Under Sri Lankan law, parties remain free to resolve their dispute by agreement at any stage of the arbitral proceedings, and the law provides a clear mechanism for giving such a settlement binding and enforceable effect. This article outlines the legal position, the procedure to be followed, and the matters parties should keep in mind.
The Statutory Framework
Arbitration in Sri Lanka is governed by the Arbitration Act, No. 11 of 1995 ("the Act"). Section 14 is the applicable provision on settlement. It declares that it is not incompatible with arbitration proceedings for a tribunal to encourage settlement, and permits the tribunal, with the agreement of the parties, to use mediation, conciliation or any other procedure to that end at any time during the proceedings.
Where the parties settle, the tribunal shall, if requested by them, record the settlement in the form of an "arbitral award on agreed terms". Such an award must comply with the formal requirements of section 25 and must state that it is an award on agreed terms. Significantly, section 14(4) provides that it has the same status and effect as any other arbitral award made in respect of the dispute. It is therefore final and binding on the parties under section 26.
The Importance of a Formal Award
The distinction between a settlement agreement and an award on agreed terms is of real practical consequence, as the Supreme Court's decision in Lanka ORIX Leasing Company Ltd v. Pinto and Others [2002] 1 Sri L.R. 115 illustrates. In the said case, the parties reached a settlement before the arbitrator, and its terms were recorded and signed by the parties and the arbitrator. When the Respondents defaulted, the Appellant sought to enforce the document in the High Court as an arbitral award. Enforcement was refused, and the Supreme Court affirmed that decision.
The Court held that a mere record of the parties' agreement does not constitute an award. A formal award on agreed terms must be prepared and signed by the arbitrator in accordance with sections 14(3) and 25(1), and a signed copy must be delivered to each party under section 25(4). The Court further observed that the arbitrator is expected to examine the validity, legality and enforceability of the settlement terms before making the award, particularly where the settlement provides for future performance, such as payment by instalments.
The Procedure
Settlement negotiations are ordinarily conducted on a "without prejudice" basis, so that offers made cannot later be relied upon as admissions. Once terms are agreed between the parties, they should be reduced to writing and should address the amount and timing of performance, the consequences of default, interest, and the allocation of costs. The signed terms are then submitted to the tribunal together with a joint request under section 14(2). The tribunal reviews the terms and issues a written, signed and dated award stating the place of arbitration and that it is an award on agreed terms. Where the terms are fully performed at the time of settlement, the parties may instead execute a private settlement agreement and withdraw the proceedings.
Enforcement
An award on agreed terms is enforced in the same manner as any other award. Under section 31, a party may apply to the High Court within one year after the expiry of fourteen days from the making of the award, whereupon the court enters judgment and a decree enforceable under the Civil Procedure Code.
Conclusion
Sri Lankan law not only permits but actively supports the settlement of disputes after arbitration has commenced. The decisive factor is the manner in which the settlement is recorded. Parties should ensure that the terms are clearly drafted, remain within the scope of the dispute referred to arbitration, and are embodied in a formal award on agreed terms, duly signed and delivered by the tribunal.