ALTERNATIVE DISPUTE RESOLUTION
In other words, unless the probability of P accepting D’s original offer of an 80:20 split is greater than 62.5% then P’s counter-offer of a 50:50 split has the same or better expected value for D than the hope that P will in the end accept an 80:20 split. Furthermore, if D doesn’t accept P’s offer then the situation will become a Mexican standoff and negotiations will be stalemated, meanwhile as each party continues paying their respective solicitors S gets smaller and smaller.1While this is a case of who blinks first, P is the one who is making a fair offer and D is the one who is seeking to profit from an unfair offer (although this would not be readily apparent to the casual observer) and for the reasons set out below, as a matter of principle, the parties should always adopt an even split of the Surplus. If these negotiations were taking place on day one of the dispute, we would be looking at J = $100,000, C = $30,000 and S = $40,000. Whilst the values of J and C, assuming that the original calculations were accurate, will remain constant throughout the course of the litigation up to the time of judgment, however that is not true of S. S is the solicitor/client costs as will be incurred in the future. S does not include solicitor/costs which have already been paid or incurred in the past. This significantly effects the extent to which the parties are apart. If the offer of an 80:20 split was made by D on day one then it would come to an amount of $42,000 and P’s counter-offer of a 50:50 split would come to $66,000. Thus, they would be $24,000 apart. If those same offers were made half-way through the case when each party had spent $20,000 on their solicitors then they would only be $12,000 apart. It will be recalled that Equation (1) is: Ep = pJ + 2pC – C – S; and Equation (2) is: Ed = C – S – pJ – 2pC. If there is a 50:50 split that is the equivalent of adding S to both equations. Equation (1) therefore has the value of Ep = pJ + 2pC – C = $66,000 and Equation (2) has the value of Ed = C - pJ - 2pC = -$66,000. A symmetrical split has the effect of removing the Surplus from the calculations, whereas an asymmetrical split retains the Surplus. Thus as time passes and more and more money is spent on the lawyers and the experts in which case an asymmetrical offer will, with the progressive payment of legal
42 THE BULLETIN June 2021
costs, approach a symmetrical offer and if the only point of difference between the parties is whether the split should be symmetrical or asymmetrical then it is definitely the case that the only winner is the lawyers and the experts. If, on day one, all that separated the parties was the terms on which the Surplus was to be split, D wanting 80:20 and P wanting 50:50, which leads to a difference in offers of $24,000, a gap too large to bridge, but after each party has spent $20,000 in legal costs we have halved the gap which is no longer too large to bridge then all that has been achieved is that an extra $40,000 has been spent on lawyers and other experts and the parties are commensurately worse off. All of this would have been avoided had the parties from the outset adopted the principle of a 50:50 split of the Surplus.
SOME BRIEF OBSERVATIONS The key to understanding and applying a games theoretic approach to settlement negotiations is to look at the whole picture and, in particular, to look at the position from both parties’ points of view and not to solely focus on one’s own position. One may be in a quandary but then one’s opponent may also be in quandary, which may or may not be as bad as one’s own position. Also, another important lesson to be drawn here is the fact that one should not be terrified of taking risks when reason and common sense tells one that these are risks worth taking. In short don’t be a dove. Similarly, it is far from obvious that there is any advantage in being a hawk and there is a very real risk that by adopting such a role one may only achieve lining the pockets of the legal profession. At the end of the day litigious negotiations have a centre of gravity and that is a fair division of the pie. Not only is litigation a negative sum game but once it commences the parties lose control over their destiny insofar as their destiny is determined or shaped by the litigation. Apart from taking the matter through to a trial and judgment the only way for the parties to win back that loss of control is to cooperate with each other and ordinarily that can only be achieved through each treating the other fairly. The desire to be in control of one’s own destiny is a very powerful magnet which draws parties into being cooperative and therefore into settling their disputes fairly.
In adopting these three categories, the hawk, the owl and the dove may be seen by many as an over-simplification. Human beings are not so easily defined, they are much more subtle and nuanced with no two people being exactly the same. None of which can be denied. However, the intention here is to identify different points on a spectrum which at one end there is an extreme version of the hawk strategy and at the other there is an extreme version of a dove strategy, with the centre being occupied by the owl. Essentially the hawk, the owl and the dove are conceptual models with each sufficiently delineated from the others to separate out three quite different strategies. The significance of which is to demonstrate that whilst an even division of the pie is the centre of gravity in respect of the negotiating process that point, however, is not set in stone. The point at which a dispute ultimately resolves is a matter which can be substantially affected by strategy, particularly in those cases where one of the parties/players adopts a bad strategy, such as being a dove. Thus, so long as neither party is adopting a bad strategy the process of negotiations ought to arrive at a good approximation to a fair division of the pie. It will be recalled that the centre of gravity in the example is S + Ep (i.e. $66,000), in the case of P, and S + Ed (i.e. -$66,000), in the case of D. A properly informed intuition would ordinarily regard any offer which was substantially outside the range of $55k to $70k as not being acceptable to the party disadvantaged by that offer. In which case the offer would be refused leaving the offeror with the choice of going to trial the expected value of which would be less advantageous than to settle somewhere between $55k and $70k. Hence, so long as that range is more attractive to both parties than going to trial then in the majority of cases the matter ought to settle at some point within the range constituted by the Surplus. Up to this point it has been tacitly assumed that the parties’ involvement in litigation is a one off or that it is only on rare occasions in which the parties find themselves involved in litigation. That of course overlooks those parties who are serial litigants, a classic example of which would be an insurer. In the case of a serial litigant that party has open to it the opportunity to make a credible threat
