Examining ABA Guidelines on Settlement Negotiations

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By Ronald C. Minkoff
[Originally published in NYPRR January 2003]


Those of us who practice the law of lawyering know that applying the Model Rules or the New York Code of Professional Responsibility (N.Y. Code) to the settlement process is often confounding and unsatisfactory. With rare exceptions, such as the “no contact” rule of Model Rule 4.2 and DR 7-104 of the New York Code, existing ethical codes do not specifically address the settlement process at all. In fact, rules such as the prohibition in Model Rule 8.4(c) against “dishonesty, fraud, deceit and misrepresentation” fit uneasily with the bluff and parry common to serious settlement talks.

As a result, the settlement process has left us with some of the more fascinating (and seemingly unanswerable) dilemmas of professional responsibility law: Can you withdraw if your client refuses a reasonable settlement offer? How should you respond when you know your adversary is settling when she and her client are unaware of certain material facts which might affect her decision, or of a drafting error in the settlement documents? Can a settlement be conditioned on an agreement not to report attorney misconduct, or on a lawyer’s commitment not to represent certain groups of clients in the future?

A document released by the ABA Section on Litigation in August 2002, Ethical Guidelines for Settlement Negotiation (Guidelines), addresses these and many other difficult issues. The product of three years of work by a committee of judges, practicing attorneys and academics throughout the country, the 58-page Guidelines, do not purport to create new ethics rules, but to summarize existing standards and serve “as a resource… to facilitate and promote ethical conduct in settlement negotiations.”

The Guidelines are divided into three main sections: “Settlement Negotiations Generally,” which addresses general issues of competence, fair dealing and public disclosure; “Issues Relating to Lawyers and Their Clients,” which focuses on decision-making authority in the settlement process when a lawyer represents ordinary clients, clients with diminished capacity, organizations, and insureds; and “Issues Relating to a Lawyer’s Negotiations with Opposing Parties,” which discusses misrepresentations, omissions and hard-ball tactics during settlement talks, as well as the propriety of certain restrictive provisions commonly included in settlement agreements. Each section is divided in turn into subsections setting forth general rules or principles, followed by detailed “Committee Notes.” These Notes attempt to apply general precepts found in the N.Y. Code and the Model Rules to specific settlement related issues. Often, and most interestingly, the Notes discuss “best practices,” contrasting aspirational standards with the lowest common denominator minimums found in the rules and the case law.

We can’t provide a complete summary of the Guidelines in this limited space. We can, however, give some examples of the issues addressed and of conclusions reached:

Honesty. The Guidelines make simple honesty a touchstone of all settlement-related conduct by attorneys — whether with their own clients or with opposing counsel. For example, citing Comment 2 to Model Rule 1.4, the Guidelines emphasize the lawyer’s obligation to convey to her client the complete terms of a settlement proposal from the other side. [Guidelines at 13.] Indeed, the Guidelines note that even if the client has given the lawyer broad authority to settle, “best practices” dictate that the lawyer “communicate the full terms of [any] final settlement agreement,” obtain “specific consent” to that settlement and even notify the client “of the client’s right to revoke [the previous settlement] authorization” at the time the lawyer seeks the client’s approval of a tentative settlement. [Id. at 14-15.]

Similarly, the Guidelines emphasize the traditional rule that lawyers may not make material misrepresentations, or knowingly affirm false statements by others, during settlement discussions [Guideline 4.1.1 at 34-35], all the while noting that certain common statements, such as those about the value of the case or what a party will accept, are not considered factual and therefore are not subject to this rule. [Id. at 35, citing Model Rule 4.1, comm. 2.] But the Guidelines do not stop there. While indicating that “a lawyer generally has no ethical duty to make affirmative disclosures of fact when dealing with a non-client,” the Guidelines make clear that “under certain circumstances a lawyer’s silence or failure to speak may be unethical.” [Id. at 37.] These circumstances include situations long the subject of law school hypotheticals, such as the failure to disclose the fact that the client has passed away during settlement discussions, or the existence of “an advantageous scrivener’s error in a document.” [Guideline 4.1.2 at 38.]

Authorization to Settle. The Guidelines prohibit a lawyer from including in a retainer agreement provisions giving the lawyer irrevocable authorization to settle or allowing the lawyer to withdraw if the client refuses the lawyer’s recommendation of settlement. But the lawyer can discuss the conditions for withdrawal in the retainer agreement if he does so accurately. [Guideline 3.2.3 at 15–16.] Yet, the Guidelines go further, suggesting that a lawyer may be permitted to withdraw “based on the client’s approach to settlement,” even if doing so will prejudice the client. [Id. at 16.] Furthermore, the Guidelines state that “[a] lawyer who has a fundamental disagreement with or considers the client’s settlement strategy or goals repugnant or misguided but not illegal may withdraw from the representation or may continue the representation on the condition that the lawyer will not be required to perform the repugnant act,” as long as the lawyer reveals his or her reluctance to the client. [Guidelines at 21–22.]

Apart from vague language in Model Rule 1.16, the Guidelines cite no authority for this position, and it does not seem justifiable: What basis can exist for a lawyer to determine suddenly that a client’s position is so “repugnant” that it need not be followed? And what does “repugnant” mean in the first place? Nor is this position consistent with previous statements in the Guidelines themselves which give the client full authority to determine when and on what terms to settle. [See Id. at 11–12.]

Common Restrictive Provisions. The Guidelines address commendably restrictions which lawyers often place in settlement agreements. For example, Guideline 4.2.1 applies the general ethical proscription against agreements to restrict the practice of law [Model Rule 5.6(b) and N.Y. Code, DR 2-108]. It would prohibit settlement agreement provisions “that preclude[] one party’s lawyer from representing clients in future litigation against another party,” or even to serve as counsel for the adversary in order to conflict the lawyer out of future adverse representations. Guideline 4.2.2 suggests that a lawyer may prohibit her client, as part of a settlement, from waiving the client’s right to attorneys’ fees, while noting that ethical opinions have taken both sides of this issue. [Guidelines at 42-43.] Meanwhile, Guideline 4.2.3 states that “[a] lawyer must not agree to refrain from reporting opposing counsel’s misconduct as a condition of a settlement in contravention of the lawyer’s reporting obligation under the applicable ethics rules.” However, it does not address these harder questions: (1) can a lawyer ask his opponent to drop a pending disciplinary complaint; and (2) can such a provision be imposed when the duty to report the misconduct in question is not mandatory under the prevailing rules?

No-Contact Rule. The Guidelines address specific aspects of the “no-contact” rule in the settlement context, such as whether lawyers can send copies of settlement proposals made to opposing counsel directly to the adverse party (“no”) and whether a lawyer may encourage a client to have direct communications with a represented adverse party (unclear, except in New York, but probably yes). [Guidelines at 52–53.] New York’s DR 7-104(b) permits a lawyer to encourage direct client-to-client contacts, as long as prior notice is given to opposing counsel.

Still, quibbles aside, the Guidelines are an invaluable achievement, providing guidance in an area that has resisted easy rules and conclusions. Moreover, by stressing the difference between “unethical” and “unprofessional” behavior, they provide aspirational, value-laden standards that the Model Rules too often lack.

Most important, the Guidelines are a signpost for the future. For those uncomfortable with the “one size fits all” nature of the Model Rules and N.Y. Code, the Guidelines demonstrate how ethics rules can be focused on a particular subject matter or practice area. This provides the next generation of rule makers with a uniquely practical model for revising ethics codes, one which will allow the creation of standards more in tune with the realities of particular practice areas.

Ronald Minkoff is a member of the New York law firm of Frankfurt Garbus Kurnit Klein & Selz where he practices commercial litigation and professional responsibility law. He is also an Adjunct Professor of Professional Responsibility at Brooklyn Law School.

DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.

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