SC Lawyer, July 2012, #3. A Handshake is Not Enough.

• Author: By Angus Lawton and Erica McElreath

South Carolina BAR Journal

2012.

SC Lawyer, July 2012, #3.

A Handshake is Not Enough

South Carolina LawyerJuly 2012A Handshake is Not EnoughSettlement Agreements Under Rule 43(k)By Angus Lawton and Erica McElreathYou have finally done it. After months of negotiating, you hang up the phone knowing that the big case you have been working on is finally settled. Opposing counsel has a great reputation, and you know you can trust his word. Even so, you immediately draft a letter memorializing the terms of your agreement and send it to opposing counsel. You are a little nervous about his client backing out, so you ask him to have his client sign it. He does, and sends it back to you. You think the deal is done.

Fast-forward several months, and the opposing party is running into obstacles trying to comply with the terms of the settlement. You ask opposing counsel to close the deal, and you get nothing but excuses. After several more months, you hear from opposing counsel that the deal is off. You plan to move to enforce the settlement agreement. Is the agreement enforceable?

The rule

This situation is specifically addressed in Rule 43(k) of the South Carolina Rules of Civil Procedure.

The rule provides:

No agreement between counsel affecting the proceedings in an action shall be binding unless reduced to the form of a consent order or written stipulation signed by counsel and entered in the record, or unless made in open court and noted upon the record, or reduced to writing and signed by the parties and their counsel. Settlement agreements shall be handled in accordance with Rule 41.1, SCRCP.

In the scenario described above, there is (a) no consent order regarding the alleged settlement; (b) no written stipulation signed by counsel and entered in the record regarding any settlement; (c) no hearing in open court where a settlement was noted upon the record; and (d) no writing signed by the parties and their counsel. Stated simply, there is no binding settlement agreement under South Carolina law, and a motion to enforce the settlement should fail.

History of the rule

Rule 43(k) is based on former Circuit Court Rule 14. Like its predecessor, the rule is intended to prevent disputes as to the existence and terms of agreements regarding pending litigation and to relieve the court of the necessity of determining such disputes, which "are often more perplexing than the case itself." Ashfort Corp. v. Palmetto Const. Group, Inc., 318 S.C. 492, 493-94, 458 S.E.2d 533, 534 (1995). The S.C. Supreme Court has gone so far as to say that "[t]he time of the court should not be taken up in controversial matters of this character." Id.

Compliance with Rule 43(k) became easier with the S.C. Supreme Court's most recent amendment, effective on April 29, 2009. The amendment provides that agreements of counsel can be binding if they are "reduced to writing and signed by the parties and their counsel." The amendment eliminates the need for the agreement to be an official part of the record. With this addition to the rule, an enforceable agreement can be signed by all parties and counsel at the conclusion of a successful mediation.

Since the rule was amended, there have been no appellate court decisions interpreting the phrase "reduced to writing and signed by the parties and their counsel." However, based on the appellate courts' strict compliance with the rule since its inception, it seems likely that the courts will continue to require strict compliance before determining that a settlement agreement is enforceable.

Reasons for the rule

Although Rule 43(k) seems harsh, there are legitimate reasons for such a rule, and the courts are justified in demanding strict compliance. As indicated in the case law, disputes about settlement agreements often are very complicated. The only real witnesses in such disputes often are the attorneys. The courts are hesitant to make attorneys witnesses in cases that they have been handling. Furthermore, in disputes involving alleged settlement agreements, there will often be issues concerning the attorney client privilege and what information was transmitted to the clients by the attorneys. If a client testifies that his attorney told him that the case was settled, then the attorney client privilege is probably waived. This will open the door to unnecessary and unpleasant discovery.

There is also an issue regarding Rule 408 of the South Carolina Rules of Evidence. This rule, titled "Compromise and Offers to Compromise" generally provides that settlement offers are not admissible to prove liability for a claim or its amount. Rule 408 will come into play if there is a trial on an issue regarding a settlement agreement, and it will likely prevent the introduction of any evidence regarding settlement offers.

Rule 43(k) in civil litigation

Attorneys in South Carolina settle cases every day without satisfying Rule 43(k). In fact, it is probably a rule ignored more than any other rule of civil procedure. Many attorneys go through their entire careers without having an issue with the enforcement of a settlement agreement. At least in civil litigation, there are usually no problems consummating settlements based on a phone call, a letter or a handshake.

Rule 43(k) comes into play in cases where there are difficult clients, or where there are volatile relationships between the parties or attorneys. It can be an issue when a settlement involves more than the simple payment of money in exchange for a release. Especially when dealing with complex issues or relationships, it is important to comply with Rule 43(k) before assuming that an agreement can be enforced.

Attorneys can get into trouble by telling clients that their case has been settled prematurely. If there is no enforceable settlement agreement, then the client should be informed that the deal is tentative. Strict compliance with the rule is the only way for an attorney to know that a deal can be enforced.

Rule 43(k) must also be considered when a case settles at trial. At this point, with the excitement of resolving the case and the rush to put it on the record, key terms are often omitted from the record. If it is not in the record, it is not a part of the agreement, and the deal will not be enforced by the court.

Rule 43(k) in family court

After heated discovery, a husband and wife sit down with their attorneys and a mediator and attempt to finally settle their divorce case. This process takes all day, during which the parties and their attorneys spend hours pouring over every detail. After analyzing the case from every angle, the parties emerge with a mediation agreement, setting out all the details of the parties' final settlement agreement. The agreement is signed by the parties and their attorneys in order to satisfy the requirements of Rule 43(k).

Husband goes home and speaks with his newly-divorced neighbor, who tells husband that he agreed to pay far too much alimony. If he takes the case to trial, the judge will surely cut that amount in half. After this advice, husband calls his attorney to tell her that the deal is off. Wife moves to enforce the agreement. Is it enforceable?

According to the South Carolina Rules of Family Court, Rule 43(k) applies to domestic relations actions. See S.C. R. Family Ct. 2(a). In family court, as with civil litigation, the parties are free to reach an agreement concerning their disputes. In civil cases, an agreement that complies with Rule 43(k) should be enforceable; however, in family court there is an additional hurdle to overcome. All agreements concerning alimony, child support or property issues must be presented to the family court for approval. Moseley v. Mosier, 279 S.C. 348, 353, 306 S.E.2d 624, 627 (1983). When approving a settlement agreement, the family court must determine: (1) if assent to the agreement is voluntarily given; and (2) if the agreement is fair under all relevant circumstances. Funderburk v. Funderburk, 286 S.C. 129, 131, 332 S.E.2d 205, 206 (1985). If the court finds the agreement was entered into freely and voluntarily, and concludes that the agreement was fair, the agreement should be approved, provided it also comports with Rule 43(k).

In family court matters, the court's discretion in approving agreements seems to undermine the force of the rule. Though it appears to pack less punch in family court, lawyers are well-advised to craft settlement agreements that comply with Rule 43(k). In at least one instance, the S.C. Supreme Court has declined to enforce a family court agreement that did not comport with the rule. (See the discussion on Buckley v. Shealy, infra.)

Case law

The cases interpreting Rule 43(k) have required strict compliance with the requirements of the rule. In some instances, the rule seems harsh. For example, the case Farnsworth v. Davis involved an action for breach of contract and negligence. During the course of discovery, Plaintiff's counsel wrote a letter to defense counsel indicating that Plaintiff would settle the case for $22,000. Plaintiff had specifically authorized his attorney to write the letter.

Thereafter, the defense attorney accepted the offer. He signed the settlement letter and returned it to Plaintiff's counsel. Unfortunately, the Plaintiff then changed her mind and rescinded the agreement. Defense counsel then filed a motion to compel the settlement. The circuit court ordered the Plaintiff to comply with the settlement agreement, finding that the requirements of Rule 43(k) had been satisfied. The matter then went up on appeal.

After hearing the case, the S.C. Court of Appeals held that the agreement could not be enforced, as the requirements of Rule 43(k) were not satisfied. Farnsworth v. Davis, 367 S.C. 634, 637-38, 627 S.E.2d 724, 726 (2006). It did not matter that the parties admitted that there was a duly executed written agreement. It did not matter that the Plaintiff had authorized his attorney to write the letter. The specific requirements of Rule 43(k) were not satisfied, and the case was remanded to the circuit court for trial.

In Galloway v. Regis Corp., Galloway sued Regis Corp. alleging she fell in Regis' retail establishment. The case settled after mediation, but no formal settlement agreement was signed. The parties subsequently informed the clerk of court that the case had been resolved, and a form order dismissing the case as settled was entered in the record. Subsequent disputes arose concerning the terms of the settlement agreement, and Galloway filed a motion seeking to compel Regis to comply with the settlement agreement. The trial court enforced the alleged settlement, but the S.C. Court of Appeals reversed the decision because the requirements of Rule 43(k) were not satisfied. "While we recognize the apparent unfairness that our ruling works upon Galloway, our conclusion is compelled by the Supreme Court's rulings . . . We hope our decision here underscores the importance of putting a settlement agreement on the record or immediately reducing the agreement to writing, and including in the writing all material terms and conditions of the agreement. Only then will an attorney be certain that his client's interests are fully protected." Galloway v. Regis Corp., 325 S.C. 541, 546, 481 S.E.2d 714, 716 (Ct. App. 1997).

"Substantial compliance" with the rule has been rejected in three cases. In a domestic case involving a divorce, the parties settled a portion of their dispute during mediation and put the settlement agreement in writing. The husband paid the wife for six years pursuant to the agreement. Thereafter, disputes arose regarding the terms of the agreement, and the agreement could not be located. The trial court declined to enforce the settlement agreement, and the Supreme Court affirmed in an opinion written by Chief Justice Toal. The Court ruled that Rule 43(k) prohibited the enforcement of the agreement, despite the fact that money had actually changed hands between the parties for six years. Buckley v. Shealy, 370 S.C. 317, 322, 635 S.E.2d 76, 78 (2006).

Young v. Cooler was a case involving an automobile accident. The liability portion of the claim was going to trial, but the UIM carrier agreed to settle the case. The attorney for the UIM carrier wrote a letter stating that $15,000 would be paid "regardless of the outcome of your settlement negotiations or trial" and further stated that he would order the drafts and prepare a release. The attorney later learned that he was mistaken about the liability coverage limits and withdrew the $15,000 offer. After the trial, the insured made a motion to the trial judge to enforce the alleged settlement with the UIM carrier. The judge granted the motion. The S.C. Court of Appeals reversed, concluding that the letter was not enough to satisfy the requirement of Rule 43(k). The court stated, "even if the Youngs intended to be bound and attempted to announce to the court that a settlement had been reached, the requirements of 43(k) were not met." Young v. Cooler, 347 S.C. 362, 366, 555 S.E.2d 410, 412 (Ct. App. 2001).

What happens if the clients, unbeknownst to the lawyers, negotiate a settlement concerning pending litigation? As the title of the rule states, Rule 43(k) applies to "Agreements of Counsel." If the attorneys did not negotiate the agreement, then arguably the rule does not apply. However, in Ashfort, the S.C. Supreme Court rejected a similar argument. In that case, an attorney hired by an insurance carrier attempted to settle a case, and the lawsuit was dismissed. Later, a dispute arose about the terms of the settlement. One of the parties argued that Rule 43(k) did not apply because the agreement was between the parties and "merely confirmed by the parties' counsel." The S.C. Supreme Court rejected this argument. "To take such a narrow reading of Rule 43(k) would defeat its purpose of preventing disputes such as this one. . . [W]e find appellants' assertion that there has been substantial compliance with Rule 43(k) to be without merit." Ashfort, 318 S.C. at 495, 458 S.E.2d at 535.

Conclusion

Attorneys should be aware of the exact requirements of Rule 43(k). The rule is simple but specific. Following the rule may require a few extra steps beyond a handshake or phone call, but those extra steps are well worth it when a settlement agreement is questioned. Attorneys can avoid problems by strict compliance with the rule or by understanding that no agreement can be enforced unless the exact requirements of the rule have been satisfied.