Settling A “Winner Takes All” Arbitration Through Mediation (Part II)
February 27, 2020
My last post discussed settling a “winner takes all” arbitration using a mediation technique requiring both parties to assess their chances of winning among 10 arbitrators chosen at random. By getting each to adopt a more realistic settlement range, a mutually acceptable number becomes possible. In this Part II, I look at how accounting for counsel fees and costs of arbitration can get the parties over the finish line.
Closing The Gap By Accounting For Fees And Costs
Once the parties have accepted the likelihood that they will prevail with fewer than 100% of the potential arbitrators, accounting for their respective counsel fees and arbitration expenses can often bridge much of the remaining gap. Assuming there is no possibility of fee shifting in the final award, both parties’ settlement positions must recognize that their risk adjusted proposals should be net of fees and costs of arbitration. The claimant should subtract her avoided costs from the minimum acceptable recovery, and the respondent should add his avoided costs to the maximum acceptable payment. In our hypothetical case from Part I, assuming no fee-shifting and each side has avoided costs of $100K, this would result in a settlement at $600K if claimant agrees she will prevail with 7 of 10 arbitrators, and respondent agrees he will prevail with 5 of 10 arbitrators:
Claimant’s Risk Adjusted Proposal = $700K
Subtract Claimant’s Avoided Costs = $100K
Claimant Should Agree to Accept = $600K
Respondent’s Risk Adjusted Proposal = $500K
Add Respondent’s Avoided Costs = $100K
Respondent Should Agree to Pay = $ 600K
“Winner takes all” arbitrations are difficult to mediate, but a settlement can result from getting both parties to look at their likelihood of success in a different way, and by fairly accounting for their costs of arbitration. Of course, arbitrations involving the valuation of multiple, independent legal issues, damages and the potential award of fees and costs require a far more complex “decision tree” analysis. The “intangible costs” of arbitration also can be significant, and may need to be accounted for in many cases. But even those arbitrations may benefit from a mediation that shifts some part of the discussion from the probability of winning and losing to one about how ten different arbitrators will see the case.
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