Introducing Certainty to Arbitral Settlements in India: Mandating Written Agreements and Appeal Under Section 34 for Settlement Determinations

[Hamza and Vanshika are students at NALSAR University of Law.]

Acknowledging the primacy of party autonomy in private agreements, and a preference for amicable settlement over adversarial adjudication, the Arbitration and Conciliation Act 1996 (Act) empowers arbitrators to encourage settlements between parties, recognizes settlement as a ground for terminating proceedings, and allows settlements to be recorded as enforceable arbitral awards. However, ambiguities in the statute further enhanced by misplaced judicial precedents have made settlement agreement itself a matter of prolonged litigation (for reference, here and here).

This article traces the dispute over settlement to Section 30(2) not mandating such settlement to be in writing. Further, the ambiguity over scope of appeal from determinations of the arbitral on existence or absence of settlement exacerbates the uncertainty. The article suggests changes to bring certainty to the settlement process and minimize the risk of post-settlement litigation, particularly where a party attempts to resile from the agreement.

After a brief reiteration of the relevant statutory provisions, the article first, examines whether a settlement agreement must be explicit and in writing to be recognized by the tribunal. Second, it assesses the arbitrator’s role in determining the existence of a valid settlement. Finally, it evaluates the scope of appeal against a tribunal’s refusal to recognize a settlement.

Relevant Provisions

Section 30(1) of the Act allows the arbitral tribunal (Tribunal) to encourage settlement between the parties. Section 30(2) states that if the parties reach a settlement during arbitration, the Tribunal shall terminate the proceedings, and if requested by the parties and not objected to by the Tribunal, record such settlement as an arbitral award, such an award shall have the same effect as of other arbitral awards as per Section 30(4).

Section 32(2)(b) makes the agreement of the parties a ground on which the Tribunal can pass an order to terminate the proceedings.

Formal Requirements for Valid Settlement Agreements: Must They Be in Writing?

Unlike Order XXIII Rule 3 of the Civil Procedure Code (CPC), which expressly mandates written compromise agreements for court proceedings, Section 30(2) of the Act contains no such explicit requirement for arbitral settlements. This raises a crucial question -- if the arbitrators can recognize settlements based on implied or oral agreements between parties, or must such agreements be formally documented?

The Bombay High Court addressed this issue directly in Mohd. Hussain Abdullabhai v. Shabbirbhai Abdullabhai (Abdullabhai). The Division Bench, while overruling a single bench decision held that, the mandatory writing requirement under CPC Order XXIII Rule 3 does not extend to arbitration proceedings, as Section 19(1) of the Act expressly excludes CPC application. Section 30 of the Act imposes no formal requirement for settlements to be in writing or signed by parties. Consequently, arbitrators may properly terminate proceedings based on demonstrated settlement agreements, even absent formal written documentation.

This legal position grants arbitral tribunals wide latitude in recognizing settlement agreements. Tribunals may now terminate proceedings based on various forms of demonstrated agreement between parties, including email correspondence, minutes of meetings, oral admissions during hearings, or even evidence of partial performance of settlement terms. On one hand, this aligns with the informality of procedure in the arbitration proceedings, since an insistence on written settlement could have become a rigid requirement that prolonged the process despite the parties having reached settlement. On the other, this risks that that the Tribunal may determine the rights and obligations of the parties not based on merit, but based on a settlement that a party may not have intended to have such effect. The next part of the article analyses the scope of the discretion of arbitrator to determine the existence of settlement under the Act.

The Tribunal’s role in Recognizing a Settlement

As argued above, the framework permitting unwritten settlements necessarily vests arbitral tribunals with significant interpretive authority. The decision in Abdullabhai states, “As sub-section (1) of section 30 does not require settlement to be in writing or signed by the parties, if a contention is raised before the learned Arbitrator that there is a settlement of disputes between the parties, for the purpose of subsection (2) of section 30, the arbitral Tribunal will have to decide whether there is such a settlement.” Holding thus, it overruled the position taken by the single judge that the arbitrator has negligible role to play in deciding if a settlement exists or not.

This decision aligns with the competence-competence doctrine, which designates the tribunal as the primary adjudicator of matters affecting its jurisdiction. The termination of proceedings via settlement constitutes such a jurisdictional question, hence placing the Tribunal at the epicenter of such determination. However, considering the extraordinary nature of settlement award which decides rights and obligations not on their merits, but on the agreement of the parties, the discretion of the Tribunal in determining the existence of settlement must be curtailed.

First, by introducing an amendment to the Act along the lines of Order XXIII Rule 3 CPC, the parties should be mandated to reduce such a settlement into writing to avoid prolonged litigation or the scope for a party to deny the existence of a settlement. Second, the role of the Tribunal while recognizing a settlement must be restricted to a procedural enquiry of whether the settlement was freely entered into by the parties with the intent to finally determine their inter se rights and obligations. The Tribunals must resist the temptation to evaluate the commercial wisdom of settlements, as such overreach would violate the foundational principle that arbitration derives its legitimacy from party choice.

Appeal Against Order of the Tribunal on Settlement Petition

Once the Tribunal has accepted or rejected the petition to terminate the proceedings on ground of settlement, the current statutory provisions are unclear if such determination could be appealed. Therefore, the judicial precedents have decided on the provision under which such determination could be appealed. The Delhi High Court in the decision of Future Coupons (Private) Limited v. Amazon.com NV Investment Holdings LLC held that where the Tribunal terminates the proceedings under Section 32(2) without passing an award, on grounds such as settlement or if the proceedings have become unnecessary in the opinion of the Tribunal, the aggrieved party may approach the High Court invoking the writ jurisdiction. On the other hand, where the Tribunal refuses to terminate the proceedings and the arbitration continues, the aggrieved party must wait till the final award is passed and subsequently challenge the award under Section 34 making the non-termination one of the grounds of challenge. A similar approach was undertaken by the Madhya Pradesh High Court in Master Point v. Sandhya Chouhan.

This framework however is fundamentally flawed. First, it creates a bifurcation of remedies for a decision on termination depending on whether the Tribunal chose to terminate or not to. This results in an inconsistent outcome since the scope of writ petition and the burden of proof is significantly less than the burden of proof under Section 34 of the Act, which requires an examination of patent illegality.

Second, when tribunals refuse to terminate proceedings despite an alleged settlement, the prevailing legal framework compels parties to endure the entire arbitral process until a final award is issued. This requirement creates significant practical difficulties, imposing unnecessary financial burdens and procedural delays on parties who believe their dispute has already been resolved through settlement.

The alternative and a more coherent framework for appeal against an order determining settlement would be to allow such orders to be appealed under Section 34 of the Act. This is in line with the broader jurisprudence on Section 34 petitions. The Supreme Court in multiple decisions such as IFFCO Limited v. Bhadra Products, held that a decision on a jurisdictional question could be treated as an interim award and challenged under Section 34. The issue of termination of proceedings on ground of settlement undoubtedly pertains to the jurisdiction of the Tribunal, and hence is an interim award, and should be appealable under Section 34.

Conclusion

There is much uncertainty around the procedure of settling a dispute under the Act in India. This article suggests that first, a requirement of settlement being in writing by both the parties should be incorporated in Section 30(2) to reduce litigation and increase certainty. Such a requirement will also reduce the discretion available to the Tribunal to decide on the existence of settlement which will only have to confirm if there is a settlement in writing entered into by both the parties with free consent. The curtailment of the Tribunal’s discretion would further party autonomy, ensuring that a Tribunal based on consent does not stand between the parties if they choose to settle subsequently.

Lastly, this article suggests that the decisions of the Tribunal on termination of proceedings due to settlement of the parties should be appealable under Section 34 of the Act, to increase consistency and avoid prolonging proceedings that could be without jurisdiction.