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.
- 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.
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.