Vol 13 (2016) - Issue 6

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Beyond Grey Hair and Gut Instincts: Using Decision Trees to Supplement Analysis in Litigation

1. Introduction
Lawyers are reluctant to use numbers or percentages when advising clients on risk and outcomes in litigation matters. Many insist on using probabilistic phrases like 'significant chance' and 'reasonable prospects' instead of precise numbers in their advice.1 This practice can lead to confusion and can deprive the client of the considered views of her legal advisers following a careful and systematic analysis of the issues in the case. Yet surprisingly few clients insist that their lawyers 'put a number on it' when giving advice. As a result, decisions are often made in deference to grey hair,'gut instincts' and settlement numbers that 'feel right', in the absence of any robust evaluation of the choices, chances and the financial outcomes of the litigation.
Decision trees – a diagrammatical representation of all choices, chances, costs and payoffs associated with a given project – are commonly used in banking, manufacturing, consulting and medical sectors to manage risk, evaluate options, develop strategies and allocate resources. Decision trees are also powerful tools for decision-making in litigation as they provide a methodical framework in which to integrate the views of in-house counsel regarding costs, probabilities of success and potential economic value of the litigation, with those of external lawyers concerning the legal issues and strategy.
Decision tree analysis can be particularly valuable for insolvency practitioners (IPs) when bringing litigation on behalf of insolvent entities, for three reasons. First, IPs are usually better placed than typical clients to contribute to, and interpret, the quantitative analysis provided by decision trees, and to use decision trees to inform their decisions. This is because they are trained in accounting and finance and tend to appreciate visual representations and analysis presented in a finite number of alternatives, when making decisions. Second, IPs owe duties to creditors and the court. Decision trees are a useful supplementary analysis to justify a decision to pursue, assign or abandon a claim in the name of an insolvent entity. Third, decision trees provide an IP with a comprehensive view of the range of potential outcomes from the litigation, including the potential financial risks of losing the action, which can be of greater importance than winning in the context of a proposed action by an insolvent entity with limited resources.
The first part of this article introduces decisions trees and their key features; the second part describes the key insights that can be drawn from decision trees in a litigation context, as the well as the limitations of decision tree analysis; and the final part of this article uses decision trees to demonstrate how IPs can use third party litigation funding to minimise the downside risk of litigation. In all sections, this article draws on a case study – a potential claim for wrongful trading by a company in administration – to illustrate how decision trees can supplement traditional analysis and decisionmaking in litigation.