The Power of a Sealed Offer in an Arbitration

A well judged Sealed Offer can be a powerful tool in arbitration proceedings, if properly made at the appropriate time.  The most common use of a Sealed Offer is by a Respondent which offers to pay a stated amount of the damages claimed by the Claimant, plus interest and costs up to a certain date.  If correctly made, such a Sealed Offer will remain confidential until the end of the case and will be taken into consideration by the Tribunal if it is asked to assess costs.  The usual rule is that if the case proceeds to a final Award and the Clamant is Awarded no more than the amount offered in the Sealed Offer, the Claimant is only entitled to its legal costs and interest up to the date of the Sealed Offer and will have to pay the Respondent’s legal costs from the date of the offer; in other words, a Sealed Offer can shift the costs risk from the time it is made from the Respondent to the Claimant.

Often in Without Prejudice negotiations settlement offers are made between the parties on a lump sum basis ‘Save as to Costs’.  This means that the offer remains confidential until the Tribunal has to assess costs, at which point the party which made the WP offer can refer to it when making costs submissions.  Whilst commonly made, a lump sum ‘Without Prejudice Save as to Costs’ offer during an arbitration will often not provide a Respondent with any or adequate costs protection.  This is because it is not always possible to compare an all inclusive lump sum offer (for principal, interest and costs) to a final Award for damages plus interest and costs, so that it is often unclear whether the Claimant in the Award has done ‘better’ or ‘worse’ than the Save as to Costs offer?  In those instance Tribunals can be expected to ignore such WP offers, giving the Respondent no effective costs protection.

To minimise that risk, a Sealed Offer needs to specify the amount of damages offered to be paid by the Respondent, plus, separately, that the Respondent will also pay interest and the Claimant’s recoverable costs up to the date of the offer, to be agreed or assessed by the Tribunal.  That way, any final damages award will be easily comparable to the WP offer made, providing the Respondent with potential costs protection if the Claimant does not ‘beat’ the offered amount of damages.  The Sealed Offer should also have a clear validity period for acceptance; say 21 days.

A well made Sealed Offer can cause a Claimant to pause and consider whether it should proceed with its claim at all?  For example, we recently took over the defence of a long running claim in London arbitration for a commodity trading client which had failed to ship a cargo of Petcoke to its buyer because the Buyer had not cleanly accepted the nominated vessel in time.  In turn, the Buyer alleged that the Seller was in breach of contract and brought a claim for USD 2.4 million market loss of profit damages for non-performance. 

There was a dispute whether the nomination was accepted in time or not, and a dispute as to the amount of market loss damages?  However, case law and the facts of the case enabled us to argue in the Defence Submissions that even if the Seller was in breach the Buyer was only entitled to its resale loss of profit under its sub-sale contract, which loss was trivial compared to loss of profit assessed at the prevailing market price. 

When serving Defence Submissions we made a Sealed Offer for that trivial amount, shifting the costs risk of proceeding with the claim onto the Claimant, should it end up with damages of only that amount, or less.  Faced with our ‘resale loss only’ argument in the defence and the costs consequences of the Sealed Offer, the Claimant quickly capitulated and accepted the Sealed Offer and settled for only 3% of the amount of the claim!  An excellent outcome for our clients.

In part this excellent result was achieved because of the ‘resale loss only' argument we introduced and the evidence we obtained to support it but effective use of the Sealed Offer forced the Claimant to confront its real risks of proceeding and to ‘give up’.

It is not always appropriate or tactically wise to make a Sealed Offer in Arbitration proceedings, but an experienced lawyer acting for a Respondent should consider this option early on in proceedings, if there is a material risk that the client might be ordered to pay damages to the Claimant if the case proceeds to a final Award.  Sometimes, cases in Arbitration end up being about exposure to legal costs and a well-made Sealed Offer is a way of managing that risk.      

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