An early-neutral-evaluation clause can help keep contract disputes out of court and protect business relationships

I’m becoming convinced that most business contracts should include an early-neutral-evaluation (ENE) 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 simple sample ENE clause

Here’s an example of a simple contract provision requiring early neutral evaluation:

Early neutral evaluation of disputes: At the request of either party, the parties will submit any dispute between them, arising out of or relating to this Agreement or any transaction or relationship arising from it, to (nonbinding) early neutral evaluation, in accordance with the Early Neutral Evaluation procedures of the American Arbitration Association if not otherwise agreed.

This provision allows either party to invoke the ENE process. Procedurally, the clause provides for resort to the American Arbitration Association’s 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 in addition to the arbitrator/mediator/evaluator 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