By James Castles
Why do cases settle? It’s usually because the parties to a dispute recognize that there is an uncertainty as to what the ultimate outcome might be in the jury’s verdict or an arbitration award and they also recognize that they will incur substantial costs in taking a case through trial or arbitration. These costs do not only include attorney’s fees and costs. There are also other financial (distraction from productive work), emotional and reputational costs as well.
Until the advent of mediation, cases settled either by direct negotiations between the parties or their lawyers. Litigated cases also often settled at the Court Settlement Conference that was usually held a few weeks before trial.
Mediation is now the main means by which settlements are achieved. Mediation allows for the use of a third person (the mediator) to assist the parties in understanding their respective risks. This can be done through a “facilitative” approach where the mediator does not offer an opinion as to the strengths or weaknesses of the parties’ positions. In a “facilitative” mediation, the mediator provides information; often play the devil’s advocate to help the parties better appreciate their risks and conducts shuttle diplomacy that hopefully gets the parties sufficiently educated so that the case can be settled. Mediation can also be done through an “evaluative” approach where the mediator is far more opinionated about the strengths and weaknesses of the parties’ positions and voices these opinions or “evaluations” to the parties. This occurs over the course of the mediation. In such a mediation, the mediator basically previews for the parties how he/she thinks the matter will be decided at a trial or arbitration.
Cases typically do not get mediated until the parties, and their counsel, feel that they know enough about the other side’s positions to be able to reasonably evaluate those positions. This particularly true when the dispute involves complicated issues or multiple parties and when there are insurers involved since insurers are unlikely to contribute monies towards a settlement without having a good evaluation of their insured’s risk and potential exposure.
There are many cases, however, that are not that complicated and do not involve multiple issues or multiple parties. In such cases, it is in the parties’ mutual interests to resolve the case as soon as possible and certainly before the fees/costs being incurred in the matter become a significant factor to the parties in terms of their settlement positions. If the claimant is looking to net $X for a settlement and the respondent is willing to contribute no more than a net $Y for a settlement, it is best when fees/costs do not become a significant factor in getting to these net figures.
For this reason, the less complicated cases should be mediated relatively soon after the dispute arises. If mediation gets scheduled, the parties can exchange information needed to allow for a reasonable evaluation of each other’s positions. This is done before discovery and, therefore, is predicated primarily, if not exclusively, on that party’s knowledge and understanding about the dispute. Because the information exchanged is being exchanged pursuant to the scheduled mediation, it can be cloaked with the mediation privilege and the parties therefore need not be concerned about impeachment, etc. should the case fail to settle.
The purpose of this short paper is to suggest an approach that this writer has seen rarely employed. The idea is to schedule a mediation but to try to settle the matter far enough in advance of the mediation so as to avoid the fees/costs associated with the mediation which can be substantial. Considering the mediator’s fee, the lawyer’s time in preparing and attending the mediation, the client’s participation, etc., a mediation can easily costs $20,000, or more, even in a relatively uncomplicated case. Here’s the suggested approach:
First, get the mediation scheduled in a way that allows time for settlement discussions prior to mediation and allows the mediation to be cancelled without incurring mediation-related fees/costs if the case settles through these discussions. You should schedule the mediation nonetheless, however, so that you have a date fixed in the event the case does not settle thorough these earlier discussions and also because this will cloak any information shared with the other side with the mediation-related privileges.
Second, share information openly with the other side so that they can understand your positions and allow them to evaluate what they think the case is reasonably worth for settlement purposes.
Third, and this is the step that this writer strongly recommends but has rarely seen implemented, is to contact a neutral third party and agree on a date/time when each party will present their “best” settlement figure to this third party neutral. This means that the claimant presents its lowest figure as its demand and the respondent presents its highest figure as its offer. The figures presented to the neutral are confidential and not to be disclosed by the neutral to anyone, including the mediator and the parties to the dispute. If the settlement figures cross (i.e., the offer exceeds the demand), the neutral splits the difference and informs the parties that the case has settled at that adjusted amount.
For example, if the demand is $250,000 and the offer is $300,000, the case settles at $275,000. Both sides should be happy since the claimant will receive $25,000 more than its “bottom” line demand and the respondent will pay $25,000 less than what it was willing to pay in its highest offer. If the amount of the offer is less than the demand, the neutral simply informs the parties that there is no settlement unless the offer is within 10% of the demand. If this occurs, the neutral informs the parties that they are within 10% of each other to give them an opportunity to modify their positions. The parties can decide how they wish for this to be handled. The process can be repeated as it started with each side giving the neutral their “best” figures; the parties can agree to split the difference and settle on this basis; etc. There is also no magic to the 10%. The parties can always agree to use a different percentage in this process. Finally, if the difference between the offer and the demand is greater than the percentage agreed to be used by the parties, the neutral simply informs the parties that there is no settlement and the matter heads to the scheduled mediation. This process has no downside and should be done far enough in advance of the mediation so that cancellation fees are avoided. Anyone can serve as a neutral. A lawyer who is known to the lawyers for the parties is a typical candidate. The neutral’s role involves nothing more than taking a couple of phone call or emails from the lawyers for the parties advising the neutral of that party’s “best” settlement figure. The neutral then advises the parties if there is a settlement or whether they are within the agreed to percentage. If the neutral knows the parties, he may provide this service for free. Whatever it costs, this process is dramatically less expensive than a full mediation. Since it has no downside, it should be used in non-complicated cases.
Fourth, if the negotiation process outlined above fails to resolve the case, you still have the mediation scheduled. The parties will go into mediation knowing only one thing and that is that the offer and demand were not within the percentage agreed to in the afore described process. This obviously means that the parties have a sizeable difference in how they have evaluated their respective risks. Mediation, particularly an “evaluative” mediation, hopefully will persuade one or both parties that they should reconsider how they have evaluated the dispute. This will hopefully allow for movement in the settlement positions and ultimately result in a resolution at the mediation or shortly thereafter.
About the Author:
James (Jim) Castles is a partner at Furukawa Castles LLP where he specializes in construction matters and has over 35 years of trial, arbitration and mediation experience in both the state and federal courts. He has extensive experience in drafting contracts and advising clients with respect to achieving contract goals by properly managing risk through clear and unambiguous contract terms. Mr. Castles also advises clients during the performance of construction projects with respect to risk management, project documentation and strategic positioning. Jim can be reached at firstname.lastname@example.org.