Some lawyers seem to believe that the sky's the limit on settlement demands and what to ask for in trial. The higher the better, the thinking seems to be, on the notion that juries or defendants will award something less. Ask for $100,000, and hope they give $50,000 is a common way of thinking, the fear being that if you ask for $50,000, the jury or judge will reduce it from there, and you'll get only a portion of what you want.That kind of thinking is driven, in part, by the way people negotiate. Many, many times in my career, I've begun negotiations or made settlement offers at the outset of a case which represented a fair value of the case. In each situation where I've done that, the other side has uniformly responded with something less than what we offered -- and I've had to go to great pains to explain that my initial offer wasn't artificially high, wasn't inflated to allow for negotiating room, but was, instead, how I valued the case. There might be some room to go a little lower, but there wasn't much.
People -- especially lawyers and claims adjusters -- had, and have, a hard time grasping that, the idea that my offer wasn't set way up here in order to allow me to come down to here, the range where I actually wanted to be. They expected that if I wanted, really wanted to get $10,000 for my client, that I'd start at, say $50,000, and then work downward. Whereas, what I tend to do is say "I want to get $10,000 for my client, so I'll offer $10,000." And when I do that, the other side gets confused, or angry, or in one case, argues that I'm acting in bad faith.
(That really happened: An adjuster told me I was being unreasonable and acting in bad faith because our initial offer was our final, lowest offer and I wouldn't advise my client to go lower.)
A relatively recent case may help change the trend of artificially inflating offers and demands (and artificially lowering counteroffers and demands.) In Shadley v. Lloyds of Londonb, 2009 WI App 65, the Court of Appeals did a little legislating from the bench, of sorts, and came up with a formula to determine who really won a case -- and how much they should get in fees.
The basic facts are that Shadley hired Stys to move her house, and then was unsatisfied with the job Stys did, so she sued him for damages. She made negligence and breach of contract claims. The contract provided that
In the event that any action is filed in relation to this agreement, the unsuccessful party in the action shall pay to the successful party, in addition to all the sums that either party may be called on to pay, of [sic] reasonable sum for the successful part[y's] attorney fees.
That's where things got interesting. Stys served an offer of settlement under section 807.01(1), offering to pay Shadley $25,000. Shadley wasn't interested and went to trial, where she asked for $100,000 in damages. (The record apparently suggested that she might have asked for as much as $150,000 at one point.)
The trial court awarded damages to Shadley, but not for everything she wanted. In particular, Shadley didn't get reimbursed for things like her daughter's tuition. (It wasn't clear how Shadley thought that might be an element of damages.) In total, Shadley was awarded $14,976 -- or about $10,000 less than she could have settled for.
The trial court then ruled that Shadley was the "successful" party, and awarded her more than $43,000 in fees. Stys, of course, appealed, and the Court of Appeals put the judicial brakes on that award.
The Court of Appeals first found the contract to be ambiguous -- and then never mentioned the oft-repeated rule that an ambiguous contract is generally ruled against the drafter; such a rule would have meant that Shadley's preferred construction (that she was successful and gets her fees) was the winner. Instead, the Court said that the intent of the parties was the controlling factor, and also said (correctly) that the question of the parties' intent is a question of fact.
The Court of Appeals then said that the trial court's findings of fact about the intent of the contract were unsupported by the evidence in the record:
The trial court, however, failed to find that the parties' intended to equate the terms “successful party” and “prevailing party,” and we find no evidence in the record to support such a finding. Therefore, we find the trial court's decision to be clear error, and we will independently attempt to decipher the parties' intent.
That is, the Court of Appeals -- not a fact-finding court -- opted not to remand to the circuit court to make a factual finding about intent that was supported by the record (or to supplement the record.) Instead, the Court of Appeals -- not a fact-finding court -- set out to find some facts.
Only the Court didn't do that, either: Instead, it just used case law to interpret the contract. It relied on an earlier case interpreting a similar provision in a contract, and found that earlier case's analysis "helpful" in determining what the parties intended to do here.
(That earlier case was Borchardt v. Wilk, a 1990 case in which a promissory note said that:
"If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable **656 law. Those expenses include, for example, reasonable attorneys' fees."
That's a standard paragraph in many promissory notes, and not really similar, at all, to the Shadley-Stys note, which doesn't talk about enforcing anything. The Borchardt note didn't mention success or failure, and the Shadley note doesn't mention enforcing things. Borchardt's main question was whether the note holder was entitled to fees for defending against a counterclaim brought by the borrower when the note holder sued to enforce the note. The Borchardt defendant won on the counterclaim -- and the Court of Appeals construed the contract to mean that the parties intended (?) to reduce the lender's attorney's fees award proportionately.)
After analyzing Borchardt and deciding it was similar to Shadley's contract, the Court of Appeals then found, as a factual matter, that the parties could not have intended that Shadley get all her fees when she didn't get all her damages.
The Court of Appeals did not cite to anything in the record on which it based that factual finding, instead basing its belief -- in the Court of Appeals, a belief becomes the law -- of what was intended on what it termed a "more rational reading" of the contract's fees provision.
In short, then, the Court of Appeals ruled that the circuit court, which had watched the whole trial unfold, had no evidence on which to base its interpretation of the contract -- and then interpreted the contract itself without saying what evidence it saw in the record to support that interpretation.
The Court's interpretation was this: Shadley and Stys must have intended that a party would be awarded fees in proportion to the success they achieved -- with the success measured as the ratio between what they asked for and what they got:
"A more rational reading of the provision would grant Shadley that proportion of her attorney fees that equate to her success at trial. On remand, the trial court is directed to determine the total amount of damages Shadley sought to recover and calculate the percentage of that total on which she was successful, i.e., the amount Shadley actually recovered divided by the total amount of damages she sought to recover. Allowing Shadley to recover her attorney fees only in proportion to her success seems to us the better reasoned and rational interpretation of the parties' contract provision. The Stys in turn, should receive that percentage of their attorney fees on which they were successful. That is the portion of Shadley's claim on which Shadley was not successful. For instance, if the trial court were to determine that Shadley recovered only 20% of the total amount of damages she sought, she should receive 20% of her requested attorney fees and the Stys should receive 80% of theirs, for a total of 100%."
Of course, that's not 100% of the fees by any measure other than "weird appellate math." The total of fees to be awarded, actually, under that formula is about 50% -- 80% of one side's, and 20% of the other's.
(To see why that's true, assume that each side had $43,000 in fees, as Shadley's side did. The total of fees, then, would be $86,000. The Court of Appeals "100%" fee formula would result in Shadley getting $8,600, or 20% of her fees, and Stys getting $34,400 -- or 80% of his fees. The total fees awarded are $43,000, leaving the total fees unawarded, and borne by the respective parties, at $43,000.)
The Court then didn't address who won the appeal -- Shadley might have lost even more, or less, since both sides appealed. Shadley tried to keep her total fees awarded to her, but got only 80% of her fees. Does that mean she lost? Or should she get 20% of her fees on appeal awarded to her, as well?
The Court also didn't look at alternative measures of success, such as the fact that Shadley won on both claims of her complaint -- so in terms of liability, she was 100% successful.
I've always been uncomfortable with courts purporting to determine what the intent of the parties was, especially when it appears that the actual language of the contract wasn't discussed at all, as seems to be the case here. It's only after the fact that the courts step in and start trying to decide what the parties "meant" by a form provision in a contract used in dozens or hundreds of situations. The pretense that the courts are discovering intent is especially thin soup in cases like this, where not a single fact is mentioned that suggests the parties intended to reduce their attorney's fees by the ratio of "what they were awarded" versus "what they sought."
(In fact, the opposite could be argued: Would Shadley have demanded more than $100,000 if she knew that not getting that much would reduce her fees award by 80% or more? After all, if Shadley had demanded only $50,000, and gotten the same result, she would have been awarded, under the Court's formula, 28% of her fees -- and concomitantly reducing Stys' fees award.)
The unworkability of the Shadley formula notwithstanding, the Court's decision will go on and will be used in the future to determine what fees should be awarded when a party is entitled to fees -- making it necessary for lawyers to determine, up front, how much should be demanded, and how much should be offered. That initial demand letter set artificially high to allow for negotiation down the line could end up costing a substantial amount of fees -- and an initial counteroffer set artificially low to allow a party to work their way up could have the same effect.
As an added bonus, or detriment, depending on where you stand, the Shadley/Borchardt rule might also allow parties to start using mediation negotiations as evidence in support of reducing a fee award. Settlement offers are generally inadmissible to prove liability, (sec. 904.08, Wis. Stats.) but may be introduced for other purposes, including, under Shadley, now, reducing the fee award. Mediation negotiations are supposed to be inadmissible as well, with very limited exceptions, (sec. 904.085, Wis. Stats.) -- but settlement offers aren't supposed to be mentioned "on the trial," either, being only to be brought up after the fact. So who's to say that it wouldn't be a manifest injustice, in a post-judgment motion seeking fees, to disallow a communication in mediation?
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