I’m becoming convinced that most business contracts should include an early-neutral-evaluation (ENE) clause (such as the FirstDrafter model clause) to help head off litigation. If a contract dispute starts to get serious, an early, non-binding "sanity check" from a knowledgeable neutral can help the parties and lawyers get back onto a more-productive track before positions harden and business relationships suffer — not to mention before the legal bills start to mount up.
Advantages of ENE
The Northern District* points out that the goals of early neutral evaluation include “provid[ing] a ‘reality check’ for clients and lawyers”; it notes that in an ENE proceeding:
- “The evaluator has no power to impose settlement and does not attempt to coerce a party to accept any proposed terms.”
- “The parties’ formal discovery, disclosure and motion practice rights are fully preserved.”
- “The confidential evaluation is non-binding and is not shared with the trial judge.”
- “The parties may agree to a binding settlement.”
- “If no settlement is reached, the case remains on the litigation track.”
(* U.S. District Court for the Northern District of California, which encompasses Silicon Valley.)
A sample ENE clause
The FirstDrafter Dispute Management section contains a clause allowing either party to invoke the ENE process. Procedurally, the clause provides for resort to the American Arbitration Association Early Neutral Evaluation procedures if they can’t agree otherwise.
FOOTNOTE: AAA involvement in a consultation with a neutral would entail an administration fee payable to the AAA ($500 per party when last checked). The parties might prefer to avoid this expense by doing a self-administered ENE, but many practitioners have found that having a neutral administrator is often well worth the money.
FOOTNOTE: The AAA procedures contain evidentiary provisions analogous to Rule 408 of the Federal Rules of Evidence. Rule 408 provides that — with certain limited exceptions — communications made in the course settlement discussions are inadmissible in court. (So, too, do many counterpart state-law rules.) The rationale is that parties are likely to be more candid in settlement discussions if they don’t have to worry about having a carelessly-worded comment quoted back to them by opposing counsel in front of a judge or jury.
Additional reading
- Sandy Gage, Early Neutral Evaluation – panacea or pitfall? (Jan. 2007)
- American Arbitration Association, Early Neutral Evaluation: Getting an Expert’s Opinion (2005)
- Association for Conflict Resolution, list of ENE resources
