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

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

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

WHAT HAPPENED

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

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

Dismissal

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

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

Attorney Fees

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

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

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

Settlement Agreements

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

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

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

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

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

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

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

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

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

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

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

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

Mediator: Then what?

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

Mediator: Then what?

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

Mediator: And then what will you do?

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

Mediator: What next?

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

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

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

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

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

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

• What are your chances of obtaining that outcome?

• What will it cost you to get that outcome?

• What are your chances of collecting the judgment?

Finally, another story about Alexander the Great and Diogenes: 

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

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Settlement agreements are contracts.They are subject to the rules governing the formation and enforcement of contracts. Each settlement agreement should be drafted to respond to the particular law, facts, and risks of the case. This is not be a simple "cut and paste" job.

If a settlement agreement is breached, a lawsuit can be filed to enforce the terms of the settlement. While there are reasons not to have an attorney fee provision in some commercial contracts, settlement agreements should have attorney fee provisions, in my view. An attorney fee provision is a deterrent to any party who may want to rescind a settlement agreement, as the losing party would have to pay the other side's attorney fees.This increases the risk of trying to undo a settlement and helps the parties maintain what they bargained for: the resolution of a dispute.

A recent California Court of Appeals case addresses attorney fees and choice of law provisions in settlement agreements. (Click here to read the case.) In the Aronson v. Advanced Cell Technology, the settlement agreement memorialized  the settlement of a lawsuit that had been filed in Massachusetts and included a provision that stated it would be enforced according to Massachusetts law.  The attorney fee provision provided that the Plaintiffs in the Massachusetts action would be entitled to attorney fees in connection with the enforcement of the settlement agreement. The agreement did not provide for any reciprocal recovery for the defendant in the event of a dispute.

The Massachusetts law conflicts with California Civil Code section 1717 which provides attorney fees to the prevailing party, plaintiff or defendant, even though the contract may specify that only one of them is entitled to attorney fees.The Massachusetts law, on the other  hand, does not provide reciprocity to the left out party so that only the named party would be entitled to attorney fees in the event an enforcement action were taken.

In Aronson, the plaintiffs in the Massachusetts action filed suit in California to enforce the settlement agreement. The lawsuit was later dismissed without prejudice, and the defendant moved for an award of attorney fees in the sum of $645,000. The defendant claimed it was the prevailing party because the case was dismissed. The trial court denied the motion on the basis of Civil Code section 1717(b)(2) which says there is no prevailing party when there is a voluntary dismissal. The defendant argued that this exception under California law does not apply because the settlement agreement was to be governed by Massachusetts law. However, under Massachusetts law, the defendant was not entitled to attorney fees because the settlement agreement only specified the plaintiff as the party entitled to attorney fees. To that point, defendant argued that Civil Code section 1717 actually applied to that aspect of the case so that the attorney fee provision was reciprocal. In essence, the defendant wanted California law to apply to one aspect of the settlement agreement and Massachusetts law to apply to another aspect of the settlement agreement. The Court of Appeal affirmed the trial court's order denying the motion for attorney fees and ordered the defendant/appellant to pay the plaintiffs/respondents' cost of appeal.

Lessons Learned

• While the opinion is not earth shaking, it does illustrate, once again, that the drafting of settlement agreements should not be a simple "cut and paste" job.
• Caution must be used when agreeing to a choice of law provision. Each state has its own laws which could result in unanticipated consequences.
• Before agreeing to a choice of law provision outside of your jurisdiction you should attempt to learn how the other state's laws could affect critical terms in your settlement agreement.

Other Points of Interest

The scope of the release is also an important consideration. From the defense perspective, the release should be broad as possible to include any and all causes of actions and claims. The plaintiff, of course, will want the release to be drafted as narrowly as possible so that only those rights that are at issue in the litigation are released. In construction defect cases, the owner will only want to release patent or obvious defects and reserve rights with respect to unknown claims or conditions. Similarly, the owner will not want the release to include any warranties that would otherwise be available under the terms of the construction contract or purchase agreement..  

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California's public policy encourages the settlement of civil disputes. One way of doing so is Code of Civil Procedure section 998, a statue that shifts the risk of litigation to the party who rejects a pre-trial settlement offer but fails to obtain an award greater then the rejected offer. The statute gives the trial court the authority to award costs, including attorney fees and expert witness fees, under certain circumstances.

The statute provides an incentive to settle by increasing the potential exposure to paying the other side's litigation costs to the party contemplating a settlement offer. If the plaintiff's 998 offer is rejected, the defendant faces additional costs if the plaintiff is awarded a higher amount than the rejected offer; if the defendant's offer is rejected, the plaintiff could win the case, but if the damages award is less than the rejected offer, the plaintiff could be ordered to pay the defendant's litigation costs. Therefore, it is possible to win at trial but still lose the battle of who pays the freight of taking the case all the way through trial.

The California Court of Appeals published a case two days ago that adds clarity to the issue of costs and attorney fees under a section 998 offer. (Click here to read Martinez v. Metropolitan Transit Authority.) The Metropolitan Transit Authority made a settlement offer under section 998 which stated: "[MTA] hereby offers to Compromise the above-captioned matter for the total sum of $2501.00, with each party bearing their own costs."  Plaintiff accepted the offer but subsequently filed a motion for attorney fees pursuant to certain applicable statutes and argued that the section 998 offer did not preclude her from requesting attorney fees because the offer only referred to "costs" and made no mention of attorney fees. MTA argued that that under Code of Civil Procedure 1033.5 (a)(10)(B), the term "costs" includes statutory attorney fees.

The trial court denied plaintiff's motion, stating "statutory attorney's fees are an item of cost pursuant to CCP section 1033.5 (a)(10)(b)...and are therefore included in the defendant's section 998 offer, which states 'each side to bear their own costs.'" The Court of Appeal affirmed.

This circumstance calls for another "bright line rule." Unless the offer expressly states otherwise, an offer of monetary compromise under section 998 that excludes "costs" also excludes attorney fees. 

BEST PRACTICES

This case focuses on a statutory attorney fee request. Would the result have been any different if the attorney fees request was made pursuant to a contract provision? The Court did not address this squarely but did make the following observation: 

Allowable costs under [CCP]1032 are specified in section 1033.5. Section 1033.5, subdivision(a)(10) provides that attorney fees are allowable costs under 1032 when authorized by contract, statute, or law. Because attorney fees are costs under section 1033.5 it follows that when a section 998 offer provides that each party will bear its own costs the word "costs" refers to all costs described in section 1033.5, including attorney fees.

This case is a reminder that we should carefully draft our section 998 offers so that they clearly define the intended terms of the offer. It took an opinion from a court of appeal before the plaintiff in a $2500 case gave up her claim for attorney fees (assuming she does not take it to the Supreme Court of California).

While it now appear evident that costs include attorney fees, it would be a good practice to include in 998 offers a statement that each side will bear its own costs and attorney fees. That way there is no ambiguity about the intent behind the 998 offer as it relates to costs.

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If you win your lawsuit, you can make the loser pay your attorney's fees, right?  In California (and in most states) the answer to that questions depends on whether there is a statute or a contract provision that provides something like, "The prevailing party is entitled to an award of attorney's fees." "Good," you think to yourself, "My contract has such a provision, so if I win my lawsuit I can make the other side pay my attorney's fees." Not so fast, pal. It is usually not that simple. The question of who pays can be "a riddle wrapped in a mystery inside an enigma," to borrow a phrase from Winston Churchill. 

When it comes to "who pays," the California Appellate Courts often use the phrase "good news bad news" when addressing prevailing party law under Civil Code section 1717. As in, the good news is you won the case, the bad news is the loser does not have to pay your attorney's fees. Section 1717(a) provides:

In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing  on the contract...shall be entitled to reasonable attorney's fees in addition to other costs. 

But what does it mean to be the "prevailing party"? In cases where there is a "simple unqualified win, " as noted by the California Supreme Court in the Hsu case (1995), getting an award of attorney's fees is not that difficult. But what if there are mixed results? You win on some but not all of your causes of action. You defeat most but not all of the plaintiff's claims. Who is the prevailing party then? Unless you are absolutely certain of a simple unqualified win, you must be aware of the potential consequences of a trial with mixed results. 

This week the Court of Appeals published another "good news bad news" case (click here to read the case), pointing out that under Section 1717(b)  the rules for awarding fees are not rigid, there is no precise formula, and trial courts have discretion  to weigh the claims and defenses against the actual outcome to see if either party really prevailed over the other at trial. The case,  De La Cuesta v. Benham, involved a landlord/tenant dispute over unpaid rent. The tenant defended on the grounds the property was uninhabitable due to water leaks and sewer problems. The result was the landlord was awarded only 70% of his claimed damages and therefore, the trial court ruled that he was not the prevailing party and was not entitled to an award of attorney's fees. The Court of Appeals reversed the decision and ordered the case be remanded to the trial court for a hearing on the reasonableness of the attorney's fee request. 

The De La Cuesta case is not ground breaking law but it should have an eye-opening effect on lawyers and their clients. The court's factual summaries of several published  Section 1717 cases  help to unwrap the riddle of the mysterious, enigmatic prevailing party law. Trial court's do have discretion; attorney fees are not automatic, even if your victory means you did somewhat better than the other side. The  Nasser case, for example, was a "mixed result" case where a tenant got what he wanted-staying in the premises-but he also got hit with a rent increase. The trial court ruled there was no prevailing party in the case, and the Court of Appeals affirmed. In the Kytasty case, a given "right" was validated, but its scope was curtailed. The trial court's ruling that there was no prevailing party was affirmed by the Court of Appeals. In the Hilltop case, a movie promoter was required to pay monetary damages but won on the alter ego theory. Same result as the others: the "result was a draw," neither side prevailed, no attorney's fees. Several other cases are mentioned in the opinion to illustrate the nuances of the so-called good news bad news cases.

LESSONS and APPLICATIONS

• The likelihood of absorbing your own attorney's fees or having to pay the other side's attorney's fees is a factor  that must be considered in your litigation risk analysis, and should be reflected in your expectations about the  reasonable settlement value of the case.
• It is better to consider the potential ramifications of a good news bad news case than react to the realities of one. 
• Clients should be informed of all the risks of trial, including the possibility that winning the case does not necessarily mean prevailing for purposes of attorney's fees awards. 

POST SCRIPT: In a recent mediation of mine, an attorney for one of the parties wanted to terminate our discussions about the attorney's fees and costs, and advised his client that it was not necessary to make any concessions with respect to the costs of litigation. He believed his client would be deemed the prevailing party even if the damage award was only $1. This post is dedicated to all lawyers who may have this belief. May your Pyrrhic victories be few and far between.

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

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

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

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

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

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

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

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

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

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

And the scorched earth litigation continued on appeal:

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

SCOREBOARD

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

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

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

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

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

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

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

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The Critical Path recently reported on a study showing lawyer overconfidence as a barrier to the efficient resolution of disputes. This post will focus on a different study and a recent case that illustrate another barrier to conflict resolution: parties who view disputes as warfare and litigation as a battlefield.

Researchers have found that men in war simulations often overestimated their chances of winning, making them more likely to attack and behave aggressively, resulting in unnecessary losses that could have been prevented with a more balanced approach. In a recent "unpublished " opinion of the California Court of Appeal, a case in which the defendants engaged in "scorched earth tactics," according to the court,  overly aggressive conduct resulted in unnecessary losses for the defense. Click here to read the case. (Note: California Rules of Court prohibit courts and parties from citing or relying on opinions not certified for publication, except as specified by rule 8.1115.) 

The plaintiff in the case was a flight attendant on a corporate jet. She was fired and sued her former employer, two corporate officers, and the pilot. At one point in the litigation, the case could have settled for between $200,000 and $400,000. One of the defendants told his lawyers that he was not interested in settling the case, but rather in destroying the former employee and her lawyer at whatever the cost. As a result, his lawyers engaged in an aggressive litigation strategy described by the court as follows:

The ensuing pace and vitriol of this litigation is suggested by the circumstance that no less than five summary judgment motions were filed, two of them by Medvig. Unsurprisingly, the discovery process was reduced to warfare that was as intense as it was costly.

Costly indeed. With bills of $150,000 to $200,000 per month, the inevitable happened. First, the case did settle, with the defendants paying the former employee not $200,000 or even $400,000, but rather $675,000. And a second dispute erupted between defendants and their lawyers over legal fees, so the law firm withdrew from the case and sued for more than $1,000,000, having only been paid $200,000 for the work of its lawyers. An arbitrator awarded the law firm $938,457 for the unpaid fees, $327,000 for attorney fees incurred to collect the fees, costs of $152,105, plus 10% interest.

The law firm then filed a petition with the trial court to confirm the arbitration award against the defendants. Ultimately, the trial court entered judgment for $1,551,215. The defendants appealed, lost, and the court of appeal awarded costs of appeal to the law firm for an unspecified amount. 

Moral of the Story

To paraphrase a 1970's catchphrase, "Stuff happens." So do disputes. They happen in life, and in business. How we respond to them is our choice. Is there an alternative to the "destroy the opposition at whatever cost" approach to litigation? Of course there is. One of my favorite Japanese proverbs describes an approach that is both economical and wise: "Even a piece of paper has two sides". 

You can spend a lot of money hammering the opposition with discovery to beat them into submission or use it as a precise instrument to figure out what's on the other side of your own story. This will enable you to evaluate the case, analyze the risk of going to trial, and engage in meaningful settlement negotiations. In addition to a factual inquiry, you may want to consider the emotional elements that may be driving the litigation. For example:

• 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?

When we try to see things from the other side's perspective, we can more clearly focus on the strengths and weaknesses of our side of the story. Anger is replaced by wisdom. Fewer mistakes are made. Economical resolutions are reached. On the other hand, when the focus is on destroying an opponent, our judgment becomes slanted; we look at the dispute solely through the narrow lens of our own experiences filtered by our own prejudices.

In the case cited above, decisions based on anger and retribution thwarted a $400,000 settlement and left the defendants with a bitter 1.8 million dollar pill to swallow. I hope their experience is good medicine for us all.

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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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