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June 1, 2015

As a case gets closer to a scheduled trial date, the parties frequently engage in eleventh hour settlement discussions. The uncertainty of a trial result often influences all parties to settle a pending dispute with a certain result via settlement. The party who had more success during the discovery phase of the litigation may have more leverage in the settlement negotiations. However, more often than not, the terms of a settlement agreement leave both sides with a feeling of discontent. The plaintiff often feels as though he or she should have received more and the defendant often feels as though he or she should have paid less. The settlement negotiation process requires the parties to exercise reason over emotion. When a plaintiff turns down a substantial cash offer during settlement negotiations, he or she has to be prepared for a result at trial that could be worse. I recently experienced such an occasion while defending a general construction client.

This case involved the build out of a commercial space. The owner had a cost-plus agreement with the general contractor, which required our client to pass through his actual costs for materials and labor to receive an agreed upon percentage mark-up for overhead and profit. At the conclusion of the project, the owner accused our client of intentionally inflating the invoices from his laborers and material suppliers to receive a much larger profit than our client was entitled to. Our client disputed these allegations, but had discarded much of the documentation regarding the project. Accordingly, the owner filed a lawsuit against the general contractor in his individual and corporate capacities alleging claims for both breach of contract and fraud.

After five painstaking years of discovery and pretrial motion practice, the case was finally set for trial. After the trial date was set, the parties focused on settlement negotiations. At first, it appeared as though the parties were too far apart. Initially, the plaintiff demanded in excess of $1,000,000, which was quickly reduced to a mid-six figure demand. The defendant’s offer slowly crept up from $0 to $50,000 to $100,000. At the final pretrial conference, the judge persuaded both parties to move even further. The plaintiff’s final settlement demand was $160,000. At that point, the defendant would not agree to come up with more than $120,000 paid over several years. The general construction company had stopped doing business and our client was going to have to make these payments personally. Therefore, the defendant was hesitant to commit to more than he thought he could pay.

In the week before trial, the parties agreed that the financial amount for the settlement would be $160,000 with monthly payment over several years. However, the plaintiff then demanded that the defendant must stipulate to specific facts concerning fraudulent conduct. The defendant absolutely refused to stipulate to fraudulent conduct, because he had not inflated the invoices he passed through to the owner. Rather, he was agreeing to settle the dispute to avoid the uncertain result of the trial and the expense of attorney’s fees associated with the trial. On the first day of trial, the judge cautioned the plaintiff of two things: 1.) Be careful when pointing fingers, because three fingers may be pointed back at you; and 2.) Reconsider the proposed settlement offer, because not all breaches of contract amount to fraud. However, based on the defendant’s refusal to stipulate to fraudulent conduct, the plaintiff rejected the settlement offer and the case proceeded to trial with the plaintiff claiming that it was entitled to approximately $1,300,000 in damages.

At the beginning of trial, the plaintiff was very confident. The plaintiff believed that most of the evidence produced in discovery supported his position. However, the evidence did not come in at trial in plaintiff’s favor. Rather, the plaintiff was impeached multiple times during cross-examination and one of his witnesses was nearly found in contempt for refusing to directly answer questions that were asked on cross-examination.

After calling six fact witnesses and an expert witness over nearly two full weeks of trial, the plaintiff rested its case. At the conclusion of the plaintiff’s case, the defendant moved for a directed finding. When moving for a directed finding in a bench (non-jury) trial, the defendant asks the court to weigh the evidence and rule in defendant’s favor on the plaintiff’s claims without requiring the defendants to put on a defense at trial. After a lengthy oral argument, the judge ruled in favor of the defendants on the fraud and breach of contract claims against the general contractor in his individual capacity and on the fraud claim against the general contractor in its corporate capacity. This ruling left the plaintiff in a very poor position. The only claim that survived the motion for a directed finding was the breach of contract claim against the corporate defendant, and the corporate defendant had no assets because it had stopped doing business several years prior.

Since all of the fraud claims were denied and there was no longer the potential for personal liability, the defendants did not put on a defense case. After closing arguments, the judge entered a small judgment against the corporate defendant, which was less than 10% of the damages initially sought by the plaintiff. Regardless, the judgment resulted in little comfort to the plaintiff, because the corporate defendant had no assets to satisfy the judgment. Accordingly, instead of accepting the $160,000 settlement offer, the plaintiff incurred the substantial expense of having two attorneys prepare for and conduct trial for nearly two weeks and the additional expense of its expert witness preparing and testifying at trial.

While our client received a very successful result at trial, this story should serve as a cautionary tale to those who are currently involved in litigation and those who may experience litigation in the future. Always give careful consideration to settlement offers in the days before trial and even settlement offers that may arise during or after trial. There is an inherent value to a certain result, plus you save the cost of trial. Always be aware that the result at trial could be less than the amount offered in settlement; it could even result in no recovery at all. Even the strongest cases have potential flaws, and it is impossible to predict with 100% accuracy how a judge or jury will interpret the evidence presented at trial. It has been said that there are only two certainties in life: death and taxes. Well there is only one certainty in trial: additional litigation expense. Accordingly, the prudent litigant should always assign value to the certainty of settlement, because the uncertainty of trial may prove to be the greatest expense of all.