You’ve prepared for trial – have you prepared for settlement?
It is ironic that the vast majority of pre-trial effort is devoted to trial preparation when the vast majority of legal disputes are actually settled out of court. While preparing for trial is clearly important, litigants can achieve improved outcomes by also preparing for settlement.
The Latin author Vegetius wrote, “Si vis pacem, para bellum”, which is roughly translated, “If you want peace, prepare for war”. In matters of litigation, this stark advice explains why so much effort is devoted to trial preparation when most cases will never see the inside of a court room. Preparing for legal war conveys the very credibility and commitment that will or may compel the other party to settle. So it is important. Trial preparation also clarifies the dispute and works to narrow the bargaining differences between plaintiff and defendant, which in turn makes settlement more likely. Nevertheless, as vital as it is to prepare for the conflict, the peace itself can sometimes be overlooked. And in mattes of legal dispute, parties overlook preparations for settlement at their peril.
While the settlement bargaining process is not as structured or procedural as trial, it has its own complexity and this is sometimes ignored in the rush to “cut a deal”. Analysed properly, litigants need to weigh and balance a number of complex, inter-related, probabilistic and often countervailing economic forces to make the right settlement bargaining decision. Some of these considerations include:
- Factor and evaluate the impact of over 40 economic variables
- Weigh the settlement economic effect of the trial’s risks and opportunities
- Consider the offer-contingent nature of settlement probability
- Correctly discount the economic effect of uncertainty
- Consider the signal value of information contained in a settlement offer
- Quantify the value attached to private information
- Discount the time value differential between settlement and trial cash flows
- Consider the impact of contingent or hybrid fee structures
- Examine the effect of risk aversion on settlement bargaining optimisation
- Quantify the “shadow effect” of punitive damages in settlement pricing
- Examine the “term structure” of settlement and identify settlement-opportune timing for negotiations.
Clearly, the optimisation of settlement bargaining is a complex problem. The problem is non-linear, highly contingent and extremely quantitative. However, despite this complexity, litigants can sometimes oversimplify the problem and reduce the evaluation of settlement to a combination of trial expected values and qualitative bargaining strategy.
Preparing for Settlement
We take a different view. Our work in this area has focused on deconstructing the settlement bargaining problem mathematically, through the lens of game theory and information economics. We have developed a number of quantitative models that allow us to analyse lawsuits to identify settlement bargaining positions that optimise expected wealth. Our methods combine proprietary economic models of litigation with leading academic theories. In addition to game theory and information economics, we also draw on the disciplines of financial analysis, bargaining theory, probability theory and Monte Carlo simulation. Among other things, our models and our processes can help clients to assess and evaluate:
- Their wealth maximising settlement offer or demand
- The probability of an offer being accepted or rejected
- Information implied in an opponent’s settlement offer
- The implied probability of a plaintiff trial victory
- A credible aggressive bargaining position
- The real cost of a concession
- A robust optimal final offer
- The sensitivity of trial and settlement to various dimensions of the dispute
In all, this complex analysis of settlement requires factoring and discounting the effects of over 40 different economic dimensions of the case.
While every aspect of legal procedure and legal argument in litigation is carefully researched, reasoned, documented and agreed, it is fair to say that settlement decision-making often lacks this rigour. It is often an afterthought. It is sometimes rushed. And after the calculation of a trial expectation, the process essentially pivots from one of careful legal analysis to one of bargaining intuition, gut feel and opinion. It is ironic that after several years of painstaking and detailed legal work, the matter of settlement can sometimes be reduced to a personal bargaining hunch or bluff in the guise of “strategic bargaining”. At best this is good, but poorly justified bargaining savvy. At worst, the process of making settlement decisions can appear loose, unstructured and at times rash.
Here is a key benefit of our approach. As important as exploring financial optimisation is, we believe that an equally important benefit of our approach is the discipline it can bring to the consideration of settlement. Using our analytic framework, litigants can for the first time:
- Achieve analytic rigour in settlement analysis
- Document, demonstrate and justify an economic rationale
- Make quantitatively defensible decisions
- Maintain an auditable process of litigation settlement decision-making that will hold up to scrutiny
Benefits of Preparing for Settlement
When we begin to look at settlement bargaining from a more scientific point of view a number of benefits can accrue beyond the merely financial. Among other things litigants can:
- Be less susceptible to settlement error
- Bench test their settlement bargaining strategies or negotiating intuition before pre-trial negotiations go live
- Deconstruct the settlement bargaining process and derive a wealth of implied information
- Reverse engineer the opponent’s settlement offers
- Add an analytic filter to current qualitative bargaining decisions
- More closely sync their settlement policy with corporate risk tolerance
- Bridge the “computational gap” between litigation analysis and the negotiating table.
In short, preparing for settlement in this way can add rigor to the analysis of your legal dispute in the forum in which it is most likely to be resolved: settlement.