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August 26, 2015

Best Practices: Settling A Business Dispute Without Fear Of Making An Admission

by Norman E. Greenspan

Business persons often want advice regarding their discussions with persons or companies with whom they are embroiled in a dispute. Often the dispute is between two companies that have an ongoing business relationship and have a need to communicate about a variety of matters that arguably touch on the matter that is in dispute. There may be reluctance to get lawyers directly involved because that will be seen as an act of war that will only serve to escalate matters, not get them resolved. From a business perspective there may be good reasons to try and settle a dispute despite the belief that there is no merit to the claim. Yet, there is a legitimate concern in not wanting to say or do anything that is going to hurt “the case” should the dispute not be settled.

From a purely legal perspective, there are rules of evidence in both federal and state courts that make conduct or statements made in compromise negotiations, or offers to compromise or settle a dispute, inadmissible at a trial. See, e.g., Rule 408(a), Federal Rules of Evidence, which is also the model for many state court rules of evidence. The two prerequisites for the application of Rule 408(a) are the existence of a disputed claim and negotiations or discussions whose purpose is to compromise or settle the claim. However, what constitutes an existing dispute? Must there be a pending lawsuit, or a lawyer’s demand letter, in order for there to be an existing dispute? At what point do discussions between the parties evolve into compromise negotiations? Can there be compromise negotiation if lawyers are not involved? There are no bright line answers to these questions, or a simple rule to follow.

Nonetheless, there is an underlying public policy that provides the framework for the application of the inadmissibility rule to settlement negotiations and offers to compromise. As a general matter of jurisprudence, rules and laws are interpreted by courts to protect the interests of the public. Courts see the settlement of disputes as being in the public interest, and that disputes are likely to be settled only if there is free and frank discussion toward settling the dispute. There can only be free and frank discussions if the parties are not concerned that whatever they say, or any offer or demand in compromise that they make, will be used against them at a trial if the matter does not settle. The United States Court of Appeals for the Sixth Circuit had this to say about this concern:

There exists a strong public interest in favor of secrecy of matters discussed by parties during settlement negotiations. …The ability to negotiate and settle a case without trial fosters a more efficient, more cost-effective, and significantly less burdened judicial system. In order for settlement talks to be effective, parties must feel uninhibited in their communications.

Goodyear Tire & Rubber Co. v. Chiles Power Supply, 332 F.3d 976, at 980 (6th Cir. 2003).

Nonetheless, the inadmissibility of the evidence of settlement discussions does not mean that it is beyond discovery in a civil case. For information to be discoverable, it does not have to be admissible. It only needs to be reasonably calculated to lead to the discovery of admissible evidence. Rule 26(b)(1), Fed. R. Civ. P. Indeed, Rule 408(b), FRE, addresses some very limited circumstances where this evidence is admissible. Some courts have allowed the discovery or settlement discussions even though the evidence of those discussions was inadmissible at trial.

Neither Rule 408(a) or the existing case law requires that an attorney be involved in the settlement discussions for the settlement inadmissibility rule to apply. So, here are some practical pointers if you want to try and resolve a dispute without having to unnecessarily worry about what you say or offer coming back to haunt you:

  • Address the specific problem directly with the other side, separate and apart from other business issues.
  • Have each party agree that the discussion you are going to have is for the purpose of trying to resolve a dispute, and that each side agrees to keep these discussions confidential and limited to only those persons who need to know.
  • Both sides should acknowledge that there is a dispute, and that these discussions are for the purpose to trying to settle the dispute.
  • Get the agreement in writing.

As with most things in life, there is no guaranty that this will work. However, it should provide you with a significant measure of comfort to allow you to move forward with your business instead of being stymied by a resolvable dispute.

For more information, please contact Norman at 215-390-1025 or at ngreenspan@starfieldsmith.com.