HOW TO CONCLUDE A SETTLEMENT AGREEMENT IN INTERNATIONAL ARBITRATION
Ilya Alexandrov, Dr. iur., MBA (Finance)
Managing Partner, Alexandrov & Partners
Settlement Agreement as an Alternative to Lengthy Court Proceedings
Many business professionals have already experienced the advantages of settlement agreements as an alternative to lengthy court proceedings. An amicable resolution of disputes helps maintain a healthy business environment and fosters a positive reputation for both the company and the individual entrepreneur.
It is therefore worthwhile to revisit, in greater detail, the features and opportunities for optimizing time and cost when negotiating and concluding a settlement agreement within the framework of ongoing international arbitration. Prior to the onset of the Special Military Operation in 2022, the team at Aleksandrov & Partners represented a claimant in such a case, which proved to be highly illustrative from a professional perspective. A similar approach may be adopted when preparing for dispute resolution in commercial arbitration centers located in neutral jurisdictions, such as the Dubai International Arbitration Centre (DIAC), Dubai, UAE.
From Our Practice
A Russian claimant—a manufacturing and trading enterprise engaged in the supply of equipment kits to various regions of Russia—filed a claim with the Arbitration Institute of the Stockholm Chamber of Commerce. The respondent was an Italian manufacturing company that supplied individual components and assembled equipment units to Russia. During the pre-litigation stage, the Italian supplier failed to demonstrate adequate responsiveness and commercial courtesy towards the Russian partner, and the quality-related claims concerning the Italian components remained unresolved. Consequently, the Russian purchaser prepared and submitted a statement of claim under the expedited arbitration procedure at the Arbitration Institute of the Stockholm Chamber of Commerce, having paid the registration fee for the tribunal’s secretariat services.
Unexpectedly, the Italian respondent became more active and, after reviewing the statement of claim, through its counsel proposed a settlement agreement offering compensation lower than the amount claimed. During the initial attempt to reconcile their positions, the parties failed to agree on the compensation amount. As a result, the respondent submitted its statement of defense, to which the claimant subsequently responded by increasing the original claim amount and contesting the respondent’s arguments set forth in the defense.
The claimant then initiated a second attempt at settlement by proposing, following the increase and substantiation of the claim, a corresponding increase in the compromise amount offered in the settlement agreement. At that stage, the arbitration fee had not yet been paid, no expert examinations had been appointed, and overall, the parties had not incurred significant expenses. Ultimately, the respondent agreed to increase the compensation by approximately 25% over its initial offer. The parties finalized and executed the settlement agreement by exchanging scanned copies of the signed pages via email.
The timing of negotiating and concluding a settlement agreement is particularly significant in terms of court costs. After paying the registration fee, the parties, in accordance with the expedited arbitration procedure, were able to exchange and submit to the tribunal their statement of claim, statement of defense, and all supporting documents substantiating their legal positions. It is well established that a settlement agreement may be reached at any stage of dispute resolution—whether pre-litigation or during arbitration proceedings. In the case described, the parties’ timely decision to settle allowed both sides to achieve significant savings, particularly with respect to the arbitration fee, as the tribunal had already determined that the fee would be split equally (50:50) between the parties.
Is Approval of a Settlement Agreement by an International Arbitral Tribunal Always Required?
On the Question of Mandatory Approval of a Settlement Agreement by an International Arbitral Tribunal for Its Validity In this case, the parties completed all necessary actions before the case materials were submitted to the arbitrator and before the commencement of the arbitration proceedings. The parties executed an independent civil law contract, namely, the settlement agreement.
This settlement agreement contains a new, autonomous arbitration clause, which allows the parties, in the event of non-performance of the settlement, to initiate proceedings under the expedited procedure at the Arbitration Institute of the Stockholm Chamber of Commerce. Such a scenario would require the commencement of a new case, including compliance with all procedural steps stipulated by the Arbitration Rules for expedited arbitration.
As demonstrated, the parties in this instance could have chosen a more costly and time-consuming route—paying the arbitration fee, waiting for the arbitrator to review hundreds of pages of case materials, and only then submitting the settlement agreement for approval. This approach has the advantage that an approved settlement agreement can subsequently be recognized and enforced as a national or foreign arbitral award. However, where there is a constructive approach and mutual willingness to resolve the dispute, this path is generally more expensive and therefore excessive.
A different situation arises if the parties’ intention to settle emerges, for example, after reviewing the results of an independent expert report, during an oral hearing, or following consideration of the opinion or report of a specialist invited to the hearing. In such circumstances, the settlement agreement would undoubtedly require approval by the international arbitral tribunal. Nevertheless, even then, by virtue of the principle of party autonomy, the parties may enter into a new civil law contract—whether a settlement agreement or another type of contract—or amend an existing agreement and subsequently terminate the arbitration proceedings without a substantive award, utilizing procedural tools available to the parties, particularly the claimant, during the process. In such a scenario, it would be preferable to have the settlement agreement approved by the arbitrator, given that the arbitration proceedings have already commenced, and the arbitration fee has been paid in full.
Enforcement of a Settlement Agreement in Foreign Jurisdictions
If the parties harbor any doubts regarding the good faith or willingness of the counterparty to voluntarily perform the terms of the concluded settlement agreement, it is advisable to undergo the procedure of having the settlement agreement approved by the international arbitral tribunal through the issuance of a corresponding arbitral award.
In practice, the approval procedure is primarily necessary to enable the parties to benefit from the provisions of international conventions on the recognition and enforcement of foreign arbitral awards, in particular the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter, the “Convention”).[1] This is especially relevant when it becomes necessary to recognize and enforce such an arbitral award in the territory of another state. It should be noted that the international arbitral tribunal must issue an award approving the settlement agreement, rather than an order or ruling (such as those used by Russian state commercial courts to terminate proceedings), since procedural documents of this nature issued by arbitral tribunals are not explicitly mentioned in the text of the Convention.
In general, settlement agreements are intended to be performed voluntarily. However, if a non-approved settlement is not performed, the parties may initiate new arbitration proceedings under the new arbitration clause. Expedited arbitration is particularly suitable in such cases, as it allows for a swift award—typically within three months of commencement, depending on the tribunal and its rules. The subject matter of such proceedings is limited to the settlement terms, rather than the complex relationships of a broader commercial or investment contract.
For Russian parties, cooperation with arbitrations in jurisdictions considered “unfriendly” (such as Sweden, home to the SCC) remains complex and uncertain in 2025. Much depends on the geopolitical situation and mutual sanctions between Russia and such countries. Since the adoption of the EU’s 8th sanctions package in October 2022, which restricts legal services to Russian entities, sanctions have created significant obstacles for Russian companies in arbitration in Stockholm, affecting funding, transfers, and access to legal counsel. Sanctions against specific companies or their management may make participation impossible.
Even if a favorable award is issued, enforcement in the EU or other sanctioning countries may be difficult or impossible. Therefore, Russian companies should consider alternative jurisdictions for dispute resolution and reconsider direct commercial relations with EU countries to minimize the risk of denial of justice.
The Dubai International Arbitration Centre (DIAC) is a leading arbitration institution in the Middle East. Given sanctions and limited access to European arbitration centers, DIAC is increasingly attractive to Russian companies. Its expedited procedures and experienced arbitrators make it a strong alternative for cross-border disputes.
DIAC provides arbitration and recognition of settlements, with enforcement supported by local law and international standards. The UAE government actively fosters a business-friendly environment, including respect for international arbitral awards.
Hong Kong, as a major financial center, is home to the Hong Kong International Arbitration Centre (HKIAC). Its procedures are aligned with international standards, facilitating enforcement of settlements. Hong Kong is a party to the New York Convention, simplifying recognition and enforcement of foreign arbitral awards, including settlements. In Hong Kong, settlements generally do not require mandatory court approval if the parties agree, but tribunal approval may be advisable for enforceability and to avoid disputes.
The China International Economic and Trade Arbitration Commission (CIETAC) is one of China’s leading arbitration institutions. Enforcement of settlements and awards in China is governed by both domestic law and international standards. China continues to improve its legal environment to attract foreign investors. Enforcement of arbitral awards in China is possible if formal requirements are met, which may require additional steps by the parties.
The decision to seek tribunal approval of a settlement depends on the parties’ trust and the risk of non-performance. If both parties are confident in each other’s compliance, an out-of-court settlement can save time and money. However, if there is any risk of non-performance, tribunal approval is a more reliable option. The additional time and cost may be justified by the ability to enforce the settlement, which is particularly relevant in international arbitration, where enforcement may be more complex than in domestic courts.
Ultimately, the choice between approval and non-approval is a balance between cost savings and enforcement guarantees. Each case requires a careful assessment of risks and benefits.
[1] Article 1 of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards