Settlement Agreement
The Arbitration and Conciliation Act, 1996
📚 Introduction to Settlement Agreement
A Settlement Agreement under the Arbitration and Conciliation Act, 1996 is a legally binding agreement reached between disputing parties either during arbitration proceedings or through conciliation proceedings. The Act provides two distinct mechanisms for settlement:
- Section 30: Settlement during arbitration proceedings
- Section 73: Settlement agreement through conciliation
Key Features:
- Provides an amicable resolution to disputes
- Has the same status and effect as an arbitral award
- Enforceable like a court decree
- Reduces litigation time and costs
- Preserves business relationships between parties
⚖️ Section 30: Settlement During Arbitration
Provisions of Section 30:
Sub-section (1): The arbitral tribunal may encourage settlement of disputes and may use mediation, conciliation, or other procedures at any time during arbitral proceedings with the agreement of parties.
Sub-section (2): If parties settle the dispute during arbitral proceedings, the tribunal shall terminate the proceedings and, if requested by parties, record the settlement in the form of an arbitral award on agreed terms.
Sub-section (3): An arbitral award on agreed terms shall be made in accordance with Section 31 and shall state that it is an arbitral award.
Sub-section (4): An arbitral award on agreed terms shall have the same status and effect as any other arbitral award on the substance of the dispute.
🤝 Section 73: Settlement Agreement in Conciliation
Provisions of Section 73:
Sub-section (1): When the conciliator sees elements of a settlement acceptable to parties, he shall formulate terms of a possible settlement and submit them to parties for observations. After receiving observations, the conciliator may reformulate the terms.
Sub-section (2): If parties reach an agreement on settlement, they may draw up and sign a written settlement agreement. If requested, the conciliator may draw up or assist in drawing up the settlement agreement.
Sub-section (3): When parties sign the settlement agreement, it shall be final and binding on the parties and persons claiming under them.
Sub-section (4): The conciliator shall authenticate the settlement agreement and furnish a copy to each party.
📋 Section 74: Status and Effect of Settlement Agreement
The settlement agreement under Section 73 shall have the same status and effect as if it is an arbitral award on agreed terms on the substance of the dispute rendered by an arbitral tribunal under Section 30.
This creates a legal fiction that elevates the settlement agreement to the status of an arbitral award, making it enforceable without further adjudicatory process.
💡 Practical Examples
Example 1: Commercial Dispute Settlement (Section 30)
Scenario: Company A and Company B entered into a contract for supply of machinery worth Rs. 50 lakhs. A dispute arose regarding the quality of machinery supplied. The matter was referred to arbitration.
Settlement Process:
- During arbitration proceedings, the arbitral tribunal encouraged settlement
- Parties agreed that Company A would replace defective parts and provide warranty extension
- Both parties requested the tribunal to record the settlement
- Tribunal recorded it as an arbitral award on agreed terms
Result: The settlement agreement has the status of an arbitral award and is enforceable like a court decree.
Example 2: Property Dispute Settlement (Section 73)
Scenario: Two brothers, Haresh and Pitambar, disputed ownership of a flat. They agreed to conciliation proceedings.
Settlement Process:
- Conciliator formulated terms: Haresh would pay Rs. 15 lakhs to Pitambar for full ownership
- Terms were submitted to both parties for observations
- After observations, conciliator reformulated terms: Rs. 12 lakhs payment over 6 months
- Both parties signed the written settlement agreement
- Conciliator authenticated the agreement and furnished copies to both parties
Result: The settlement agreement is final, binding, and has the effect of an arbitral award under Section 74.
Example 3: Employment Dispute Settlement
Scenario: An employee claimed wrongful termination and approached conciliation.
Settlement Process:
- Conciliator identified possibility of settlement
- Formulated terms: Company pays 6 months salary as compensation and provides experience certificate
- Employee agreed with modification: 8 months salary
- Company accepted; both signed the settlement agreement
- Conciliator authenticated the agreement
Result: Dispute resolved amicably without lengthy litigation.
📊 Comparison Table: Section 30 vs Section 73
| Aspect | Section 30 (Arbitration) | Section 73 (Conciliation) |
|---|---|---|
| Proceedings | During arbitration proceedings | During conciliation proceedings |
| Authority | Arbitral Tribunal | Conciliator |
| Role | Tribunal encourages and records settlement | Conciliator formulates, assists, and authenticates |
| Formulation | Parties formulate their own terms | Conciliator formulates terms for parties' observations |
| Signature Requirement | Recorded by tribunal on request | Must be signed by both parties |
| Authentication | Not specifically required | Mandatory authentication by conciliator |
| Status | Arbitral award on agreed terms | Has same status as arbitral award (Section 74) |
| Enforcement | Enforceable as arbitral award | Enforceable as arbitral award |
| Procedure | Less procedural requirements | Strict procedural compliance required |
| Part of Act | Part I (Arbitration) | Part III (Conciliation) |
🔄 Flowchart: Settlement Agreement Process
Process under Section 30 (Arbitration)
Process under Section 73 (Conciliation)
⚖️ Important Case Laws
Case 1: Haresh Dayaram Thakur vs. State of Maharashtra (2000)
Citation: AIR 2000 SC 2281
Court: Supreme Court of India
📌 Facts of the Case:
- Haresh Dayaram Thakur (appellant) and Pitambar Dayaram Thakur (respondent) were brothers
- Dispute arose over ownership of Flat No. 16/199 at Ramakrishna Nagar, Khar (W), Mumbai
- The flat belonged to Maharashtra Housing and Area Development Authority (MHADA)
- Appellant purchased the flat for Rs. 3,45,000 through an agreement dated 21.11.1989
- Conciliation proceedings were initiated by the Bombay High Court
- Conciliator held meetings but drew up settlement agreement unilaterally in secrecy
- Settlement agreement did not bear signatures of the parties
- Conciliator sent the agreement to court in a sealed cover
- High Court confirmed the settlement without entertaining objections
📌 Issues Raised:
- Whether the settlement agreement was valid without signatures of parties?
- Whether procedural requirements of Section 73 were complied with?
- What are the mandatory requirements for a valid settlement agreement?
📌 Supreme Court Observations:
- A conciliator is to assist parties in settling disputes amicably
- Conciliator has wide powers to decide procedure but must follow statutory provisions
- When parties can resolve disputes by mutual agreement, conciliator must proceed according to Section 73
- Conciliator must formulate terms and submit to parties for observations
- Settlement takes shape only when parties sign the agreement or request conciliator to prepare and affix signatures
- Under Section 73(3), settlement agreement signed by parties is final and binding
- Successful conciliation ends only when settlement agreement signed by parties comes into existence
- Only such agreement has legal sanctity of arbitral award under Section 74
📌 Judgment:
- Supreme Court held that procedural requirements of Section 73 were not followed
- Settlement agreement without parties' signatures cannot be given legal sanctity
- The principle: "If statute prescribes a procedure for doing a thing, the thing has to be done according to that procedure"
- High Court order confirming settlement was set aside
- Settlement agreement dated 31.8.1999 was set aside
- High Court directed to dispose of writ petition afresh on merits
📌 Legal Principles Established:
- Settlement agreement under Section 73 must be signed by both parties
- Substantial compliance is not sufficient; all statutory requirements must be complied with
- Settlement agreement can get status of arbitral award only when properly executed
- Conciliator cannot unilaterally prepare and submit settlement without parties' signatures
📌 Significance:
- Landmark case defining mandatory requirements for settlement agreements
- Established strict compliance requirement for Section 73
- Protects parties' rights by ensuring voluntary participation
- Prevents arbitrary settlements by conciliators
Case 2: Mysore Cements Limited vs. Svedala Barmac Ltd. (2003)
Citation: AIR 2003 SC 3493
Court: Supreme Court of India
📌 Key Holdings:
- Reiterated the principles laid down in Haresh Dayaram Thakur case
- Settlement agreement under Section 73 gets status of arbitral award under Section 30 only when all requirements are satisfied
- Agreement must be in conformity with manner stipulated and form envisaged
- Agreement must be duly authenticated in accordance with Section 73
- Not every agreement between parties acquires status of settlement agreement under Section 73
📌 Legal Principles:
- Mere substantial compliance is insufficient for settlement agreements
- All statutory requirements under Section 73 must be strictly complied with
- Only properly executed settlement agreements can be enforced as arbitral awards
📌 Significance:
- Reinforced strict compliance requirement established in Haresh Dayaram Thakur
- Clarified that settlement agreements have special status requiring procedural perfection
- Ensured protection of parties' rights in conciliation proceedings
❓ Questions and Answers
Answer: A Settlement Agreement is a legally binding agreement reached between disputing parties either during arbitration proceedings (Section 30) or through conciliation proceedings (Section 73). It has the same status and effect as an arbitral award and is enforceable like a court decree. The Act provides two mechanisms: (1) Settlement during arbitration where the tribunal records the agreed terms, and (2) Settlement through conciliation where a conciliator assists parties in formulating and finalizing the agreement.
Answer: The key differences are:
- Context: Section 30 applies during arbitration proceedings while Section 73 applies during conciliation proceedings
- Authority: Section 30 involves an arbitral tribunal while Section 73 involves a conciliator
- Formulation: In Section 30, parties formulate their own terms; in Section 73, the conciliator formulates terms for parties' observations
- Procedure: Section 73 has more detailed procedural requirements including authentication by conciliator
- Signature: Section 73 mandates signatures of both parties; Section 30 is recorded by tribunal on request
Answer: Based on the Supreme Court judgment in Haresh Dayaram Thakur case, the mandatory requirements are:
- Conciliator must identify elements of settlement acceptable to parties
- Conciliator must formulate terms of possible settlement
- Terms must be submitted to parties for their observations
- Conciliator may reformulate terms based on observations received
- Parties must draw up a written settlement agreement or request conciliator to do so
- Both parties must sign the settlement agreement (mandatory)
- Conciliator must authenticate the settlement agreement
- Authenticated copies must be furnished to each party
Answer: Under Section 74, a settlement agreement reached under Section 73 has the same status and effect as an arbitral award on agreed terms rendered by an arbitral tribunal under Section 30. This means:
- It is final and binding on the parties and persons claiming under them
- It is enforceable like a court decree under Section 36 of the Act
- No further adjudicatory process is required for enforcement
- Parties cannot challenge it on merits as they have voluntarily agreed to the terms
- It creates a legal fiction elevating the settlement to the status of an arbitral award
Answer: The Supreme Court in Haresh Dayaram Thakur vs. State of Maharashtra (2000) established the fundamental principle that: "If a statute prescribes a procedure for doing a thing, the thing has to be done according to that procedure."
The Court held that:
- A settlement agreement under Section 73 can get legal sanctity of arbitral award only when both parties sign the settlement agreement
- Substantial compliance is not sufficient; all statutory requirements must be strictly complied with
- A settlement agreement without parties' signatures cannot be enforced
- The conciliator cannot unilaterally prepare and submit a settlement agreement without parties' participation and signatures
Answer: Generally, parties cannot challenge a properly executed settlement agreement on merits because:
- Settlement is voluntary and based on mutual consent
- Under Section 73(3), the signed settlement agreement is final and binding
- It has the status of an arbitral award which can only be challenged on limited grounds under Section 34
However, a settlement agreement can be challenged if:
- Procedural requirements of Section 73 were not followed
- Agreement does not bear signatures of both parties
- There was fraud, coercion, or undue influence
- Agreement is contrary to public policy
- Conciliator exceeded his authority
- Agreement was not properly authenticated
Answer: In the case of Anuradha SA Investments LLC & Anr. v Parsvnath Developers Limited, the Delhi High Court held that:
- Improper stamping does not invalidate the entire settlement agreement
- The agreement can be enforced after proper stamping is done
- Parties need to get the settlement agreement properly stamped as per applicable stamp duty laws
- The substantive rights under the agreement remain valid
- Non-stamping is a procedural defect that can be cured, not a fatal defect
Answer: Settlement agreements offer numerous advantages:
- Time-Saving: Avoids lengthy litigation or arbitration proceedings
- Cost-Effective: Reduces legal fees and other litigation costs
- Preserves Relationships: Maintains business and personal relationships through amicable resolution
- Flexibility: Allows creative and customized solutions tailored to parties' needs
- Certainty: Provides immediate resolution and closure to disputes
- Confidentiality: Proceedings and settlement remain confidential (Section 75)
- Enforceability: Has same status as arbitral award and is easily enforceable
- Control: Parties maintain control over the outcome rather than leaving it to tribunal
- Reduces Court Burden: Helps reduce pendency in courts and arbitral tribunals
Answer: The conciliator plays a crucial facilitative role:
- Identification: Identifies elements of settlement that may be acceptable to parties
- Formulation: Formulates terms of possible settlement based on discussions
- Submission: Submits proposed terms to parties for their observations
- Reformulation: May reformulate terms based on parties' feedback
- Assistance: Assists parties in drawing up the written settlement agreement if requested
- Authentication: Authenticates the final settlement agreement
- Distribution: Furnishes authenticated copies to each party
- Neutral Facilitator: Acts as neutral third party to facilitate amicable resolution
Important Note: The conciliator assists and facilitates but does not impose settlement. The final decision to settle rests with the parties.
Answer: Yes. According to Section 30(1), it is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute. With the agreement of the parties, the arbitral tribunal may use mediation, conciliation, or other procedures at any time during the arbitral proceedings to encourage settlement.
Process:
- Tribunal must obtain agreement of parties before using conciliation
- Tribunal can suggest settlement at any stage of proceedings
- If parties settle, tribunal terminates proceedings
- On parties' request, tribunal records settlement as arbitral award on agreed terms
- This promotes flexibility and encourages amicable resolution even during arbitration