I was in a mediation the other day and realized that I haven’t really set out the basics of the considerations for settlements in litigation, so there’s no better time than the present.
There is a field of legal study known as the “economic analysis of the law”. As an oversimplification, its view is that the law can (and should) be viewed as being guided by economic forces and that the role of the law is to effect the various human interactions governed by the law in the most economical and efficient means possible. I am personally not a true believer in the economic analysis theory nor any other theory (such as the sociology of law or legal realism) that tries to encompass law and legal thinking in one “tidy” theory. My main problem with economic analysis of the law is that it becomes very difficult to fit subjective concepts such as “fairness” or “equity” into objective economic frameworks. However, economic analysis of law (like the other theories) has at least one major concept that does reflect aptly on the legal system. In the economic analysis theory, the key feature (again an oversimplification) is that what really counts is that it’s all about money. In that regard, I think that the theory does properly apply when one looks at the issue of settlement.
Over 95% of lawsuits in Canada settle. Why? Does the system not work? Or, to the contrary, is the system so good that it effects resolutions of disputes at a super-high rate? In my opinion, the answer to both is “no”. Why do settlements occur? Because it’s all about the money. Here’s how this is the case:
1. How much is the lawsuit REALLY about? I had a case in Ottawa a few years ago where the plaintiff was suing for just over $1 Million. My client, a large oil company, and I had analyzed the claim and thought that it was nowhere near that amount so we tried to settle for far less and when the plaintiff would not accept that amount, we proceeded towards trial. Before the trial there is a settlement conference (formerly known as a pre-trial conference). At that time the judge who presided over the pre-trial conference very matter-of-factly looked at the plaintiff and the plaintiff’s lawyer and said “if this went to trial and if I was your judge, you would receive at best about $40,000 – and that’s if you win, which isn’t a guarantee.” The second the plaintiff heard that and realized that this wasn’t going to be the huge payday, suddenly the refusal to settle melted away and we reached a settlement about an hour later.
2. How much is it going to cost to go forward to trial? Let’s use the Ottawa example again. If that trial had proceeded, it would have been at least a one week trial with numerous medical experts, eyewitnesses, etc. Let’s suppose that it would have cost the plaintiff $50,000 for the trial and the most the plaintiff would have received is $40,000 (there were other cost factors such as offers to settle that would have also come into play but we’ll leave those aside for the sake of simplification of the example). That meant that even if the plaintiff won the trial, the plaintiff would have been $10,000 in the hole and the plaintiff’s lawyers would have received $50,000. In that situation, what is the point of going forward to trial? Not much from the plaintiff’s perspective. From the defendant’s perspective, if the option is paying $50,000 for my law firm to handle the one to two-week trial or paying up to $1 Million, suddenly $50,000 seems like the better option.
3. What are the realistic chances of success? Again, keeping with the Ottawa example, the judge indicated that he would award $40,000 at best – but only if the plaintiff succeeded. So, now we have an added element of risk because there was a real possibility for the plaintiff that the plaintiff might lose the trial. And this applies for EVERY litigant that goes to trial because, if the case was such a slam-dunk that one side was guaranteed to win, then that party would have brought a motion to dismiss the case or for summary judgment and there would have been no need for a trial.
Moreover, there is an element of risk in terms of not only the facts of the case, but also in their presentation. Again, another example for you. I was involved in extremely complex real estate litigation years ago on behalf of two banks. One of the key witnesses was a chap who was nice enough but when we went to prepare him for examinations for discovery it was blatantly obvious that he was confusing the timing of events and who said what / when / how and even the most basic of facts. We were super-concerned that he was going to get killed in his examination for discovery and make a bunch of admissions that he shouldn’t make, but we were stuck. As it turned out, he went into the examination for discovery and was solid as a rock. When it came for trial, we were again concerned about how he would do as a witness at trial so we met with him to prepare for his testimony and the cross-examination he would likely face. To our pleasure and surprise, he was solid as a rock in practice. When he got on the witness stand, however, he forgot everything, reverted to what he was like before his examination for discovery and did so poorly that he realized this and he ran out of the courtroom after he was done and we never heard from him again. (Fortunately, the trial judge placed no reliance on his evidence for her decision and our clients still won the day despite this debacle.) The point, though, is that the facts were in our favour but the one witness could have possibly cost our clients the case. So there is always an element of risk in any trial (and hence why litigation is called an “art” and not a “science”).
4. How far apart are the parties on settlement terms? This is a variation of item 1. Both sides have to assess their likely “best case” and “worst case” scenarios. When that is done, each side determines a “line in the sand” where the defendant determines how much it is willing to pay (and the plaintiff determines how much it is willing to accept) and any amount higher than that (or lower than that for the plaintiff) makes it worthwhile to proceed to trial. If it turns out that the parties are within, say, a few thousand dollars of each other, then it will be much easier to bridge that gap than if, say, the difference between their two positions is hundreds of thousands of dollars apart.
5. Are there any “non-monetary” factors at stake? These can be quite varied. For example, is there some “personal” factor that has taken priority since the lawsuit started? For example, one of the parties is now ill and does not wish to proceed with the lawsuit and just “wants to get out”. It doesn’t even have to be an illness. I always say to my clients that lawsuits cost in terms of time, money and energy. Sometimes a party to a lawsuit may not be as “mad as hell” as he/she was when the lawsuit first started and isn’t willing to spend more time pursuing or defending the lawsuit. Another example of a non-monetary factor shows up in employment litigation where the client is more willing to settle if he/she gets a good letter of reference which could outweigh the amount of severance pay that the client is seeking in the lawsuit. Sometimes there could be reputational issues at stake.
The difficulty with non-monetary factors is that they will be known for your side but rarely determined for the other side. Approximately guesses can be made to determine the costs, chances of success, etc. for the other side as these are relatively objective bits of information. However, for example, unless the other side happens to let it be known that he/she isn’t interested in the lawsuit any further (which would be a very rare occurrence), that will be a non-monetary factor that will never be known – but could work significantly in the background without you even knowing it.
For most litigation involving your small businesses, though, the key factor will usually be the economics of either pursuing or settling the lawsuit. And you should visit and re-visit the economics of the lawsuit at several times throughout the litigation to ensure that you are not wasting your time, money or energy.
Something to think about.