Economic Analysis of settlements

TABLE OF CONTENTS

I. INTRODUCTION

II. LEGAL BACKGROUND
1. Sec. 779 of the German Civil Code (§ 779 BGB)
2. Sec. 278 of the Code of Civil Procedure (§ 278 ZPO)
3. Sec. 15a of the Introductory Law to the Code of Civil Procedure (§ 15a EGZPO)
4. Others
5. Other countries
5.1 France
5.2 Switzerland
5.3 United Kingdom
5.4 USA

III. ECONOMIC ANALYSIS OF LAW
1. Basics
2. Economic analysis of settlements – game-theoretical approach
2.1 Main features
2.1.1 Players
2.1.2 Actions and Strategies
2.1.3 Outcome and Payoff
2.1.4 Costs
2.1.5 Information
2.2 Example
2.3 Extensions
2.4 Interim conclusion

IV. DETAILED ANALYSIS OF GERMANY
1. Settlements and social welfare
1.1 General considerations
1.2 Load removal of the judicial system
1.3 Preservation of legal relationships
1.4 Circumvention of procedural rules
1.5 Particularities in Germany
1.6 Other aspects
1.7 Interim conclusion
2. Analysis of reality
2.1 The German judicial system
2.2 The German law schools
2.3 The German mentality
2.4 Interim conclusion

V. CONCLUSION

BIBLIOGRAPHY

I. INTRODUCTION

In Germany, settling a civil dispute by trial seems quite popular: Whereas, in 1980, the number of new lawsuits of first instance was ‘only’ 1.26 million, there were 1.68 million new suits in 1986¹ – an increase of more than 33 %. In 1994, around 2.12 million civil lawsuits were filed². According to a survey of the German Federal Department of Justice and the Prognos AG, the number of new lawsuits in 2000 was approximately 2.5 million³. However, only a small number of those suits were settled before going to trial or during trial and, predominantly, courts had to render a judgement⁴. This becomes apparent when looking at the fact that in 2000, German civil courts completed circa 1.8 million actions⁵. Compared to the number of new lawsuits in 2000, it is more than 70 %. In the U.S., by comparison, less than 10 % of the actions reach the phase of trial⁶. This is the reason why German courts are obviously being busy.

In addition, because of the German Reunion in 1989/1990, the German judicial system had to handle a completely new situation in the new federal states, the so-called ‘ neue Bundesländer’. Despite this consistent growth of the courts’ caseload, the number of people working in the judicial branch, mainly

judges, clerks and other court staff, remained at a similar level between 1980 and now⁷. And although there are several possibilities to settle and/or even not to use the judicial branch at all, it is very likely that in Germany a lawsuit will be filed and the parties will continue litigating until they reach the trial phase. As a result, the German judicial system is overloaded.

This paper’s goal is to examine why, in Germany, settlement is not very popular and parties to a civil law dispute prefer litigation to settlements. For this reason, the paper examines whether there are possibilities to settle in Germany at all. It will delineate a settlement’s efficiency for individuals in general and the efficiency for society of some of the legal possibilities for settlement in Germany in particular. This is mainly an economic analysis of settlements in order to ascertain if settlements are actually economically efficient. However, this paper does not only consider abstract economic aspects when analyzing reasons and conditions whether and how to settle. It also pinpoints legal and social aspects peculiar to Germany to answer the above question of why settling is not very popular in Germany.

II. LEGAL BACKGROUND

First of all, in Germany there exist several possibilities to settle a dispute out of court and several legal rules regarding settlements and the attempt to settle. This chapter shall introduce and compare the rules of Germany to other countries’ laws and regulations by explaining the respective legislature’s approach:

1. Sec. 779 of the German Civil Code (§ 779 BGB)

§ 779 I BGB provides a statutory definition for the expression settlement: ‘A contract with which the parties to legal relationship eliminate the dispute or the uncertainty about this relationship by reciprocal easing (settlement), […]’⁸. This section shows that the arguing parties to a legal relationship may always settle by private contract. In other words, the parties to a dispute shall come together, talk and think about the dispute and try to reach an amicable solution. § 779 BGB clarifies the legislature’s intent that parties should arrange their conflicts rather than looking for a judgement. § 794 I Nr.1 ZPO even substantiates this intention by regulating that a settlement has the same procedural effects like a verdict: It constitutes an enforceable title that authorizes execution against the other party’s property⁹.

2. Sec. 278 of the Code of Civil Procedure (§ 278 ZPO)

After having looked at § 779 BGB, there is a need to take a look at the general rule of § 278 I ZPO. This rule explicitly states that not only the parties to a legal dispute, but also the court, i.e. the judge, shall be looking at all times for an amicable result of this dispute¹⁰.

Since 2002, the German Code of Civil Procedure provides that in every case where a civil lawsuit has been filed, there shall be a conciliation attempt,

§ 278 II ZPO¹¹. This means that the parties are to meet before going to trial to try to find a pre-trial solution. To save time and money, this attempt usually takes place in the courthouse with the judge as a neutral chairman. Yet, the judge can suggest a change in the forum or type of dispute resolution if appropriate, § 278 V ZPO. However, this is not very common¹².

This pre-trial conciliation attempt is not necessary when the parties previously tried to settle in private or by using alternative dispute resolution before going to court. It is also not necessary if there is obviously no expectation to settle, § 278 II S.1 ZPO. The judge is not allowed to dismiss the action even if it is the case that one or more parties did not attend this conciliation attempt, that is to say there was no such attempt. He will start or schedule the proceedings, as if there was such an attempt, but no amicable solution has been reached. Therefore, this rule again fortifies the German legislator’s intent to promote settlements. But because of the above reasons, it is not very striking in reality.

3. Sec. 15a of the Introductory Law to the Code of Civil Procedure (§ 15a EGZPO)

In December 1999, the German legislator passed the Act to Promote Amicable Arrangements¹³. This clause in the Introductory Law to the Code of Civil Procedure gives the German federal states the possibility to implement a new procedural condition: Under certain circumstances, it is not admissible for a party to start proceedings in local courts without a prior conciliation attempt¹⁴. Those special circumstances which are chosen to test in which areas the idea of a mandatory conciliation attempt works, are i.e. the suit for payment of a minor amount (up to 750 €), for removal of tree branches or for revocation of defamatory statements¹⁵. Eight German federal states implemented this new condition during the first two years¹⁶, adopting mostly the same requirements to incorporate this conciliation attempt. One example of such an implementation is the Bavarian Conciliation Act (BaySchlG) from October 2000, which requires the parties to a lawsuit to seek settlement before being allowed to proceed to court. The chairman of the conciliation attempt has to be a notary or an attorney-at-law who is licensed by the Bavarian Bar Association to be a referee, Art. 5 BaySchlG. However, pursuant to § 15a III EGZPO and the real purpose of conciliation, the arguing parties may agree to another chairman or forum, Art. 3 BaySchlG.

§ 15a EGZPO explicitly states that this conciliation attempt is mandatory. If it does not take place, the court has to dismiss the action. With this approach now, the legislator obviously tries to force adversarial parties to try to settle.

4. Others

The idea of § 15a EGZPO is not new¹⁷: Between 1924 and 1950,

§ 495a ZPO in its old version (‘a.F.’) also required a conciliation attempt before allowing parties to initiate proceedings in local courts. Until 1976, there was a similar procedural condition in family law (when filing a petition for divorce),

§§ 608 ff ZPO a.F. But the legislative branch abolished those rules due to inefficiency¹⁸. Currently, there are still some other rules concerning settlements in the German Code of Civil Procedure like § 796a ZPO (‘ vollstreckbarer Anwaltsvergleich ’), allowing lawyers to conclude settlements for their clients to simplify the procedure¹⁹ or § 485 II ZPO, allowing some procedural steps even if there is no pending lawsuit. But again, those rules are not very important in practice²⁰. And even though there are legal and out-of-court possibilities to settle other than the mentioned – such as arbitration, §§ 1025 ff ZPO, and mediation –, they mostly are still in the fledgling stages and not very popular in Germany²¹.

For this reason, only one other area of civil law shall be briefly introduced, but it is one of the most important ones in Germany regarding settlements and conciliation: the German Labour Law. § 54 ArbGG requires, in every employment dispute, a mandatory conciliation attempt before the parties are allowed to go to court. The reasoning is quite simple: There is almost always a legal relationship with a personal element between parties to a labour law dispute²². To protect this relationship, the parties shall try to settle before going to trial. Unfortunately, until now, this is the only area of law in Germany where this kind of procedural condition has proven successful. This is evident when looking at the fact that, i.e. in 1994, German labour courts completed 472,816 proceedings (only initial proceedings, no appellate cases). Courts had to render only 40,179 decisions, whereas in 197,605 cases, the parties settled²³.

5. Other countries

5.1 France

Until 1976, the French Civil Procedure Law required a so-called ‘petite conciliation’, a mandatory conciliation attempt with the responsible judge before being allowed to go to trial. Nowadays, with the ‘Nouveau Code de Procedure Civil’, the plaintiff can choose to take either the pre-trial conciliation attempt or immediately proceed to trial²⁴. If the plaintiff chooses the conciliation attempt, the judge or a third neutral person guides this attempt. The period of time for this attempt is limited to one month; the parties to the action do not have to take additional costs. A French court has the discretion, together with the parties, to stay the proceedings at all times and send the parties to another appropriate forum, i.e. a mediator, and, if not successful, to go on with trial. Hence, the French system provides very attractive possibilities and incentives to try to settle.

5.2 Switzerland

In most of the Swiss cantons, the so-called ‘juge de paix’ or ‘giudice di pace’ takes the court’s function and decides in an upstream procedure, before the parties are allowed to go to trial, sec. 193 of the Zurich Code of Civil Procedure. Those ‘judges’, elected by the citizens and sometimes not even lawyers, complete a remarkable part of the civil actions and ease the courts’ workload²⁵. Yet, this is no real rule or incentive to settle, but a totally different approach to support overloaded courts than the German approach.

Nevertheless, because Swiss rules concerning alternative dispute resolution are quite favourable, Switzerland is still a very popular forum for international – mainly commercial – disputes, especially compared to Germany²⁶.

5.3 United Kingdom

The UK’s civil procedure has some of the most ground breaking settlement laws in the world. Especially ‘Part 36: Offers to settle’ of the Civil Procedure Rules (‘CPR’) creates a mechanism designed to encourage parties to settle a claim before a trial takes place²⁷. It allows the parties to litigation to make offers to compromise the case. If this offer is not accepted and the offeror does better than his offer when the case goes to court, the recipient of the offer will suffer from a reduction of the costs awarded by the court, sec. 36.14 f CPR. If the recipient is the defendant, there may also be an adverse effect in the interest awarded. Consequently, Part 36 CPR is a valuable strategic tool as the drastic financial sanctions and incentives created by it are likely to help put pressure on the opposing party to settle and hence, can offer significant protection in costs²⁸.

5.4 USA

In the U.S., there have been countless experiments on alternative dispute resolution (‘ADR’) and settlement bargaining. There are more than enough ADR mechanisms for opposing parties to avoid trial, like mediation, arbitration²⁹, etc. Indeed, only less than 10 % of the civil disputes finally go to trial – or even to initial proceedings³⁰. The reasons for this fact simply are the characteristics of the American Civil Procedure Law:³¹ the common law structure, no fee-shifting, the risk and uncertainty of a jury trial, discovery proceedings which could get out of hand, etc. That is why in the U.S., ADR mechanisms are that successful: It is less to support overloaded courts, but more to help arguing parties solve their dispute without having to be subject to the American judiciary³².

III. ECONOMIC ANALYSIS OF LAW

In order to understand the economic analysis of settlements and of the above rules, one has to have a general understanding of this kind of analysis. After a short overview of the basic principles of the economic analysis of law, this chapter analyzes settlements by using the main tool now being employed by analysts in this area: the game theory.

1. Basics

The economic analysis of law is a methodical approach to mainly evaluate legal rules by observing their effects³³ and, in addition, to make statements about how legal rules should be designed³⁴. It looks at the relevant actors’ behaviours – the effects – and evaluates ‘whether these effects are socially desirable’³⁵. Thus, an economic analysis mainly examines the economic efficiency of these effects³⁶. Additionally, when analyzing the law with this approach, it has to be clear in one’s mind that basic economic premises are implied³⁷:

First, the core of every economic analysis is the individual human being itself. The relevant actor is not considered to be an individual person, it is defined as an average person in the society. That means that not every real person has to have the same behaviour to allow an economic analysis of law – in reality, every individual has specific characteristics. For an economic analysis, it is sufficient that the relevant average person as an artificial individual is considered to have an average and predictable behaviour. This is the basic premise which makes an economic analysis and projection possible.

Second, those relevant actors are forward looking and rational. They consider every possible alternative and choose the most efficient one. The actors evaluate every alternative by comparing the costs and benefits and considering either maximum output with given input or minimum input with given output.

In the end, economic analysis of law is not looking at the individual welfare, its main purpose is to find the most efficient alternative for the social welfare. Criteria for this economic efficiency are i.e. the Kaldor-Hicks- Equilibrium (the allocation of resources with the highest sum of social welfare) or the Pareto-Criterion (no person is worse-off than before any reallocation of resources)³⁸.

[...]

¹ Leeb, Entlastung der Justiz, BB-Beilage (Nr.10) 1998, 3, 3

² Id.

³ See Id.

⁴ So i.e. Wassermann, Zur „Prozessfreude“ der Bundesbürger, NJW 1995, 1943, 1943.

⁵ Statistisches Bundesamt, Erledigte erstinstanzliche Verfahren an den ordentlichen Gerichten, Deutschland; http://www.destatis.de/basis/d/recht/rechtgra2.htm [30.06.2007].

⁶ See Stadler, Außergerichtliche obligatorische Streitschlichtung, NJW 1998, 2479, 2482.

⁷ ‘At least the increase of personnel in the judicial branch was not appropriate to handle the enormous increase of work’, Leeb, Entlastung der Justiz, BB-Beilage (Nr.10) 1998, 3, 3.

⁸ The original wording of § 779 I BGB is: ‚Ein Vertrag, durch den der Streit oder die Ungewißheit der Parteien über ein Rechtsverhältnis im Wege gegenseitigen Nachgebens beseitigt wird (Vergleich), [...]’.

⁹ See more detailed Zimmermann, ZPO – Fallrepetitorium, p. 167 [and case 236, respectively].

¹⁰ The original wording of § 278 I ZPO is: ‚Das Gericht soll in jeder Lage des Verfahrens auf eine gütliche Beilegung des Rechtsstreits oder einzelner Streitpunkte bedacht sein’.

¹¹ See for an example Zimmermann, ZPO – Fallrepetitorium, p. 174 [and case 247, respectively].

¹² Greger, Güterichter – ein Erfolgsmodell, ZRP 2006, 229, 230.

¹³ The original wording is: ‚§ 15a EGZPO - Gesetz zur Förderung der außergerichtlichen Streit- beilegung’; http://dejure.org/gesetze/EGZPO/15a.html [02.06.2007].

¹⁴ See for more details Greger, Obligatorische Schlichtung, SchiedsVZ 2005, 76, 78.

¹⁵ Id.

¹⁶ Bavaria, North Rhine-Westphalia, Baden-Wuerttemberg, Brandenburg, Saarland, Saxony- Anhalt, Hesse and Schleswig-Holstein. See Id.

¹⁷ For an illustration of laws and regulations regarding settlement in Germany’s past and now see Stadler, Außergerichtliche obligatorische Streitschlichtung, NJW 1998, 2479, 2480.

¹⁸ So Id.

¹⁹ Giving an example Zimmermann, ZPO – Fallrepetitorium, p. 176 f [and case 252, respectively].

²⁰ So Stadler, Außergerichtliche obligatorische Streitschlichtung, NJW 1998, 2479, 2480.

²¹ See, e.g., Paul, Ausbildung und Kosten der Mediation, FPR 2004, p. 176 ff. These alternatives, however, are not the topic of this paper.

²² Leinemann, Die Arbeitsgerichte, BB 1997, 2322, 2327.

²³ The other proceedings have been closed otherwise. For more details see Leinemann, Die Arbeitsgerichte, BB 1997, 2322, Statistischer Anhang (citing Der Bundesminister für Arbeits- und Sozialordnung, Arbeits- und Sozialstatistik, Hauptergebnisse 1995, Handbuch der Justiz 1996).

²⁴ Giving more details Stadler, Außergerichtliche obligatorische Streitschlichtung, NJW 1998, 2479, 2482.

²⁵ Stadler, Außergerichtliche obligatorische Streitschlichtung, NJW 1998, 2479, 2482.

²⁶ Raeschke-Kessler, Neuere Entwicklungen im Bereich der Internationalen Schiedsgerichts- barkeit, NJW 1988, 3041, 3051.

²⁷ See DCA, Part 36 of the Civil Procedure Rules, Consultation Paper CP 02/06, p. 5.

²⁸ With the same conclusion DCA, Part 36 of the Civil Procedure Rules, Consultation Paper CP 02/06, at p. 2.

²⁹ For a detailed overview on this see Benson, Arbitration, Encyclopedia of Law and Economics, 159, 159 ff.

³⁰ Stadler, Außergerichtliche obligatorische Streitschlichtung, NJW 1998, 2479, 2482.

³¹ See Id.

³² Id.

³³ Consequentialism as a main principle of the economic analysis of law. See Kirstein, Ökonomische Analyse des Rechts, Ökonomische Analyse zentraler Rechtsinstitute, part 2, p. 3; http://rolandkirstein.de/recht051020.doc [05.05.2007].

³⁴ Drexl, Die wirtschaftliche Selbstbestimmung des Verbrauchers, § 5, 162, 163.

³⁵ Polinsky/Shavell, Economic Analysis of Law, SIEPR Discussion Paper No. 05-05, p. 2.

³⁶ So Möllers, Rechtsgüterschutz im Umwelt- und Haftungsrecht, p. 122.

³⁷ For an introduction in ‚Law and Economomics’ and a further discussion of those premises see, e.g., Drexl, Die wirtschaftliche Selbstbestimmung des Verbrauchers, § 5, 162, 163 ff.; Polinsky/Shavell, Economic Analysis of Law, SIEPR Discussion Paper No. 05-05, p. 2; Kirstein, Ökonomische Analyse des Rechts, Discussion Paper 2003-06, p. 2 ff.; Schäfer/Ott, Lehrbuch der ökonomischen Analyse des Zivilrechts, part 1.

³⁸ For an illustration of those criterions see Bärwolff, Die ökonomische Analyse des Rechts und seine Anwendungen, p. 4 [and footnote 5, respectively]; explaining the Pareto-Efficiency at length Varian, Intermediate Microeconomics, p. 511 ff.