The Settlement Agreement: How It Is Made, and Why It Is as Good as an Award

• Section 74 gives the settlement agreement the status and effect of an award on agreed terms under section 30;
• section 30(4), chapter 370, gives an award on agreed terms the same status and effect as any other arbitral award on the substance of the dispute;
• section 35 makes an arbitral award final and binding; and
• section 36 makes it enforceable in accordance with the Code of Civil Procedure as if it were a decree of the court.

So a conciliation settlement is enforced as a decree. The party who breaks it is not sued on a contract; it is executed against.

Compare the three settlement instruments in this book, which is a table worth learning across Modules I and III:

Haresh Dayaram Thakur: what happens when the steps are skipped

Haresh Dayaram Thakur v. State of Maharashtra, AIR 2000 SC 2281, decided 5 May 2000.

Facts. A conciliator, a former Judge of the High Court, held some meetings with the parties at which there was discussion. He then drew up the so called settlement agreement himself, in secrecy, and sent it to the court in a sealed cover. The document did not bear the signatures of the parties, and its terms had not been disclosed to them. The court below treated that settlement as binding and refused to entertain any objection to it.

Held. The Supreme Court set out the statutory scheme and held that the procedure prescribed by Part III had not been followed. Its reasoning is worth having in its own words:

The settlement takes shape only when the parties draw up the settlement agreement or request the conciliator to prepare the same and affix their signatures to it. Under sub-section (3) of section 73 the settlement agreement signed by the parties is final and binding on the parties and persons claiming under them. It follows therefore that a successful conciliation proceeding comes to an end only when the settlement agreement signed by the parties comes into existence. It is such an agreement which has the status and effect of legal sanctity of an arbitral award under section 74.

The Court held that the conciliator was vested with wide powers to decide his own procedure, untrammelled by the Code of Civil Procedure or the Evidence Act, but that when it appears to him that there exists an element of settlement which may be acceptable to the parties he must proceed in accordance with section 73: formulate the terms, make them over to the parties for their observations, and draw up a settlement in the light of those observations. It found that the conciliator and the judge below had failed to notice the clear distinction between an arbitration proceeding and a conciliation proceeding, and that the court had wrongly given the document a status even higher than an arbitral award by refusing to entertain any objection to it.

Why it matters. It is the authority for the proposition that the signature of the parties is constitutive, not formal. A document produced by a conciliator, however eminent, that the parties have not signed is not a settlement agreement, has no section 74 status, and cannot be enforced. It also warns against the confusion the whole of Module III exists to prevent: a conciliator is not an arbitrator, and his opinion is not an award.

Mysore Cements: the same point, applied

Mysore Cements Ltd v. Svedala Barmac Ltd, AIR 2003 SC 3493, (2003) 10 SCC 375, decided 12 March 2003, Shivaraj V. Patil J with Doraiswamy Raju J.

Facts. It was contended that a document described as a Letter of Comfort amounted to a settlement agreement under section 73 and was enforceable as such.

Held. Setting section 73 out sub-section by sub-section, the Court found no such formulation and reformulation by the conciliator as sub-section (1) requires, and held that on the undisputed facts and the record all the requirements of section 73 were not complied with, so the documents could not be given the status of a settlement agreement under that section. It quoted paragraph 19 of Haresh Dayaram Thakur in full, and applied the settled principle that where a statute prescribes a procedure for doing a thing in a particular way, it has to be done accordingly.

Why it matters. It confirms and applies Haresh Dayaram Thakur, and adds the general principle. The section 73 steps are not a formality to be inferred from the parties' conduct: a document that has not been through them is not a settlement agreement, whatever the parties call it.

A worked example

Two companies conciliate a payment dispute. After four meetings the conciliator can see the shape of a deal.

What must she do? Under section 73(1), because it appears to her that there exist elements of a settlement which may be acceptable, she shall formulate the terms of a possible settlement and submit them to the parties for their observations.

Both sides comment, and one wants the instalments restructured. She may reformulate the terms in the light of those observations, under the second limb of sub-section (1).

They agree. Who writes it up? Under section 73(2) the parties may draw up and sign the agreement, and if they request it she may draw it up or assist them.

When does it bind? On signature, under section 73(3). Not on her formulation, and not on her authentication.

What must she then do? Under section 73(4), authenticate the agreement and furnish a copy to each party.

One company then fails to pay the second instalment. The other executes. By section 74 the agreement has the same status and effect as an award on agreed terms under section 30, which by section 30(4) has the status of any award, which by section 36 is enforced as a decree.

Now change the facts to Haresh Dayaram. Suppose the conciliator, after the meetings, had written out terms herself, never shown them to the parties, obtained no signatures, and sent the document to a court saying the matter was settled. That is not a settlement agreement. There is nothing to enforce, and a court that treated it as binding would be doing exactly what the Supreme Court condemned.

What beginners get wrong

Authentication does not make the agreement binding. Signature does, under section 73(3). Authentication is the conciliator's duty afterwards.

A conciliator's formulation is not a decision. It is submitted to the parties for observations and may be reformulated.

A conciliation settlement is not merely a contract. Section 74 gives it the status of an award on agreed terms, so it is enforced under section 36.

The conciliator drafts only if asked. Section 73(2) puts drawing up the agreement on the parties, with the conciliator assisting on request.

Do not describe Haresh Dayaram as a case about the merits. It is about the procedure of section 73, and the point is that skipping the steps leaves nothing binding.

Quick revision

• 73(1): where it appears there are elements of a settlement acceptable to the parties, the conciliator shall formulate terms and submit them for observations, and may reformulate.
• 73(2): the parties may draw up and sign a written settlement agreement; the conciliator may draw it up or assist if requested.
• 73(3): on signature it is final and binding on the parties and persons claiming under them.
• 73(4): the conciliator authenticates it and furnishes a copy to each party.
• 74: the agreement has the same status and effect as an arbitral award on agreed terms under section 30, hence section 30(4), section 35 and enforcement under section 36.
• Haresh Dayaram Thakur (5 May 2000): a conciliation succeeds only when the settlement agreement signed by the parties comes into existence; a document drawn up by the conciliator in secrecy and unsigned by the parties has no such status, and the courts below had failed to notice the clear distinction between arbitration and conciliation.

Test yourself

1. At what moment does a conciliation settlement become binding? When the parties sign the written settlement agreement, under section 73(3). The conciliator's formulation of terms and his later authentication under section 73(4) do not create the binding force.

2. What is the effect of section 74? It gives the settlement agreement the same status and effect as if it were an arbitral award on agreed terms on the substance of the dispute rendered under section 30. Through section 30(4), section 35 and section 36, that means it is final, binding and enforceable in accordance with the Code of Civil Procedure as if it were a decree of the court.

3. What did the conciliator do wrong in Haresh Dayaram Thakur? He held meetings, then drew up the so called settlement agreement himself in secrecy and sent it to the court in a sealed cover, without disclosing its terms to the parties and without their signatures. The Supreme Court held that a successful conciliation comes to an end only when a settlement agreement signed by the parties comes into existence, and that it is such an agreement which has the status of an award under section 74.

4. Who drafts the settlement agreement? Under section 73(2) the parties may draw up and sign it, and the conciliator may draw it up or assist in drawing it up only if the parties request him to.

5. How does a conciliation settlement compare with a Lok Adalat award? Both are consensual outcomes given statutory force. A Lok Adalat award is deemed a decree of a civil court by section 21 of the Legal Services Authorities Act 1987, with no appeal. A conciliation settlement takes the status of an arbitral award on agreed terms under section 74, and is therefore enforced under section 36 of the Arbitration and Conciliation Act as if it were a decree.