Trial Counsel for Law Firms

Civil Trial Economics

Basic economics suggests that a decision of whether or not to go for trial is a simple analysis of whether it is better to settle or go to trial. In a civil matter, settling is usually for a fixed dollar figure.

Going to trial in a civil case can be analyzed as a factor of the probability of success and a probability of failure adding in the costs of both outcomes. For example, assume a plaintiff has a $100,000 claim, and receives an offer to settle from the defendant of $60,000, there are estimated legal fees of $25,000 per side and a there is a 75% probability that the plaintiff will obtain judgment for $100,000 and a 25% probability that the case will be dismissed.

In this example, excluding costs, trial has a value of 75% * 100,000 + 25% * 0 = $75,000. It looks like the plaintiff should go to trial because $75,000 > $60,000, but what about costs consequences?

Costs would be 75% * costs if successful + 25% costs if unsuccessful. Costs awarded on success will likely be partial indemnity or about 60% of the $25,000 in fees which equates to $15,000.00. Therefore costs incurred no matter what if successful are $25,000 – $15,000 = $10,000. Costs if unsuccessful would be fees of $25,000 plus 60% of the other side’s costs for a calculation of $25,000 + $15,000 = $40,000. The costs calculation is therefore 75% * $10,000 + 25% * $40,000 = $17,500 in costs anticipated to be paid.

The new settlement position appears to be $75,000 – $17,500 = $57,500. The settlement offer of $60,000 appears reasonable because costs have reduced the value of the claim significantly. The impact of costs can also be amplified by strategic offers to settle making the offer even more appealing. But the analysis does not stop there, otherwise plaintiffs will settle too low.

From the defendant’s perspective, the full analysis is that they will pay 75% * ($100,000 plus costs/fees of $40,000) + 25% * ($0 + fees of $10,000) = $107,500. Considering the defence perspective, the settlement offer of $60,000 is very low.

The range of an appropriate settlement including costs is $57,500 (what the plaintiff will accept) to $107,500 (what the defendant will pay). This is is quite the range of overlap for a $100,000 case.

Trial economics stresses the importance of looking at a case from both sides. Furthermore, parties should note how costs affect trial economics and decision-making. Costs cut down a plaintiff’s claim and increase the amount a defendant will settle for, bringing parties closer together and creating a large overlap.

Quite often settlement discussions include an assumption that the parties will absorb their own costs. Perhaps this approach is flawed in that it removes the range of overlap and can actually impair settlement discussions.

All of this is based on simple economics.  A similar analysis can be done for criminal trial economics.  We will discuss factors affecting settlement here.

Hassell Trial Counsel
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Toronto, Ontario M6G 3P8

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