October 1, 1999
By Gregory T. Spalj
It is fashionable these days to disdain litigation in favor of partnering, mediation, mini-trials, arbitration, early neutral evaluations, and other forms of “alternative dispute resolution.” Although each of these devices has its place, often a good old-fashioned trial works best. But just because you choose to leave the resolution of your dispute to a jury does not mean that partial settlement agreements, with one or more parties, should be overlooked. Such agreements can be used as a means to increase the likelihood of a larger recovery.
Settlement agreements can be used to resolve part of a dispute without resolving the larger controversy. For example, a plaintiff may settle its claims with one of two defendants, leaving for litigation the claims against the remaining defendant. Alternatively, a plaintiff may settle with both defendants, leaving the defendants’ claims against a third party defendant open for resolution. A plaintiff may also settle a portion of its dispute with all parties, and choose to litigate the balance of its claims. These partial settlement agreements can be used strategically to improve the likelihood of a successful recovery or defense.
Since I love talking about my victories as much as I know you will enjoy reading about them, I will give you an example of a settlement agreement in a case where I just received a $2 million jury verdict. The case involved a contractor, an engineer, and a municipality. I represented the contractor, who was a party to a lump sum agreement for the construction of a wastewater treatment project. The agreement’s underlying bid included a unit price for an “adder” for rock excavation. The engineer drafted the contract documents without including any estimated quantity of rock to be excavated. The treatment plant was a publicly-bid project, requiring that the project be awarded to the lowest responsible bidder. Because there was no estimated quantity for rock excavation, whatever number a contractor inserted for its unit price would not affect the base bid. In other words, the price for rock excavation was not a factor in determining who was the project’s low bidder. The engineer also drafted the contract documents to allow the owner to specifically reject the unit price for rock excavation (if the engineer thought it was too high).
My client, the contractor, recognized that there were many types of rock excavation which could prove costly per cubic yard (e.g., a small layer of rock toward the bottom of the excavation or a huge boulder). The contractor also recognized that since there was no estimated quantity of rock to be multiplied at his requested unit price, there was no “downside” to his inclusion of a high unit price for rock excavation in the bid. Thus, the contractor bid the rock excavation at $1,500 per cubic yard, in an effort to protect his business for whatever rock he encountered.
The contractor was the low bidder. The engineer recommended that the owner accept the contractor’s bid, but did not instruct the owner to reject the $1,500 per cubic yard rock excavation unit price.
Construction of the treatment plant ultimately required the contractor to excavate approximately 1,490 cubic yards of rock. Accordingly, pursuant to the contractor’s agreement with the owner, he was entitled to $2,166,750 over and above the $1.9 million contract. After several unsuccessful attempts to informally resolve the matter, I recommended that my client sue the owner of the treatment plant to enforce the agreement because despite the fact that it was the engineer who had failed to estimate rock quantities and reject the $1,500 unit price, which directly resulted in the contractor’s damages, only the contractor and the owner were parties to the construction agreement. In turn, the owner chose to exercise its right to assert a negligence claim against the engineer.
All parties tried to settle the matter using alternative dispute resolution. The engineer, the real culprit in the case, refused to make a substantial settlement offer. Eventually, the contractor and the owner entered into a $1.8 million settlement agreement, whereby the owner would pay the contractor $200,000 in cash and execute a promissory note for the balance. Additionally, under the terms of the partial settlement agreement, the contractor assumed control of the owner’s lawsuit against the engineer for negligence and agreed to use any proceeds recovered to fund the $1.6 million promissory note.
The partial settlement agreement allowed the contractor to request that the jury place the financial responsibility for the engineer’s blunder on the engineer, as opposed to the owner. The owner was blameless in the transaction. It had merely relied on the bad advice of its engineer.
After a week long trial, the jury agreed that the contractor was entitled to an additional $2,166,750 from the owner under the agreement. The jury also determined that the engineer was negligent. Since the owner would have been required to pay some reasonable price for the rock excavation, the jury awarded the owner damages against the engineer in the approximate amount of $2 million. As indicated, however, the contractor is entitled to the recovery under the terms of the partial settlement agreement.
This method of partial settlement had never before been employed in Minnesota. The engineer ultimately filed two unsuccessful appeals challenging the partial settlement agreement. The contractor has yet to be paid.
In Minnesota, as in most jurisdictions, there is a strong public policy favoring settlement agreements. In order for them to competently hear and resolve the ever-increasing number of civil cases which appear on their dockets, trial courts rely on a settlement rate which exceeds 90%. What this means for you, as a litigant, is that trial and appellate courts will endeavor to uphold any type of settlement agreement which resolves all or part of a dispute.
Construction disputes typically involve more than two parties. Quite frequently, the dispute involves contractors, subcontractors, suppliers, owners, architects, engineers and other consultants, all of whom typically point an accusatory finger at one another. Smart construction lawyers will often promote alliances between their clients and certain parties to oppose other parties left out of the fold.
A settlement agreement is nothing more or less than a contract. Generally, it will bind the parties to certain agreed upon terms and conditions. A settlement agreement is likely to withstand judicial scrutiny if it does not prejudice the rights of those parties not participating in the agreement, or contravene or unilaterally alter the law.
Litigation has often aptly been analogized to warfare. Many battles are won and lost throughout the litigation process. Unlike warfare, however, the outcome of litigation rests with the judgment of the jury — something not entirely influenced by the facts of the case and/or creative lawyering. Just as war and politics often make for “strange bedfellows,” so, too, does litigation. It may prove advantageous for a party to pursue a partial settlement agreement in order to ensure some recovery or minimize risk – as part of an overall effort to increase the likelihood of a favorable jury verdict.
There are many types of settlement agreements to be used in litigation which change the alignment of the parties. These include:
· Pierringer releases (where a party agrees to assume the liability of another party for a sum certain)
· Participation Agreements (where there is no release – the parties agree to pursue recovery together against others)
· Loan Receipts
· Mary Carter agreements (the plaintiff agrees to cap a defendant’s financial responsibility in exchange for an admission of liability)
· High/Low agreements (the parties agree that the plaintiff’s recovery will fall somewhere between agreed upon maximum and minimums)
· Miller-Shugart agreements (the plaintiff and the defendant agree that the defendant’s insurer will be solely responsible for the plaintiff’s damages)
· Drake v. Ryan settlement agreements (insurance companies forge agreements to the detriment of other parties)
· and many other devices designed to simplify and resolve portions of litigation.
In the construction context, partial settlement agreements are often complicated by the relationships of the parties involved. The rights and obligations of some parties will be determined by contract, while others are guided by the principles of common law. A construction lawyer must be conversant with all available partial settlement devices to maximize the client’s opportunity for success at trial.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T