
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For more information about the issues covered in this report, please contact Marcus Esly in our London office at 44-20-7936-5356 or at EslyM@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
ENDNOTES
| 1/ | Azpetrol International Holdings BV, Azpetrol Group BV and Azpetrol Oil Services Group BV v. The Republic of Azerbaijan, ICSID Case No. ARB/06/15. The award is widely available on the Internet at ita.law.uvic.ca/documents/
Azpetrolaward.pdf but appears never to have been published on the ICSID or ECT Web sites.
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| 2/ | For example, “Azpetrol shake-up could affect investments in Azerbaijan,” Eurasianet, January 2006 at www.eurasianet.org/departments/
business/articles/eav011006.shtml; Investment Treaty News, August 10, 2006, at www.iisd.org/pdf/2006/
itn_aug10_2006.pdf; Guliyev, “The Trans-Caspian energy route: cronyism, competition and cooperation in Kazakh oil export,” 37 Journal of Energy Policy 3171 (2009).
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| 3/ | ICSID Case Nos. ARB/06/15 and ARB/07/1.
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| 4/ | Haigh v. Brooks, 10 A&E 309 (1839); Cook v. Wright, 1B.&S. 559, 569 (1861).
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| 5/ | A possible example is Jackson and Others v. Thakrar and Others, EWHC 271 TCC, ¶¶56-67 (2007) in which one of the reasons given for finding that there was no compromise was the absence of an intention to create legal relations.
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| 6/ | “[I]f some particulars essential to the agreement still remain to be settled afterward, there is no agreement.” Lord Blackburn, Rossiter v. Miller, 3 App. Cas. 1124, 1151 HL (1878) [not cited by the tribunal].
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| 7/ | Lloyd LJ in Pagnan SpA v. Feed Products, Ltd, 2 Lloyd’s Rep 601, 619 (1987), quoted in ¶57 of the Award.
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| 8/ | Because, absent subsequent agreement, a reasonable price or a reasonable time for completion would fall to be implied under the Supply of Goods and Services Act 1982.
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| 9/ | In the construction context, see cases discussed in Keating on Construction Contracts at 4-024.
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| 10/ | For an example of a case in which parties reached an agreement while contemplating that further terms as to matters of detail would be agreed before a binding agreement was reached, see Metal Scrap Trade Corp. v. Kate Shipping Co., Ltd., 2 Lloyd’s Rep 402, 409 (1994) [not cited by the tribunal].
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| 11/ | Chitty on Contracts, 2-004 (13th ed.).
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| 12/ | 1 WLR 896, 912-913 (1998); [2009] UKHL 38, decided after the Azpetrol award.
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| 13/ | A rule dating back to at least Inglis v. John Buttery & Co, 3 App Cas 552 (1878) [decision of the House of Lords] and affirmed by the House of Lords in Prenn v. Simmonds, 1 WLR 1381 (1971) and again in 1998 in IDRC v. West Bromwich.
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| 14/ | The tribunal noted that English law’s exclusion of prior negotiations was in marked contrast to international law, where the travaux preparatoires of a treaty are expressly recognized as an aid to interpretation in the Vienna Convention on the Law of Treaties 1969, Article 32.
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©2010 Howrey LLP
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