There are a variety of reasons cases don’t settle at mediation, but the most common – at least in my experience – is that opposing parties often make erroneous assumptions of risk. Put another way, plaintiffs frequently overvalue and defendants frequently undervalue a claim, thereby miscalculating the risks they each face if they don’t settle.
To guard against faulty assumptions of risk, Barry Goldman – author of “The Science of Settlement”– recommends that litigants test their assumptions by pretending the claim is a commodity that can be bought and sold on the open market. Doing so will enable plaintiffs and defendants alike to more accurately determine their true subjective value of the claim.
Plaintiffs can test their assumptions of risk by asking what price they would be willing to pay to acquire the same claim if they didn’t already own it, knowing they can profit if the claim is later resolved for more than they paid, but that they will incur a loss if it is resolved for less. In other words, plaintiffs should pretend the claim is a marketable asset that has been put up for sale by a third party. Bearing in mind the cost to prosecute the claim and the possible outcomes – and allowing for a reasonable profit margin – what is the most plaintiff would be willing to pay to purchase the right to pursue such a claim?
Defendants can test their assumptions of risk by asking what price they would charge to defend and indemnify the same claim if not already required to do so, knowing they can profit if the claim is later resolved for less than they charged, but that they will incur a loss if it is resolved for more. In other words, defendants should pretend the claim is the contingent liability of a third party who prefers to pay for someone else to assume the risk. Bearing in mind the cost to defend the claim and the possible outcomes – and allowing for a reasonable profit margin – what is the least defendant would charge to accept responsibility for the claim?
Said somewhat differently, at what prices would plaintiff and defendant each feel confident that they have something to gain and little or nothing to lose? The answers will reveal the parties’ subjective values of the claim, thereby enabling each to adjust for any mistaken assumptions of risk.
Making an accurate assumption of risk is a critical step in the dispute resolution process, without which each party to the dispute will be assuming a greater risk than necessary that the process will end without a resolution.
As always, it would be my pleasure to assist you and your clients in the dispute resolution process. Please don’t hesitate to contact me if I can be of service.
Best regards,
Floyd J. Siegal
fjs@fjsmediation.com