The Role of Law in Settlement

Abstract

Litigants often view the choice between seeking an adjudicated outcome of a dispute and settling out of court as one between invoking the public rule of law as a dispute resolution mechanism on one hand and substituting private contract for law on the other. This dichotomy overstates the difference in the role law plays in adjudication and in alternative dispute resolution (ADR). Law significantly affects non-adjudicative settlements in two related but distinct ways. First, the parties' substantive legal entitlements affect out-of-court settlement outcomes, because a litigant with a strong case can demand more as a condition of agreeing to a private settlement than can a party with a weaker case. Lawyers are quite familiar with the fact that, for this reason, substantive legal entitlements affect disputants' bargaining power and thus influence the outcomes of private dispute resolution. Second, the legal rules governing settlement behavior and many of the rules governing the adjudication process also influence nominally private dispute resolution activities. This less-recognized effect of law on ADR is the subject of this article, written for the forthcoming Handbook of Dispute Resolution. More specifically, this article considers the ways in which these bodies of law create, shape, and constrain the ability of disputants to exercise bargaining power in ADR processes, which in turn affects both the likelihood that disputes will settle out of court and the terms of such settlements.

In order to assess this role of law in ADR, the article begins by presenting a brief analytical model of bargaining that explains the process by which lawyers attempt to settle disputes outside of the adjudicatory process. It then considers the extent to which the law of bargaining behavior limits misrepresentation and coercion as sources of bargaining power in non-judicial fora, and the extent to which certain adjudication rules - such as fee shifting statutes and offer of settlement rules, evidentiary restrictions concerning settlement negotiations, and judicial review of some types of settlement agreements - affect disputants' bargaining power outside the courthouse.

Keywords: Settlement, Alternative Dispute Resolution, Negotiation, Mediation, Misrepresentation, Nondisclosure, Duress, Fee Shifiting, Offer-of-Settlement, Federal Rule of Evidence 408