Lawsuits are Investments

Whether enforcing a contract, recovering damages, or seeking injunctive relief, most civil lawsuits are ultimately efforts to obtain money or something of equivalent value; thus, there should be a return-on-investment analysis for every claim. Often, litigants and their counsel get so caught up in the content of what their lawsuits are about that they overlook or completely disregard this crucial point.

Clients want to make their lawsuits about bringing to light certain issues to the public record or punishing the defendant, or a sense of justice. Unfortunately, there is a huge disconnect between the current justice system in the civil lawsuit “world” and the expectations of the public. To bridge the gap, lawyers should understand from school and should communicate to their clients that civil lawsuits, whether a claim for restitution, defamation, personal injury, breach of contract etc., are ultimately collection actions. When a client is suing another party, this is ultimately an unsecured claim against another for a specific amount of money. Even those matters that involve injunctions (unless related to a form of abuse which overlaps into the criminal sphere) usually have a monetary value tied to it. For example, a Mareva injunction is an order that is usually tied to some form of money that is the subject of the order.

Therefore, what has greater importance to the merits of the claim is the ability of the client to withstand the term of litigation, and the subsequent ability to enforce a judgment once successful. There are critical questions that a lawyer should ask their client at the outset before starting a civil action such as:

·       Does the defendant have any assets?

·       Does the defendant have any creditors that are in a secured priority to your claim such as a bank?

·       What are the costs to pursue the claim both financial and nonfinancial (time, stress, and publicity)?

·       Does the defendant have the financial support to hire a firm that can delay the claim even if they are in the wrong?

These are critical questions to ask in determining whether or not to start a civil action against another party before you even get to the point where you are asking the question that everyone starts with: “what are the odds of success”? Not only is that question the least relevant but it also garners the least accurate response – regardless of a lawyers’ assessment, a judge can always rule differently making the answer inaccurate. When the above questions are not discussed with the client in a transparent manner at the outset and repeated, clients will often be upset with their lawyers regardless of whether or not they are successful. For example, a client might spend $50,000 in legal fees to win a $25,000 judgment against a defendant who has no assets. Was the fight worth it? If the answer is “not financially,” the litigation was not a business decision — it was a losing investment cloaked in principle.

A claim must provide a return on the above investment and the moment there is a feeling that there is no return on investment – even if the claim has merit and a likely chance of success – it should be abandoned. I would suggest that litigators ask their clients up front how much they are looking to spend or budget for their lawsuit. This seems counter intuitive for two reasons: (i) the lawyer is not doing a good job selling their service and will scare the client away when they need the legal fees to pay their own bills; and (ii) the answer most clients give is that after suffering a financial loss from the other party, they certainly do not want to spend anything beyond at most an up-front retainer fee (and many times not even that). However, by bringing up budgetary constraints at the outset and periodically checking in, it will be appreciated by clients. Larger institutions do in fact have legal budgets and will work with the litigator to stay within budget and small owners will understand it in terms of investing and spending cash flow. Individuals will understand that there is an up-front cost to suing and this is a further investment in the global calculus of what is owing to them. Put in these financial terms, clients may want to consider an alternative to the litigation process.

Due to the complexity of the system today, the increase of the number of litigants and lawyers to represent them; the world of litigation has now become mostly an exercise in investing and settling. Person A believes they are owed $500,000 but knows it will cost $100,000 and years to obtain a judgment against Person B – it is better to accept a settlement of $200,000 and “write-off” the remainder of what they feel they are owed than continue. This exercise is often done by mediators and sometimes with success, but to do it at the beginning of a claim usually fails because tempers run high and there is a lack of trust between the parties and their counsel. Similarly, many cases begin and then are abandoned when they become too delayed or costly and become “phantom claims” in the court – the plaintiff does not want to pay more to abandon them (and in some cases cannot due to counterclaims) which result in further backlogs and costs for the court system as a whole.

To solve this issue, until there are major reforms in the litigation system as a whole, I would encourage:

1.     Educate lawyers from law school not only about the merits and common law but also enforcement, cost and security and investment in a practical matter that can be explained to clients;

2.     All clients should be explained the factors in point 1;

3.     Mediation should occur much earlier in the process;

4.     The court should appoint triage officers who call the parties with stagnant claims to explain the above points and anonymously allow for the parties to abandon their claims in a face-saving manner at no further cost. This should be done earlier than the current 5-year term under rule 48.

To reduce the backlog in courts, we need to reduce litigation in general for those matters where there is truly a return on investment and counsel clients accordingly. Failing to provide this counsel can result in unhappy clients, unpaid bills, and malpractice risk.

Every lawsuit should be treated as a business case, with a return-on-investment analysis at its heart. Clients don’t need a day in court — they need a solution. Sometimes that means litigating. Sometimes it means walking away. And sometimes it means settling early and avoiding a long, uncertain road. Let’s stop selling litigation as a quest for justice without considering whether it pays off. And let’s start treating every lawsuit for what it truly is — a collection action, with a bottom line that matters.

This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.