New Settlement Concept: Lower Expectations Likely to Result in “Happier” Parties

Several years ago, the Journal of Empirical Legal Studies published a study showing that most plaintiffs who declined a financial settlement offer and proceeded to trial ended up receiving less money than the offered amount.¹ A New York Times article on the study interviewed attorneys, many of whom empirically agreed, and shared the following insights:²

• “Most clients think they are completely right.”
• Lawyers may not be explaining the odds to their clients – or clients are not listening to their lawyers.
• A good lawyer has to be able to tell clients that a judge or jury might see their position differently. “Part of it is judgment and part of it is diplomacy.”

Recognizing a greater financial exposure does not imply abandoning aggressive strategies and negotiation techniques, nor does it equate to making a worse deal or a deal at all costs. But setting more realistic expectations can improve the chance of resolving a dispute and being satisfied with the results.

Resist the Dark Side

Hotly disputed issues often have a long and emotion-filled history between the parties. While one of these contentious issues may be the critical issue in a case, other times this issue is just what makes people angriest and they can’t stop talking about it. In the context of preparing for settlement discussions, it is important to avoid giving in to your clients’ anger and getting distracted. Instead, focus on the money and the issues that have the greatest cost impact.

Getting Down to Dollars

At the start of a dispute, there may be limited information regarding the financial details of a claim, from either the claimant or defendant perspective. However, once the claim and supporting documentation are provided, an early assessment of damages offers insights and helps shape strategy. Without this evaluation, both the attorney and client are only gauging exposure on the strength of legal and factual issues, but not the corresponding costs.

For example, there may be a significant delay on a project, but most of the claimed damages are associated with a loss of productivity. Or, the focus may be on a disputed extra work claim, but much of the damages are due to delays in implementing this change.

Once a claim is submitted, both the claimant and defendant should evaluate it objectively. This means more than a cursory justification of the defendant’s flat-out rejection, or the claimant’s affirmation that all its costs are completely accurate. Claims may be overstated by owners or contractors, either intentionally or unintentionally. It is important that the claimant recognize any overstated items.

The Circle of Trust

While a trusting relationship between parties may have deteriorated long ago, to reach a settlement (especially one that everyone is pleased with), the parties need to be able to trust and verify that the claimed costs are accurate and reasonable.

While contractors may be sensitive about sharing financial information, including bid estimates and cost reports, owners are sensitive about overpaying and the feeling of getting “ripped off.” However, contractors should be willing to provide these documents, and in many public contracts they are required to do so. Some owners may be reluctant to pay claims in the first place, but if they are convinced of their own exposure, most are generally willing to pay for the reasonable impacts.

Sharing financial records is critical in allowing owners to have confidence in their decision making and being able to provide justification to senior management or public agencies. If the claimant has prepared a well-supported claim, transparency through the underlying financial records only reinforces the strength of its case (at least, prior to considering entitlement).

On the other hand, sharing financial documentation that shows a claim is significantly overstated still has settlement benefits to both sides. The defendant can use the information to make its own assessment of a reasonable amount, rather than dismissing the claim outright because of a lack of support. When presented with this information, it will often prod the claimant to reassess what its claim is really worth.

Hi, Low! Nice to Meet You

Ranges are a useful tool for making decisions. Rather than approaching settlement discussions with a single value in mind, a helpful approach is to provide high and low evaluations for the different components of the claim. This first step would include both analysis of damages and entitlement, but would hold off on legal considerations for the time being.

Investigation of facts, legal research, and expert consultation are all important aspects to determining the merits of a position. However, there can be a tendency to overvalue the strength of an argument after being immersed in this intensive information gathering process. This can lead to false confidence in the merits of a position, not just for attorneys, but for clients and decision makers, who may become more entrenched as time goes on.

Try establishing the low value based on what you would consider reasonable on a normal day. Then, while still considering the damages and entitlement analysis, establish the high number based on what you could envision as reasonable on your most generous day. This does not mean conceding everything, but viewing it from an objective, neutral perspective. As there are always gray areas, this is an opportunity to capture the uncertainty and see how things would look giving the other side the benefit of the doubt on items that are not cut and dry.

Quantifying Legal and Trial Risks

While analyzing damages and entitlement is a significant task, and analyses do differ, there is still a relative level of technical certainty. However, quantifying legal and trial risks has much more uncertainty.

The previously referenced New York Times article quoted a lawyer who said, “An attorney could advise a client that they have a strong defense to enforcement of a contract, but that is not the same thing as forecasting what the likely outcome at trial would be.” After completing the high-low claim evaluation, it is a good time to evaluate legal and trial considerations, such as:

• Notice provisions
• Executed releases
• No damages for delay clauses
• Preclusion of evidence
• Witness availability / credibility
• Interest
• Trial costs
• And others

Quantifying these risks is not an easy process. It demands removing biases and should involve discussions with various team members to capture a range of legal experience and perspectives. Different adjustment factors may be applied to the low and high evaluations overall, or to specific components. Additionally, it makes sense to address some of these risks individually (e.g., interest) and other factors collectively (notice provisions, releases, and no damage for delay clause).

Other risk management approaches, including decision trees and statistical computer modeling (e.g., Monte Carlo simulations), can be applied to forecast litigation outcomes and quantify, in dollars, the technical, legal, and trial risks.

Conclusion

So, no, you do not need to give away the store to reach a settlement, but it is important to honestly recognize and quantify the full exposure in a case with thorough technical and legal considerations. “Good or Bad” and “Strong or Weak” do not translate to valuable recommendations for a settlement amount. The evaluation exercise does not limit aggressive negotiations, or require a client to make full concessions. However, preparing realistic expectations can help you achieve a good settlement that you and your client are both comfortable and “happy” with. 

Endnotes

1. Kiser, Randall L., Martin A. Asher, and Blakeley B. McShane. Let’s Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations. Journal of Empirical Legal Studies Volume 5, Issue 3, 551–591, September 2008

2. Glater, Jonathan. “Study Finds Settling Is Better Than Going to Trial.” New York Times, http://www.nytimes.com/2008/08/08/business/08law.html, (August 7, 2008).