If parties to a contract get into a dispute, sometimes a “sanity check” from a neutral, knowledgeable third party can be a big help in getting them past the disagreement and back onto a more-productive track. This is often true in marriage, and it can also be true in business. In litigation, courts sometimes order the parties to participate in early neutral evaluation (ENE). The idea is to try to get them to settle the dispute before legal bills have mounted up, positions have hardened, and business relationships may have been irreparably damaged. ENE is likely to be even more effective before litigation begins; hence, many Pactix starter forms include a clause requiring it.

Consultation as settlement discussion

Rule 408 of the Federal Rules of Evidence 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.

Procedures for early neutral evaluation

The extended version of the Pactix ENE section includes detailed procedures. In many cases, however, it will be easier simply to agree to the American Arbitration Association Early Neutral Evaluation procedures (last accessed July 31, 2007). NOTE: The AAA procedures contain exclusionary provisions analogous to Rule 408 of the Federal Rules of Evidence.

HEADS-UP: 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 well prefer to avoid this expense by doing a self-administered ENE.

Incentives to agree with the neutral's recommendation

In ENE, any proposed resolution by the neutral would be non-binding (unless the parties agreed otherwise). If both parties accepted the neutral's recommendation, problem solved. Under the extended version of the Pactix ENE section, if a party did not accept the neutral's proposed resolution:

• if that party went on to lose subsequent proceedings, it would be required to pay the other party's attorneys' fees.
• if that party were to win subseqsuent proceedings, it would not be able to recover its attorneys' fees, no matter what the agreement might otherwise say.

And if neither party accepted the neutral’s proposed resolution, the parties presumably would "do what they needed to do."