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 first sentence in an appellate opinion can strike fear in the heart of any advocate. I should know. Nearly twenty years ago the California Court of Appeal began its opinion on a losing appeal of mine with this sentence: “This case presents a real doozy of a puzzle in mechanic's lien law.” Last week, in a case involving an attempt to undo a settlement agreement by way of subrogation and reverse an award of expert witness fees, the California Court of Appeal began its opinion even more dramatically: “What the heck?!? At one point, the trial court commented, ‘This is one of the most screwed up cases I’ve ever seen.’ We heartily agree.” Click here to read the opinion.

Why highlight such a “screwed up” case in a blog dedicated to helping people resolve construction disputes? Well, we can learn a lot from the opinion-someone else’s pain can be our gain, so to speak. First, the case reminds us that settlement agreements are contracts with consequences. And second, rejecting statutory settlement offers also has consequences.

Facts About the Case

A man was injured when he stepped on a nail in a restaurant that was being refurbished. As a result of the accident, the man’s leg was amputated, and he sued the restaurant and property owner, alleging that they “negligently managed, controlled and supervised the demolition being done on the premises, and failed to take reasonable precautionary measures to protect him from a risk of harm, which caused his injuries.

Essex Insurance Company provided a defense to the purported property owner who was not its named insured, but did not discover its mistake until after judgment was entered following a jury verdict in the plaintiff’s favor. Litigation ensued over Essex’s obligation to pay the judgment. Essex eventually entered into a global settlement with the plaintiff that had the effect of resolving three lawsuits, including the personal injury action and a bad faith action plaintiff brought against Essex, in exchange for a lump sum payment. The settlement agreement did not allocate the payment among the three lawsuits or resolve issues regarding the identity of Essex’s insured.

Essex then sought indemnity from plaintiff’s physician who had treated him after the accident with the nail, on a theory of equitable subrogation for his proportionate liability for the amount Essex paid in settlement. The doctor filed a motion for summary judgment, which the trial court granted on the basis that Essex had waived any claim for equitable subrogation. In a post-judgment order, the trial court also awarded the doctor the cost of his expert witness fees. On appeal, Essex challenged both the judgment and the order. The Court of Appeal " agreed with the trial court that Essex must lie in the bed it made,” and affirmed.

Settlement Contract

The settlement agreement between Essex, the property owner, and the plaintiff included a lump sum payment of $700,000 which resolved three pending cases, including a bad faith action against Essex. The settlement agreement did not allocate payment amounts among the three pending cases; there was no statement about how much was being paid to compensate plaintiff for his personal injury. Accordingly, the trial court found Essex had impliedly waived its subrogation rights when it failed to enter into separate settlement agreements or otherwise apportion the amount paid among the three lawsuits. The Court of Appeal agreed:

Essex’s contention, however, shows why an implied waiver is applicable here — without resort to extrinsic evidence that is most likely inadmissible, it is impossible to prove how much was paid to settle each claim. Moreover, Essex ignores the other issues it failed to address in the settlement agreement apart from apportionment of the damages between the three lawsuits that shows it did not step into its insured’s shoes in paying the settlement, such as the failure to identify its insured or to apportion damages between economic and non-economic damages.

On appeal, Essex contended the trial court should have considered the inference that the settlement payment was compensation for the personal injury claim of the plaintiff and even suggested that evidence outside the body of the settlement contract could be offered to show the intent of the parties. The Court disagreed, stating that such extrinsic evident would most likely be inadmissible and that in any event, Essex waived its right to equitable subrogation by its actions.

Expert Witness Fees

The doctor made a statutory offer of settlement to Essex in compliance with California Code of Civil Procedure section 998. (Click here for a previous post on statutory offers: Settlement Negotiations: Don't Get Smacked by the Statutory Stick.) The good doctor’s offer to Essex was this: dismiss your claims for a waiver of costs. Essex did not accept and after the trial court ruled in favor of the doctor, he asked for an award of costs that included payment of his expert witness fees of $28,000. Essex opposed the award on the grounds that the statutory offer for a waiver of costs was not given in good faith. In denying Essex’s challenge to the order to pay expert fees, the Court of Appeal noted:

An offer to compromise may be “realistically reasonable” and justify cost shifting even though the party receiving the offer is unlikely to accept it as a consequence of the party’s skewed valuation of the case. Here, Essex recovered nothing from Dr. Heck. Dr. Heck’s offer is presumed reasonable and it is Essex‟s burden to show otherwise.

As a result, Essex was ordered to pay the doctor's expert witness fees. Thus, not only did Essex lose the right to shift the burden of its settlement payment to the doctor through equitable subrogation, the doctor was able to shift the costs of litigation onto Essex through the statutory offer procedures of Code of Civil Procedure section 998.

Lessons to be Learned

1. Settlement Agreements are contracts. They will be interpreted and enforced according to the standard rules of contract interpretation and the laws of evidence. Therefore, settlement agreements must be written with the utmost care. In particular, one should be concerned about the scope of the release to be sure that the intent of the parties is accurately reflected.
2. Statutory offers must be considered in the light of the laws of the local jurisdiction where the case is pending. It is not wise to react emotionally to a statutory offer of settlement. One should seek to evaluate such offers based upon objective criteria rather than the party's skewed valuation of the case, as noted in the Essex case. Remember, the party challenging the statutory offer generally has the burden of proving it is unenforceable.

So now you know about the "What the heck?!?" case. I hope it will help you when you are attempting to resolve your next case, even if it presents a "doozy of a puzzle."

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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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It is an interesting paradox that construction professionals who devote their lives to building unique structures according to customized plans generally use "cookie cutter" form contracts to govern the duties and obligations of the parties. When a construction dispute arises, most construction professionals and their lawyers will spend many hours scrutinizing the contract documents to analyze their rights. Since so much time is spent evaluating the contract after the dispute, shouldn't there be at least an equal amount of time and thought put into it before the project begins? Instead of standard cookie cutter provisions, doesn't it make sense to think about the risks of the project and clearly define what will happen in the event of a dispute?  I have been preaching this sermon for many years, and recently posted an article on the subject called, Resolve Construction Disputes More Efficiently With Customized ADR Provisions.

A new case in California  (PDF) illustrates the benefit of customized contract provisions related to dispute resolution. The case involved the proposed development of a parcel of property and a contingent lease for a drug store build-out for Rite Aid. Here is the smart part of what happened: the lease agreement did not have the standard "prevailing party" language in the event of a dispute. Instead the lease stated that the prevailing party is entitled to "reasonable expenses," and then listed what the parties meant by that term: attorney fees, court costs, witness and expert fees.

The developer won the case and asked the court to award reasonable expenses including attorney fees and expert witness fees. Rite Aid challenged the developers request for $83,000 for expert witness fees in a motion to tax costs. The trial court denied the motion and Rite Aid appealed the judgment in favor of the developer, including the award of expert witness fees.

The California Court of Appeal affirmed the award of expert witness fees, holding that the the lease expressly called for them as an item of cost. The Court gave deference to the fact that this was a customized provision negotiated by sophisticated parties:

This does not mean-and we do not hold-that expert witness fees are recoverable in every case where "costs" are merely mentioned in a contract. A general cost provision should be interpreted according to the established statutory definition. But where sophisticated parties knowingly and intentionally negotiate a broader standard into their contract-and particularly where, as here, that standard specifically includes "witness and expert fees"-the intent of the parties should be upheld by the court. (Emphasis added.)

In most states, there are other ways to obtain an award of expert witness fees. I wrote about them in a post entitled, Settlement Negotiations: Don't Get Smacked By The Statutory Stick. But statutory awards of expert fees are discretionary awards made by the trial court after certain facts are established to the satisfaction of the judge. This Rite Aid case, on the other hand, provides a blue print for construction professionals who want to clearly define what will happen to the losing party in the event of a dispute rather than hoping for the favorable discretion of the trial court.

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Yesterday a district court judge appointed a special master to mediate a lawsuit between four major record labels and Jammie Thomas, a Minnesota woman who allegedly downloaded and distributed more than a thousand songs on the internet in violation of federal law. The case is deemed by many to be a vanguard in the music industry’s effort to thwart the practice of peer to peer (P2P) file sharing, which is costing the music world a bundle, according to industry experts. The strategy seems to be that the threat of a lawsuit and heavy fines will deter music lovers from unlawfully downloading and distributing music to their friends.

The special master/mediator, Jonathon Lebedoff, a former chief magistrate judge of the District of Minnesota, has a great deal of mediation experience-he was responsible for the settlement of the Dalkon Shield litigation, for example. Nevertheless, the good judge must overcome a number of barriers to resolve this conflict.

Barrier No. 1-Mediation is Less Likely to Succeed if it is Involuntary

Mediation is based on the premise that parties who voluntarily participate in the process and agree to devote their time, money, and resources toward problem solving will be sufficiently invested to find a way to resolve their dispute. In this case, the record industry and Ms. Thomas were ordered to mediate the case prior to July 16, 2010, and Plaintiffs’ representative, Recording Industry Association of America, was ordered to pay the special master $400 per hour to conduct the mediation. In my experience, parties who are ordered to mediate a dispute rarely have the requisite personal investment to fully engage in the mediation process and maximize the opportunity to settle the case. They simply show up to comply with a court order but their hearts are not into it. Furthermore, unless the parties decide it is in their mutual best interest to have one side pay for the mediator, it is unwise to force one side to pay for the mediator because the side being forced to pay the full freight will resent it and the side going along for the free ride will not be sufficiently invested in the process to care if it succeeds or not.

Barrier No. 2-Bad Timing Can Destroy the Chances of a Successful Mediation

The best time to mediate a case is when both sides feel they have sufficient information to analyze the risks of trial and calculate the reasonable range of settlement. If parties attempt to mediate too early, the defense may feel it needs more information before a reasonable offer can be made; mediate too late and the plaintiff may have spent so much money on the litigation that its only viable option to recoup its fees and costs is to proceed with trial. If you wait to mediate the case until after the verdict, then the prevailing party has less risk to consider and will be less flexible in the negotiations.

In the Jammie Thomas case, the special master/mediator is being asked to mediate a dispute that has already resulted in two jury verdicts in favor of the record companies. The first trial resulted in a jury award of $222,000 in statutory damages which was thrown out by the trial judge. The second trial resulted in a jury award for $1,920,000 in statutory damages which the trial judge reduced to $54,000.

Thus Judge Lebedoff must try to facilitate a settlement by helping Ms. Thomas see the wisdom of  paying all or part of the $54,000 and convincing the record companies to waive their right to appeal the trial judge’s reduction of their seven-figure verdict. This will not be easy.

Barrier No. 3-Litigation Risk Analysis Should Include Collectability

Assuming liability and damages have been properly analyzed, the collectability of a judgment must be factored into a litigation risk analysis. In other words, does the defendant have sufficient assets to satisfy a judgment? If not, it may be very difficult to settle the dispute. With nothing to lose, a party may not feel it necessary to work out a compromise.That seems to be the case with Ms. Thomas.

Ms. Thomas is a young mother of four who works as a natural resource coordinator for the Millie Lacs Band of Ojibwa Indians. While I know nothing about her finances, it is interesting that the record companies are the ones who seem anxious to get the case settled, not Ms. Thomas. Perhaps they realize that they are spending a lot of money to enforce a judgment that may not be collectable.

Greg Sandoval of CNET News reported in January 2010 that Ms. Thomas rejected a settlement offer of $25,000. In response, according to Mr. Sandoval, the record companies released the following statement, "It is a shame that Ms. Thomas-Rasset continues to deny any responsibility for her actions rather than accept a reasonable settlement offer and put this case behind her[.]"

Barrier No. 4-A Zero-Sum Attitude in a Dispute Resolution Setting

Commercial mediation works very well when all the parties share the same objective: the resolution of a dispute. But when a party simply wants to prove it is right and that the other side is wrong, reason or logic rarely prevail in a mediation session. This zero-sum attitude does not take into account the emotional and financial toll of a trial, an appeal, and perhaps more trials and appeals.

This seems to be the situation that Judge Lebedoff faces as the mediator in the Jammie Thomas case. One of her defense lawyers told CNET that they have always sought a $0 award and that the defense lawyers planned to challenge even the reduced damage award. And though the Plaintiff record companies appear to want to settle the case, Mr. Sandoval reports that they would be just as happy to appeal the ruling of the district court judge that greatly reduced the statutory damage award.

Fortunately, all of these barriers can be overcome if the parties will set aside their trial advocacy skills and focus on their negotiation advocacy skills.This change in attitude coupled with the problem solving skills of Judge Lebedoff can overcome any barrier that may exist. Best wishes to Judge Lebedoff and the parties in the upcoming mediation.

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I like Abraham Lincoln’s adage about preparation: “If I had eight hours to chop down a tree, I'd spend six hours sharpening my ax.” This post is about sharpening our negotiating axes through a pattern of preparation that includes rigorous legal analysis. My friend and fellow mediator, Don Philbin of San Antonio, Texas wrote one of the finest articles I have read on the subject entitled, “Prepare for Mediation: A Multidisciplinary Approach to Negotiation Preparation." You can read his article by clicking here. (PDF) It will surely sharpen your negotiation skills and help you efficiently resolve many difficult disputes. Here is a summary of Don's article:

1. Rigorous Legal Analysis Forms the Basis Negotiation Preparation.

 [Preparation] is the be-all of good trial work. . . . Everything else, felicity of expression, improvisational brilliance, is a satellite around the sun. Thorough preparation is that sun.         -Louis Nizer

In reviewing the essentials of the rigorous legal analyses that lie at the base of any economic analysis, New York litigator Louis Solomon concludes that “the importance of intelligent, critical, analytical, yet realistic case evaluation cannot be overstated.” Solomon notes that case evaluations should begin early and be updated consistently, including at certain regular intervals.The goal is assessing risk, not achieving perfection. In a recent article, he condenses the evaluation process into five key steps:

identify potential issues;

evaluate issue relationships and overall case bearing;

evaluate the risk or probability of each outcome (fact and law intensive);

evaluate possible upside and downside exposure; and

identify the indirect and collateral issues from the client’s perspective.

2. Decision Tree Analysis Helps Develop and Test Scenarios

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

The process itself is as valuable as the result because it structures our analysis and focuses our attention on the component parts of the problem. In considering the range of outcomes and their probabilities, the parties not only come to a more realistic view of their options, they are able to communicate those scenarios in a common vernacular.

You can read my post on decision trees entiled, Dispute Resolution, Decision Trees, and Albert Einstein by clicking here.

3. Anchoring

As we move from dispute analysis to negotiation planning, we are often faced with the decision to either make the first offer or await one from the other side. That decision turns on a number of variables. One commentator argues that anchoring “describes the process by which the human mind does virtually all of its inferential work.” Anchors function much like our “gut” reactions to the value of an object or lawsuit – the “thin slice” our subconscious sends our conscious mind to evaluate. The more relevant information our analytical mind has, the less we are swayed by an unreasonable anchor. Mistaken or misguided anchors can increase the odds of impasse and have other unintended consequences.

4. Preparation Provides a Framework for Options

Litigants must make choices [about the claims] or turn them over to others for a binding decision. Unwilling to drain every swamp looking for evidence, they are often faced with making decisions with less than perfect information. The challenge then is to make the best decision with the information they do have or budget an appropriate amount based upon the developed choices. Economic analysis helps narrow the field from the legally possible to the economically viable

Outstanding trial lawyers spent considerable time and effort honing their skills to be effective courtroom advocates. But since most cases settle before a verdict is reached, it is equally important to develop effective negotiation advocacy skills. I hope you will spend some time with Don's article to help you sharpen your ax.

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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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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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Veteran Utah trial lawyer Harold G. Christensen recently published Samurai Lawyer, a pithy book that provides excellent counsel to trial lawyers based upon “The Samurai Way” of living (and dying, I might add). However, given the fact that more than ninety percent of civil cases settle before trial, it is negotiation skills, not trial skills, that are most often called upon by litigators, and yet relatively little attention is given to them 

 In Japan, samurai were warrior servants who embodied the law of bushido, a Japanese word formed from two other words: bukyo, meaning “The Warrior’s Creed,” and shido which means, “The Way of Gentlemen”. Litigators who adopt these principles to enhance their negotiating skills will resolve their clients’ disputes more effectively and will become more than courtroom warriors; they will be valued as wise and trusted counselors at law.

                                                           I. VISION

A successful negotiator has outstanding vision; he sees both the strengths and weaknesses of his case. He has the capacity to look beyond the narrow focus of advocacy and peer into the broad spectrum of possible outcomes through the eyes of the judge or the jury. He meticulously evaluates the law and facts advocated by his opponent, knowing, as did the samurai, that “You must understand the conditions on the opposite shore to comprehend your side of the river.” This perspective minimizes negotiating mistakes, which, studies have shown, occur more frequently with plaintiffs, but that when defendants do make them, they are really big mistakes resulting in awards much higher than plaintiff’s last pre-trial settlement offer.

                                                           II. PREPARATION

Samurai negotiators know “When you’re thirsty it’s too late to start thinking about digging a well,” so they prepare for the negotiations in every detail. Foundational questions include:

• What do I want to accomplish through the negotiation?
•  What outcomes would not be acceptable?
• Why would these outcomes not be acceptable?
• What are the terms that I must have vs. terms I would like to have?

In their seminal work, Getting to Yes,” Fisher and Ury suggested that negotiators prepare by determining their BATNA, their best alternative to a negotiated agreement. In other words, the client would rather  go to trial than accept an amount lower than the bottom number in her settlement range, if she is the plaintiff, or if she is the defendant, she would prefer going to trial rather than pay more than the highest number in her settlement range. In order to establish their BATNA, successful negotiators determine in advance the point at which the risks of trial outweigh the concessions their client must make to settle the case.

Trial risks can be effectively evaluated through decision tree analysis, in which the key events of the litigation through trial are projected, and an estimate of the probability for success or failure of these events is assigned. 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. If, on the other hand, the evaluation is limited to liability and damages, the basic question is what are the chances of prevailing on the issue of liability? If liability can be established, what is the range of damages likely to be awarded? The outcome will provide a range for settlement purposes.

                                                            III. Benevolence

“A wise man hears one and hears ten,” so goes the Japanese proverb. Litigators are not known for their benevolence in the courtroom; however, it is an important characteristic for negotiators, who must look beyond economics to see if there are additional motivating factors on the other side of the table. Successful negotiators consider the following:

• What are the conditions and circumstances of the other side?
• What is the financial condition of the other side?
• What business or personal pressures is the other side facing?
• What would my interests be if I were on the other side?

In addition, such things as the titles and responsibilities of the other side’s negotiating team, and their respective ages, length of employment, and relevant experience should be considered. But it does not stop there; successful negotiators also take into consideration the age, health, and financial condition of their clients, including the impact of the litigation on work and family, for successful negotiators understand that, win or lose, trials exact a price beyond money from all of its participants.

                                                             IV. WISDOM

Often, litigants negotiating a dispute will fall into the “You go first” trap. They want the other side to make the first offer and this often leads to frustration, mistrust, and, ultimately, an unsuccessful negotiation. Wise negotiators understand, “Knowledge without wisdom is a load of books on the back of an ass.” They recognize the psychological affects of anchoring and framing, concepts that inure to the benefit of the party who is willing to make the initial move during negotiations. Anchoring occurs when one of the parties makes the first reasonable settlement offer, one that suggests that the target figure is within reasonable range of the likely outcome if the case were to proceed to trial. Studies have shown that the party making the first reasonable offer will likely succeed in the negotiation as the other side must respond to the range that has been set.

Framing is a concept that gives the wise negotiator additional advantages by providing persuasive context to the negotiations. It can cause the other party to focus on features within a desired construct while disregarding other aspects arising from the disputed event. For example, in the realm of politics, we see national leaders framing the debate over health care. While one side has attempted to frame the debate by focusing on the importance of extending health care for everyone, the other side seems to have taken control of the debate by framing the issue as the nationalizing of health care for the benefit of a small group of uninsured people at great cost to the majority of Americans who are content with the status quo. As a result, the party in power has been put on the defensive and has been forced to react within the framework established by the “loyal opposition.” For the litigated case, framing is most effective during the initial phase of negotiations, either during pre-settlement correspondence, in mediation or settlement briefs or during a joint mediation session prior to caucusing. Thoughtfully done, framing can influence the subsequent behavior of both sides: for the “framer” it provides a pattern for organizing and shaping persuasive arguments, while placing on the other side the onus of responding within the desired framework.

                                                            V. HONESTY

Litigators may enlist many strategies during settlement negotiations: anchoring, framing, indifference, aggression, to name a few; but the samurai negotiator understands that honesty and integrity are perhaps the two most powerful tools available to him. He recognizes the truth of the Japanese proverb, which states, “Darkness reigns at the foot of the lighthouse.” Honesty can provide the light that engenders trust; trust will beget understanding; and understanding most often results in the resolution of a dispute, not because either side concedes it is wrong, but because of enlightened self-interest. Honesty also protects the negotiator who may be tempted to blur the line between “puffing” and deceit during negotiations. “ Indeed, cases from twenty-eight states hold that '[a]n attorney can be liable to a non client, even an adversary in litigation, for fraud or deceit.' " Shafer v. Berger Kahn, et.al. (2003) 107 Cal. App. 4^th 54. 

                                                            VI. LOYALTY

Hojo Shigetoki was a samurai warrior of the Kamakura period of the 13^th Century. His writings influenced generations of samurai who followed him. He said this about loyalty: “When one is serving officially or in the master's court, he should not think of a hundred or a thousand people, but should consider only the importance of the master.” Of course attorneys have the highest ethical obligations to their clients. Occasionally, however, clients may call into question the motivation of their attorneys during negotiations. In a recent case that cast into question the breadth of the mediation privilege in California, a client sued his lawyer for malpractice on the basis that the attorney forced him to settle the case. Cassell v. Superior Court, Cal App 4^th 2009/B215215. The samurai negotiator always places the interests of his client ahead of all other considerations.

                                                            VII. COURAGE

Some trial lawyers feel that settlement negotiations are for the faint of heart. Samurai negotiators understand this mentality. In fact they know there are certain cases that must go to trial, and they prepare for that possibility. But they also know that most of the time, lawsuits are resolved through negotiations, so they prepare themselves and their clients accordingly. This takes professional courage. Clients focused on justice do not always appreciate being told that a judge or jury may not agree with them. At the risk of offending or even losing their clients, samurai negotiators fully inform their clients of the realities of the case: that the costs of litigation may outweigh the upside potential of the damage award, that the judge may limit critical evidence, that the jury may not believe the expert witnesses, or any number of things that make ceding control of a case to a tribunal of strangers a very risky proposition. This leads samurai negotiators to engage in settlement negotiations prior to trial as forcefully and effectively as they would prosecute a trial, for they know, as the samurai knew, that “A good sword is the one left in its scabbard.”

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