Sunday, October 16, 2016

Litigation is Like Throwing a Rock, and Waiting Five Years for it to Sail Through the Window…, all the while burning a comet's tail of money.

Comet and Oort Cloud,
"I haven't seen a dime. These things go on forever and forever. Never get involved in litigation. Your hair will fall out, your bones will turn to sand. And it will still be going on. … It was like throwing a rock through a window-but you wait for five years to hear the sound. Litigation is like picking up a glass of water with a prosthetic hand. It's very frustrating, and you'll never get it to your lips. But when you have to, you have to. If somebody burned your house down, you'd have to do something about it."
                            – Tom Waits, The Observer November 23, 1992

I recently almost finished a trial; a bittersweet experience and confirmation yet again that Tom Waits had it right in 1992.

In 1983, the year I graduated from law school, a group of professors published a study attempting to evaluate the costs and benefits of litigation. They evaluated what they called an “investment model” of litigation: do parties get more out of it than they put in? Does litigation make economic sense? See The Costs of Ordinary Litigation, 31 UCLA Law Review 72 (1983). The professors were optimistic about the process and concluded, “yes,” for plaintiffs and defendants alike, litigation was often a good investment.  But the costs of litigation they reported were quaint by today’s standards. After 33 years of legal practice I can report that parties often get more than they bargained for when they throw that rock of litigation and wait five years for it to sail through the window. The rock burns money like a comet’s tail as it flies, and the window sometimes shatters in unexpected ways. A failure to properly evaluate and resolve a case early can be painful.

Case in Point 1. For a while one of my clients had the dubious distinction of having the longest running civil case in the Alameda County, California court system. It was an ordinary fee dispute between an architect and his mechanical, electrical, plumbing engineering consultant for the construction of a new public hospital. When the engineering client came to me in 1996 they were owed about $800,000 in fees: not an inconsequential amount. The problem was, for various good reasons, the architect had convinced the county board of supervisors to reconfigure the new hospital and substantially increase its size. A selling point for the new plan was that the construction cost would remain unchanged—but this was a misrepresentation to the board.  The architect also neglected to say that the new project would entail significantly more architectural and engineering services (and fees). That request would come later, after the project was approved.

There are studies which claim that for public infrastructure projects, like hospitals, roads, bridges, political decision-makers get lied to about the costs at the point of decision making 90% of the time. This hospital project was an example. The decision to build the new hospital was made in the early 90’s. The county was obligated to provide county health care services—but they were not required to build a new hospital. Privatizing was in vogue politically at the time and some board members advocated that the county should outsource medical services rather than build a new county hospital.  An extra $10 million of construction costs for the new hospital might have tilted the balance of arguments against building a new hospital. So hospital administrators and their service provider, the architect, (all of whom badly desired approval of the new hospital project) represented the revised project plan as “on time and on budget, but better” when compared to the original plan. In order to make this claim they made a number of dubious assumptions about costs. In short the board was being lied to about the true costs in order to get the project approved politically.

Once the expanded project was approved, the county’s project administrators had to find inventive ways to justify the increased costs that would invariably be needed—like the extra architectural costs and the extra engineering costs. They couldn’t very well go to the board and say “Ahem, we need more fees for the architect and its consultants because we misrepresented the true costs to you a couple of years back.” So as committed fees ran out, and as the architect and consultant kept working on the project, pressure mounted.  Finally, the county administrator and the architect found a way to make an added fee request in conjunction with a further addition to the project.  But … in the process… my client’s $800,000 fee request was not addressed.  The architect made a final deal with the county and agreed he would ask for no further fees for its consultant, now. Perhaps later…. 

On construction projects the expectation is that owners will pay for the architectural and engineering fees, and the architect will not pay consultants until fees are squared away with the owner first. That’s how it should work if everyone does his or her job. In this longest running case, however, the architect failed to properly manage the process. In order to get the project approved initially, and in order to secure its own fee increase later, the architect neglected to secure fees it would need to pay its consultant. Having represented the project as “on time and on budget” in order to help sell it to a resistant board, and later failing to include my client’s additional fees in the change order with the county, the architect was hemmed in. The architect found he was unable to obtain approval of a further fee request for my client after the fact.

When my client, the engineering consultant, threw the rock and articulated its claim in a lawsuit, the architect should have recognized that it was in a vulnerable position. It should have found a way to settle with the consultant.  Indeed, at the outset of the case the architect would have resolved the issue for approximately $380,000.  That was the range of settlement demand by my client at the outset. Correct evaluation at the outset of the case was critical.

But the architect and its attorneys failed to properly evaluate the case. They considered the normal process—money must come from the owner—and they refused to acknowledge the unusual circumstances, or any separate responsibility for the architect.  So that rock of a lawsuit sailed through the court system for 14 years burning money like a comet. There were two court trials and two appeals, and at the end a judgment for my client in the amount of $4.7 million. In addition to paying this judgment, the architect had to pay its own attorneys an undisclosed amount.  If you are curious the 2nd Appeal can be found here: Ted Jacob Engineering Group, Inc. v. The Ratcliff Architects, et al. Failing to properly evaluate a case early can be very expensive.

Case in Point 2. The arbitration I just concluded involved payment due to my client, a subcontractor on a $72 million high school construction project. For reasons unrelated to my client, the school district elected to terminate its relationship with the general contractor five years ago, shortly prior to completion of all the work. The usual factors were at play: bad architectural plans, construction defects, and mismatched, or overmatched, personalities.

My client was responsible for earthwork, such as grading under building pads, installation of site utilities (potable water, fire water, storm drains, sanitary sewers, and gas) and preparing the ground for laying a synthetic baseball field.  At the time the owner and general contractor parted ways, my client was owed about $900,000, less a credit for some deleted work under the ball field.

In the heat of battle, when the school district terminated the general contractor, the school district grossly overvalued the credit for my client’s deducted work.  The value of the deducted work was somewhere between $350,000 and $526,000. [There were some other issues, very interesting to construction lawyers but not relevant to our point here]

There was good reason, therefore, to resolve my client’s final contract amount early at somewhere between $374,000 and $500,000.  In fact, my client offered to settle for $300,000 with the general contractor five years ago in 2011. This offer was rejected.

The general contractor’s rejection of my client’s $300,000 offer in 2011 was understandable because my client’s claim was a pimple on a much larger dispute between the general contractor and the school district. The problem is that by September 2015, when the school district and the general contractor settled their issues, my client’s rock of litigation had been sailing through space burning money like a comet for four years. It was known to everyone at the outset that if my client recovered anything, he would also recover attorney’s fees; in other words, the defendants would be responsible for that comet’s tail of money trailing the rock of litigation.

Since there was no question that my client would be the prevailing party in the lawsuit, it was just a question of how much, not whether my client would recover, the rational thing to do was to settle early.  The defendants, however, elected to wait until two days into arbitration before making a reasonable offer of settlement. The case, which could have settled for less than $500,000 in 2011, settled for $1 million two days into arbitration, five years later.

Like any settlement, the result was a mixed bag. Deducting litigation costs, my client achieved approximately the result he would have had his offer been accepted five years ago. Collectively, the defendants paid a lot more than if they had settled earlier.  In addition to the $1 million dollars the defendants paid to my client in settlement, they also incurred their own attorneys fees, the last 12 months exclusively on this matter. The total costs to the defendants of deferring settlement is bound to be in excess of $1.3 million. And it could have been worse. If the case had proceeded to judgment, depending on the amount of interest and attorneys fees the arbitrator might have awarded. At the point of settlement in mid trial, the flight of the rock was beyond the defendant’s control.

Tom Waits had it right: litigation is like throwing a rock and waiting five years for it to fly through the window. Settle in mid-flight and the comet tail of money trailing this rock vanishes into thin air as sunk costs. If the matter proceeds to judgment, the rock and the accumulated weight of its comet tail come crashing through the window. It can burn your house down. If possible, it’s better never to throw rocks. But, as Waits said: “when you have to, you have to.”

Note: If you've not run into Tom Waits, he's worth paying attention to. You can also watch him in Jim Jarmusch films. Check out "Down by Law" for example.  Here is Waits singing his iconic "Heart Attack & Vine."

Tom Waits: "Heart Attack & Vine"

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