3 PerspectivesDecember 19, 2008

What High-Low Agreements Can Do for You: Settlement Structures Part III

The fiscal year ends in just two weeks, and for some reason your client’s auditors keep focusing on that Acme Tool case. It’s been around all year, but somehow they won’t let go of Acme’s claim for punitive damages. You know punitives are out of the question and your opponent probably knows it, too, but accountants aren’t much for hunches. Since the case isn’t ready for settlement, Acme Tool’s claim makes its way to your auditor’s punch list for later discussion. Do you have a choice here?

You don’t have to settle the case to satisfy your accountants, your insurers and everyone else who might be alarmed by how much the other side has claimed. A high-low agreement can help you remove the potential for a runaway if you’re the defendant — and, if you are the plaintiff, you can use a high-low agreement to protect your downside and cover your costs while you focus on the heart of your case.

The High-Low Agreement Defined

In You Can Win by Settling Halfway: Settlement Structures Part I we discussed when it might pay to settle halfway — when you might resolve parts of a dispute to “streamline the matter, limit expenses, and refocus the parties on resolving what’s left,” and we explored that thought a bit more in Part II. The premise of this Settlement Structures Series is to explore how you can streamline your case as you work to resolve it — and a high-low arrangement is another way to do just that.

A high-low agreement is a form of settlement agreement where the case continues toward traditional resolution through trial or arbitration, but the parties agree that, no matter the outcome in the proceedings, the plaintiff will recover at least $x but the defendant will pay no more than $y. Under this arrangement the plaintiff is certain he will recover at least the number at the low end of the range, and the defendant caps her losses at a number she can deal with.

When Does a High-Low Agreement Make Sense?

A high-low agreement makes sense when the plaintiff, the defendant or both need to avoid an extreme verdict. Some examples where this approach might make sense include:

• The defendant is simply not comfortable with the runaway downside risk the case presents;
• The defendant needs to cap her liability to satisfy some of her stakeholders (like insurers, lenders or the CFO);
• The plaintiff in a case with significant damages faces a real possibility of a defense verdict and needs to cover some expenses, such as medical costs (discussed in more detail in an article by Connelly Roberts & McGivney LLC);
• The plaintiff needs some money in the short term, and agrees to limit his potential recovery in exchange for an agreed-upon “low” where the low is paid immediately;
• The plaintiff or his lawyer needs to ensure that litigation costs are covered;
• The defendant needs to settle within the limits of her insurance policy to protect her assets but her carrier would rather take the lawsuit to trial (this and other examples have been discussed in the Settle It Now Negotiation Blog); or
• Either party wants to narrow the dispute as a first step toward settlement.

Naturally, there are circumstances where high-low agreements are prohibited or need to be disclosed (discussed in greater detail in this Connelly Roberts article), but if you have a traditional two-party dispute there are rarely any restrictions on how you get the matter resolved.

Take Your High-Low Agreement to Arbitration

Importantly, the high-low agreement isn’t just for lawsuits headed to trial. As JAMS discusses in greater detail here and USA&M Midwest discusses here, high-low agreements may be used in arbitration, as well, resulting in “High-Low Aribtration” or “Bracketed Arbitration”. The high-low arbitration agreement combines the comfort these agreements provide with the confidentiality, convenience and other benefits of arbitration. They work for small disputes, too — one ADR provider in Massachusetts has posted a short form Agreement for Binding High-Low Arbitration and accompanying Confidential High-Low Agreement Form on its website. For a base cost of $475 each, two parties can get a third-party resolution of their dispute, and their agreement to bracket the arbitrator’s award ensures a result both can live with.

Try a high-low agreement so you can focus your fight on what the case is really worth. You’ll be glad you did.

Categories: Arbitration,Negotiation,Settlement,Structures

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