Why litigate when negotiation results in better outcomes

I recently came across an article in the Journal of Empirical Legal Studies (September 2008), “Let’s Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations”, which ought to give litigants much pause for thought before proceeding to trial. The study, with more variables, was an update and evaluation of the continued validity of 3 studies conducted in the previous decade. It was conducted over a 38 month period, 2002-2005, to determine the incidence and magnitude of error by lawyers/clients proceeding to trial rather than accepting the last offer made in settlement negotiations. A total of 2054 cases were examined in California with approximately 20% of its litigation bar representing parties in the cases.

A “decision error” occurred when either the plaintiff or defendant decided to reject an adversary’s settlement offer, proceeded to trial and found the trial result (by judge, jury or arbitrator) was financially the same or worse than the rejected settlement offer. Decision error is strictly a mathematical calculation and thus the results did not signify or connote lawyer negligence. The cases selected were those in which a monetary amount could be ascertained; these included cases in tort, contracts, and real estate and excluded those in probate and family law. The study concluded, in part, the incidence of decision making error is more significantly affected by “context” variables (case type and forum) than by “actor” variables (e.g. attorney gender and experience).

The study documents many case types including contract, fraud, personal injury, employment, premises liability and products liability and calculates the results where there is plaintiff error, defendant error or no error and provides the decision error by plaintiffs or defendants in each type. In the aggregate the study found plaintiff’s erroneously concluded trial was a superior option in 61.2% of primary cases while defendants made an erroneous assessment in 24.3% of those cases. However the magnitude of defendant errors vastly exceeded that of the plaintiff’s errors – by about 10 fold.

The study also tracked decision errors in cases where the attorneys were also mediators; in those cases decision errors were significantly less. The authors concluded: “The attorney-mediator data, moreover, suggest that attorneys trained and experienced in dispute resolution, and perhaps more cognizant of framing biases, may have a salutary effect on attorney/litigant decision making”. Also, in those cases where a formal offer was made pursuant to California Rules of Court, there were lower rates of decision error. The authors of the study concluded the party making the offer in that instance “undergoes a beneficial evaluative process that results in improved decision making.”

So, what can we conclude from all this in our Court system? I don’t know of a comparable study in Canada and I suspect the results would be similar. I recently was a panelist for a Canadian Bar Association webinar and we polled the audience (mainly family law, interestingly) by asking them which was the better outcome: cases they took to trial or the last settlement offer made in that case. The result: 75% said the last settlement offer was better than the trial outcome. Admittedly it was a small sample and the variables were unknown; however it is food for thought.

What we do know is that of all the litigated cases approximately 2% proceed to trial. A lot of time and money is spent preparing for a trial which is highly unlikely to take place. More time, thought and effort needs to be focused on settlement negotiations – skills far different from those at trial. It’s one of many reasons why conflict resolution is or should be a large part of every dispute, whether or not it’s in litigation. Preparing for and participating in a settlement negotiation –either directly with your counterpart or in mediation, encompasses different skills than proceeding to trial. Interests/needs of the parties are paramount to getting resolution. More focus on the negotiation and/or use of a mediator should significantly reduce “decision error”, which means better outcomes, less cost, less stress (for you and your client) and a satisfied client. It’s hard to imagine a better outcome than that.