Litigation Newsletter: Three Stages of Escalation – Part 2
Agreement Outside of Legal Proceedings
If a conflict arises, attempting to reach an agreement outside of and before the initiation of legal proceedings is worthwhile in most cases. Regardless of the outcome of the settlement discussions, the mere fact that such discussions were held always provides a better and more accurate picture of the needs of the opposing party, their strategy and line of argumentation, as well as the actual circumstances. The parties involved often submit documents as part of the out-of-court settlement discussions, which can be valuable during a later assessment of the prospects of a lawsuit. In addition, initial concessions are usually made, naturally without prejudice, and consequently the parties learn which points the opposing party considers to be less important and which are not as strong.
Willingness to compromise
Settlement discussions require a willingness among the parties to compromise. In practice, however, this is where the first problems already start to arise. The relationship between the parties is often considerably disrupted from the start, and neither party can imagine approaching the other and making concessions. As a result, the lawyer’s first duty is often to convince their own clients of the benefits of settlement negotiations and to establish their clients’ willingness to compromise.
Preparation and strategy
Good preparation of settlement discussions is key. In the initial phase, it’s about identifying the specific problem as precisely as possible. Based on this, an assessment of the situation and a risk analysis are performed. The risk analysis can be made based on a decision tree according to the “Risse” method1. The relevant development options of the case are first mapped in the decision tree. In the second step, each development option is estimated with a probability of occurrence. Finally, the overall risk is calculated as a statement of probability, and this is capitalized based on the amount in dispute. A settlement framework and the objective of the settlement discussions are then defined on that basis. Not only the risk of litigation plays a role in this decision. It must also be considered whether resources are available for legal proceedings or whether a negative prejudice with regard to similar cases should at all costs be avoided.
Depending on the objective of the settlement discussions, either a more aggressive or a more conciliatory strategy is chosen. If the relationship between the parties is to continue after the settlement negotiations, a more conciliatory strategy may be necessary. However, regardless of which strategy is chosen, it is important to maintain flexibility at all times. This is the only way to ensure appropriate reactions to surprising developments. For example, new facts identified during the course of the settlement discussions may require an adjustment of the risk analysis and result in an improvement or a deterioration of a party’s own negotiating position.
Flexibility also calls for creativity. The matter in dispute must be placed in a broader context and new perspectives must be developed in the interests of all parties involved. For example, disputes are often ultimately resolved by economic factors. Specifically, the aim is to sound out possible countertrades and to present both parties with a tangible benefit.
Secrecy
Settlement discussions should always be confidential. Only then will the parties be prepared to express an open-minded view on the matter. A separate confidentiality agreement is usually drawn up for settlement discussions. In the digital age, technical and organizational measures should also be taken to ensure that no unauthorized third parties gain knowledge of the contents of the settlement negotiations (only involve selected persons in the settlement negotiations, protect documents with passwords, etc.).
We have reached an agreement - What now?
The next and final step is a case-specific formulation of the settlement text. What must be avoided at all costs is an incomplete or unclear formulation of the settlement, which would jeopardize its successful implementation. Accordingly, great care should be taken when formulating the settlement text. For example, it should always be clear which claims are deemed to be settled with the agreement. In addition, the side issues of the settlement should not be forgotten and included in the agreement as needed, such as the obligation to withdraw from debt enforcement proceedings, to delete construction workers’ liens or to make entries in the land register.
And if no agreement is reached?
If the settlement discussions ultimately fail, the next opportunity to reach a settlement will be before the conciliation authority or – if conciliation proceedings are not held – directly in court. Even if pretrial or out-of-court settlement negotiations have failed, the parties should participate in the conciliation proceedings or court settlement negotiations without any fixed expectations or a rejectionist attitude. On the one hand, this avoids displeasing the conciliation authority or the court, and on the other hand, proposals and non-prejudicial assessments of the conciliation authority or judge can bring a breath of fresh air into a deadlocked situation.
1Prozessrisikoanalyse, Erfolgsaussichten vor Gericht bestimmen (Litigation, Determining Prospects of Success in Court), Risse and Morawietz, C.H. Beck, 1st edition, 2017.