THE ECONOMICS OF LEGAL PROCEEDINGS

             In deciding on the best course of action for navigating a lawsuit, oftentimes an overlooked aspect is the financial costs to maintain an action.  For example, suppose Company A breaches the clear terms of a contract with Company B, costing Company B to incur damages in the amount of $30,000.00.  In response, Company B commences an action by filing a Summons and Complaint.  Immediately thereafter, Company A provides a settlement offer of $15,000.00, only half of the total amount of damages that Company B incurred as a direct result of Company A’s breach of contract.  While accepting the offer of $15,000.00 would still result in Company B taking a loss of $15,000.00, a deeper analysis of the economic implications of litigation may make the $15,000.00 offer seem more attractive, especially since the settlement offer was made immediately after the service of the Summons and Complaint.

            Utilizing the sum of $350.00 per hour, which is a reasonable hourly rate for an attorney, Company B would expend $15,000.00 in counsel fees after approximately 42 hours of work being expended on their case.  While this may seem like a fair number of hours, in our example, the only work that has been completed is the drafting, filing, and service of the Summons and Complaint.  Accordingly, significant additional work will need to be undertaken in order to proceed with the litigation of the case.  For example, the drafting and filing of a Request for Judicial Intervention, Preliminary Conference, drafting of discovery demands, review of discovery documents, conducting depositions, defending depositions, compliance conference, additional court conferences, communication with opposing counsel, communication with client, trial preparation, and trial.  Motion practice is also common in litigation, which may cost approximately $5,000 per Motion filed.  Even if Company B does not file any Motions, Company A may file Motions necessitating the need for Company B to file opposition.  Further, additional expenses such as transcript fees, process server fees, and mailing fees will also accrue during this time.  In addition, legal proceedings may take upwards of three years, time in which the $15,000.00 could be re-invested in the company or other investments, all while monthly legal fees are not be incurred.  Moreover, even if the Court issues a favorable decision for Company B, Company B will then need to attempt to collect against such judgment.

            Perhaps in this example, company B expends only $10,000.00 in counsel fees and obtains a favorable ruling from the Court three years after the commencement of the action, and receives a Money Judgment in the sum of $30,000.00.  Accordingly, Company B would have obtained a benefit of only $5,000.00 more than the original settlement offer, three years later ($30,0000 Judgment less $10,000.00 in counsel fees for a total benefit of $20,000.00).  Moreover, since the Court issued a Money Judgment, Company B is now left with the burden of attempting to collect against such judgment, which may cost additional counsel fees, as well as fees from the sheriff or marshal.

           Since Company A breached the agreement in the first place, it is possible they do not have the funds or assets upon which the Judgment can be collected.  As such, it is possible that Company A will be left without any funds that they can collect.  Thus, in this example, not only would Company B have been damaged in the amount of $30,000.00 by Company A’s breach, but they would also have incurred counsel fees in the amount of $10,000.00, for a total cost of $40,000.00.  In contrast, had Company B accepted the original settlement offer of $15,000.00, the total cost would have been $15,000.00, a savings of $25,000.00.  Many clients ask if they are able to recover their counsel fees in a lawsuit.  Please see our article entitled “When You Can Recover Attorney Fees In A New York Lawsuit”.

           The above example, is, of course, completely hypothetical, and each case has its own unique facts and circumstances.  Further, in cases where the damages are significantly higher than the above example, it more likely makes economic sense to invest additional funds into the litigation rather than accepting an offer substantially lower than the cost of the damages.  However, the ongoing cost of litigation should always be kept in mind when weighing settlement options.

Should you have further questions concerning this or other matters, please contact The Siegel Law Firm, P.C.

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