Settlement offers: The client is always right

March 2016 | Eye on Ethics

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Legal commentators report that approximately 95 percent of cases settle before trial. When a settlement offer comes in, sometimes what the client is willing to accept is below the lawyer’s expectations. However, while the lawyer may counsel the client to hold out for a larger amount, a solidly established principle of legal ethics is that the decision on when and for how much to settle is for the client to make. See ABA Model Rule 1.2(a) Scope of Representation & Allocation of Authority Between Client & Lawyer 

(a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client’s decisions concerning the objectives of representation and, as required by Rule 1.4, shall consult with the client as to the means by which they are to be pursued. A lawyer may take such action on behalf of the client as is impliedly authorized to carry out the representation. A lawyer shall abide by a client’s decision whether to settle a matter.  (emphasis added)

Paragraph [1] of the Comment to the rule explains further:  

[1] Paragraph (a) confers upon the client the ultimate authority to determine the purposes to be served by legal representation, within the limits imposed by law and the lawyer’s professional obligations. The decisions specified in paragraph (a), such as whether to settle a civil matter, must also be made by the client. 

Under tightly circumscribed parameters, paragraph [2] of the Comment Communication does permit the lawyer to abstain from communicating the offer if the client has made it clear that such an offer would be unacceptable:

 a lawyer who receives from opposing counsel an offer of settlement in a civil controversy or a proffered plea bargain in a criminal case must promptly inform the client of its substance unless the client has previously indicated that the proposal will be acceptable or unacceptable or has authorized the lawyer to accept or to reject the offer.

This principle of client control is near absolute; no matter the degree to which the lawyer disagrees with the client or thinks the settlement is too low or predicated on poor information, he is ultimately bound to abide by the client’s wishes.  See, e.g., Connecticut Bar Association Opinion 96-19 (1996)  stating that a client’s decision to accept a settlement must prevail despite the fact that the  lawyer believed the settlement to be too low and the Workers’ Compensation Commissioner refused approval; Connecticut Bar Association Opinion 95-31 (1995) A lawyer whose divorce client, in circumstances where the couple has substantial financial disparity,  wishes to finalize an agreement crafted by the parties any further financial discovery must inform the client of the consequences of a settlement on such terms and then the lawyer may follow the client’s instructions.  

Offer must be communicated to client

Absent the exigent circumstances described in the Comment to Rule 1.4, lawyers must pass along settlement offers even where they appear on their face to be unacceptable. Ethics opinions that have considered this question consistently reinforce this precept.   

The requirement that settlement offers be promptly communicated to clients was discussed in ABA Formal Opinion 92-362 (1992); Contact With Opposing Party Regarding Settlement Offer, which cited to the above mentioned provisions of Rules 1.2 and 1.4.  

See also New York County Lawyers’ Association Opinion 667 (1988) emphasizing that all settlement offers must be promptly communicated – not just the ones the lawyer believes are in the client’s best interests; Virginia State Bar Opinion 1264 (1989)  (A lawyer must tell client of a settlement offer that includes a promise not to bring criminal action despite the fact that the lawyer believes the offer is absurd and made for intimidation purposes.)  

Beware the temptation to wrest settlement authority from the client

Despite the clear mandate of the applicable rules of professional conduct, many state bar ethics opinions have addressed whether a lawyer can take control of the settlement decision through provisions in fee agreements and have found such practices to be unacceptable.  See, e.g., New York Country Lawyers’ Association Opinion 699 (1994) stating that lawyer may not place a provision requiring the lawyer’s consent to the client’s acceptance of a settlement in the contingent fee agreement and North Carolina State Bar Opinion 145 (1993), opining that language in a contingent fee agreement waiving the client’s exclusive right to accept settlement  of a civil matter is improper. 

Other attempts to specify settlement terms that are unacceptable have been disapproved. See, (D&D Carpentry Inc. v. U.S. Ban/corp, 329 Wis.2d 435 (2010) (A lawyer has no authority to agree to arbitrate a client's case without the client’s knowledge and consent.)

See also District of Columbia Bar Opinion 289 (1999) (retainer agreement may not categorically prohibit the client from accepting a settlement offer that requires the client to keep the terms of the settlement  confidential, or to reject a settlement offer conditioned on the client’s waiver of the right to pursue court-awarded attorneys’ fees).

Lawyers should also not attempt to influence their clients’ settlement offer decisions through provisions in contingent fee agreements that state that clients will be obligated to pay the lawyer on an hourly basis if the client were to reject a settlement offer that the lawyer recommends.  See, e.g.,  Connecticut Bar Association  Opinion 99-18 (1999) (provision that says lawyer’s fee reverts to his regular hourly rate if the client refuses a settlement offer the lawyer recommends, and the defendant ultimately prevails disapproved); Oregon State Bar Opinion 2005-54 (2005) (disapproving a term in contingent fee agreements providing that if a client rejects a settlement offer that the lawyer thinks is reasonable the lawyer would be entitled to the agreed-upon percentage of the rejected settlement amount plus an hourly fee beginning from the point of rejection) and Philadelphia Bar Association Opinion 2001-1 (2002)  Finding improper a contingent fee agreement provision that allows the lawyer to receive payment on an hourly or quantum meruit basis if the client rejects his settlement advice. The Philadelphia Committee did state that a fee-conversion clause triggered by a client’s decision to depart from objectives that are clearly articulated in the agreement—for example, equitable versus monetary relief—may be permissible.  

Compare Pennsylvania State Bar Opinion 2002-48 (2002), a digest of which as it appears in the ABA/BNA Lawyers’ Manual on Professional Conduct states as follows:

A lawyer is not prohibited by the ethics rules from using a retainer agreement that obligates the client to pay the lawyer on a quantum meruit basis and reimburse all costs should the client accept a settlement offer without the lawyer’s agreement. The lawyer must fully explain the consequences of this arrangement, and must ensure that it does not adversely affect the representation.

As a practical matter, lawyers have ways to nudge the settlement process that stop short of contractual control. For example, many retainer agreements state that the client must pay costs such as filing fees, expert witness fees, etc., and during the initial negotiating phase, the client may not have incurred any of these expenses. Under these circumstances, asking for a check for these expenditures is likely to bring the cost/benefits analysis into clear focus.

Settlement authority pursuant to a power of attorney?

Most courts and ethics committees have disapproved of broadly worded powers of attorney that give a lawyer the unfettered discretion as to whether to accept a settlement offer on the client’s behalf. See, Ohio Supreme Court Board of Grievances Opinion 2010-6  (2010).

Absent some demonstrable exigency, a lawyer may not use a contingent fee agreement giving him a power of attorney to do whatever he deems necessary in the case, including signing a settlement agreement, settlement check, or closing statement.

See also South Dakota Opinion 95-4 (undated)

A lawyer whose client signed a durable power of attorney allowing the lawyer to handle the client’s financial matters and where the client subsequently developed psychiatric problems, refuses to communicate with the lawyer and is estranged from relatives may seek the appointment of a guardian or take other protective action if the lawyer reasonably believes the client cannot adequately act in her own best interest. The lawyer should also investigate the possibility of depositing with the court the client’s items of value, including a settlement offer, that are in the lawyer’s possession and allowing the court to decide how to handle the matters.

Compare Utah Opinion 78 (1987).

A lawyer who is unable to locate his client may accept an appropriate settlement offer on the client’s behalf if acceptance is pursuant to a properly executed power of attorney. Without an express power of attorney, generally the lawyer may not accept the settlement offer.

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When receiving settlement offers from the opposing party, bear in mind that under most circumstances Model Rules 1.2 and 1.4 require that the lawyer communicate to the client that the offer has been made. Furthermore, courts and ethics committees look disfavorably on fee agreements that in effect take away the client’s ability to either accept or reject a settlement offer. As always, review the applicable ethics opinions, case law and rules of professional conduct in your jurisdiction for further information. Your state or local bar association may also be able to help.

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