The answer to this question assumes that the alleged malpractice precedes the settlement, and the client is confronted with an opportunity to settle the underlying case that has been compromised by the malpractice. If instead the malpractice relates directly to the lawyer's handling of a settlement, see our other article - Are there any special rules for legal malpractice cases involving lost settlement opportunities?
A. Whether to settle
If a malpractice claim is contemplated, a settlement of the underlying case can make it harder (though not impossible) to show whether and to what extent the malpractice cost the client damages.
To prove that a pre-settlement mistake damaged the client, the client must compare the actual result with the likely result if there had been no mistake. If the underlying case does not settle and goes to trial, the actual result speaks for itself, though the client must still demonstrate the alternative result that would likely have occurred without negligence (one hypothetical). By contrast, if the case settled, then the client, in the malpractice case, is essentially dealing with two hypotheticals, in that the client must offer a convincing explanation of where the handicapped case was headed without a settlement, in addition to where it would likely have landed without negligence. The first question is wrapped into the question of whether the settlement was a reasonable response to the new challenges presented by the alleged lawyer mistakes, and/or whether the lawyer' mistakes lowered the reasonable settlement value of the case. These could present potentially thorny evidentiary challenges.
The point is not that these challenges can never be overcome, nor that settlement should be avoided. It is simply that settling the case may, at the very least, increase the number of issues that must be addressed and overcome in the malpractice case.
On the other hand, a client has a duty to mitigate damages. Imagine that the lawyer commits a mistake that is a game-changer insofar as it significantly diminishes the client's prospects of a successful result at trial. Imagine further that the opposing side makes a substantial offer to settle the case, the client rejects the offer, goes to trial, and loses. In the malpractice case, the defendant lawyer might argue that the client's refusal to accept the settlement was a failure to mitigate damages, and that any damages for malpractice should be reduced by the amount of the rejected settlement offer. That can be a risky move for the defendant lawyer, as it could provide fuel to the claim that the lawyer was negligent ("my lawyer screwed up so badly that he says I was crazy for not taking that low-ball settlement").
Often there is no easy answer when it comes to settling a case handicapped by malpractice. The point of this essay is not to provide a roadmap for action but rather to offer some idea of the competing considerations involved. Each situation must be determined on its own unique facts and circumstances.
B. How to settle
If the client decides to settle the case anyway and take his/her chances, it is important to make sure that the language in the settlement agreement itself does not inadvertently destroy or impede the malpractice claim. Language in the release and any confidentiality and non-disparagement provisions are the most commons source of potential problems in this area.
Settlement agreements often contain lengthy, verbose, and overly broad releases. Often the parties' lawyers sign the settlement agreement along with their respective clients, and the releasing and released parties are defined to include the parties' respective heirs, representatives, attorneys, etc. The idea is that each party releases the opposing party and that party's representatives. Problems can arise when the release language is not clear and creates the possible interpretation that every person identified in the settlement is releasing every other person identified in the settlement (including representatives). The client should be careful to ensure that the settlement does not give fodder to any argument that he/she just released his/her own lawyer. This scenario of settlement in the aftermath of major malpractice often occurs where the negligent attorney is no longer on the case, and new counsel is assisting with the settlement, which perhaps does not distinguish in its release between current lawyers and former lawyers.
If the settlement agreement contains a confidentiality agreement or non-disparagement clause, special attention should be given to ensure that it does not thwart the client's ability to put on evidence in the later malpractice case. For example, suppose a client was negligently represented in a case against a company for fraud and the case was dismissed on account of such negligence. Suppose that loss resulted in a judgment of $600,000 against the client for the company's attorney fees. Suppose the client intended to make a claim for malpractice, but in the meantime hired new counsel who helped the client negotiate a settlement in which the client agreed not to appeal the fee award, in exchange for a reduced payment of $400,000. Suppose that in connection with this settlement, the company desired that certain information exchanged in discovery in the underlying case be kept confidential, and the company wanted the client to agree not to communicate anything disparaging about the company in the future.
Client, through his second lawyer, would be well-advised to negotiate a "carve-out" in the settlement that specifically exempts such restrictions in the context of a subsequent legal malpractice lawsuit or arbitration. Otherwise the client may be prevented from putting on evidence in the legal malpractice case to support the claim. The client would need to present the original fraud case as part of his/her "case-within-a-case" to prove damages, and the fraud itself could be an inextricable part of the narrative of the malpractice (for instance, if the malpractice were failing to properly assess the merits of the fraud claim and advise the client accordingly).
One might argue that litigation privilege, based on which statements made in the course and scope of a lawsuit are privileged against claims for damages, would protect the client's ability to present the underlying fraud case notwithstanding the confidentiality and non-disparagement provisions. However, the law is neither clear nor uniform in many jurisdictions regarding the scope of this privilege, including whether it can be waived through written agreement (settlement). It is better to avoid that debate altogether with an appropriate carve-out if feasible.