Is ‘no deal’ better than a ‘bad deal’? Away from its current political significance in the Brexit negotiations, being able to answer that question is an essential part of preparing for a mediation.
What does ‘no deal’ look like?
‘No deal’ means walking away from a mediation without an agreement. Walking away, however, is only part of the story. Before walking out, a good negotiator should assess their alternatives: namely, what other courses of action are open to them if they do not agree on a settlement.
A list of alternatives to a negotiated agreement should be prepared and examined in advance of a mediation. A negotiator should then identify the alternative route that is projected to give the best outcome. This ‘best’ option is known as the Best Alternative To a Negotiated Agreement (BATNA).
Where an agreement is not reached at mediation, the parties usually determine that litigation is their best alternative to a bad deal.
What constitutes a ‘bad deal’?
A bad deal is a negotiated agreement that is not as good as the outcome that you are likely to obtain by pursuing your BATNA. For the example used in this article, we will assume that the BATNA is continuing to litigate: namely, going to court to have a judge decide the outcome.
But how do you assess an offer to decide whether ‘no deal’ is preferable? Calculating a value for your BATNA is a good start.
Working out your BATNA
For this calculation, we will use the example of a claimant who is hoping to recover £500,000 in damages for a breach of contract by the defendant. The type of contract and the nature breach are not relevant for this simple example.
To calculate the BATNA, the claimant’s lawyers should consider the following matters:
The probability of winning at court
The outcome of a court hearing cannot be guaranteed. As such, lawyers are accustomed to assessing litigation risk. Lawyers often have to provide risk assessments to insurers offering litigation cover, and law firms use risk assessments when looking at funding options for their client. The probability of winning at court is usually expressed as a percentage.
In this example, the claimant’s lawyers estimate the chances of success at 70%.
To avoid an unrealistically high value for the BATNA, the claimant’s lawyers adjust the amount claimed in damages (£500,000) to take the litigation risk into account:
70% of £500,000 = £350,000
Estimate of legal costs
The claimant’s lawyers estimate that legal costs up to and including a court hearing are £100,000.
Irrecoverable legal costs
In litigation, the winning party is unlikely to recover all of their legal costs from their opponent. The claimant’s lawyers estimate that the claimant would fail to recover 20% of the legal costs incurred. This would leave the claimant with £20,000 that would be irrecoverable even if they won at court.
Calculating the BATNA
The BATNA value can now be calculated by subtracting the irrecoverable legal costs from the adjusted figure for damages:
£350,000 – £20,000 = £330,000 (net gain)
The BATNA, expressed as a net gain, can then be used as a level to compare an offer against. If the offer is lower than the BATNA then the claimant should probably reject it. If the offer is higher, the claimant should consider whether to try and improve or accept it.
Unfortunately, the BATNA is better suited to an ‘all or nothing’ dispute, where the claimant is likely to be awarded 100% of their damages if they win.
Enter the MLATNA
Few cases have an all or nothing outcome. It is more common for a claim to include more than one item (or head), where each item is dependent on its own set of facts and legal principles. A claimant might, therefore, fail to achieve 100% of the damages sought on each item of their claim. For disputes where a party is likely to have partial success and not recover the entire sum claimed at court, you should calculate the Most Likely Alternative To a Negotiated Agreement (MLATNA).
Some negotiators refer to the MLATNA as a ‘reality check’ tool. Where the BATNA projects the best possible outcome, the MLATNA looks at what is most likely to happen if negotiations break down. In practice, calculating the MLATNA is the most useful and used approach during a mediation: although lawyers and mediators rarely use this term.
A value for the MLATNA is calculated in a similar way to the BATNA. The main difference is that lawyers estimate the amount that the court is likely to award in damages (having regard to the strengths and weaknesses of each aspect of the claim). The BATNA assumes that the damages will be awarded in full.
Calculating the MLATNA
We will continue with the example above. The claimant’s lawyers estimate that the claimant would be awarded £400,000 of the £500,000 claimed. The probability of winning at court and the legal fees to take the matter to trial are the same as for the BATNA example.
70% of £400,000 = £280,000
£280,000 – £20,000 (irrecoverable costs) = £260,000 (net gain)
The net gain for the MLATNA is less than that for the BATNA. That is to be expected. The claimant has taken a more realistic approach to the award likely to be made by the court. As such, the net gain for the MLATNA offers a greater degree of accuracy when comparing it to an offer. If the defendant in this example made an offer of £300,000, the BATNA might cause the claimant to reject that offer and go on to do less well at court. The MLATNA, however, would allow the claimant to consider improving or accepting that offer.
Working out your WATNA
The Worst Alternative to a Negotiated Agreement (WATNA) in the example above is a loss at court. That would mean recovering none of the damages claimed. The claimant would also have to pay the defendant’s costs as well as their own.
The net loss would be calculated as follows:
£0 (damages) – £100,000 (claimant’s costs) – £80,000 (opponent’s costs) = -£180,000 (net loss)
The defendant’s costs have been assumed to be the same as the claimant’s. The calculation also assumes that the defendant would have a portion (20%) of their costs that are irrecoverable.
The WATNA is less useful than the BANTA and MLATNA, but it can help each party understand the worst alternative to reaching a negotiated agreement. It can also be useful to calculate an opponent’s WATNA and show them what ‘no deal’ could mean.
Some things to bear in mind
Do not treat the BATNA or MLATNA like a traditional bottom line. As a dispute develops, litigation risks and projected legal costs change. You should, therefore, regularly re-examine your assumptions and re-calculate. A traditional bottom line is rigid and may not reflect what you can realistically achieve at court.
The net gains and losses generated by the calculations above are estimates and should only be used as a guide. There are also other considerations that should be included when calculating the alternatives to a settlement at mediation:
- Time lost on taking a dispute to court rather than managing your business.
- The effect that an ongoing conflict has on family life.
- Any reputational damage from a protracted legal dispute.
This is not a comprehensive list, and it is not possible to assign a monetary value to all of the items in it, but any other relevant costs and issues should be considered together with the values obtained above.
You should also be wary of overly optimistic or pessimistic assessments of prospects or costs, legal and otherwise. Relying on a poorly estimated BATNA or MLATNA could mean that you reject a reasonable offer or enter into a bad deal.
It is prudent to also estimate the BATNA, MLATNA and WATNA for your opponent. Pointing out your strong BATNA or MLATNA to an opponent, while using their WATNA to show them what could happen if they do not make a reasonable offer, can be a useful strategy. Calculating your opponent’s BATNA or MLATNA can also help you define the Zone of Potential Agreement (ZOPA) for a dispute, which can help you to make effective offers.
This article covers a lot of ground. There are large texts that cover these subjects in greater depth, and there are many different approaches to calculating the BATNA, MLATNA and WATNA for a dispute. But by applying some of the basic principles discussed here, you can improve your ability to assess the offers made during a mediation.
