An Accidental Settlement?

August 1, 2016 | Kristine A. Tidgren

A case from the Iowa Court of Appeals last week should warn attorneys and clients that they must remain on the same page during settlement negotiations. If they don’t, the result can be bad…both for the client and the attorney.

The background facts are summarized in these short sentences from the co­­urt’s opinion:

Atellia Kinzenbaw died testate, leaving one-sixth shares of the family farm to six of her children. [Editorial Comment: A discussion for another day!]. Doyle was one of the six children receiving a share of the family farm. The Final Report was approved and the Estate closed on August 4, 2014. There appears to be a history of bad blood/bad relationship between Doyle and his other five siblings.

Bad blood, bad relationships among siblings. So far just a typical court of appeals case, right?

But, this case is different. Rather than resolving an actual dispute among the siblings, the court here was tasked with determining whether Doyle’s attorney had acted within his authority in reaching a family settlement agreement on Doyle’s behalf. Doyle argued, “Absolutely not.” His attorney’s testimony was somewhat cloudy. But, the district court and the court of appeals found that Doyle was bound to the terms of a settlement agreement Doyle never signed…a settlement agreement reached through emails and phone calls between Doyle’s attorney and the attorney of the siblings.

This case is a great reminder for attorneys and a good lesson for clients that a binding contract can be formed without a “formal signature” on a “formal document.” Today’s practice of communicating primarily via email rather than by telephone makes the possibility of an “accidental contract” much more likely. Remember, contract law uses an objective standard. If you objectively accept, subjective intent is irrelevant.

The courts found that the siblings had proven the existence of the contract under which five siblings (through a newly-formed LLC) would buy out Doyle’s share of the family property. The courts ruled that the existence of the contract was proven through a chain of emails between the siblings’ attorney and Doyle’s attorney:

  • 8/14/14 email from Doyle’s attorney to the sibling’s attorney indicating that Doyle is perfectly willing to have his interest in the farm bought out
  • 8/15/14 email from the siblings’ attorney to Doyle’s attorney indicating that the siblings are going to meet to discuss whether interest exists to buy Doyle out
  • 11/7/14 email from the siblings’ attorney to Doyle’s attorney indicating that Wagner had attached a proposed Settlement Agreement based on Doyle’s acceptance of the siblings $233,000 settlement offer
  • 11/7/14 email from Doyle’s attorney to the siblings’ attorney indicating he would take a look at it and get back to him
  • 11/9/14 email from the sibling’s attorney to Doyle’s attorney asking for progress update
  • 11/9/14 email from Doyle’s attorney to the siblings’ attorney indicating that he had made two minor changes on the Settlement Agreement
  • 11/9/14 email response from the siblings’ attorney indicating the changes are agreeable
  • 11/9/14 email from Doyle’s attorney indicating that “Doyle’s coming in to sign in the next hour”

And then Doyle arrived at his attorney’s office, apparently having second thoughts about the settlement agreement and the amount of money ($233,000) promised by his siblings. The next email in the chain is from Doyle’s attorney stating that “this is the damnedest thing,” but Doyle now wants to participate in the LLC. Later that day, Doyle’s attorney wrote that he would accept service if the siblings’ attorney sought to enforce the agreement.

And that he did. Apparently Doyle did not raise the statute of frauds in his resistance or during the evidentiary hearing because the district court denied Doyle’s motion to enlarge findings and consider that enforcement of the agreement was barred by the statute of frauds. The district court stated that the argument had not been preserved. Although this defense might have made the case more interesting, it likely would not have saved Doyle. The attorney, who (the district court found) was authorized to accept an agreement on Doyle’s behalf, was communicating to the siblings’ attorney in writing, apparently signing his emails. Whether the court would have found that a sufficient writing signed by the person to be charged (or his authorized representative) is a question for another day. Nonetheless, Iowa Code § 554D.108(4) (Iowa’s version of the Uniform Electronic Transactions Act) specifies, “If a law requires a signature, an electronic signature satisfies the law.” Even so, don’t forget to immediately raise the statute of limitations if there’s any argument that it applies.

In reaching its decision, the court focused on the authority of an attorney to accept a settlement on his or her client’s behalf, stating the following general principles:

An attorney is presumed to act with authority. The presumption, however, is not conclusive and may be rebutted. The presumption is overcome only by clear and satisfactory proof.

The court reviewed the testimony of Doyle’s attorney in reaching its conclusion that substantial evidence supported the district court’s finding that Doyle’s attorney did have authority to enter into a binding settlement on his behalf.

Doyle’s attorney agreed that Doyle had not read or signed the settlement agreement. He stated that although Doyle had voiced concerns about the price offered, he believed that Doyle had agreed to accept the offer after considering potential litigation costs and generally declining land values. Doyle’s attorney stated that he would “generally agree” that he “would not make an offer without having authorization.” He also testified, however, that “he felt” that “it was his general practice, and also the case in this situation, that any final acceptance was subject to Doyle’s approval of a definitive document.”

Doyle testified that he was hard of hearing and did not own a computer or receive (or read) emails. He said that while he gave his attorney authority to negotiate a settlement on his behalf, he did not convey authority to his attorney to “settle or accept an offer.” He stated that he never would have agreed to accept a buyout for $233,000 because he believed his portion of the family farm was worth at least $750,000 to $1,000,000.

In affirming the trial court’s finding of a binding settlement, the court relied on Iowa Code § 602.10114(2): An attorney has the authority to “[b]ind a client to any agreement, in respect to any proceeding within the scope of the attorney’s or counselor’s proper duties and powers.”

The trial court had stated, “[Doyle’s attorney] was authorized to accept the sum of $233,000 from the siblings’ attorney for the buyout of Doyle’s interest in the family farm. Although Doyle now appears to have buyer’s (or in this case seller’s) remorse, he is unable to rebut the presumption of authority by clear and satisfactory evidence.” The court of appeals agreed, finding that Doyle had failed to prove by clear and satisfactory evidence that he did not consent to the agreement. The court concluded that Doyle’s attorney had Doyle’s consent to accept the settlement agreement.

This decision comports with the general rule set forth in the Restatement (Second) of Contracts, §27, cmt. a:

Parties who plan to make a final written instrument as the expression of their contract necessarily discuss the proposed terms of the contract before they enter into it and often, before the final writing is made, agree upon all the terms which they plan to incorporate therein. This they may do orally or by exchange of several writings. It is possible thus to make a contract the terms of which include an obligation to execute subsequently a final writing which shall contain certain provisions. If parties have definitely agreed that they will do so, and that the final writing shall contain these provisions and no others, they have then concluded the contract. Faught v. Burdlong, 540 N.W.2d 33, 35 (Iowa 1995).

If parties wish not to be bound until a final formal document memorializes the agreement, they must make that intent clear:

On the other hand, if either party knows or has reason to know that the other party regards the agreement as incomplete and intends that no obligation shall exist until other terms are assented to or until the whole has been reduced to another written form, the preliminary negotiations and agreements do not constitute a contract.  Id. at 35 (discussing Restatement (Second) of Contracts, §27, cmt. B).

Parties wishing to make clear that a proposed agreement is not intended as a binding offer can attach a disclaimer such as the following, "THIS AGREEMENT IS NOT BINDING UNTIL THE FINAL WRITTEN AGREEMENT IS SIGNED BY THE SELLER."  This type of disclaimer would clarify the intent of the parties, which is the key inquiry in a case such as this. Remember, this intent can only be determined from objective evidence.

One thing everyone can agree to is that no one wants to stumble into an accidental settlement.

The case is In the Matter of the Estate of Kinzenbaw, No. 15-0981 (Iowa Ct. App. July 27, 2016).