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

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

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

 A recent story reported in a business industry blog illustrates this point. By the way, I have deleted the references to the names of the individuals and parties involved in the story.

[Company X], a tugboat shipyard and barge repair facility, on Tuesday requested that ...[the] Circuit Judge...prevent an economics expert from testifying on behalf of a man suing the company.

[Plaintiff], 41, is suing [Company X] claiming his right arm was mangled when a large metal ball attached to a crane fell on it while he was working on a barge on the upper Mississippi River.

The company disputes [the expert's] testimony in a 13-page motion to disqualify.

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

"She calculated [Plaintiff's] lost earnings at $1.7 million."

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

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

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

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

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

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

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

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

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

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

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

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

LESSONS LEARNED

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

·         Plaintiff has damages that exceed $822,000.

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

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

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

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

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

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

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

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

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

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

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

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

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Trial advocacy is often dramatized in movies and television. We see persuasive lawyers depicted in emotional closing argument scenes and intense lawyers in those "gotcha" moments of searing cross-examination. But truly great trial lawyers have a skill not seen in the courtroom, let alone on the silver screen: the ability to predict the outcome of a trial before it starts.

Clients come to lawyers asking simple questions about complicated problems: What is the risk? What are my chances? Do I have a case? Clients want to know what will happen to them if they proceed through trial. And they should be worried, according to the late Oliver Wendell Holmes, Jr., because the power of the state to enforce court judgments and degrees is looming over every trial. Prediction, said he, is the object of the study of law:

When we study the law… we are studying what we shall want in order to appear before judges, or to advise people in such a way as to keep them out of court. The reason why it is a profession, why people will pay lawyers to argue for them or to advise them, is that in societies like ours the command of the public force is intrusted to the judges in certain cases, and the whole power of the state will be put forth, if necessary, to carry out their judgments and decrees. People want to know under what circumstances and how far they will run the risk of coming against what is so much stronger than themselves, and hence it becomes a business to find out when this danger is to be feared.The object of our study, then, is prediction, the prediction of the incidence of the public force through the instrumentality of the courts. (The Path of the Law, 10 Harvard Law Review 457 (1897)

A recent California Court of Appeals case exemplifies both the power of the state to enforce judgments and the important role of risk analysis in civil litigation, and it also stands for an important principle of law, which I will address first.

In Gunderson v. Wall, a jury awarded plaintiff $1.7 million in compensatory damages and $800,000 in punitive damages against Wall and Welded Fixtures, Inc. The defendants paid the judgment and filed an appeal. In a November 2009  unpublished opinion, the Court of Appeal affirmed the compensatory damages award, but ruled there was insufficient evidence to support the punitive damages. (Click here to read the unpublished opinion.) The plaintiff voluntarily repaid the $800,000, representing the punitive damage award. However, the defendants filed a motion in the trial court seeking restitution of the interest that had accrued on the punitive damage payment during the time of the appeal. The trial court denied the motion, finding the defendant acted inequitably in response to plaintiff's post-judgment efforts to collect the judgment. Defendant filed an appeal, and the court of appeal affirmed the decision not to reimburse the defendants the accrued interest. As a result of this case, parties need to be certain they have acted reasonably in the post-judgment process if they intend to ask the court for equitable considerations, such as repayment of interest on a reversed judgment.

The Gunderson opinion and its unpublished companion opinion provide some practical insight into Justice Holmes' statements about the power of the state over litigants and the importance of risk analysis, or prediction.  

PREDICTION AND THE POWER OF THE STATE

• Will you proceed through trial for the chance of being awarded punitive damages? In California, you will have to prove by clear and convincing evidence that someone committed malice, oppression, or fraud, and if you have a corporate defendant, that a corporate officer or managing agent was involved in the misconduct (Civil Code 3294). The jury will probably be instructed that plaintiff must prove the conduct was despicable which means conduct that was so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people.  In Gunderson, the jury awarded punitive damages, but the appellate court said there was insufficient evidence to support the award.
• Your risk analysis should consider the impact of potential motions in limine on the evidence you intend to introduce at trial. In the 2009 Gunderson opinion, for example, one of the defendants asserted his fifth amendment right against self incrimination. The trial court then issued an order that precluded the defendant from presenting any evidence or cross-examining any witnesses at trial. This order was reversed on appeal, giving the defendant the right to a new trial. This also brings up the need for predicting the likelihood and expense of an appeal and a second trial.
• Gunderson used the power of the state to enforce the original judgment which included writs of execution and the installation of a receiver at defendant Welded Fixtures. The court also issued a writ of body attachment requiring defendant Wall to personally appear to answer questions about the loss of computers and financial data at Welded Fixtures.

Prediction, then, is an important element in the practice of law. It is not enough, however, to merely predict the outcome of the trial.  Each aspect of the trial has parts and subparts that must be analyzed, including the possibility of an appeal and a new trial, the costs and time associated with the litigation, and the likelihood of collecting the judgment. Trial lawyers who analyze and explain these risks to their client are the best of the best. They are true counselors at law and trusted advisers to their clients.

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Lawyer jokes. Many lawyers are offended by them. While they are sometimes offensive, they are often humorous, and some even have an element of truth to them, like the one below:

A judge tells the taxi driver to take him to the halls of justice." Where are they?"asked the driver.

"You mean to say that you don't know where the courthouse is?" asked the incredulous judge.

"The courthouse? Of course I know where that is," replied the driver. "But I thought you said you wanted to go to the halls of justice."

Stepping up from the world of jokes and tall tales to dramatic moments at the movies, we hear Paul Newman's character saying in The Verdict , "The court exists to give 'em a chance at justice."

We can pass off such views as merely being an attempt at humor or entertainment. However, we should take pause when similar sounding statements are made by credentialed professionals like the great Oliver Wendell Holmes, Jr., an Associate Justice of the Supreme Court of the United States for 30 years, who is reported to have said to one young lawyer who entered his courtroom:

"This is a court of law young man, not a court of justice!"

While such statements seem shocking, how can justice always be perfectly administered by the imperfect men and women of our legal system, including lawyers, judges, and jurors? How can even well-meaning people always accurately apply the common law that has evolved over hundreds of years and the modern statutory law enacted by the competing interests of political bodies? Even though we have the best legal system in the world, is it reasonable to expect that justice can always be served given the indeterminate character of language and the changing mores of a diverse population? Justice Arthur Gilbert of the California Court of Appeals recently gave a speech based on the supposition that our expectations that the law will provide a fair measure of predictability and certainty is, in many cases, an illusion.

If these things are true, then, one of the most important attributes for lawyers is the ability to predict the outcomes of trials. In a famous law review article entitled The Path of the Law, Oliver Wendell Holmes, Jr., two years before his appointment to the U.S. Supreme Court, wrote about the awesome power of the state to enforce the judgments of courts and the important role lawyers have in trying to predict what will happen at trial:

When we study the law we are not studying a mystery but a well known profession. We are studying what we shall want in order to appear before judges, or to advise people in such a way as to keep them out of court. The reason this is a profession, why people will pay lawyers to argue for them or to advise them, is that in societies like ours the command of the public force is intrusted to judges in certain cases, and the whole power of the state will be put forth, if necessary, to carry out their judgments and decrees. People want to know under what circumstances and how far they will run the risk of coming against what is so much stronger then themselves, and hence it becomes a business to find out when this danger should be feared. The object of our study, then, is prediction, the prediction of the incidence of the public force through the instrumentality of the courts. (The Path of the Law, 10 Harvard Law Review 457 (1897))

Most civil cases settle before trial. In California state courts, about 90 percent of the civil cases are settled prior to trial, and in Federal Court, the rate is closer to 95 percent. However, those who do not settle their cases before trial do not necessarily do better in court. In fact, a recent study has shown a propensity for decision errors when offers of settlement are rejected. Plaintiffs committed decision errors, receiving an award at trial that is less than or equal to the last offer made by defendants, in 61.2 percent of the cases in the study. Defendants made decision errors, having to pay damage awards to plaintiffs that were greater than or equal to the last demand made by plaintiffs, in 24.3 percent percent of the cases in the study. However, it should be noted that the mean cost of the error for plaintiffs was $43,000 while the defendants, when they made a mistake, the mean cost was $1,140,000.

Trial lawyers must be more than predicting machines, they must be effective counselors who explain not only the chances of winning or losing, but also explain what can happen when "justice", at least their clients' view of justice, is not served in court. What are the practical consequences of losing, what can happen if you win but are not deemed the prevailing party by the court, are there litigation risks that are not obvious to a layman? What happens when offers of settlement are rejected and the result at trial is not as good as the rejected offer? All of these questions must be explored well in advance of trial. 

A recent unpublished case in California, illustrates the unpredictable path of the law: A trial over the purchase of real property resulted in a finding by the trial court that neither side performed their duties under the purchase agreement. Nevertheless, the defendant filed a post-trial motion for attorney fees and was awarded $538,884. On appeal the plaintiff asked, in essence, how could the defendant be the prevailing party when the trial court said he did not perform his duties, and when the he voluntarily dismissed his cross-complaint?  The Court of Appeals affirmed the decision of the trial court, stating that the defendant was the prevailing party under the laws and facts of the case.

Lawyer jokes can be funny, but there is nothing funny about the unanticipated consequences of a trial. The power of the courts to enforce their judgments and decrees is no laughing matter, either. That is why I am such a proponent of mediation. It is a dispute resolution process that allows the parties to decide, not judges or juries, what is in their best interests, according to the best predictions their lawyers can make. 

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