The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

The New York Giants are playing the New England Patriots in the Super Bowl, again. What would happen if the Patriots prepared for the game by focusing exclusively on their strengths and the Giants’ weaknesses while ignoring their own weaknesses and the Giants’ strengths?  That would be ridiculous, right? Bill Belichick, Tom Brady? Forget about it. No way. Those guys will be prepared for every contingency, every angle, and every trick play.

Preparing for mediation is a lot like preparing for a football game-it requires strategic thinking and careful planning. Yet oftentimes I see parties who refuse to recognize the strengths of the opposition or acknowledge any weaknesses in their own cases. They act as if no one will be contesting the outcome if the case goes to trial.  On the other hand, parties who prepare for mediation by conducting an objective risk analysis of the strengths and weaknesses of both sides of the case almost always find reasons to negotiate a successful resolution of the dispute.

 A recent story in a Wisconsin law blog illustrates this point:

National Maintenance and Repair, a tugboat shipyard and barge repair facility, on Tuesday requested that Madison County Circuit Judge Dennis Ruth prevent an economics expert from testifying on behalf of a man suing the company.

Shannon Blair, 41, is suing National Maintenance and Repair claiming his right arm was mangled when a large metal ball attached to a crane fell on it while he was working on a barge on the upper Mississippi River.

The company disputes Dr. Rebecca Summary's testimony in a 13-page motion to disqualify.

"Dr. Summary's calculation of lost earnings and fringe benefits lack an adequate and reliable foundation," the motion reads. "At deposition, Dr. Summary acknowledged that Plaintiff returned to work for National Maintenance on July 26, 2010. However, only her calculation of past lost wages accounts for this fact. With respect to future lost earnings and benefits, Dr. Summary inexplicably decided that Plaintiff would stop working on the first day of trial and would never work again. Such an assumption is unsupported in the evidence and is belied by reality."

She calculated Blair's lost earnings at $1.7 million.

"Even were the Court to accept Dr. Summary's figures and assumptions, her arithmetic is wrong. Using her own figures and assumptions, Dr. Summary overstates Plaintiff's alleged future lost wages by $251, 700," the motion states.

"As the foregoing illustrates, Dr. Summary's opinions do not bear sufficient indicia of reliability and the bases for her opinions are simply not trustworthy."

A party who ignores the possibility that such key evidence could be excluded will not be able to objectively consider the reasonable settlement value of the case, and the litigants will almost always be forced to go to trial because at least one side’s settlement value is based on unrealistic assumptions.  So on the question of lost earnings in this example, what are the chances that the motion will be granted? If it is fifty-fifty, the settlement value would be $850,000 (1,700,000 x .50), assuming 100% liability. What if liability is fifty-fifty? Then the settlement value of the lost earnings claim would be $425,000 (1,700,000 x .50 x .50). Even if the plaintiff got his expert testimony into evidence, what are the chances the damages will be reduced by $251,000 due to the alleged arithmetic errors? If there were a 25% chance of that, the plaintiff would have to do another calculation: $1,700,000 x .50 x .50 -251,000 x .25=$362,250. Under these circumstances from the plaintiff's perspective the reasonable range of settlement of the lost earnings claim is $425,000 to $362,250.

Of course the defendant may have some different assumptions about the likelihood of having its motion granted, so that the defendant's range of settlement may be different. That's okay. It should be expected.  So, for example, what if the defendant believes there is a 50% chance on liability, a 75% chance the motion will be granted, and a 10% chance the court will agree the math is wrong? The defendant's range of settlement would be $212,500 (1,700,000 x .50 x .25) to $187,500 (1,700,000 x .50 x .25-251,000 x .10).

Now we see a range of settlement that includes the plaintiff's high of $425,000 and defendant's low of $187,500. There is still a large gap but the parties are now within a reasonable range to get a deal done. By comparison, if plaintiff had assumed he had a 100% chance of defeating the motion and defendant assumed it had a 100% chance of having its motion granted, the range would have been $1,700,000 to $0. I can hear it now, "I am not going to dignify that number with a response. You tell him to get real or we will see him at trial!" And the plaintiff, "Zero? Are you kidding me? I'll see them in court!" Such failure to make reasonable assumptions about the likelihood of success almost always forces the parties into a trial that neither one really wants.

There are many variables that go into determining the settlement value of a case, and the more of them you take into consideration the more realistic the numbers will become. You would, of course, always factor in the likelihood of success on the questions of liability and damages, but what about the chances of winning or losing a summary judgment motion; a motion to preclude evidence; or some other dispositive motion? What about litigation costs and the possibility of having to pay the other side’s attorney fees if you lose? When two sides carefully think through these types of issues, they almost always come to the mediation within striking distance of each other’s settlement range and when that happens-TOUCHDOWN! Both sides win.

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Even after twenty years, the so-called “McDonald’s coffee case” or “hot coffee case” is still the poster child of tort reform advocates and the rally cry of consumer attorneys. The former decry a legal system which permits such “frivolous” lawsuits while the latter complain that public relations firms distort the facts of the case to engender public sympathy for big business. Let’s pivot away from the politics of the case and, going back in time, look at the lawsuit from a neutral perspective-as people who want to resolve a dispute as efficiently and effectively as possible. Like a mediator.

The hot coffee case is reported in Wikipedia. Using the facts reported in the article, let’s consider what risks were involved in the case and identify some of the barriers to settlement. What was it about the settlement negotiations that made trial a better option for the parties than a settlement? In other words, using Fisher and Ury’s term from their national bestseller Getting to Yes, what was the BATNA-the best alternative to a negotiated agreement-for each party, and why was trial deemed to be a better option than the settlement terms that were offered? This is a question every litigant must consider in order to properly prepare for settlement negotiations.

Your BATNA becomes evident through rigorous risk analysis of the legal, economic, and emotional aspects of the dispute. You should also consider these things from your opponent's perspective. Unless you attempt to view the case from the other side’s perspective of the risks and rewards of the case, you may force your opponent to engage in a trial that no one really wants. Therefore the key to effective negotiations is finding a reasonable settlement range that takes into account the risks and rewards of trial for both sides. The plaintiff will not agree with the lowest number in the settlement range and the defendant won’t agree with the highest, but once both parties find themselves in the same settlement range, settlements almost always happen. It is the mediator’s job to help them get there. Unfortunately, it appears the parties in the hot coffee case were never in the same range until after the trial.

The Accident

• A 79-year-old woman ordered a 49-cent cup of coffee from a drive-in window at a McDonald’s restaurant. The cup had a warning label about the hot coffee.
• McDonald’s served coffee at 180-190 degrees. At that temperature, the coffee would cause third-degree burns in two to seven seconds.   
• While sitting in the passenger seat of a parked car, the woman placed the cup between her legs and pulled the lid toward her to remove it. In the process, she spilled the coffee on her lap.
• She suffered third-degree burns on six-percent of her skin and lesser burns over sixteen percent. She was hospitalized for eight days, underwent skin grafting, and spent the next two years receiving medical treatment.
• Her past medical expenses were $10,500; her future medical expenses were $2500; and her lost income was $5000 for a total of approximately $18,000.

 Pre-trial Settlement Negotiations

The plaintiff made a pre-lawsuit offer of settlement in the sum of $20,000. McDonald’s offered $800.  McDonald’s also rejected a pre-trial offer of $90,000, and then a $300,000 offer, and a final pre-trial mediator’s proposal of $225,000.

Trial, Verdict, and Post-Trial Settlement

At trial, the plaintiff introduced evidence of measures that could have been taken to reduce the risk of burning and evidence of 700 other burn victims. The jury returned a verdict that awarded the plaintiff $200,000 in compensatory damages and $2.7 million in punitive damages. The punitive damages were apparently based on plaintiff’s counsel’s argument that McDonald’s took in $1.35 million in coffee sales per day, and the jury awarded two days worth of sales as a punishment for what happened. The jury did find the plaintiff was 20% at fault, so the compensatory damages were reduced to $160,000. The judge reduced the punitive damages to three times the compensatory amount, for a total of $640,000.

Eventually the parties entered into a confidential settlement prior to the filing of an appeal, presumably in an amount that substantially exceeded McDonald’s initial offer of $800.

Observations

The settlement value of the hot coffee case must be analyzed from a pre-trial and post- verdict perspective.

Pre-trial: What were the chances the jury would find McDonald’s liable? Was the warning on the cup sufficient? Did the plaintiff have any comparative fault? McDonald’s pre-trial offer of $800 seems to indicate that it did not believe a jury would find the company liable under the facts of the case. In addition, the $800 was more than the $714 average settlement given to 700 other burn victims. The defense may have also factored in the high cost of litigation the plaintiff would face and expected a considerable discount from the plaintiff as a result.

The plaintiff though had real injuries and verifiable damages of $18,000. The plaintiff may have felt that the initial settlement offer of $20,000 was reasonable given her actual damages and considerable pain and suffering. Two-thousand dollars for pain and suffering would be more than fair and reasonable, plaintiff must have thought. But did the plaintiff factor in the possibility that a jury would not find McDonald’s liable? Did she really have a 100% chance of success? Could it have been a 75% chance, or some other number? Even if she was 100% certain that McDonald’s would be liable, did she consider that a jury might find that she was also at fault and that her damages could be reduced by some amount on a comparative fault basis?

McDonald’s turned down plaintiff’s pre-trial settlement offer of $90,000. Given the $160,000 of compensatory damages actually awarded by the jury, it seems the $90,000 offer was within a reasonable range. Without more information it is hard to tell the dynamics at this point, but it seems McDonald’s had a totally different view of the case, probably because the medical expenses were only $10,500. McDonald’s probably thought that even if it were found to be liable, an award for pain and suffering would not be more than 3 or 4 times the medical expenses, so the cap on the damages would be limited to no more than $52,000. Therefore, a settlement of $90,000 was unacceptable to McDonald’s because it represented a valuation that was almost two times the amount plaintiff was likely to get on her best day of trial.

McDonald’s then turned down plaintiff’s pre-trial settlement offer of $300,000 and the mediator’s settlement proposal of $225,000. Very interesting: generally the plaintiff would have attempted a compromise by going below her last number which was $90,000. Why did the next offer go up, and not down? Probably because the plaintiff uncovered evidence to support a claim for punitive damages, so the price of settlement went up. It is a funny thing though-most businesses do not want to settle a case based upon potential punitive damages. That is because the burden of proof is so high that it is hard to get punitive damages, so businesses adopt the attitude, “if you want punis you’re going to have to take them from me at trial.” It is a business risk they are often willing to take.

McDonald’s may have thought they could keep evidence of the other burn victims out of the trial by filing a motion to exclude such evidence. I noticed in the court docket numerous motions to exclude filed by McDonald’s, including a “Motion to Exclude Prior Deposition Testimony and Photographs of other Burn Injuries at Trial. (08/04/1994)” Apparently the motion was denied which then let the jury consider McDonald’s prior knowledge of the danger of the 190 degree coffee which apparently led to an award of punitive damages.

I recommend that every trial risk analysis include the possibility of favorable and unfavorable outcomes for law and motion matters. For example, what are the chances of excluding certain evidence and if the motion fails, could the potential damages increase? From the plaintiff’s side, a risk analysis may include the possibility of losing a motion for summary judgment or the impact on damages if a motion to exclude evidence is granted.

A final thought about punitive damages:  court’s have the authority to reduce awards for punitive damages if the amount is deemed to be excessive on constitutional grounds. Here, the trial court reduced punitive damages to three times the compensatory damages. The days of huge punitive damage awards of ten, fifteen, or a hundred times the amount of the compensatory damages are long gone. The U.S. Supreme Court opinion in the State Farm v. Campbell case (where the compensatory/punitive damages ratio was 145:1) a few years ago changed all of that. Plaintiffs need to account for that in their risk analysis and expectations. Trial courts seem to be limiting punitive damage awards in most cases to three or four times the compensatory damages, and if they don’t, an appellate court probably will.

Post-Verdict: at this stage the dynamics have shifted in plaintiff's favor. McDonald’s will have to pay $640,000 plus interest unless the verdict is reversed on appeal. Why then would plaintiff settle for an amount less than $640,000? Because there is a chance the she could lose on appeal. Then she would have to retry the case with a different jury which means an uncertain outcome and additional litigation expense. As a result, the parties settled the case.

Final Thoughts

There are other factors to consider when evaluating the settlement value of a case: the costs of litigation, the possibility of having to pay the other side’s costs and attorney fees if you do not prevail,  the time value of money, etc.. There are also other costs that are harder to gauge:  the emotional toll of participating in a trial, the time commitment, added pressures on family and business colleagues, and much, much more.

I am a great believer in the benefits of settling disputes prior to trial. It requires a realistic view of the facts and the law by both parties. That view must be shaped by realistic assumptions. You cannot compare the strongest parts of your case with the weakest parts of your opponent’s case and expect to have a meeting of the minds.

Disputes happen but reasonable people can usually find ways to resolve them in a cost-effective manner. When they cannot even agree on a possible settlement range, settlement is not possible and the dispute will spill into court. Who will wipe up the mess? A jury of your "peers"-strangers really-who may not even know what it is like to drink hot coffee.

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I like to read and report on appellate court cases that illustrate the benefits of self-determination in the mediation process as opposed to court-imposed adjudication in the civil trial process. It may involve a little "Monday morning quarterbacking,"  but I don't consider it to be second quessing anybody but more like watching game film to learn from past competitions and prepare for the next contest.

Today I want to report on a new California Court of Appeal case involving a homeowner and a condominium owners’ association.  It addresses the voluntary dismissal of some but not all causes of action, the question of who is the prevailing party for purposes of awarding attorney fees, and the consequences of a fully executed settlement agreement that includes a waiver of known and unknown claims. These are typical issues in every lawsuit but looking at them from a “post-mortem” perspective can increase our capacity for pre-trial solutions.

WHAT HAPPENED

It is never a good sign when an appellate court admonishes one of the parties to get her “ducks in row,” but that is what happened in this condo case. The court stated:

 A party contemplating litigation to enforce the covenants, conditions, and restrictions of a condominium project should get the "ducks in a row." That is to say, such party should be ready to go forward procedurally and prove its case substantively. Failure to do so subjects the losing party to an award of attorney fees. Here, a condominium owner filed against a condominium association. In defending the suit, the Association incurred attorney fees of a quarter million dollars. Based on faulty reasoning, the owner dismissed eight of the ten causes of action on the eve of trial. She prevailed on no level whatsoever, let alone on a "practical level." But the trial court denied the Association any attorney fees, and the Association appealed. We conclude that the denial was an abuse of discretion as a matter of law. The condo owner did not realize her "litigation objectives" on these causes of action. The Association did realize its "litigation objectives" and was the prevailing party on a "practical level." It is entitled to attorney fees as mandated by the Legislature.

Dismissal

There are potential consequences when a lawsuit is dismissed either voluntarily, as was the case in the condo case above, or involuntarily due to some court action. Depending on the state statute, the court will determine which side is the prevailing party and award that party the costs of litigation and under certain conditions, attorney fees. In the condo case, the plaintiff may have to pay up to $250,000 in attorney fees to reimburse the condo association, the prevailing party. It should be noted that a trial court can also award litigation costs and attorney fees to the prevailing party after a civil trial.

When conducting a pre-trial risk assessment, I believe it is imperative that all parties to a lawsuit consider the possibility of having to pay not only their own costs and fees but also the costs and fees of the other side. Parties must be realistic about the risks posed by the prevailing party statutes, especially given the discretion courts are given in making the determination of who is the prevailing party.

Attorney Fees

In most states, such as California, attorney fees are awarded to the prevailing party if there is a contractual or statutory basis for such an award. For example, many contracts have attorney fee provisions which provide that in the event there is litigation over the subject matter of the contract, the prevailing party will be awarded its attorney fees. Some states have enacted laws to advance a favored public policy that include attorney fee provisions to the prevailing party. In the condo case, for example, the condo association filed a motion pursuant to California Civil Code section 1354, subdivision (c), which provides: "In an action to enforce the governing documents" of a common interest development, "the prevailing party shall be awarded reasonable attorney's fees and costs."  

Litigants should be aware of the potential for having to pay the other side’s costs and attorney fees and conversely, that the other side may have to reimburse them if they prevail. Both sides of the issue should be considered when evaluating the risks and benefits of trial. Paying the other side’s attorney fees and costs is a bitter pill to swallow, especially if the issue was not fully evaluated and discussed prior to trial.

My friend at Construction Law Musings, Chris Hill, has a good post today on attorney fee provisions in construction contracts at www.constructionlawva.com.

Settlement Agreements

Settlement agreements generally contain very broad language to ensure that all claims and causes of action related to the issues in dispute are forever discharged and released. In California, Civil Code section 1542 provides that a person cannot release unknown claims. However, it is a common practice among lawyers to include a waiver of section 1542 so that the settlement and release agreement resolves all known and unknown claims that exists between the parties. This issue came up in the condo case.

The homeowner filed suit against the condo association in 2004 and settled the case in 2005, resulting in a settlement and release agreement that included a provision waiving all rights to known and unknown claims. The homeowner filed a second lawsuit against the condo association in 2008. In response the condo association argued that the homeowner’s claims were barred by the terms of the 2005 settlement agreement. The trial court agreed and so did the California Court of Appeal:

 Accordingly, we reject [homeowner's] argument that the 2005 release did not apply to unknown claims against Association that arose prior to the release. If an argument such as this were given currency, a release could never effectively encompass unknown claims. A releasor would simply argue that release of unknown or unsuspected claims applied only to known or suspected claims, making it ineffective as to unknown or unsuspected claims.

Settlement agreements are contracts. They are subject to the rules of evidence and are interpreted by the courts according to state contract law. They should be carefully drafted and reviewed before they are signed. You must be sure to precisely limit the release language to what is intended by both parties. For example, in the condo case the defendant condo association carved out of the release the homeowner’s obligation to pay monthly homeowner dues and assessments. Sometimes it is simply a point of negotiation, with the defendant wanting the release to be as broad as possible and the plaintiff wanting it to be as narrow as possible. Broad or narrow, both parties must think through the consequences of the release agreement so as to avoid any future surprises.  

As a mediator, I am an advocate for clarity, objectivity, reason, finality, and fairness. Cases like the condo case reinforce what I learned over a twenty-five year career as a trial lawyer: the outcome of a trial is never certain. The most effective trial lawyers are also effective problem solvers and counselors at law. They thoroughly consider each aspect of the dispute, they weigh the risks and rewards of trial, and they carefully explain all of the facets of the litigation to their clients. In my experience, well-prepared attorneys and well-informed clients can usually find a way to resolve a lawsuit prior to trial. Being part of the process that includes such preparation and perspective is one of the great privileges of being a mediator.

Resolving disputes through mediation is both challenging and rewarding. However, the certainty and finality of mediation also means there is less drama and truama when compared to a civil court trial. No "hail Mary" passes to win the game; no last second field goals to save the day. Instead the steady and sure process of mediation is more like the "Three Yards and a Cloud of Dust " reference that was used in the 1960's and '70's to describe the Ohio State Football teams of the legendary coach Woody Hayes, who famously said that when you throw the football three things can happen and two of them are bad(an incomplete pass or an interception). He preferred to run the football even if it meant a gain of only three yards and then a cloud of dust when the runner was tackled. A football team that strings together enough three yard gains (3.4, to be exact), will eventually cross the goal line. And so it is with mediation: parties that stick with the procees and grind it out will usually reach the goal of resolving their dispute, and when that happens, both sides win.

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Conflict is inevitable in our adversary system of justice. The term “adversary system” is defined as “the jurisprudential network of laws, rules, and procedures characterized by opposing parties who contend against each other for a result favorable to themselves.”(Black’s Law Dictionary, Fifth Edition., p.49, italics added.) Since contention is a fundamental aspect of civil litigation, those of us who practice the art and science of mediation must find ways to help adversaries set aside their arsenals of advocacy skills and pick up, for a season, the tools of constructive problem solving.  

The Greek philosopher Diogenes once asked Alexander the Great what his plans were. Alexander answered that he planned to conquer and subjugate Greece. Then what? Diogenes asked. Alexander said that he planned to conquer and subjugate Asia Minor. And then? Alexander said that he planned to conquer and subjugate the world.

Diogenes asked the question again: What next? Alexander the Great told Diogenes that after all that conquering and subjugating, he planned to relax and enjoy himself. Diogenes responded: Why not save yourself a lot of trouble by relaxing and enjoying yourself now?

Mediators often employ the same line of questioning to the opposing sides in a civil dispute. Given the fact that victory in trial is not an absolute, a mediator might ask the following kinds of questions (slightly exaggerated for effect):

Mediator: If the case does not settle, what are your plans?

Trial Lawyer: I am going to use every conceivable resource to discover everything I need to know to win at trial.

Mediator: Then what?

Trial Lawyer: I am going to depose every witness I can round up.

Mediator: Then what?

Trial Lawyer: I am going to hire the best experts in the industry, and they will review all of the documents and all of the deposition transcripts in the case.

Mediator: And then what will you do?

Trial Lawyer: I will write a knock-out motion for summary judgment and if that does not work dozens of motions in limine to severely limit the other side’s evidence at trial.

Mediator: What next?

Trial Lawyer: I will prepare extensively for trial, hire trial consultants, develop fancy exhibits, and convince the jury with my winning arguments.

Mediator: If you win, what will you do next?

Trial Lawyer: I will take whatever measures are necessary to collect the judgment…unless the other side files an appeal.

Mediator: Why don’t you save yourself a lot of trouble and your client a lot of money now by engaging in serious settlement negotiations?  

Disputes happen; they are inevitable. Helping parties see beyond the conflict, the emotions, and the blame is what mediation is all about. In a variety of ways and means, a mediator will help the parties look objectively at the questions of liability, damages, costs, and collectability. The mediator will ask the parties to view the conflict, not through their eyes and experiences, but through the eyes and experiences of those who will sit in judgment, the judge and the jury. Often this point of view sheds new light on questions affecting every civil dispute:

• What do you think you will get in monetary terms if you go to trial?

• What are your chances of obtaining that outcome?

• What will it cost you to get that outcome?

• What are your chances of collecting the judgment?

Finally, another story about Alexander the Great and Diogenes: 

While Diogenes was conducting some research, Alexander anxiously asked, “How can I help you?” Diogenes replied simply: “Please step out of my light!”

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NUMBER ONE: Exchange with your opponent salient information about the case well in advance of the mediation. If you represent the plaintiff you may want to ask defense counsel what additional information, if any, is necessary for the defense to be fully prepared for the mediation. If you represent the defendant you will want to be sure the plaintiff’s counsel is fully informed about your view on the liability and damages issues. Last minute exchanges of information frustrate the mediation process because there will be insufficient time for the other side to analyze the information and review it with experts, management, and other people of influence.

NUMBER TWO:  Set a target settlement range prior to mediation. Your settlement range should be analyzed by considering your alternative to a negotiated agreement (BATNA). Your BATNA "is the standard against which any proposed agreement should be measured. This is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your best interest to accept. (Robert Fisher & William Ury, Getting to Yes: Negotiating Agreements Without Giving In ( Penguin Books 1991).

 NUMBER THREE: Analyze in advance your risk versus concession points. You should consider at what point the risks of trial outweigh the concessions you must give to reach a resolution of the dispute. These are your ROCR points (Risks Outweigh Concessions for Resolution), and their confluence leads to settlements.

NUMBER FOUR: Prepare an effective mediation brief. Your brief should focus on the key facts of the case pertaining to liability and damages. While briefs are very helpful to mediators they serve the dual purpose of informing your opponent about the strengths of your case. Some lawyers do not exchange their briefs with opposing counsel. I think that is a mistake. A well-written brief sent to opposing counsel well in advance of the mediation allows you to inform the decision makers on the other side about your view of the world. If there is some information for the mediator’s eye’s only, you can add a confidential section to the mediator’s brief. For example, you may have some information you intend to use at trial that you don’t want the opponent to know about but could be useful information for the mediator.

NUMBER FIVE: Prepare your client for the mediation. You should have a pre-mediation meeting with your clients to discuss your settlement strategy, the risks of trial, the costs of litigation, including attorneys fees and expert fees, the implications of a statutory offer to compromise and the possibility of paying the other side’s fees and costs, evidentiary problems and motions in limine that could limit your ability to put on your case, the possibility of an appeal and the length of time and the costs associated with an appeal, collectability issues, and any other fact that would help your client make an informed decision with regard to the settlement value of the case.  

NUMBER SIX: Ensure the presence of the decision makers. Nothing sinks a mediation faster than not having the captains on board and engaged in the process.

NUMBER SEVEN: Show respect for other parties. The objective in mediation is to find a solution to a problem. People who feel disrespected are generally more interested in saving face than they are in resolving the dispute. While you do not have to agree with the things that are being said by your opponent, you should show respect for the other side’s point of view.   

NUMBER EIGHT: Be willing to listen. Effective listening may be the greatest skill-set you can bring to the mediation. Unless you attempt to see things from the other side’s point of view, you will not be able to see your case from the most important vantage points: the jury box and the bench. After all, the judge and the jury are duty bound to carefully listen to the other side at trial; you should be equally engaged and attuned in mediation.

NUMBER NINE: Remain flexible. Enough said.

NUMBER TEN: Don’t hold on to unreasonable expectations. You should not expect to settle the case based on the terms you might receive on your best day of trial. You should go into the mediation with a settlement range based on a realistic risk analysis that considers the strengths and weaknesses of your case and even takes into account the things you cannot control, like an unfavorable jury, the exclusion of a key piece of evidence, or a disastrous witness.

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Mediation is the antidote to the uncertainty of trial and most often leads to the timely, cost-effective resolution of disputes. In mediation, the people with “skin in the game,” the litigants, not jurors, judges, or appellate court justices, decide how and when the conflict will end.  On the other hand, litigants who proceed through trial are subject to the rules of the court and the full power of the state to enforce court judgments and decrees. If an appeal is filed, the process of resolving the dispute may be extended for years.    

The uncertainty of trial and the power of the state were illustrated in Garbell v. Conejo Hardwood Floors, a recent decision published by the California Court of Appeals, where the jury did not view the expert testimony the way one of the parties expected. The trial court did not view the law the way the other party expected. And the appellate court took away the cost award, including consultants and experts fees, of the party that lost the case but was deemed the prevailing party by the trial court. The purpose of this post is to summarize the salient points of the decision and in the LESSONS LEARNED section below, apply them to a hypothetical mediation and pre-trial risk analysis.

Here’s what happened: The Garbells had an $822,000 fire loss at their home, only half of which was covered by insurance. The insurance company paid $424,000 to the Garbells for the covered part of the loss and filed a subrogation action against the flooring contractor who was accused of starting the fire. The homeowners also filed a claim against the flooring contractor to recover the $400,000 of personal property destroyed in the fire that was not covered by insurance. The flooring contractor settled with the insurance company in the subrogation action but defended itself against the claims of the homeowners at trial. The jury found that the damages were $822,000, with the flooring contractor being responsible for fifty-five percent of the loss and the homeowners being responsible for forty-five percent on comparative fault principles. . As a result, the trial court awarded $28,000 in damages to the homeowners, representing the net amount after the subrogation payment and the homeowners’ comparative fault were taken into account. In addition, the trial court awarded costs to the flooring contractor because the homeowners had rejected a $100,000 settlement offer from the flooring contractor and only received a net award of $28,000. Both sides appealed the judgment.

On appeal, Canejo Hardwood contended there was insufficient evidence for the Garbell’s expert to conclude that a carelessly discarded cigarette caused the fire and even if the fire was caused by a cigarette, there was no evidence that the cigarette belonged to one of its workers. Canejo Hardwood also argued that it did not have control over the garage where the fire started after its men left for the day. The Court of Appeal noted, “The jury disbelieved this theory. While we might have reached a different conclusion based upon the evidence, we do not second guess the jury. We therefore conclude there was sufficient evidence of causation to support the jury's finding of negligence.”

The Appellate Court also rejected the Garbell’s argument that the trial court miscalculated their damages by deducting the insurance payment they received after determining comparative fault for the total property loss. The court reached this decision following an extensive review of subrogation laws and the collateral source rule, with the court concluding there was no error in the damage calculation.

Finally, the Appellate Court did agree with the Garbell’s that the trial court erred in awarding costs to Canejo Floors. The court determined that for purposes of awarding costs, the trial court should have looked at the gross amount of the judgment-$452,000-instead of the net award of $28,000. Since the judgment of $452,000 exceeded the Code of Civil Procedure section 998 offer to compromise, costs should not have been awarded to Canejo Floors, and the case was remanded to the trial court for a reconsideration of the motion for costs.

LESSONS LEARNED

A pre-trial risk analysis of the legal and economic implications of going to trial is always appropriate. You want to see if you can negotiate a settlement that is better than an uncertain result at trial. The term negotiators often use is BATNA: what is your best alternative to a negotiated agreement? In other words, what are your chances of getting a better result at trial than you can through negotiations. Here are a few things you might consider in a hypothetical pre-trial assessment:

·         Plaintiff has damages that exceed $822,000.

·         If plaintiff gets everything he wants, he will be awarded $398,000 after the insurance company gets compensated $424,000 on its subrogation claim.

·         Defendant offers to settle the case for $100,000.

·         Plaintiff does not want to accept the $100,000 but knows there may be a settlement range of $398,000 to $100,000. This is where a good mediator can help the parties bridge the gap.

·         How can Plaintiff justify taking less than $398,000 and convince the defendant to pay more than $100,000?

·         Plaintiff must realize that his claim could be reduced through comparative fault principles. Is it possible that a jury could find the plaintiff at fault for 45% of the $822,000 loss? If so, is there some percentage of your claim that you would discount to take this possibility into account? Is it possible that the jury could find the plaintiff entirely at fault because the defendant did not have control over the garage at all times?

·         Defendant must realize that it is possible that the jury will find that the plaintiff has no comparative fault. Is there some amount more than $100,000 that you would be willing to pay to take this into account?

·         If there is comparative fault, what is the likelihood that the court would deduct the subrogation payment from the net amount after the comparative fault calculation?

·         Even if you think there is no implicating evidence because the fire destroyed the evidence of the cause of the fire, what are the chances that a jury will believe the testimony of plaintiff’s expert witness?

·         Given these factors, is there a way to reach a compromise? If you are the defendant, do you want to spend more on experts and consultants when you realize you may not get your costs of litigation back because the plaintiff need only prove damages above your 998 offer when it is undisputed that the loss exceeded $822,000 and even after the subrogation claim is paid off, the plaintiff will still have a good shot at getting a damage award above $100,000.01? And if you are wrong, plaintiff will be the prevailing party so that you won’t get your costs back and there will be a chance you will have to pay the plaintiff’s costs

·         Is there an attorney fee provision that you should consider? What are the chances that the other side will be deemed the prevailing party? What are your chances of being the prevailing party? Do you want to take the risk of paying your own attorneys fees, and those of your opponent?

·         If there is an appeal, what are the chances of prevailing, how long will it take, and how much more money will you have to spend?

There is no doubt that some cases must be resolved by trial. This usually happens when the parties’ pre-trial valuations of the case are wildly disparate. But in most cases, reasonable, objective people can find a way to look at the legal and economic factors to find a way to reach a compromise. Sometimes the gap is closed when an additional factor is taken into account: the emotional toll of a trial on litigants, including the pressure felt by families, shareholders, and partners, and the diversion of time, money, and energy from the people and goals that matter most in life.

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Most of my mediations involve traditional bargaining over money. Sometimes referred to as “positional bargaining,” the process looks something like this: Party A has a claim against Party B for breach of contract, negligence, etc. Party A wants money as compensation for the loss. Party B does not want to pay any money or at least not the amount being claimed. They attempt to settle the matter through numerous rounds of offers and counter-offers, with the mediator assisting the parties in the process.  Most often the matter will be settled, with Party A feeling he did not get enough money and Party B feeling he paid too much.

While the everyday world of most mediators who assist in the resolution of civil disputes involves traditional bargaining, the initial mediation training they receive focuses on interest-based bargaining which often results in thoughtful solutions for mutual gain. For example, an orange is held up and the story is told of two sisters who both want the fruit. The subsequent fight is elegantly resolved when the sisters begin to speak to each other about their interests, and they learn that one wants to eat the fruit and the other simply wants the peel as part of a recipe for dinner; they rejoice to learn that both of their interests could be met by carefully pealing the orange.

A similar example of resolving a dispute through interest- based bargaining is the story of sisters fighting over their deceased mother’s wedding ring. Family unity is wonderfully restored when the sisters start talking about what they really want: one wants to wear the ring and the other wants to remove the diamond from the ring and have it made into a necklace. The conflict is resolved when the one who wants to wear the ring decides to replace the diamond her sister wants with her own birthstone.  

While these stories nicely illustrate how family conflicts can be resolved, does interest-based bargaining actually work in the rough and tumble world of business disputes or personal injury claims? When there is a fight over money, can the parties fashion a resolution that involves more than money? The answer to that question is this: it depends. It depends if there is an ongoing relationship that both parties want to preserve. For example, in the construction industry, a construction dispute between a general contractor and a subcontractor could be resolved if the subcontractor expressed an interest that goes beyond a cash settlement and the contractor expressed an interest in preserving a relationship with a valued subcontractor. Perhaps the subcontractor would take less than he thinks he is owed if the general contractor agreed to give the subcontractor opportunities to bid on future work.

Interest-based bargaining can also be used to successfully resolve a business dispute where the parties have more than just money with which to bargain. The Facebook litigation between Mark Zuckerberg and his former Harvard colleagues, who claimed that Facebook was based on their idea for a social network called Connect U, is an example of this. It has been reported that the case was settled by Facebook paying $65 million, with $20 million paid in cash and $45 million being paid in the form of a stock swap for Connect U stock. This appears to have met Facebook’s interest in limiting its cash contribution to the deal while giving the Connect U people value in the form of Facebook stock which, if you follow the markets at all, turned out to be a good deal.

There may be situations in personal injury cases that would benefit from interest-based bargaining. Perhaps the plaintiffs are interested in preserving the memory of a loved one who is lost in a tragic accident or motivated to see that measures are taken to prevent such accidents in the future.  A defendant unable to meet the financial demands of such a plaintiff could expand the settlement potential of the case by addressing plaintiff’s non-monetary interests in the form of a memorial or some form of educational platform.

It is wise to think about the other side's interests, even in adversarial proceedings. The bottom line is that interest-based bargaining in business disputes or personal injury matters can work under certain circumstances. When a dispute arises the parties should consider whether there are non-cash considerations that could be explored as additional incentives to settle a dispute. 

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Benjamin Franklin's " Poor Richard's Almanack" had it right: "An ounce of prevention is worth a pound of cure."  This was true for farmers in 1739 and it is true for lawyers and their clients in 2011. Not that Ben held farmers and lawyers in equal esteem,as you may notice when reading the following Franklin favorite: "A country man between two lawyers is like a fish between two cats."

Given our adversary system of jurisprudence in America, I would acknowledge that conflicts between lawyers can get downright messy. When a dispute arises, the parties have to figure out what to do about their rights and obligations under the terms of the contract, and if they cannot resolve the issues, they hire lawyers (and sometimes mediators) to help them resolve the dispute, and if they are unable to do so, a trial court judge may be called upon to decide who is right, once and for all, unless there is an appeal, then appellate justices may be asked to sort it all out. Such was the case in Kirk Crawford, et. al. v. Weather Shield Mfg.(2008) 44 Cal. 4th 541, a breach of the duty to defend case between a contractor and a subcontractor. Ben Franklin might have summarized the dispute like this:

A duty to defend provision between two lawyers is like a fish between two cats. 

The question presented in the Crawford case was whether, under the terms of the subcontract, the subcontractor was obliged to defend the general contractor/developer for construction defects allegedly caused by the subcontractor even though (1) the jury ultimately found the subcontractor was not negligent, and (2) the parties accepted an interpretation of the subcontract that gave the builder no right of indemnity unless the subcontractor was negligent.This was a huge issue in the building industry and here's where the two cats fighting over a fish comes into the picture. Actually, as you will see, the two cats attracted a bunch of other cats because this particular fish was so big.

The general contractor  was represented by an excellent  law firm and its position on appeal was supported by three other law firms who, in representing the interests of general contractors, filed amicus curiae or friend of the court  briefs. Such briefs are filed by people who want to weigh in on a case that could later affect their interests.  The subcontractor was also well represented by a fine law firm, and with  five amicus curiae briefs filed by other law firms representing the interests of various subcontractor groups. 

 The California Supreme Court summarized the defense and indemnity provisions of the subcontract as follows:

We focus on the particular language of the subcontract. Its relevant terms imposed two distinct obligations on Weather Shield. First, Weather Shield agreed "to indemnify and save [JMP] harmless against all claims for damages to persons or to property and claims for loss, damage and/or theft ... growing out of the execution of [Weather Shield's] work." Second, Weather Shield made a separate and specific promise "at [its] own expense to defend any suit or action brought against [JMP] founded upon the claim of such damage ... loss, ... or theft." (Italics added.)

When the home owners filed suit against the contractor for a variety of construction defects and the contractor filed a cross complaint against its subcontractors, Weather Shield took the position that it was not responsible for the window leaks, and refused to defend or indemnify the contractor. This kind of decision is made every day by subcontractors. But this is where the "ounce of prevention" comes into play. Instead of scrambling around to decide what rights and duties are owed at the commencement of litigation, it would be much better if some time (and even attorneys fees) were invested in the contract phase to have a clear understanding of the terms and conditions of the contract. If you want the job badly enough, maybe it will not bother you that you may be taking on the contractor's defense obligations, even if you are not negligent. The point is to make an informed risk analysis at the beginning of the project to avoid suprises later.

The contractor JMP and the other subcontractors, except Weather Shield and the framing subcontractor, settled with the home owners before trial for an amount in excess of a million dollars.That left the contractor to press its cross complaint against Weather Shield, the window manufacturer and supplier, and the framer who installed them. The jury found that the framer was liable for a million dollars in damages, and that Weather Shield was not responsible.

Since Weather Shield was not negligent it had no indemnity obligations, but the contractor JDM claimed Weather Shield had a duty to defend the contractor against the window claims from the commencement of the litigation. In essence, the contractor said to Weather Shield, you refused to defend us in violation of the subcontract, and we want to be reimbursed $131,000 for the cost of defending your portion of the window issue and we want another $46,000 for attorneys fees we spent trying to force you to pay us our defense costs. The Court held  Weather Shield had an immediate duty to assume the contractor's defense as soon as the case was tendered to it. The Court said:

By virtue of these statutory provisions, the case law has long confirmed that, unless the parties' agreement expressly provides otherwise, a contractual indemnitor has the obligation, upon proper tender by the indemnitee, to accept and assume the indemnitee's active defense against claims encompassed by the indemnity provision. Where the indemnitor has breached this obligation, an indemnitee who was thereby forced, against its wishes, to defend itself is entitled to reimbursement of the costs of doing so.

 

Here, the subcontract at issue not only failed to limit or exclude Weather Shield's duty "to defend" JMP, as otherwise provided by subdivision 4 of section 2778, it confirmed this duty. In language similar to that of the statute, the subcontract explicitly obligated Weather Shield both to indemnify JMP against certain claims, and "at [its] own expense to defend" JMP against "any suit or action ... founded upon" such claims. (Italics added.) The duty "to defend" expressly set forth in Weather Shield's subcontract thus clearly contemplated a duty that arose when such a claim was made, ⁸ and was not dependent on whether the very litigation to be defended later established Weather Shield's obligation to pay indemnity. 

LESSONS LEARNED

Most contracts will have at least two provisions in anticipation of third party claims. There will be an indemnity provision which covers losses caused by the subcontractor's negligence. There may also be a duty to defend provision which may or may not be triggered as soon as the third party claim is made, depending on the contract language. Both provisions deserve an "ounce of prevention" in the contracting phase of a project. These indemnity and defense provisions can be complicated, and they can vary in terms of what is required and when it is required. Don't assume what you see in your subcontracts is just "standard stuff". Words in a contract have meaning, and they may mean something you did not anticipate at the beginning of the project. In this case, the "pound of cure" for Weather Shield included the cost of paying for its own defense, the cost of reimbursing the general contractor for its defense of the window issue, and the cost of paying the attorneys fees incurred by the contractor to prosecute the duty to defend claim.

FINAL NOTE

California Civil Code 2782(c) provides that construction contracts for residential construction entered into after January 1, 2006, that include provisions that require subcontractors to indemnify builders and their agents against liability for claims for construction defects are unenforceable to the extent the claims arise out of the negligence of the builder or its agents.

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President Obama, House Speaker Boehner, and other Washington politicians are engaged in budget and debt ceiling negotiations that affect each of us but, sadly, we hear a lot of the same old blame game, and not nearly enough about compromise and resolution. Both sides seem to be locked in their positions which does not leave much room for compromise.

Every lawyer's hero, Atticus Finch, the wise and ethical lawyer in To Kill a Mockingbird, has this conversation with his young daughter, Scout, about compromise:

Atticus Finch: Do you know what a compromise is?

Scout: Bendin' the law?

Atticus Finch: Uh, no. It's an agreement reached by mutual consent. Now, here's the way it works. You concede the necessity of goin' to school, we'll keep right on readin' the same every night, just like we always have. Is that a bargain?

Atticus also taught Scout how to get along with folks:

If you just learn a single trick, Scout, you'll get along a lot better with all kinds of folks. You never really understand a person until you consider things from his point of view... Until you climb inside of his skin and walk around in it.

Atticus's counsel is good for politicians and for ordinary folks embroiled in disputes, large and small: Try to see the dispute through the eye's of your adversary. Social scientists have found that objectivity does not come to human beings naturally. In fact, we seemed to be pre-wired with certain propensities that make it difficult to get past our particular view of the world. Here are a couple of their findings regarding human nature:

ATTRIBUTION ERRORS

When we succeed, we generally attribute success internally to personal skills and gifts. When a rival succeeds, we tend to believe it was do to external factors such as luck. When we fail or make a mistake, we will more likely use situational factors rather than blame ourselves. When others fail or make mistakes, however, we will often assume it is due to internal factors such poor character, laziness, or other inherent traits .

REACTIVE DEVALUATION

Humans have a hard time receiving information from their adversaries. In fact, the perceived source of the information has a lot to do with our perception of it. We discount whatever the other side offers, even if it is favorable. In one study from the 1980's, people were asked to react to a proposal that the Soviet leader Gorbachev made to reduce nuclear warheads by 50 percent. When the proposal was attributed to Ronald Reagan, 90% of Americans reacted favorably. When the proposal was attributed to an unnamed third-party, 80% thought it was a good idea. But when the proposal was attributed to Gorbachev, only 44% of Americans thought it was a good idea.

And so I say to President Obama, Speaker Boehner, their respective party loyalists, and to all of us who are trying to resolve a dispute: compromise is not "bendin'"the law. It is an agreement by mutual consent. It is about getting the job done. It is about putting aside pre-conceived notions about the other side's motivation and character; it's about acknowledging that both sides have strengths and weaknesses in their positions; it is about setting aside words of conflict in favor of words of hope and healing.

Compromise begins when we climb inside the skin of our adversary and walk around in it. Absent that minimal effort we most likely will kill any hope of a compromise.

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The Facebook litigation has been resolved...again. It was first resolved by way of settlement after a day of mediation. Then the Winklevoss twins claimed the settlement agreement was not enforceable on the grounds of fraud. As the Ninth Circuit Court of Appeals noted in affirming the decision of the district court: "For whatever reason, they [the Winklevosses] now want to back out [of the settlement]. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end.That point has now been reached." (Click here to read the case.)

I posted an article about this case on March 4, 2011. (See: The Social Network: Communications During Mediation Are Not In The Public Domain.) Based upon the questions of the Court during oral argument, it appeared the Winklevosses were waging an uphill battle. (See March 4 post featuring video of the hearing.) I was right.

The Ninth Circuit summarized the case as follows:

After a day of negotiations, Connect U, Facebook and the Winklevosses signed a handwritten , one-and-a-third page "Term Sheet & Settlement Agreement' (the Settlement Agreement). The Winkelvosses agreed to give up Connect U in exchange for cash and a piece of Facebook. The parties agreed that the Settlement Agreement was "confidential," " binding" and "may be submitted into evidence to enforce [it]. The Settlement Agreement also purported to end all disputes between the parties.

What struck me most about the opinion is how well the Court was able to simplify a complex case using plain English. I was also impressed  how important it is for clients to know what they are getting into when they sign a release. Courts will interpret release language broadly to effectuate the public policy that encourages settlements. In this case, "the Settlement Agreement grants 'all parties' 'mutual releases as broad as possible'; the Winklevosses 'represent and warrant' that '[t]hey have no further right to claim against Facebook' and 'no further claims against Facebook & its related parties.'"

Finally, it is important to point out the key role the confidentiality agreement had in the reasoning of the Court. The Winklevosses attempted to demonstrate fraud in the inducement of the settlement agreement by introducing evidence of what Facebook said during the mediation. The district court would not consider the evidence because of the protections afforded by the confidentiality agreement.

I'll end this post with the Court's matter of fact assessment of how all of this came down:

The Winkelvosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winkelvosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity.

Chief Judge Kozinski authored the opinion. It's a classic.  

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The NCAA Basketball Tournament, known as March Madness, is upon us. Each year college basketball fans are captivated by this great sporting event, where winners advance toward the championship and losers go home. Trials are like that: eventually there is a winner and a loser in every case. Except the loser does not always go home; sometimes he appeals. In a recent case the California Court of Appeals alluded to another march (Sherman's) and another kind of madness when it used the term scorched earth litigation to describe the hard fouling, take charge lawyering in the case.

 After the trial's conclusion, the court made a number of comments indicating the case was a "disaster" and had gotten completely "out of hand." Among other things, the court referred to "scorched earth litigation" and said that attorneys for both parties were "obstructionists." (Click here to read the case*) 

Scorched earth litigation tactics are often the product of what social scientists and negotiation experts call "attribution errors." When a person makes a mistake, he will attribute situational factors as the reason for the problem rather than blame himself: I was careless; I was exhausted; I was ill. On the other hand, the same person who makes allowances for himself will attribute the actions of his adversary to internal factors: he is dishonest; he is a cheater; he is immoral.

I have seen attribution errors by lawyers many, many times: A claim for extras is not because of a legitimate disagreement about the contract documents, but because the contractor intentionally underbid the work and now is asserting frivolous claims. An owner rejects a claim for extras not because he really believes the work is included in the contract price but because he wants to get something for free. Of course personalities and pettiness can create conflict, and there are those who prosecute or defend claims without good cause; but most often claims can be resolved when people are willing to attribute human error as the cause of the dispute rather than human failings.

That is not to say that construction claims are always easily resolved. Construction is a risky business, and when things go wrong parties do go into self-preservation mode. However, litigation is costly enough without burning money to destroy the other side. Objective risk analysis is essential. It is not enough to convince yourself that you are right, but can you convince a judge or 12 jurors? Will they be able to comprehend your arguments, sort through the piles of evidence, and make the correct decision? Have you spent enough time listening to the other side's arguments to see if there is any common ground or how a judge or jury might react to their side of the case?

In addition to a comprehensive legal analysis of a claim and an objective view of the psychological barriers to conflict resolution, serious consideration must be given to the economic analysis of a claim. Often parties will think in terms of the likelihood of success in prosecuting or defending a claim, with only a secondary thought being given to the costs of litigation and the risks of having to pay the other side's costs and attorneys fees. This phenomenon is illustrated in the recent construction law case mentioned above.

The plaintiffs were homeowners in Newport Beach, California. They filed a lawsuit against their home improvement contractor, alleging claims for breach of contract, fraud, accounting, and violations of California Business & Professions Code section 17200, a law designed to protect competitors and consumers from illegal, fraudulent, and unfair business practices. As a result, it appears the lawsuit was framed in such a way that the dispute was not just about the work being done right or on time or within budget, but the contractor was accused of fraudulent, illegal, and unfair business practices. (Attribution errors?) The contractor filed a cross-complaint for $84,000 against the homeowners and, apparently, the lawyers began the litigation equivalent of a  "full-court press" that eventually lead to the trial court judge's condemning remarks about scorched earth litigation.

Ultimately, the jury found against the homeowners and in favor of the contractor, awarding $20,401, substantially less than the $84,000 the contractor had sought. The contractor then filed a cost memorandum seeking more than $105,000 in costs.The trial court awarded a little more than $28,000 as the reasonable costs of the litigation. This amount included an award of $3700 out of the $36,000 sought for expert witness fees under California Code of Civil Procedure section 998, a law enacted to encourage settlements. The contractor appealed, claiming the trial court committed error by not awarding more for the costs of litigation. The court of appeals affirmed the trial court's order, and awarded the homeowners their costs on appeal.

Apparently attribution errors extended to the arguments before the court of appeals, as the appellate court noted:

[Contractor] somewhat histrionically insists there was a "procedural ambush" and a deliberate attempt to deprive [him] of the right to respond, rather than an error on the [Homeowner's] part.

And the scorched earth litigation continued on appeal:

After considering a 42-page opening brief, a 33-page response, a 39-page reply and a record exceeding 1200 pages on appeal from what should have been a simple motion to tax costs, one can perhaps begin to understand the trial court's reaction.

SCOREBOARD

First Half (trial court phase): Homeowners-$0; Contractor-$20,000 out of $84,000 in damages plus $28,000 out of $105,000 in costs.

Second Half (appellate phase): Contractor-$0; Homeowners- awarded costs of appeal.

We do not know how much the parties paid in attorney fees. Probably a lot. Presumably there was no attorney fee provision in the construction contract so each side had to bear their own fees.

I often wonder about cases like this. Would the contractor have come on so strong, spent so much money, and fought so hard if the lawsuit had been limited to construction issues instead of the additional allegations of fraud that impugned his reputation and character? What could have been done to avoid such an outcome? Here are a few questions worth considering the next time you are contemplating going to trial:

• Is it possible that you misjudged the motivation of the other side?
• Does the amount in dispute justify the expense of trial?
• Are you willing to bear the emotional toll and the distractions that trials entail?
• Have you thought about how a trial, win or lose,  will affect your family, partners, or shareholders?
• When deciding to take the case through trial, did you factor in your attorneys fees and costs of litigation and the possibility of having to pay the other side's attorneys fees and costs, including their expert witness fees? 
• Did you conduct an objective risk analysis of your chances of prevailing?
• Will a jury understand your case?
• If you factored in costs and fees, did you consider that the court might not award you all the costs and fees you would be asking for?
• Did you consider the possibility of an appeal and even a retrial?
• Did you factor in the time value of money?

Of course, some cases have to go to trial because the results of the parties' risk analyses are in different brackets (my last shot at a  March Madness reference, I promise). But in most cases, when parties objectively consider their legal and economic risk analyses, and the psychological barriers to resolving their conflict, common ground can be established and the dispute can be amicably resolved prior to trial.

 *The Court of Appeal designated the featured case as one not suited for publication in the Official Reports which means it can not be cited or relied upon by courts or parties.

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The California Supreme Court has reaffirmed confidentiality as a core principle in the mediation of disputes in California. The plaintiff in  Cassell v. Superior Court sued his former lawyers, Wasserman Comden, for legal malpractice arising from a mediated settlement, and he wanted to use information from the mediation session to prove his case. (More about that case later.) A more high profile case has the 9th Circuit Court of Appeals currently wrestling with mediation confidentiality in the Facebook litigation where the Winklevoss twins have appealed to the 9th Circuit Court to get out of a settlement that reportedly gave them $20 million in cash plus 1.25 million shares of Facebook stock (estimated to be currently worth $150 million). An interesting side note is the Winklevoss twins also had a dispute with their lawyers, Quinn Emanuel, arising out the mediation that lead to that settlement with Facebook, the settlement they are now trying to get out of. (Click here to read the Supreme Court of New York's opinion about the $13 million dollar attorney fee dispute.)

Public policy favors the pre-trial settlement of disputes, and mediation is considered by many to be  the most effective alternative dispute resolution procedure. To encourage parties to openly discuss their disputes without fear of having their communications turned on them at trial,  the California legislature enacted confidentiality laws to keep mediation information private. When people try to get out of a settlement agreement by claiming  fraud, economic duress, or some other legal theory to rescind a contract, and they attempt to use confidential information from a mediation, the courts are reluctant to consider such information. For example, during oral argument in the Winklevoss' appeal to the 9th Circuit, the judges expressed concern about  letting them use information obtained in their mediation with Facebook. Check out this YouTube video of the oral arguments by two exceptional attorneys before three outstanding jurists.  

Unlike the the Facebook litigation where one party is attempting to use confidential mediation information against the other party to the lawsuit, the new California Supreme Court case of Cassell v. Superior Court presents a situation where the client is suing his lawyer for malpractice based upon the words and conduct of his lawyer during the mediation. In essence, the client argued that the lawyer used undue influence, pressure, and fraud to induce him to settle the lawsuit for an amount that was less than they had agreed upon in their planning meeting before the mediation.

Prior to the trial of the malpractice lawsuit, the defendant lawyers asked the court to exclude any evidence of their words and actions related to the mediation based on the confidentiality laws. The trial court agreed that such communications were confidential, even in malpractice actions filed by clients against their lawyers. The client appealed the case and the Court of Appeal reversed, reasoning that the confidentiality provisions of the Evidence Code applied to disputes between parties to a lawsuit but such protections should not be extended to disputes between clients and their lawyers. The California Supreme Court disagreed, saying that the applicable statutes mean what they say: all communications related to a mediation are confidential. 

Instead, such attorney-client communications, like other communications, were confidential, and therefore were neither discoverable nor admissible-even for proving a claim of legal malpractice-insofar as they were "for the purpose of, in the course of, or pursuant to a mediation...."

Lessons Learned and Some Practical Applications

• Mediations really are confidential.
• Mediations are not mandatory; they can end at any time or be continued to another date. If you are too tired to proceed, take a break. One of the complaints of the plaintiff in the Cassell case was that the settlement happened after 14 hours of mediation; he was tired and felt pressure from his lawyers to settle the case.
• Mediations, like trials, can terminate a lawsuit; therefore preparation is essential, and it is the key to success in mediation. Lawyers must be prepared to clearly present the law and facts of the case; just as importantly, they must ready their clients for the mediation experience.
• It is good to set a settlement value before the mediation but you should remain flexible during mediation in case you learn something new or gain a different perspective during mediation. The plaintiff in the Cassell case based his malpractice action in part on the fact that the case settled for less than he and his lawyers had agreed upon before the mediation. That is not unusual. A good mediator can help parties see cases from a fresh perspective which may alter the reasonable settlement value of the case. Better to get that perspective from a mediator than from a juror in an interview after an expensive trial that may bring you less than you expected.
• The Winklevoss twins argued that the term sheet that memorialized the settlement deal did not contain the essential elements of an enforceable contract. If you had a chance to look at the YouTube video of the oral argument before the 9th Circuit Court of Appeal, you saw Chief Judge Kozinski and the Winklevoss' lawyer debating the sufficiency of the term sheet as an enforceable settlement contract. Judge Kozinski noted that the term sheet included the number of shares, the amount of cash-"everything you would want in a contract." Nevertheless, in the lessons learned category, it is important to remember that a settlement agreement is a contract and must meet the minimum requirements to be enforceable.

One final note, a humorous one( to me, anyway),  from the oral argument in the Facebook litigation. Senior Judge J. Clifford Wallace asked how the brilliant, Harvard-educated Winklevoss twins, who were being advised by high-powered lawyers and their father who is a business expert, could have been tricked into settling their lawsuit.

"Isn't it a little difficult to say...that they were taken advantage of?" Judge Wallace asked them.

The Winkevoss' lawyer responded that it was true his clients " were not behind the barn door when brains were passed out." But, he said, "The same is true with Facebook."

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Alternative dispute resolution procedures such as arbitration, mediation, and references to referees are often found in commercial contracts. A recurring issue in the ADR world is the enforceabilty of an arbitration provision when one side claims it is  unconscionable. A companion issue in California is the enforceabilty of provisions that require parties to submit their disputes to a court-appointed referee pursuant to Code of Civil Procedure 638 in the event the arbitration provision is found to be unenforceable.

In cases involving large groups such as tenants or members of home owner associations, a threshold issue is often whether some members of a group can be compelled to submit to the appointment of a referee when other members of the group do not have predispute reference provisions in their contracts for one reason or another. This was the situation in an opinion published last week by the California Supreme Court in a case called Tarrant Bell Property v. The Superior Court of California. 

Here's What Happened

 A couple of years ago, 120 lessees and residents of a mobile home park sued the owners of the park for failing to maintain the common areas and facilities and for otherwise subjecting the residents to substandard living conditions. The standard lease agreement provided that any landlord-tenant disputes would be resolved through arbitration but if the arbitration clause was deemed unenforceable the parties would submit their dispute to a court-appointed referee. However, the arbitration and reference provisions were found in only 100 of the 120 leases at issue.

In response to the lawsuit, the park owners filed a motion to compel arbitration, or, in the alternative, for an appointment of a referee. The tenants opposed the motion, arguing the arbitration and reference provisions were unenforceable and that, because some of the leases did not include the arbitration and  reference provisions, the motion should be denied to avoid the risk of conflicting rulings on common issues of law and fact.

The trial court denied the park owners' motion to compel arbitration on the grounds the arbitration agreement was unenforceable. The court also declined to enforce the predispute reference provision because of the possibility that the tenants could face inconsistent results even though they were experiencing the same problems at the mobile home park. In other words, the tenants with leases containing the reference provision would have there disputes reviewed by a referee in one proceeding while the other tenants who were not bound by the predispute provision would have their disputes resolved in court by a judge. This presents a question of fairness as the judge might not rule the same way as the referee on common questions of law and fact. Same problem; potentially different results. Unfair.

The park owners petitioned the Court of Appeal for a writ of mandate seeking to vacate the trial court's order denying their motion to appoint a referee. The Court of Appeal denied the writ, finding the trial court had the discretion to refuse to enforce the reference provision because of the possibility of conflicting rulings and other issues related to the efficient resolution of disputes.

The park owners appealed to the California Supreme Court. The Court affirmed the decisions of the lower courts, holding the legislative history of Code of Civil Procedure 638 establishes an intent to give trial courts the discretion to deny a request for the appointment of a referee when the potential for inconsistent findings is present. The Court also noted its disapproval of two appellate decisions to the contrary.

 Lessons Learned

 Some ADR provisions in commercial contracts are written with a belts and suspenders approach. Such contracts have arbitration as the first option for dispute resolution. If a court later finds that the arbitration provision is unenforceable, an alternative provision requires that the dispute be submitted to a court-appointed referee. 

Despite the careful drafting of such ADR provisions, disputes, like a baggy pair of pants, can fall to the ground when the most obvious details-like buckling and fastening-are not  considered. In California, you had better be sure the ADR provisions you spent so much time, effort and money preparing are actually found in the signed contracts of your opposition, especially when you are dealing with large groups of people such as tenants and home owner associations.

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For a long time construction defects and California law seemed to go together like peanut butter and jelly. It got a little sticky, however, for trial courts trying to deal with large, complex, multi-party cases, and builders who faced sizable jury verdicts. After many years of prolific construction defect cases, numerous vanguard appellate decisions,  and some intense lobbying by the construction industry, the California legislature enacted SB 800 in 2002. The law requires home owners to give notice and an opportunity to repair construction defects to builders prior to filing a lawsuit. However, the law, now codified in California Civil Code sections 895 through 945.5, gives builders the option of implementing their own contractual pre-litigation procedures for notice and repair of construction defects. The intent is to give builders an opportunity to repair construction defects before lawsuits are filed. If all goes well, contentious, expensive litigation can be avoided altogether.

Previously I posted an article and referred to a then new case that answered the question of whether the pre-litigation procedures under SB 800 amounted to a claim for purposes of triggering an insurance company's duty to defend ( See A Case of First Impression: Duty to Defend Construction Defect Claims in Pre-litigation Proceedings, July 28, 2010). This post addresses another aspect of the law: what happens if the builder elects to implement its own pre-litigation procedures into the purchase contract, and those procedures are found to be legally unenforceable? Can the builder then compel the buyer to follow the statutory pre-litigation procedures before filing a lawsuit?  In another case of first impression regarding the interpretation of SB 800, the California 5th District Court of Appeal said no. 

In Anders  v. Superior Court (Meritage Homes of California), home owners filed a construction defect lawsuit against Meritage Homes of California. Some of the home owners purchased their homes directly from Meritage and some of them purchased their homes from the original owners who had purchased their homes from Meritage. The original purchase contracts contained the builder's version of a pre-litigation notice and opportunity to repair procedure. In response to the lawsuit Meritage filed a motion to compel the home owners to follow the contractual pre-litigation procedures. The home owners opposed the motion. The trial court ruled that the alternative contractual procedures were unconscionable and unenforceable but also ruled that the homeowners would have to comply with the SB 800 requirements before proceeding with the lawsuit, and issued an order staying the litigation pending completion of the statutory pre-litigation procedures.

The home owners then filed a writ of mandate with the court of appeal to overturn that portion of the trial court's order requiring them to comply with the statutory procedures. The home owners argued that SB 800 provides that, if the builder's alternative procedures are found to be unenforceable, the builder may not enforce the statutory pre-litigation procedures and home owners are free to file a lawsuit without compliance with those procedures. The court of appeal agreed and issued a writ directing the trial court to vacate that portion of its order that required the home owners to comply with the statutory pre-litigation procedures. This meant the stay of the lawsuit would be lifted and the home owners could proceed with their lawsuit.

Practical Applications Of The Case

• Builders may be more likely to choose the statutory pre-litigation procedures rather than attempt to draft procedures that can withstand judicial scrutiny; and
• In the event the purchase contract does contain contractual pre-litigation procedures of the builder's making, home owners may be more willing to ignore them, file a lawsuit, and argue that the contractual procedures are unconscionable and unenforceable. 

Final thoughts: As long as people try to build homes, there will be construction defects. Which means there will always be construction defect litigation. Given this fact, it is important to try to find fair and efficient ways to resolve them. SB 800 was supposed to be the answer but in my work as a mediator, I have found that the pre-litigation procedures are effective only to the extent there is some element of good will and mutual respect among the parties and for the process. The Anders case illustrates what can happen when one side seeks to impose an unfair advantage over the other side. While contracts serve the important purpose of clearly establishing the terms and conditions of the deal, when you try to leverage your position by imposing  burdensome conditions on the other party, it can put you in a real jam.

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Benjamin Franklin, born 305 years ago this month, famously said, "A place for everything, everything in its place."  This is true for many things, including settlement agreements which are really just contracts for the resolution of disputes. However, like all contracts, settlement agreements have a place for certain things and certain things, such as provisions which identify the consideration being given, the scope of the release and waiver of rights, and much more, must be in their place. Most states have enacted laws that encourage the settlement of civil disputes and attempt to prevent them from being broken. Today's featured case is an example of the underlying public policy that favors the settlement of disputes.

In Blix Street Records v. Cassidy , the plaintiff tried to get out of a settlement agreement, initially lost at the trial court level, then won on appeal, but lost again at trial and ultimately on a second appeal.  Plaintiff's actions were emblematic of another Ben Franklin saying, "Necessity never made a good bargain."

Eva Cassidy was a popular singer and song writer who died in 1996. A dispute arose over royalty payments and motion picture rights associated with Ms. Cassidy's career. A trial began with the empaneling of a jury. During an extended break in the trial, the parties engaged in a mediation which resulted in a settlement. The handwritten settlement agreement contained a release and specified it was subject to judicial enforcement. The parties also agreed that they would prepare a formal settlement agreement after the mediation.

The parties sent an e-mail notification of the settlement to the judge. Later, however, the plaintiff owner of Blix Street Records, an attorney, began to have concerns about the settlement agreement. He believed it was one-sided in favor of the Cassidys, that material terms were missing, and that some of the existing terms were ambiguous. These concerns were not expressed to the other side nor to the court. As a result, the trial court, based on the representations of the parties that the case had been settled, dismissed the jury.

Subsequently, Blix Street Records hired another attorney who informed the Cassidys that the settlement agreement was neither binding nor enforceable. The Cassidys then successfully moved the trial court for an entry of judgment based on the settlement agreement. On appeal, the court held the settlement agreement was not enforceable because it lacked the necessary signatures of certain parties, and the case was remanded to the trial court. The Cassidys then amended their cross-complaint to add a breach of settlement contract cause of action, and the trial court ruled that even though the settlement agreement was not enforceable per the court of appeal's decision, Blix Street Records was judicially estopped from denying the enforceability of the settlement agreement because the court discharged the jury based on the representations of the parties, including Blix Street Records, that the case had been settled. Judgment was entered in favor of the defendants, and plaintiff appealed. In affirming the ruling of the trial court, the court of appeal stated:

Based on the facts, the trial court had sufficient evidence to conclude that Blix Street took two totally inconsistent positions in judicial proceedings—originally that there was an enforceable settlement agreement, but later that the settlement agreement was not enforceable. Blix Street was successful in asserting the first position because the trial court accepted Blix Street‟s position by terminating the trial and discharging the jury.There is no indication that Blix Street took the first position—that the contract was enforceable—as a result of ignorance, fraud, or mistake. Indeed, Straw, a lawyer, conceded that he believed the settlement agreement lacked material terms at the same time Blix Street was taking the position in the trial court there was an enforceable settlement agreement. Accordingly, the doctrine of judicial estoppel legally could be applied in this case.

 There is some Franklinesqe wisdom that can be taken from this case:

1. Undoing a settlement can put you in a worse position than the actual terms of the settlement. Here, Blix Street Records is subject to the terms of the release but some of the other parties are not. Addressing this anomoly, the court said: "Estoppel-whether judicial, equitable, or promissory-can, however, be used to bind a party to what would otherwise be an unenforceable contract."
2. If you have doubts, shout them out. Blix Street Records had misgivings about the settlement before the trial court dismissed the jury. This would be a different case had those concerns been expressed to the court earlier.
3. An ounce of preparation is better than a pound of cure, or something like that. Take a laptop to the mediation that is loaded with your standard form settlement agreement. That way you don't have to waste time and effort ensuring that your standard provisions are in place which will give you more time to thoughtfully draft any complicated provisions. 
4. If you can't dot every "i" be sure to cross every "t". In California, there is more than one way to enforce a settlement. If you can not get everyone's signature on the agreement, ask the judge to order everyone to court so the agreement can be put on the record. A settlement agreement is enforceable if it is in a writing signed by the parties or if the parties so stipulate before the court. (CCP 664.6)
5. Settlement agreements containing executory provisions benefit from 800 pound gorilla  riders. Under 664.6, if requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement.

I'll end with one more quote from Ben: "A slip of the foot you may soon recover, but the slip of the tongue you may never get over." 

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Appellate court opinions provide more than intrinsic precedential value; they are also useful reads in a “best practices” kind of way. Sometimes the lesson derived from them is “what not to do,” as illustrated in two recent cases from the California Court of Appeals.

The first case is one of those “I did not expect that to happen” kinds of cases. In S.J. Amoroso Construction v. Knecht (click here to read the unpublished opinion), the prime contractor took a default judgment in excess of $200,000 against its window subcontractor which was a corporate entity. After taking the debtor examination of the sole shareholder, the prime contractor sued the owner individually, seeking to pierce the corporate veil or amend the judgment to add the owner. The trial court refused to pierce the corporate veil, found the tort claims were barred by the statute of limitations, and, to add insult to injury, awarded the defendant $70,000 in attorney fees, and the California Court of Appeals affirmed. As a result, after the contractor incurred untold attorney fees and costs, a $200,000 uncollectible default judgment turned into a $70,000 obligation that the plaintiff contractor must pay to the defendant owner.

It appears from the case that the contractor had not anticipated the risk of having to pay the owner’s attorney fees if things did not turn out as planned. The contractor reasoned that since the contract was between two corporations (which meant that the owner was not a party to the contract in his individual capacity) the owner could not be awarded attorney fees based on that contract. The Court of Appeal disagreed, noting that California Civil Code section 1717 makes the right to an award of attorney fees a reciprocal benefit to the prevailing party “whether he or she is the party specified in the contract or not…”

Attorney fees were also an issue in another one of those “I’ve got a sick feeling” cases. In Silver v. Pacific American Fish Company (click here to read opinion), a cross complaint arising from a purchase agreement and related employment contract was filed. The cross-defendant responded by asserting lack of standing and judicial estoppel based on the cross-complainant’s prior bankruptcy proceeding. The trial court ruled in the cross-defendant’s favor, and an appeal was filed from the adverse judgment. The court of appeal rejected the grounds for appeal on various substantive and procedural points. This portion of the opinion is required reading because it reinforces the caution trial attorneys must take in prosecuting cases while preserving issues for appeal.

In the published portion of the opinion, the court held the cross-complainant’s notice of appeal from the post judgment order awarding the cross-defendant attorney fees was untimely, and that his notice of appeal from the judgment did not encompass the separately appealable post judgment order awarding attorney fees. Therefore, the court held that it did not have jurisdiction over the challenge to the order awarding attorney fees. The court of appeal explained:

The notice was filed after Pacific had filed its attorney fees motion, but well before any hearing or ruling on that motion. Thus, at the time Silver purported to appeal the order on Pacific’s motion, there had been no indication of the trial court’s intended ruling on that motion. The trial court’s oral pronouncement of a ruling did not occur until March

26, 2009, over a month after the filing of Silver’s notice of appeal. A notice of appeal filed after rendition of a judgment or statement of intended ruling but before entry of judgment may be treated as timely...But here, Silver filed his notice of appeal before the statement of intended decision. Thus, the notice as it relates to the trial court’s subsequent ruling on Pacific’s attorney fees motion is untimely under the holding in First American Title Co. v. Mirzaian (2003) 108 Cal.App.4th 956, 960 [notice of appeal filed before announcement of trial court’sintended ruling is untimely and cannot be treated as a premature but timely notice].

These cases caught my eye, not because the opinions were so profound or far-reaching but because they illustrate the precarious, unpredictable path of litigation. Successful lawyers understand these challenges and have the wisdom and experience to know which cases should be settled, which cases must be tried, and which cases should not be filed at all. Lawyers with these kinds of skills are more than great litigators; they are also trusted counselors at law. 

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Back in the day, the late, great actor Karl Malden pitched American Express Travelers Cheques in television commercials that depicted vacationers being robbed of their cash, followed by Karl’s earnest exhortation, “American Express Travelers Cheques: don’t leave home without them!” The point was that people could protect their money if they would use travelers checks while on vacation. Today I want to “pitch” the benefits of California Evidence Code Section 1123 (and similar statutes of other states) in securing your mediated settlements, and urge you not to leave a mediation without reference to Section 1123 in your settlement agreements. With a nod to Mr. Malden, I present the following scenario for your consideration.

Your mediation lasts late into the night and after many rounds of negotiations, you finally get to “yes,” that is, you reach a settlement. The parties then prepare and sign a term sheet setting forth the basic parts of the deal, with each side agreeing that a formal settlement agreement containing the “usual provisions” would be prepared within a few days. You shake hands with opposing counsel and return home with the feeling you have done a good day’s work. In a few days the unthinkable happens: instead of receiving a draft settlement agreement from opposing counsel, you get a call telling you the deal is off. Wait a minute, you think. California Code of Civil Procedure Section 664.6 says a written settlement agreement signed by the parties can be reduced to a judgment upon motion to the court, right? As you begin to prepare your points and authorities in support of your righteous motion, you decide to check out the chapter on mediation in the California Evidence Code. In shock, you read section 1119 and learn your settlement agreement may not be enforceable because agreements reached in mediation are deemed confidential, and are therefore inadmissible and not subject to disclosure.

You also read Fair v. Bakhtiari (2006) 40 Cal 4^th 189, which held a certain settlement agreement inadmissible under section 1119 because the agreement did not comply with Evidence Code Section 1123. Nervously, you turn to section 1123, hoping to find an exception to the general rule. You read the head note: “Written Settlement Agreement-Conditions for Disclosure.” Hallelujah! There is hope yet. You then read the magic language that makes settlement agreements reached in mediation admissible:

A written settlement agreement prepared in the course of…mediation is not made inadmissible if…any of the following conditions are satisfied:

(a) The agreement provides that it is admissible or subject to disclosure, or words to that effect.

(b) The agreement provides that it is enforceable or binding, or words to that effect.

(c) All parties to the agreement expressly agree in writing …to its disclosure.

(d) The agreement is used to show fraud, malice, illegality that is relevant to an issue in dispute.

Armed with this information, you argue in your motion that your signed settlement agreement somehow or in someway evidences the parties’ intent that it be admissible, binding, enforceable, subject to disclosure, or words to that effect. You promise yourself, however, that the next time you settle a case in mediation, the term sheet will include clear language that complies with one or more of the provisions of Section 1123, so the settlement, if necessary, can be enforced under CCP Section 664.6. While it would seem reference to any one of Section 1123’s subdivisions (a)-(c) is sufficient, you may want to use a “belts and suspenders” approach to your mediation term sheets by including something like the following provision:

It is the intent of the parties that this agreement is admissible, binding, enforceable, and subject to disclosure as provided by Evidence Code Section 1123 (a),(b), and (c), and while maintaining all other aspects of the mediation privilege, this agreement will not be deemed inadmissible under the provisions of Evidence Code Section 1119. In the event a formal settlement and release agreement is not prepared and executed by the parties within 15 days from today’s date, this agreement may be enforced pursuant to Code of Civil Procedure Section 664.6 and the court shall retain jurisdiction until its terms have been fully performed.

Alternatively, if you a prefer a bullet point format for the term sheet, you might add the following:

·        The parties intend this agreement to be admissible, binding, and subject to disclosure as provided by Evidence Code Section 1123.

·        This agreement is neither privileged nor inadmissible under Evidence Code Section 1119.

·        This agreement is enforceable pursuant to Code of Civil Procedure Section 664.6.

There is a lesson to be learned from the sad tale described above: You can protect and enforce your mediated settlement by taking the time to add a few additional words to your agreement that evidences the parties’ intent that it be admissible, binding, and subject to disclosure. If you don’t make the effort, like the vacationers whose cash was stolen in the old television commercials, your settlement could be taken from you.

Evidence Code Section 1123: don’t leave the mediation without it!

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Barriers to conflict resolution are many, and much has been written about them. In Insightful or Wishful: Lawyer’s Ability to Predict Case Outcomes, a legal studies research paper for the new law school at the University of California at Irvine, noted American psychologist Elizabeth Loftus addresses another barrier to settlement that we lawyers are loath to admit: overconfidence. Indeed, the “saber rattling” of mediation colloquy can sound like the dramatic dialogue out of a Star Wars movie:

Luke: Soon I’ll be dead and you with me. Translated: We’re spending a boatload of money litigating this case but you will run out of money before we do.

The Emperor: [laughing] Perhaps you refer to the eminent attack of your rebel fleet? Yes, I assure you, we are quite safe from your friends here. Translated: Perhaps you refer to your army of expensive expert witnesses. They are no threat to us. I assure you we are prepared to destroy their testimony.

Luke: Your overconfidence is your weakness. Translated: Your overconfidence is your weakness.

The Emperor: Your faith in your friends is yours. Translated: Don’t count on the jury to bail you out of this one.

But lawyers are supposed to be confident, right? Yes, but there is a difference between having confidence and the courage of your convictions and overconfidence and the consequences of poor judgment. In an amusing analogy, Professor Loftus compares and contrasts lawyers and weather forecasters.

First, meteorologists cannot in any way influence the outcome of their predictions. Nothing they do can make it rain. Lawyers, on the other hand, can behave in ways that influence the case outcome. Because they have this opportunity, they may overestimate their own capacity and neglect the importance of factors beyond their control. Second, lawyers have a much keener interest in the goals of their predictions than do meteorologists. Because of this, lawyers might be susceptible to over optimism and wishful thinking.

The central focus of Professor Loftus’ study is the degree of accuracy in lawyers’ forecasts of case outcomes. To read the entire research paper click here. (PDF)  Meanwhile, the following quotes provide a glimpse of her insightful observations :

In summary, whether lawyers can accurately predict the outcome of a case has practical consequences in at least three areas: (a) the lawyer’s professional reputation and financial success; (b) the satisfaction of the client; and (c) the justice environment as a whole. Litigation is risky, time consuming, and expensive.

The consequences of judgmental errors by lawyers can be costly for lawyers and their clients, as well as an unnecessary burden on an already overloaded justice system. Ultimately, a lawyer’s repute is based on successful calculations of case outcome. A lawyer who advises clients to pursue litigation without delivering a successful outcome will not have clients for long. Likewise, a client will be most satisfied with a lawyer who is accurate and realistic when detailing the potential outcomes of the case. At the end of the day, it is the accurate predictions of the lawyer that enable the justice system to function smoothly without the load of cases that were not appropriately vetted by the lawyers.

A lawyer who cannot accurately predict the outcome of a case or who does not thoroughly and efficiently appreciate the litigation risks may ignore alternatives to trial and advise the client to reject reasonable settlement offers. A lawyer who underestimates potential outcomes may advise the client to accept an unreasonably lower amount in settlement than is warranted.

Another factor that might affect the realism of lawyers’ assessments of future goals is perception of control. The extent to which an individual believes he or she can take steps to increase the likelihood of a desirable outcome has been shown to bias confidence estimates in those outcomes. When an event is perceived to be controllable, overconfidence is likely. This bias is linked to what Langer (1975) called an illusion of control, defined as “an expectancy of a personal success probability inappropriately higher than the objective probability would warrant”.

Lawyers frequently made substantial judgmental errors, showing a proclivity to over optimism. The most biased estimates were expressed with very high initial confidence: In these instances, lawyers were extremely overconfident. These findings are consistent with a large body of literature documenting overconfidence in a range of judgments.

With regard to gender, we replicated results obtained by Malsch (1990) that female lawyers were better calibrated than their male colleagues. Male practitioners were more overconfident than female practitioners. These findings are in line with gender differences observed in research on metacognition.

One implication of the present findings is that lawyer performance can be improved by implementing case management strategies that take into account the potential overconfidence biases of the litigators.Case consultations with legal peers can take place informally. For example, in many legal firms, regular meetings are held where cases are periodically reviewed so that the partners can manage the caseload efficiently and ethically. These meetings provide ideal opportunities to obtain objective opinions from other legal professionals in the form of third-party feedback about the strengths and weaknesses of a case and the likelihood that the stated goals can be achieved.

This study shows that lawyers can be too confident. When lawyers do not fully assess the risks or acknowledge certain aspects of the case that may be beyond their control, over-(and under) valuations can happen, making settlement impossible. Objectivity requires lawyers to walk a fine line, some would call it a high wire balancing act, between zealous advocacy and wise counsel. Indeed, wisdom is the safety net that keeps litigators from crashing to the earth.

May the Force be with you.

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Bear with me as I pay my respects to a lifelong hero who influenced my life for good:

John Wooden, the Wizard of Westwood, was the greatest coach of all-time. He passed away June 4, 2010; 4 months shy of his 100^th birthday. While he will be remembered for his 10 NCAA basketball championships as the head coach of the UCLA Bruins, he always considered himself first and foremost a teacher. He taught principles of living based on his Pyramid of Success, and shared his wisdom through sayings that have been quoted for decades in virtually every educational, athletic, professional, and business forum and setting.

Even though I was never very good at handling a basketball (giving hard fouls was my forte), I have been pretty good at finding ways to sharpen my skills as a negotiator and a mediator.

 Here are a few of the things I learned from Coach Wooden’s playbook:

• PREPARATION: “Failure to prepare is preparing to fail.”
• HARD WORK: “Nothing will work unless you do.”
• PATIENCE: “Do not let what you can not do interfere with what you can do.”
• PERSEVERANCE: “It’s not so important who starts the game as who finishes it.”

And here is how I have applied these sayings of his to the field of negotiations and dispute resolution:

1. If you do not prepare for mediation, you are preparing for the mediation to fail. Claims are not settled in a vacuum, they must be rigorously measured against the realities of trial before the negotiations begin. Questions about liability and damages, evidence and admissibility, costs and fees, must all be evaluated; the impact of litigation and trial on clients in terms of time, emotion, and resources must be scrutinized; and an objective study of the strengths and weaknesses of the other side’s positions must be undertaken in advance of the mediation. This is not to say that extensive discovery on every conceivable issue must be completed but sufficient thought must be given to these issues to enable you to negotiate to the best of your ability and with your client’s best interests in mind.
2. Mediation does not work unless the parties are willing to work on both objective and subjective levels. They work better when lawyers are willing to set aside trial advocacy skills in favor of negotiation advocacy skills.  They work best when both sides focus on finding ways to resolve the dispute instead of perpetuating it.
3. Do not let the tactics of the other side interfere with the implementation of your settlement strategy. You can not control your opponent but your preparations will enable you to take control of the negotiations by anchoring the offers and demands within a reasonable settlement range based on the facts of the case, the applicable law, and the record of verdicts in similar cases. Studies have shown that the first party to make a reasonable demand or offer anchors the negotiations in his favor. Thereafter, the negotiations tend to be driven in that direction.
4. Have the mindset that you are going to see the mediation process through to the end. Be prepared to endure the ups and downs of a mediation session. Don’t allow your emotions to take you out of your game plan. Unfortunately, I see this happen all too often. For example, plaintiff believes the reasonable range of settlement to be $500,000 to 250,000. The defense, believes the settlement value is between $150,000 to 225,000. In other words, unbeknown to each other, they begin the negotiation with only $25,000 separating Plaintiff’s potential lowest demand and the defendant’s potential highest offer. However, the plaintiff wants to give himself plenty of room to negotiate so he makes an initial demand of $1,000,000. The defendant’s reacts emotionally to this number: “It’s outrageous; they are not negotiating in good faith; I’m not even going to respond with a counter offer.” After some time, defendant may respond with an equally ridicules number, $25,000. How does the plaintiff react? The same way and before you know it, both sides become frustrated and the mediator declares an impasse. If you are going to convene mediation, be prepared to finish the process. Allow the mediator to help the parties work through the process to find clarity and to maximize the chances for a reasonable resolution of the dispute.

Mediators are not miracle workers; they can not create a settlement out of thin air, and no amount of their “hot air” will convince parties to settle a case that has not undergone rigorous analysis by both sides. Take a page from Coach Wooden’s playbook: prepare, work hard, control what you can, and endure to the end. And when you are in the middle of a difficult negotiation, remember one more thing John Wooden taught, "Flexibility is the key to stability."

Thank you, Coach Wooden. Thanks for everything.

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Parties hungering for their day in court must digest the potential repercussions of the carrot and stick procedures enacted by their respective legislatures to encourage the pre-trial settlement of disputes. Federal Court Rule 68 provides that a plaintiff whose judgment is less than defendant’s statutory settlement offer may be required to pay defendant’s costs, including deposition costs, filing fees, and other costs incurred after the offer expires. In certain cases, Rule 68 can also be used to cut off plaintiff’s claims for attorney fees incurred after the settlement offer.  Some state courts rules, such as California’s Code of Civil Procedure section 998 and Texas’s Rule 167, add to the list of recoverable costs, attorney fees and expert witness fees in cases where the terms of the statutory settlement offer were more favorable that the final judgment. 

It has been suggested that the correct usage of the carrot and stick idiom is actually “carrot on a stick,” referring to the hapless donkey tricked into pulling a cart by the lure of a carrot dangling from a stick. But studies have shown that rewards alone have little impact on cooperation among human beings, although punishment alone can be motivational.  But when rewards and punishment are combined the effect on cooperation is dramatic, suggesting that the more realistic image of the donkey and the cart would have the driver holding the stick attached to a carrot in one hand and a prodding stick in the other. Similarly, in civil trial courts, the benefits of compromise alone may not be enough to induce parties to negotiate in good faith, but when combined with the threat of having to pay the other side's costs, litigants are generally sufficiently motivated to settle their lawsuits.

In California, for example, a party may serve a written offer to compromise prior to trial, and if the offer is rejected and the opponent does not receive an award at trial greater than the offer, then the party that rejects the pre-trial offer may be ordered to pay the offeror's costs. This gives the parties strong financial incentives to make reasonable settlement offers and burdensome disincentives to discourage the rejection of them.

Unfortunately, some litigants do not even consider the possibility of paying the other side's costs when considering the settlement value of their cases, or, in some states where attorney and expert witness fees can be awarded, they make the mistake of only evaluating general litigation costs such as filings fees, the cost of deposition transcripts, and service of process fees.  When a statutory pre-trial offer is made, the trial lawyer must understand that the offer has created a floor that must be exceeded in order to collect his costs and avoid having to pay his opponent’s litigation costs.

The possibility of a statutory offer of settlement can induce parties to participate cooperatively during a mediation session. In preparation for mediation, counsel will usually calculate the settlement value of a case by analyzing the likelihood of success at trial both as to liability and damages. The damage estimate will then be discounted by some percentage to reflect the possibility that the trial will not proceed according to plan. If, however, counsel must also consider whether the damage award will exceed the amount of a "statutory offer," then the analysis becomes more complicated and the stakes at mediation increase.

For example, suppose plaintiff's counsel believes his case is worth $1,000,000 in damages, but for purposes of settlement discussions considers $800,000 as a reasonable amount for settlement. Without the carrot and stick of a statutory pre-trial offer, plaintiff's counsel need only worry about the other side's costs if no money is awarded at trial. Being extremely confident, counsel considers the likelihood of a jury awarding nothing to be zero. Therefore, counsel concludes $800,000 is the minimum amount that should be accepted at mediation.

On the other hand, suppose counsel's preparation includes an analysis of the other side's costs and what would have to be achieved at trial to avoid having to pay them, and then he fully explains the ramifications of statutory offers to his client.prior to the mediation. Now he will be better prepared to evaluate the risks of trial should the other side's best offer be less than he expected, say $500,000. As a result, plaintiff's counsel will be in stronger negotiating position and better able to meet the needs of his client, knowing the likely floor that he must exceed at trial in order to prevent his client from having to pay defendant's costs which, for a million dollar case, could be hundreds of thousands of dollars..Given this risk, plaintiff's counsel will be more willing to come off the original  $800,000 target number during mediation.

The possibility of paying the other side's costs, especially if they include attorney and expert fees, is a powerful incentive to negotiate in the utmost good faith. As demonstrated above, the cost-shifting feature of statutes such as Federal Rule 68 and California Code of Civil Procedure section 998 can be a carrot to entice reasonable settlement offers and a big stick to discourage rejection of settlement offers. Use this tool to your advantage at mediation. You will increase your negotiating leverage while demonstrating that you are a wise steward of your client's litigation dollars.

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It is a fact that a high percentage of construction disputes are resolved through mediation in the United States. Although the voluntary, collaborative nature of the mediation process seems inimical to the highly competitive, hard-charging  world of  the U.S. construction industry, the record of success is quite impressive. It would seem, then, if mediation can thrive in the U.S., it can also work in other countries.

 I have often thought that mediation is especially well-suited for the resolution of disputes involving Japanese entities. In Japan (and other Asian cultures), saving face, honor and loyalty remain fixed in the Japanese character. I learned a lot about this during the two years I lived there. Frankly, as a Westerner, in some ways it was harder to comprehend the culture than it was to learn the language. For example, it took me a little while to apprehend  the Japanese tendency of avoiding public conflict. In my first few months there, I am sure I offended some people because I did not appreciate the fact that what appeared to me to be evasiveness was actually an attempt to avoid conflict and public embarrassment-mostly mine. Now as a mediator, I can see that private mediation can help Japanese construction professionals resolve their disputes in an honorable way, consistent with their culture and traditions.

Prominent construction lawyer Robert S. Peckar recently posted an outstanding article in Who'sWhoLegal about the application of U.S.-style mediation in other countries. I have quoted below parts of the article that explain the mediation process and other parts which explore its benefits and barriers in the context of international construction disputes.

US-style mediation is the voluntary participation by disputing parties in negotiations facilitated by a third-party neutral known as the “mediator”. The mediator typically is a lawyer (although he or she need not be) who is trained in the art of negotiation used in the mediation process. The key elements of the typical mediation process are:

• The process is voluntary. While some speak of “binding mediation”, that term is misleading. The only aspect of mediation that is binding is the agreement made by the parties to settle their dispute (more on that later). All parties must agree to participate or there is no mediation. Although some contracts require mediation as a condition precedent to the next step in the process, there is agreement at least at the time of contracting.
• Because the process is voluntary, the parties are making a commitment that they are willing to listen, to learn, and to make compromises to achieve a fair settlement with the other party.
• The process depends on the good faith of all parties to participate with an open mind and a desire to settle.
• The process is conducted under the guidance of a mediator, who is selected by all of the parties because they trust and respect the mediator’s skills, knowledge and integrity. The mediator is neutral and independent. The mediator typically is highly trained in the art of negotiation and mediation, knowledgeable in construction, and experienced in construction law. Mediation simply introduces a trusted expert into the negotiation process to facilitate a resolution of the dispute. There are several organizations that offer mediation services to members of the construction industry.
• Before and during the mediation, the mediator is provided with confidential information from each party about the strengths and weaknesses of their case, their settlement goals, financial concerns that might affect the settlement, personal relationships impacting settlement, other matters of value to each party, such as maintaining relationships or receiving expedited payment, and other confidences that may assist the mediator. Armed with this information, the parties’ trust and negotiation skills, the mediator is in an excellent position to guide the parties to an acceptable settlement.
• US-style mediators act in a facilitative manner, however, many will be quite strong in providing advice to the individual parties during their confidential sessions. That advice may range from “encouragement” that a party modify its position in order to achieve a settlement to a polite confrontation in which the mediator informs the party in clear terms why the mediator believes that party is not properly advancing the potential for settlement. The mediator may explain to the party that its resistance to make meaningful counter-offers is unhelpful. The mediator may also express a belief that the party is operating on an erroneous legal or factual position or that it is attempting to use a negotiating strategy that simply will not work. Many of the most successful construction-industry mediators in the United States are respected for their ability to bring strong guidance and the personal qualities of effective facilitation to the mediation process.
• Because of the sensitivity of the information provided to the mediator, the parties must have complete trust that he or she will maintain its confidentiality and help them reach the best settlement possible. Trust in the mediator is the cornerstone of a successful mediation.
• The mediator acts as an “honest broker of information” and never shares one party’s confidential information with another party without express permission. Thus, the parties are able to talk with the mediator about various options, including their “bottom-line number”, and other highly confidential considerations, without fear that they will be improperly disclosed to any other party. Mediators treat this obligation as a matter of sacred trust and do not violate that trust. Furthermore, the laws in most US states provide that all communications (oral and written) during the mediation process are confidential and may not be repeated in a legal proceeding.
• The mediation progresses through a rather predictable process to conclusion. Typically there are short pre-mediation submissions exchanged between the parties and with the mediator, an opening joint session, at which all the parties make presentations to each other about their case and their perceptions of the other parties’ cases, followed by a series of private caucuses with the mediator held in separate rooms. However, the parties are not constrained by a specific format and joint sessions may follow a caucus, sessions may be held with principals only and the mediator, or any other process may be used that will help achieve settlement. Flexibility is a key to mediation.
• An important element of the opening session of mediation is that the parties speak to each other and in particular the principals, not to the mediator. Sometimes the opening session is the first time a principal has heard a fair presentation of the other party’s position. The mediator is not a judge or arbitrator; and therefore, there is little advantage to try to convince the mediator of the merits of the party’s position. That shift in emphasis, from speaking to the third-party finder of fact to speaking directly to the other party, is at the heart of what makes mediation successful. The mediator’s role is to keep that dialogue appropriate in tone and direction both in the opening public session and then in the private caucuses.
• The mediator tries to help the parties focus on what is in their best business interests as opposed who is right or wrong on the issues, since it is often difficult to convince someone that they are wrong, and the matter may have little to do with a party’s best interest as far as settlement is concerned.
• The mediator helps the parties remove emotional issues or personal conflicts from the negotiation.
• The mediator has the ability to use many well-tested closing techniques to achieve the final resolution.
• Finally, in certain circumstances and as a last resort, the mediator can offer his or her opinion on certain issues and can suggest a settlement to assist the parties. If the parties trust the mediator, his or her opinion or suggestion may be enough to cause them to make the last move to settlement.
• The mediation process continues until a settlement is achieved by the parties or until the mediator (not the parties) concludes that settlement is unachievable and declares an “impasse”, at which time the parties revert to the formal dispute resolution process provided in their contract or as required by law. It is not unusual for mediation to continue late into the night or continue day-to-day with little time for sleep as momentum towards a settlement increases. It is also not unusual for the mediation to be postponed after the parties have exchanged information, discovery has occurred, or the parties have reassessed their positions and interests. The passage of time can be used to facilitate settlement.
• If the parties reach a settlement, they sign a settlement memorandum or agreement on the spot, in the mediation room, to avoid the chance that they will sleep on their agreement and change their minds the next day.
• The parties’ lawyers play an important role in mediation. They advise their clients throughout, may make presentations, and, if they are experienced in the mediation process, can help their client and the mediator steer through the challenges of mediation. However, unlike arbitration and litigation, jurists are not the central figures in the drama. At the end of the day it is the client who has control of the company’s destiny in mediation, as the client is the decision maker who must make the choices on what to say, when to say it, and whether to accept a settlement.

In summary, mediation in the United States is a negotiation in which an independent, trusted expert in negotiation and construction law is inserted between the parties, is provided with all of the parties’ confidential information, and then, armed with this information, tries to guide the parties to a settlement. It has a very high success rate. So, why wouldn’t the rest of the world jump at the chance to settle international construction disputes through US-style mediation as often as the construction industry in the United States?

Mr. Peckar describes some of the challenges of international mediation as follows:

 However, in the truly international case that brings parties from different parts of the globe together, the confidence that a mediator and the process will be conducted in a way that is “comfortable” for that party is often not present. For example:

• International parties to construction disputes may approach any negotiation with very different perspectives on how to negotiate. For parties from some countries, it is culturally unacceptable to offer or accept a reduced amount or to even share a willingness to settle for less with the mediator, as to do so may be perceived as personal weakness. It may be more acceptable for parties from such countries to lose in arbitration or court than to make concessions voluntarily. Such attitudes make the mediator’s job very difficult. An example of a particular issue that has resulted in non-US parties becoming uncomfortable about a US-style mediator’s approach to the facilitation of a settlement is the following: US-style mediators typically remind the parties of the expense they will suffer if they fail to settle their disputes and go on to arbitration or litigation. That reminder is accepted and often appreciated by construction-industry members in a dispute in the United States. Some international parties have been heard to complain that such a consideration is not relevant or even appropriate in a discussion about how much to pay to or accept from the other party.
• The language barrier can present tremendous problems, even with a translator. How easily can a party trust someone who does not speak their language? This becomes even more of a problem if the mediator speaks the adversary’s language.
• For parties from some countries, because the mediator goes into a room with the other party for hours (the caucus) to discuss the dispute this can be extremely worrisome and can undermine their trust in the mediator and the process.
• For others the sharing of highly confidential information, particularly if the mediator does not share their nationality, culture, or religion, is very difficult. As a result, even if they participate in the mediation they may be unwilling to share their confidences, which will make it less likely that the process will be successful.
• For some, the mere fact that they have never participated in mediation before, but have been in court or arbitration, is sufficient reason to reject mediation.

Construction disputes happen in all parts of the world. Regardless of cultural differences or legal traditions, all construction professionals want to resolve their disputes as efficiently as possible. Given the high settlement rate of mediated disputes in the United States, reasonable businessmen and legal counsel everywhere should find ways to implement mediation as an alternative dispute resolution method in their respective countries. The alternative to mediation is a fight in a court of law or in an arbitration proceeding. Mediation provides a confidential forum to fully explore both sides of a dispute with the knowledge that the failure to reach a compromise will lead to increased legal fees and costs and an uncertain outcome at trial. Indeed, the wisdom of mediation is reflected in two of my favorite Japanese proverbs: (1) Even a sheet of paper has two sides and (2) A good sword is the one left in its scabbard. 

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Alternative dispute resolution often means we have to take an alternative approach to the way we think about resolving disputes. Albert Einstein wisely said, “You cannot solve a problem by thinking the same way that created the problem.”  We often see this when attempting to mediate construction dispute where the residual animosity of the construction project is contagious, infecting management, counsel, and even experts with such anger and recriminations that objectivity is diminished or even lost, and when that happens mistakes are made during the negotiations.

Studies have shown that parties to a civil dispute who fail to settle their cases prior to trial often make mistakes in establishing the settlement value of their cases and as a result do worse at trial than they could have done in settlement negotiations. According to a recent study, plaintiffs, more often than defendants, make valuation errors in unsuccessful negotiations, evidenced by the fact that a high percentage of them receive somewhat less at trial than they could have received in settlement. When defendants get it wrong, on the other hand, they do it in spectacular fashion, with verdicts coming in much higher than they could have settled their cases for. In short, plaintiffs are wrong more often but when defendants are wrong, they pay a very high price.

With so much at stake in properly setting the value of a case, construction lawyers should give as much care in objectively analyzing their cases as their clients give when preparing their bids or scheduling their jobs, with every detail of the lawsuit being analyzed for success or failure, from the filing of the complaint to the preparation of dispositive motions to a jury returning a verdict; and even to the possibility of an appeal.  This can effectively be done through decision tree analysis.

Decision Tree Analysis

Prior to mediation, you should prepare a negotiating strategy based on the settlement value of your case. If you represent the plaintiff, you must establish the lowest settlement amount that would be acceptable to your client. If you represent the defendant, you must determine the highest amount your client is willing to pay to settle the case. Whatever side you are on, this bottom line settlement number approximates your best and final offer that you would make during mediation. In their seminal book, Getting to Yes, Fisher and Ury call this number your BATNA-the best alternative to a negotiated agreement. In other words, your client would rather  go to trial than accept an amount lower than the bottom number in your settlement range if you represent the plaintiff, or if you represent the defendant, your client would prefer going to trial rather than pay more than the highest number in your settlement range. In order to establish your BATNA, you must consider the point at which the risks of trial outweigh the concessions your client must make to reach a resolution of the dispute. Decision tree analysis is a great tool to help you help your client understand the settlement value of his case.

In decision tree analysis, you establish the key events of the litigation through trial. You then estimate the probability for success of the key events and the dollar values of the potential final outcomes. A decision tree visually depicts this process in as much detail as may be desired. A more complex decision tree may include the chances of success of potentially dispositive motions, such as summary judgment, or the impact of rulings on certain key evidence. On the other hand, a basic decision tree may only depict liability and damage issues.
 
When evaluating liability and damages, you start with the basic question: what is the chance of prevailing on the issue of liability? If liability can be established, what is the amount that will be awarded for damages? The outcome will provide a range for settlement purposes.

Suppose you believe there is a 60% chance liability will be established and if established, the low, medium, and high ranges of damages are as follows: 50% chance the damage award will be $250,000; 30% chance it will be $500,000; and a 20% chance it will be $1,000,000. A decision tree based on these assumptions would look like this:

             Jones v. Smith →liability→yes 60% →damages → 50% $250,000
                                    ↓                                             
                                                                                              30% $500,000
                                    no 40%                                   
                                                                                              20% $1,000,000
                                    ↓
                                    no damages

Next you would factor in the 60% possibility of liability to determine the range of values and the average expected value:

Low Range                              Medium Range                       High Range

(.60 x .50 x 250,000)               (.60 x .30 x 500,000)               (.60 x .20 x 1M)
           
$75,000                                   $90,000                                  $120,000
                       
Average damage award = $285,000 (75,000+90,000+120,000)

This decision tree would enable you to advise your client that the average value of the case is in the range of $285,000, assuming a 60% chance of establishing liability.

You will also want to advise your client of the total average cost of litigation, which would include the average damage award and the estimated attorneys fees and costs. Assuming fees and costs of $100,000 for each side, the total average cost of the litigation for the defendant would be $385,000 (average damage award + estimated attorney fees and costs); for the plaintiff, the average value of the case would be reduced to reflect the net amount the client would actually receive, $185,000 (average damage award – estimated fees and costs). Risk analysis is not complete, however, without factoring in the possibility of having to pay the other side’s attorney fees and costs that may be awarded to the prevailing party under state or federal law.

Of course, decision tree analysis is only as good as the assumptions upon which it is based. The results, however, can provide your clients with valuable information about the potential trial outcome and the cost of litigation. You can then negotiate using objective criteria that more times than not will lead to an amicable resolution of the case.

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Pre-nuptial agreements (or “What Happens When Our Marriage Fails?” agreements) seem awfully cold-hearted. We read about them when the Tiger Woods and Paul McCartneys of the world have marital melt-downs. Most people can’t imagine building a marriage on the foundation of such a document. I quess it goes something like this:“You are my soul mate, my one and only, now sign this…” While many would be reluctant to ask their betrothed to contemplate divorce before the "I dos" are even spoken, construction professionals should not be shy about making contractual arrangements for the disputes that will likely arise during the course of construction. 

Construction professionals often fall in love with an exciting project or can’t wait to be associated with a certain owner or design team, and they enter into contractual relationships without giving much thought to what happens if the project fails. Or they are so enamored with the prospect of a lucrative venture that they do not want to consider what happens if someone breaches the contract. Instead most people rely on boilerplate contractual language that may or may not be suitable for the proposed project, and hope for the best. There is a better way.

Dispute resolution provisions in contracts (or “What Happens When Claims Arise?” provisions) are the product of this cold-hearted reality: the plans and specifications, means and methods of construction and management of a project are rarely perfect. Since everyone knows this why do disputing parties spend so much time and money trying to prove in a court of law that they are right and the other guy is wrong? Why not draft dispute resolution procedures that empower parties to resolve disputes in the most balanced, cost-effective way possible? During my 25 years as a construction lawyer, I was always amazed when sophisticated parties would bemoan the cost and time drain of litigation but never changed their contracts to limit the impact of litigation on their businesses.

There is much that can be done during the contracting phase that can prepare the parties to resolve their disputes in a more cost effective manner. For example, many construction contracts include provisions that require parties to submit to mediation before a lawsuit is even filed. Other contracts require that the parties mediate their dispute as a first step and if that fails, proceed to arbitration. Since arbitration can be as expensive as a trial in civil court, some contracts include limitations on the arbitration process.

An arbitration provision that limited discovery was the subject of a recent California Court of Appeals decision (PDF) in a case where a corporate employer fired one of its in-house attorneys, and he sued for wrongful termination. The corporate employer then filed a motion to compel arbitration in accordance with the terms of the employment contract. The lawyer opposed arbitration on the grounds that the arbitration provision was unenforceable due to the discovery limitations imposed by the contract. The trial court found that the provision concerning witness depositions was flawed, declined to sever the provision, and denied the employer’s motion to compel arbitration.

The Court of Appeal reversed the trial court, stating:

We disagree with the trial court for two reasons. First, arbitration is meant to be a streamlined procedure. Limitations on discovery, including the number of depositions, is one of the ways streamlining is achieved. In Armendariz [a California Supreme Court case], the court stated that the parties are entitled to discovery sufficient to vindicate their claims. The court also acknowledged that discovery limitations are an integral and permissible part of the arbitration process. "'Adequate'" discovery does not mean "unfettered" discovery. Armendariz specifically recognized that parties may agree to something less than the full panoply of discovery permitted under the California Arbitration Act, Code of Civil Procedure section 1283.05. (Armendariz, supra, at pp. 105-106; see also Martinez v. Master Protection Corporation (2004) 118 Cal.App.4th 107, 118-119 [agreement permitting one deposition and a document request did not as a matter of law fail to afford adequate discovery]; Mercuro, supra, at p. 183 [provision permitting an arbitrator to authorize additional depositions for "good cause" was not unconscionable].)

The discovery provision reviewed by the Court of Appeal is an example of careful pre-dispute lawyering:

Each party shall have the right to take the deposition of one individual and any expert witness designated by the other party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below in paragraph 4 [[e]ach party shall have the right to subpoena witnesses and documents for the arbitration'] shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of need.

I am not suggesting that this provision is ideal in the context of a construction contract, but it does illustrate the benefit of careful draftsmanship to control the dispute resolution process and provide an efficient, cost effective way to manage claims. In addition to discovery issues, and depending on the laws of your state, arbitration provisions could be drafted to cover rules of evidence, the scope of the arbitrator’s authority, trial court review and appellate rights, the definition of prevailing party and the circumstances by which attorney fees and costs are awarded, all of which could be drafted in a way that incentivizes the parties to settle disputes prior to the arbitration proceedings.

The bottom line is this: construction professionals deal with risk every day. Those who manage it best generally do the best. Carefully drafted dispute resolution provisions are an important part of preparing for the risks associated with construction projects. Therefore, you should draft them with the same degree of care that you give to every other aspect of a project, for the success and profitability of a project can not be measured until all disputes are resolved.

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The very first sentence of a recent opinion of the California Court of Appeal (PDF) frames the essence of a prime contractor’s multi-million dollar claim on a public works project known as the Hyperion Wastewater Treatment Plant: 

The City of Los Angeles (City) obtained millions of dollars worth of construction work that it does not want to pay for.

And the third footnote in the opinion reads like a consumer products warning label for construction lawyers:

The pretrial proceedings and trial presented the trial court with difficult legal and logistical issues that were made even more difficult by the inability of trial counsel to adequately define the case and state the law. Given this context, the trial court‘s effort to resolve these issues was admirable.

This preamble to the Dillingham-Ray Wilson v. City of Los Angeles opinion leads THE CRITICAL PATH to state the obvious (something I have a keen eye for): construction claims are complex, judges are usually not experts in construction law matters, and lawyers may find it difficult to reduce complex concepts in ways that are meaningful to the judge or the jury. For these reasons and more, the risks and uncertainties of trial are enormous, even for the most sophisticated parties and experienced construction lawyers. as illustrated by this case.There are, however, some dispute resolution tools that can be forged from the pages of the opinion:

• Proving Damages. When evaluating a construction case, you must carefully consider the question of how you will prove damages. Oftentimes an inordinate amount of time and money is spent discovering facts to support liability but the issue of damages is not fully vetted until it is time to prepare for expert depositions and trial. You have to begin your case evaluation with the end-damages-in mind. When it comes to obtaining a verdict, proof of liability without proof of damages is no proof at all.
• Method of Proving Damages. There are various methods for proving damages in construction claims: the actual cost method, the jury verdict method, the total cost method, and the modified total cost method. The acceptance of these methods of proof varies from state to state and between some state and federal courts. However, the Dillingham-Ray Wilson case recognizes the viability of the modified total cost method in California." In the published portion of this opinion, we conclude that the trial court erred because section 7107 and Amelco impact the measure of damages, not the method of proving them, and also because a modified total cost theory is permissible."
• Motions in Limine. When evaluating the likelihood of success, you have to anticipate motions in limine that can gut your case. In the Dillingham-Ray Wilson case, for example, the trial court granted an in limine motion and excluded from evidence $25 million of the contractor’s claim on the theory that it could not document its actual costs as required by contract. Of course, this ruling was reversed on appeal but that only means the contractor will have a second  trial with no guarantee that the new jury will award any damages.

These points should be among those you consider when evaluating the likelihood of success at trial. It is not enough to say, “My chances are 50/50 or 70/30.” Your risk analysis should break down each key element and evaluate the likelihood of success for each one. Your risk analysis should include a hard look at your damages and how you will prove them up. You should consider your chances of getting all of your evidence into trial by anticipating potential motions in limine. You should be sure you know the law and each element that you must prove and fashion your discovery plan around those elements.

What does all of this have to do with dispute resolution? Everything. Mediation is at one end of the ADR spectrum and trial is at the other end. Both processes resolve disputes; litigants retain control in mediation, but they lose control at trial. The Dillingham-Ray Wilson case is a good illustration of this fact. Once the trial begins, you lose control of the evidence. The judge decides what will be admitted into evidence. Once your closing argument is over, you lose control of the outcome of the case. The jury will decide the winner and the loser. Preparing your case with the end in mind will increase your ability to establish the realistic value of your case. Litigants who do this usually find a way to resolve their dispute before trial

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The litigation arising from the construction of the Los Angeles Red Line subway described in Ari B. Bloomekatz' Los Angeles Times article,  "MTA's long legal battle draws fire" reads like a modern-day version of Charles Dickens' Bleak House, the story of the long and expensive probate litigation in England's Court of Chancery that wasted many lives and the fortune of the deceased benefactor. Mr. Bloomekatz reports that the litigation between The Metropolitan Transportation Authority and Tutor-Saliba, the general contractor, has lasted fifteen years and cost the public $34 million with no end in sight. Tutor-Saliba has paid about $25 million in litigation costs.

One thing is certain: the litigation costs of both sides far exceed their respective claims:Tutor-Saliba is seeking around $16 million and the most MTA can expect is about $15 million.

Even sophisticated parties like public agencies and national construction companies can lose sight of the goal-conflict resolution-when their aim is to be proved right. Conflict is a part of life, and it is inevitable in most construction projects to one degree or another. Therefore, the management of the conflict becomes an important part of managing the project. No project is truly complete until all disputes have been resolved.

Some simple tools of construction conflict resolution include:

• Don't take it personal. Even if the other side is making it personal, don't.
• To borrow from Stephen R. Covey's The 7 Habits of Highly Effective People, "Begin with the end in mind."
• Through contract or stipulation, establish efficient discovery procedures for effective and early evaluations.
• Remember the parties are in a better position to evaluate the dispute than 12 jurors, a judge, or an arbitration panel who will never understand the facts or the law as well as you do.
• Be realistic about your litigation costs. Like construction projects, litigation tends to cost more and take longer than originally planned.

Although the final chapters of the Red Line subway litigation saga have yet to be written, its impact will soon be felt by the very people the MTA is supposed to serve-public transportation users. The Times article reports:

With the agency now considering fare increases and service cuts, some officials are calling for an audit of the expenditures and wonder if the lawsuit represents a waste of taxpayer dollars.

Some people believe that certain disputes must go to trial, and in the Times article, MTA officials express their views on non-monetary reasons for pursuing the litigation. Nevertheless, the wisdom of a negotiated resolution which provides certainty while minimizing costs is illustrated by the 15 year $59 million Red Line subway litigation.

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