Settlement = Assessment of Risk + Math
This formula describes the structural supports for settling a business dispute.
And I’m still convinced of the formula’s accuracy, based on long experience. The constancy of this formula’s application means that business people are, ultimately, rational beings—even when emotions run high.
I mentioned the formula in a recent blog post, and one kind soul asked me to explain it further. So, this is my attempt at doing so.
Here are some experiences the formula is based upon.
In one of my early settlement experiences as a young lawyer, I watched an attorney provide a settlement analysis like this [note: what actually happened is, undoubtedly, more sophisticated than what I remember]:
- “The amount of the claim against you is $100,000”
- “Your defenses have a 25% chance of prevailing”
- “So, you should be willing to pay $75,000 in settlement.”
I remember being both surprised and impressed by the analysis: it has a logic and tidiness. But I also remember a sense of unease along these lines: “Who’s to say that $100,000 is the correct damages amount?” and “Who’s to say that odds of prevailing aren’t 50% instead of 25%?”
–“Assessment of Risk”
Before coming up with the settlement formula, I’d negotiated the settlements of many, many business disputes. And here’s what I’d observed about the “assessment of risk” portion of the formula:
- When one side is uncertain down deep inside (they’ll never admit it outwardly) about the strength of their position, they are willing to make concessions.
- When one side sees strong legal and factual support for its position, they aren’t willing to concede much.
- If one side truly believes the choice is between getting a small recovery vs. no recovery at all, that side will almost always choose something over nothing.
The “math” portion of the formula is applied after the risk is assessed. It applies the risk assessment against the amount in dispute to arrive at a settlement amount—either with precision (like the 25% example above) or generally.
Here’s how I observed the “math” portion of the formula at work:
- “Wow! We might lose. We’d better settle for the best deal we can get. Maybe now is the time to start discussing bankruptcy possibilities with the other side, to heighten their sense of risk and get the number down!”
- “We know the law favors our side, and discovery has strengthened our position. So, we are going to stand firm in negotiations on a settlement amount!”
- “Our position is strong. But the other side has no money—can’t get blood out of a turnip. So, we’d better take whatever we can get and hope the 90-day preference time expires before they end up in bankruptcy.”
An upshot of the formula is this: litigators are always probing for a sense of how the other side assesses the risks—keeping in mind that bluster often signals uncertainty—to achieve a rational basis for negotiations.
Over the years, here’s what’s made my heart beat faster and harder in negotiations: conveying a strong-position settlement offer without a clear sense of the other side’s own risk assessment.
In business disputes, the formula almost always applies—even when distrust and animosities run high. However, here are two things that can blow negotiations up, or at least create an impasse:
Parties assessing their relative risks differently; and
A stubbornness of one or both sides that is contrary to (or despite) their own risk assessments, believing a bluff will achieve concessions.
My experience is that stubbornness rarely prevails, ultimately, in business dispute negotiations, even though it is a common posture in early negotiations.
Early and accurate risk assessment is the best way an attorney can provide value to a disputing client.
Whenever I discuss the Settlement = Assessment of Risk + Math formula, I always mention the family-disputes exception. The exception is this:
–When a business dispute in litigation is between family members, the formula goes down the toilet.
The formula simply doesn’t apply in family disputes. That’s because family dysfunctions and animosities are inherently irrational and cannot be overcome with logic or reason. “I’ll see you in hell before you get a dime!” is often the operative adage in such circumstances. And they often mean it . . . literally!
Settlement = Assessment of Risk + Math is a formula that almost always holds true, ultimately, in business negotiations. That’s a fortunate thing because its evidence of rationality in resolving business disputes.
The trick for all parties, therefore, is to (i) achieve an early and accurate assessment of one’s own risks, and (ii) get an accurate reading of the other side’s assessment of their own risks.
But if the business disputes in litigation are between family members . . . heaven help them all!
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