Freedom to Negotiate

As previously discussed, the law encourages settlement of disputes for many reasons, not the least of which is that settlements are more likely to be carried out than judgments enforced. One of the policies in favor of settlement is the enactment of rules prohibiting the admission of settlement negotiations in court to prove or disprove the matter in dispute. A recent case from Oregon exemplifies the application of this rule.

A bank lent a construction company money to buid houses in Washington. An associate of the company signed a personal guaranty for the loan. The company eventually failed to pay, leaving a balance of about $5.7 million. The bank foreclosed on the land and bought it for $2.6 million. It then sued the guarantor for the balance of the loan less the sale price, plus additional interest. He argued in response that under Washington law, he only owed the balance less the fair value of the property, plus interest. (The case was heard in Oregon because the parties had agreed to it.) As a result, the only issue at trial was what the fair value of the property was.

At the trial, the bank submitted three documents as evidence of market conditions. All of them, however, also reflected settlement negotiations. Two were offers from the guarantor to the bank, noting what a third party might pay for the property. The other was an offer by the bank to allow a short sale of the property if the guarantor also agreed to pay part of the balance. The trial judge allowed all three documents as evidence. The jury ruled that the value of the property was the $2.6 million the bank paid.

Everyone agreed that all three documents involved settlement negotiations. The Court of Appeals noted that the purpose of the rue against admitting settlement negotiations was to enable people to negotiate without fear that their statements in negotiation would be used against them. The court, considering this policy, decided that all of the documents had no purpose other than to show the fair value of the property, so they should not have been admitted. It could not separate market conditions from the value of the property. The court also decided that because there was a reasonable chance the documents may have affected the jury’s decision, it had to throw out the verdict and order a retrial.

If you have a dispute and are trying to settle it, you can generally rest assured that your statements in settlement cannot be used against you in court if the statements go to the main point of the dispute. You should, however, be careful not to go beyond the dispute in your negotiations. If you say something significant on another issue, that can be used.


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