In view of the increasing costs of litigation and other formal dispute resolution processes, coupled with the uncertainty of the outcome at trial, it is not surprising that an overwhelming majority of civil cases settle before they reach trial or the hearing stage of a lawsuit or arbitration.
While there are many advantages in settling a dispute, a poorly managed settlement process can compromise both reputation and relationships. In this article, we seek to highlight the key risks faced in resolving disputes through a negotiated settlement and the best practices for managing risks to achieve the best outcome.
Assessment of the position for settlement
Unless you have a complete understanding of the strengths and weaknesses of your case, and your alternative options, it is difficult to make an informed decision over whether to proceed with a trial or accept a negotiated settlement offer. At the outset of every negotiation or settlement process, it is critical to invest adequate time and resources into the assessment of your case. This is essential for planning and developing an effective negotiation strategy. Having a comprehensive and realistic understanding of your position will only increase your bargaining power.
Merits of your case and your position for settlement
This may seem an obvious task, but is often overlooked. At this stage, you will gather factual as well as subjective information.
- Factual information includes evidence that is contained in documents, correspondence, e-mails, drawings etc., as well as witness accounts. This information should be located and preserved as soon as possible. As the availability of witnesses,
- particularly if they were only employed for a specific project, may not always be guaranteed, it is important to secure their early cooperation and ensure that their accounts are recorded as soon as possible in the form of witness statements.
- Subjective information includes the objectives and motivations of the people involved in the matter – the other party as well as your own employees. A better understanding of the other side’s motivations will inform your strategy, as will a good understanding of the motivations of your employees. An employee who does not wish to give evidence or handle a dispute, particularly if there is a possibility that it will expose that employee’s shortcomings, may have greater motivation to make the matter “go away”.
Consider any ongoing or potential relationships you have or your company has with the opposing party. If there is a long-running commercial relationship, or the potential of starting a commercial relationship with the other party, be proactive and address issues at an earlier stage. Alternatively, your circumstances may demand that urgent or tough actions are taken to preserve your position and reputation.
Your relationship risk will also have an impact on the type of dispute resolution and negotiated settlement process you chose. If there are good relationships between upper management, face-to-face discussions may be an effective option. However, if relationships have soured or if attempts to resolve have been ineffective, you may consider using the services of a neutral third party such as a mediator. If you are already in the middle of an arbitration, you may consider the
hybrid procedure of Arb-Med-Arb.
Quantum and costs
Have a realistic view about the cost of managing the dispute. Apart from setting aside a financial budget for the litigation or arbitration of the dispute, it is equally important that you factor in the cost of time management and the administrative and resource burden of managing a dispute, particularly a long running one.
Other factors: Precedent value, principle, reputational impact
Your dispute may have precedent value, i.e. you may have other similar suits for which you need to establish a precedent in order to benchmark future matters. For these circumstances, litigation/arbitration could be your best option. There may also be issues of principle and organisational reputation to consider. In some circumstances, it may be necessary to stick to your principles and not allow the other side to continue behaving in a manner that is detrimental to you and the
business. This will obviously need to be balanced against the impact a long running dispute may have on your business and reputation.
Time – is it the best time to start the negotiation process?
Your assessment process and investigations may have unearthed information that you would rather not disclose. In such a situation, you may decide to negotiate immediately in order to decrease the likelihood of such information coming to light. Alternatively, if you have limited information, you may wish to wait and let litigation or arbitration commence to allow for more facts and documents to surface before assessing whether negotiation is prudent.
Are you in a better position to influence the other party to agree to your terms and your negotiating position? Your situational advantage or disadvantage can influence when you should commence the negotiation process. This is highly subjective, and as your relative situation can change very quickly, it is always prudent to consider what steps you could take to increase or improve your leverage.
Persuasion and Bargaining
During this stage, you can strategically share information available to you in order to persuade the other side to settle and resolve the dispute in a way most favourable to you. A good understanding of your advantage as well as your “walk away” point will assist you in coming up with a prudent negotiation strategy. Apart from having a target goal range within which to settle, you should also understand your concession points during the different stages of the negotiation.
It is also important to ensure that the person leading the negotiations has the necessary mandate and authorisation. If that person has to go back to seek approval from management, you could end up losing any advantage or leverage you may have had.
You can gain an advantage in the negotiation process by making the first offer and establishing a reference point. This is also known as ‘anchoring’. Having a good understanding of the other side’s objectives and motivations (based on the substantial information you had obtained during your research), will assist you in gaining an edge and anchoring the discussion in your favour. Equally, having an understanding of the other side’s position will also equip you in resisting or defusing the other side’s anchors.
This hybrid process of combining mediation and arbitration can be a useful tool in assisting your settlement negotiations. It combines the benefits of both dispute resolution methods – the finality and enforceability of an arbitration award, as well as the collaborative approach of a mediation. The dispute is first referred to arbitration. The arbitration proceedings are then stayed while parties attempt to settle their disputes through mediation. This can happen at any stage of the proceedings. If the mediation results in a settlement, the terms of the settlement can be recorded in the form of a consent arbitration award. If the mediation fails, parties will then resume the arbitration proceedings.
Managing your legal risk
In your eagerness to achieve the best outcome, it is crucial that you do not jeopardise any advantage or leverage that you may have acquired by mismanaging your legal risks. Used properly, the legal tools available to you can enhance your settlement negotiations.
There is always the risk that negotiations may break down, and that you may find yourself heading to litigation or arbitration. As such, you should be protective during negotiations, without compromising on the quality of your negotiations and settlement discussions. This is where the concept of privilege could help – having the security that frank discussions or admissions could not be used against you at a later stage. It is therefore important that privilege is maintained and that it is not inadvertently waived.
Legal advice privilege
Confidential communications (written and oral) between a lawyer and a client which are made for the purpose of giving or receiving legal advice are protected, in that you will not be required to disclose to the opposing party any such sensitive or confidential advice given to you by your lawyer. This will allow frank disclosure and discussions between you and your adviser. However, it is important to note a few key points:
- Privilege is a question of substance rather than form: simply forwarding documents to your lawyer will not make a non-privileged document into a privileged one. The document needs to be created for the purposes of giving or receiving legal advice.
- Privilege is subject to the dominant purpose test, namely whether the communication or document was brought into existence with the dominant purpose of obtaining legal advice. If the dominant purpose of an email or communication is to seek
- advice from the lawyer, and others were copied in for information only, then the email is privileged regardless of who it is sent to.
- If, on the other hand, the dominant purpose of the email or communication is to seek a commercial view, and the lawyer is copied in whether for information or even for the purpose of legal advice, then the email (in so far as it is sent to the nonlawyer), is not privileged.
- Further, if sent to the non-lawyer for a commercial comment, but sent to the lawyer for legal advice, then the email is not protected by privilege, unless it or the non-lawyer’s response discloses or might disclose the nature of the legal advice sought and given.
Confidential communications (written and oral) which has come into existence when litigation (including arbitration) is in reasonable contemplation or has commenced are protected by litigation privilege.
A few points to note:
- The documents that are protected include (i) confidential communications are between a client or lawyer (on the one hand) and third parties (on the other), and (ii) other documents created by or on behalf of the client or his lawyer.
- The documents must be prepared for the dominant purpose of the conduct of the litigation, including deciding whether to litigate or settle the dispute. A recent English Court of Appeal decision held that emails between a company’s Board members discussing a commercial proposal for the settlement of a dispute were not covered by litigation privilege. The court declined to extend the scope of litigation privilege and held that it could not see any justification for covering all
- internal corporate communications with a blanket of litigation privilege.
Without Prejudice Communication
In order to encourage frank discussion, oral or written communications made during a negotiation process, which are genuine attempts at settlement, are subject to without prejudice privilege. This means that such communication cannot be disclosed and/or used against the maker of such communication in subsequent litigation or arbitration.
- The court will be prevented from seeing the document, or informed about the communication.
- The protection belongs to both parties, and cannot be waived by one side alone.
- The protection either attaches to the whole document, or none at all. This is where without prejudice privilege differs from legal advice or litigation privilege, where documents may be redacted.
- You may have come across situations where the words “off the record” are used during oral conversations. Bear in mind that these words have no legal status. Always clarify with the other party if they intend for the conversation to be a genuine
- attempt at settlement of the dispute.
Subject to Contract
While negotiations are taking place, it is important to ensure that you do not inadvertently create binding relations because of those communications. The use of the words “subject to contract” points towards a strong presumption that the parties did not intend to be legally bound by the terms of the communication until a more formal contract was entered into. Until you are sure that all the terms of your settlement are made out and can be agreed to, it is prudent to use the words “subject to contract” in all offers and negotiations.
Documenting and finalising the settlement
It is important that your documents reflect the agreement you intend to enter into. In your haste to bring the dispute to an end, some issues that may seem obvious could be missed. Attending a mediation or negotiation
with a draft agreement that you had prepared in advance would mean that you had considered and would be able to incorporate or promote the adoption of terms that are more favourable to you. The impact could be significant,
ranging from the settlement agreement being declared void, to being bound by terms that you did not think you were entering into.
Are you settling with the correct entity? You may have entered into the contract with the local subsidiary of an international entity, set up specifically for your contract.
If the settlement involves payment of a settlement sum by the subsidiary, you may wish to ensure that the parent company is also jointly liable for payment of the settlement sum. In the event that there is a failure by the subsidiary to make payment, you will be able to look to the parent company for payment. If joining the parent company to the settlement agreement is not possible, consider obtaining a parent company guarantee of the obligations under the settlement agreement.
Authority to settle
Does the person making or accepting your offer has the authority to settle and to bind the company into the settlement agreement?
Do the terms of settlement reflect your agreement?
It is difficult to correct mistakes in settlement agreements. The courts are also reluctant to interfere in compromise agreements. As such, use plain and clear language in setting out the terms of the settlement to avoid any confusion.
Clear payment/obligation terms
Any payment or obligation terms under the settlement agreement should be set out in clear terms so that they may be enforced.
Release of all claims
Use plain and clear language to identify the dispute that is being settled, including whether it is intended to settle any potential future claims arising out of the same or similar facts as the relevant dispute. If there is a release of
all future claims, do ensure that it is reciprocal. If litigation or arbitration has commenced, and the settlement is intended to conclude all proceedings, then ensure that the terms of the settlement agreement reflect this.
No outstanding warranties & indemnities
This is particularly relevant if the original contract provides for warranties and indemnities of the subject matter. Do clarify and ensure whether your settlement terms release you from future obligations and liabilities under the underlying contract.
Preparation is key. Investing adequate time and resources in the initial stages of the process will ensure that you are well informed and able to negotiate effectively. Ultimately, the difference between a good settlement and a bad one depends on how clear and unambiguous the document setting out the terms is. Being well prepared during all the different stages of the negotiation process, and having an understanding of your legal and contractual risks, will assist you in achieving the best possible outcome.