In China, settlement negotiations may not arise until the parties have filed their case in court or arbitration and each side has presented evidence and argument. At that point, the judge or arbitrator may offer the parties an opportunity to discuss settlement. Sometimes the introduction of settlement talks is the product of one party or the other suggesting to the arbitration institution secretary or the judge that settlement is a good option for the case. In most cases, Chinese parties seem to be reluctant to settle early lest it show a fear that the party lacks confidence in the strength of its case.
American counterparties are different. US arbitration and litigation proceedings are expensive propositions and many companies seek to dispense with litigation early if at all possible. Settlement is considered even where one may have a relatively strong case if the cost of settlement may be less than the costs of litigation time and fees. Also, parties recognize the uncertainty of dispute resolution in any forum and so settlement allows certainty. Thus, we hear the expression, “A bad settlement is better than a good trial.”
As a result, a Chinese party may end up in settlement negotiations with a US party earlier than expected and the US party will be expecting the Chinese party to know the rules of engagement for such negotiations. A Chinese party, accustomed to Chinese proceedings and a combined arbitration-mediation process may be expecting that settlement discussions can be brought into evidence or that settlement discussions may be a means to create evidence or argument that does otherwise already exist. US rules of evidence are strict on the use of information and documents obtained from settlement negotiations.
If you are involved in arbitration in the United States, or a US court proceeding, or in an arbitration outside the United States that has adopted the Federal Rules of Evidence (FRE), the parties will be bound by FRE Rule 408 Compromise Offers and Negotiations, as quoted below.
Rule 408. Compromise Offers and Negotiations
(a) Prohibited Uses. Evidence of the following is not admissible — on behalf of any party — either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction:
- furnishing, promising, or offering — or accepting, promising to accept, or offering to accept — a valuable consideration in compromising or attempting to compromise the claim; and
- conduct or a statement made during compromise negotiations about the claim — except when offered in a criminal case and when the negotiations related to a claim by a public office in the exercise of its regulatory, investigative, or enforcement authority.
(b) Exceptions. The court may admit this evidence for another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.
The Rule is clear that neither party can use information relating to settlement discussions as evidence to prove the validity of a claim or a disputed amount in a civil case. In effect, anything said or written in relation to settlement will remain confidential and may never be used in the proceedings. By way of example, if you think you will collect evidence at the plant while you visit for the negotiations, you may well be barred from using it. Similarly, even if the other side acknowledges some merit in your claim or counteroffers with an amount close to your demand, that information may never be brought before the trier of fact, specifically, the arbitrators, the judge or the jury. There might be an exception for the purposes of impeachment if the evidence were clear. For example, in a letter sent for the purposes of settlement, Company A admits that its engines never met specification, but then at trial its lead engineer claims that the specifications were met. A judge or arbitrator in that case might consider allowing Rule 408 evidence to be admitted for the purpose of showing that the engineer is lying (impeachment). The evidence is not admitted to show that the engines did not meet the specification. Such instances are rare. As a rule, you should assume that settlement negotiations, and related materials, oral and written, will not be admissible evidence at trial or hearing.
These issues may also arise in international arbitration with any foreign party, where the IBA Rules on the Taking of Evidence in International Arbitration have been adopted. Article 9 (3)(b) of the IBA Rules dealing with the Admissibility and the Assessment of Evidence allows the arbitral tribunal to consider whether confidentiality attaches to documents and information relating to settlement discussions and whether such materials should be ruled inadmissible by the tribunal. Accordingly, when a party receives communication clearly marked as “Without Prejudice” or “For Settlement Purposes Only”, the intent is to protect that document from disclosure to the tribunal or trier of fact and it should not be submitted as evidence. If it is submitted, it will likely be ruled inadmissible and excluded from evidence.
If you want to engage in settlement negotiations or the other side approaches you, think carefully about what you want to say and how you will protect your rights. Consult counsel, and understand when documents and communications are falling within the scope of litigation or arbitration rules. Don’t’ wait until you are sued to find out you did not adequately protect your communications with the other side.