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

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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