QUESTION 2 – PRE -TRIAL BARGAINING (from final exam, Fall 2007) An accident has occurred, causing $10,000 in harm to the victim.
PRE
-TRIAL BARGAINING
(from final exam, Fall 2007)
An accident has occurred, causing $10,000 in harm to the victim. The amount of harm done is undisputed
and easy to prove; punitive damages
are not applicable, so any damage award would be for exactly
$10,000.
This type of accident is governed by strict liability, so the injurer is legally responsible, but it may be
difficult to prove in court that he caused the harm. The victim can hire a lawyer for $3,000 and go to trial,
in which case he would have a 40% chance of winning. He could also hire an expert witness to testify.
This would ensure victory at trial, but would cost an additional
$10,000, for a total of $13,000. Going to
trial cos
ts the defendant (injurer) $5,000, regardless of whether the plaintiff (victim) hires an expert
witness. Assume that neither party pays any legal expenses if an out
-of-court settlement is reached.
First, consider the usual
American rule
where each party
pays its own legal fees.
(a)
If the case goes to trial,
will the plaintiff hire an expert witness
or not?
(b)
Given your answer to (a), calculate
i.
each party’s
threat point
during pre
-trial negotiations (which is its noncooperative
payoff if the case goes to tri
al)
ii.
the
gains from cooperation
if a pre
-trial settlement is reached
iii.
the
settlement
that would occur if the two parties agreed to
divide the gains from
cooperation evenly
(c)
In this scenario, would the American rule lead to
over
-, under
-, or efficient precaut
ion
on the
part of the injurer?
Next, consider the usual
British rule
where the losing pa
rty pays both sides’ legal fees (including the cost
of the expert witness, if he was hired).
(d)
If the case goes to trial, will the plaintiff hire an expert witness?
(e)
Given your answer to (d), answer the same three questions as before: calculate
i.
each party’s
threat point
ii.
the
gains from cooperation
iii.
the
settlement
that would occur if gains from cooperation were divided evenly
(f)
In this scenario, would the British rule lead
to
over
-, under
-, or efficient precaution
on the part
of the injurer?
Finally, consider the following
cost
-shifting rule
, similar in spirit to Federal Rule 68. If the case goes to
trial and no damages are awarded, each side pays its own expenses. If damages are awarded and are
lower than a settlement offer the plaintiff (victim) refused, the plaintiff pays both sides’ expenses. If
damages are higher than a settlement offer the defendant (injurer) refused, the defendant pays both sides’
expenses.
(g)
What will happen if the case goes to trial
after the
defendant offers to settle for $10,001
? Is the
plaintiff better off accepting this offer or going to trial?
(h)
What will happen if the case goes to trial
after the plaintiff offers to settle for $9,999
? Is th
e
defendant better off accepting this offer or going to trial?
(i)
What do you expect to happen in pre
-trial negotiations?
(j)
In this scenario, would this cost
-shifting rule lead to
over
-, under
-, or efficient precaution
on
the part of the injurer?
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