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Keys to ADR: Key No. 010 – A Thought Piece on How to Settle Complex Multiparty Litigation: An Example

October 11, 2016

CASE SCENARIO

Let’s take an example of a factually complex, multi party action. A newly built and registered condominium corporation suffers $1M in damages when a year old make-up air handling unit (MAU) located on an upper floor failed, resulting in a catastrophic water/glycol flood over six lower floors.

An engineering report commissioned by the corporation determines that the cause and origin of the loss was the failure of a plastic union installed a year earlier to repair a crack in the piping of the MAU.

The subrogated insurer for the corporation sues among others, the declarant, the general contractor, the manufacturer of the MAU, the design engineers, the mechanical contractor, the manufacturer of the union, the distributor, wholesaler and the retailer all of whom had sold the union up the supply chain. Many of the defendants are insurance protected.

The issues in the litigation are:

  1. Did the condominium corporation respond to the flood in a timely manner?
  2. Was the union manufactured negligently?
  3. Was the pressure in the system too high and if so who had the responsibility to monitor and correct it?
  4. Was the use of plastic interior piping in the MAU appropriate for this application?
  5. Was the union over-tightened when installed and if so by whom and how?
  6. Was the piping properly braced so as to eliminate vibration inside the MAU which at least one party says was the origin and cause of the failure of the plastic union.
THE EFFICIENCIES OF SETTLEMENT
At first glance, it might appear that a lawsuit worth $1m is large enough to take to trial. But when you factor in 5 sets of lawyers, each with time and disbursements to trial estimated to be $150,000 to $200,000, it is obvious that the transaction costs to the end of trial are disproportionate to the claim. Litigating such a case to trial will be inefficient.  The inefficiency may be magnified by the operation of Rule 49, and the chance of a Sanderson or Bullock Order when costs after trial are considered.

If the inefficiencies are so manifest, why doesn’t such a case resolve early?

The reason lies, in part, in the “culture clash” of interests.  Generally speaking, the subrogated insurer has paid up front for a cause and origin report and has secured a legal opinion on the chances of success. The subrogated insurer may have also dealt with carriage and control issues with the insured and entered into a participation agreement to cover uninsured losses. In short, the plaintiff is ready out of the blocks for discovery and mediation.

The defendant insurers, on the other hand, will likely not retain expert opinions nor assess risk until after full documentary production and discovery.  In other words, the defendants usually wish to adopt a wait and see attitude to test the plaintiffs case in the discovery process before finalizing their defence theories.  The defence pleadings ordinarily contain the usual denials, assert contributory negligence, and claim over against the other defendants.  The discoveries will concentrate on both liability and damage adjustment.

So in the end, we have a hurried plaintiff who may be prepared to take a deep discount at the outset of the action to settle early, against defendants who may be prepared to take the risk of paying more later. Lawyers for defendants usually caution their clients to make no offers until after the discovery process is done.

These differing interests are the fuel that launches the suit into a long and expensive trajectory. After the discoveries, which ordinarily take at least a year to plan and convene, the parties usually sit by and wait for the delivery of the defence and reply expert reports, and wait again to talk at mediation.  By that time, the plaintiff is no longer prepared to take the discount it would have taken for an early settlement and the defendants may now be forced to pay more for a settlement than the case might be worth.

So, is there a better way to settle a multi-defendant complex action such as this ? What follows are some tips that you might use to break this seemingly difficult impasse.

Tip #1: The Counsel Summit

As soon as pleadings are closed, but before production of documents, the lawyers should convene a without prejudice “Counsel Summit”.  This meeting, as the name implies, is attended by the lead counsel. The purposes of the Summit are to:

  1. identify and prioritize the issues that the facts appears to present;
  2. discuss the classes of documents that should be produced;
  3. discuss the timing of the steps of the litigation;
  4. discuss whether it makes sense to arbitrate some of the gateway issues (e.g. cause and origin; the interpretation of governing contracts etc.);
  5. discuss whether the case can and should be bifurcated;
  6. determine if the defendants are prepared to appoint  experts BEFORE discoveries not after;
  7. To discuss using “Smart Bomb Discoveries”;
  8. Discuss the appointment of a Case Management Arbitrator.

Experienced barristers appreciate the principles of proportionality, and the need to deliver cost effective advice to their clients. On the other hand, experienced barristers cannot give clients advice on the possible outcomes at trial unless they have sufficient information and admissible evidence to assess that risk.  At the Counsel Summit, the lawyers try to find ways to reduce the time and cost of litigating, balanced against the need to have enough information to provide advice.

Tip #2: Smart Bomb Discoveries Followed By The Hot Tub

Try using “Smart Bomb” discoveries.   Smart Bomb Discoveries are intended to limit document and oral discoveries to the key issues identified by the lawyers in the Counsel Summit but with no risk to rights of full discovery. Smart Bomb discoveries work best where the defendants agree at the Counsel Summit (see point f above) to retain experts before the discovery to assist in that process.   Here’s the way it could work:

  1. Having identified the key issues at the Counsel Summit, the parties agree to conduct documentary and oral discovery limited to those key or gateway issues selected at the Counsel Summit. This is without prejudice to the later continuation of the discoveries should there be no early resolution;
  2. The discoveries are conducted as quickly as possible. The experts assist counsel at discovery. There is written protocol that the work of the experts is privileged and until final reports are produced for trial, none of the involvement of the experts can be the subject matter of cross examination at trial;
  3. Immediately after the completion of the Smart Bomb discoveries, mediation is held where the parties attempt to settle the entire lawsuit or perhaps some of the issues in the lawsuit. Usually, the parties agree to bring their experts to the mediation whether a report has been prepared or not;
  4. At the mediation the parties can, if they elect to do so:  hot tub the experts; try to settle some or all of the issues; appoint independent fact finders to be retained by all the parties, such findings to be binding on all of the parties; agree to arbitrate some of the issues.  The point here is that an early mediation can assist the parties in arriving at an early settlement or at least serve to identify the factors that appear to block a deal;
  5. If the case does not settle at the hot tub or mediation in whole or in part, the parties will complete the discovery process on the understanding that there will be another mediation at the conclusion of that second round of discoveries;

Tip #3: Case Management Arbitration

The early appointment of a Case Management Arbitrator makes good sense.  In fact, the agreement to appoint a Case Management Arbitrator should take place before or at the Counsel Summit.  The parties agree to submit to an arbitrator any disputes regarding production of documents, refusals arising from the Smart Bomb Discoveries, and any other interlocutory matter. By engaging a Case Management Arbitrator, the parties save the time and money involved in bringing formal motions to court.  The parties may also wish to have the Case Management Arbitrator mediate the dispute at the conclusion of the Smart Bomb discoveries or perhaps arbitrate some issues that the parties agree to submit to arbitration.

Tip #4: Experts and Hot Tubs

Most multiparty complex commercial disputes require expert evidence. As noted earlier, the usual inclination of defendants is to delay the appointment of an expert until after discoveries.  A better approach is to appoint defence experts immediately after pleadings and to involve them in the Smart Bomb discovery process and ensuing mediation.  This is efficient for a number of reasons. Firstly, the early involvement of the defence expert can sharpen the focus of the Smart Bomb discoveries. Secondly, by engaging the plaintiff expert and defence experts in an early dialogue, it is possible that many differences can be resolved or at least better explored. This may eliminate the tedious process of reply and supplementary reports. Thirdly, the active engagement of the experts will likely improve and enhance the mediation process.

Does this work?  We have used this approach successfully in several cases. It saves time and money and it serves the interests of both the plaintiff and the defendants.  But it takes hard work and it also takes lawyers who are interested in using creative ADR techniques to bring a case to a rapid boil. Unlike wine, complex multi party litigation does not improve over time.  A good lawyer is an efficient one who assists the client in searching out timely and cost effective solutions.

If you have any questions about this article, please do not hesitate to contact Gary Caplan at Mason Caplan Roti LLP.

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