I serve on the Board of a homeowners association, and we are preparing to vote on whether to sue a contractor or not. The details of our complaint are not important. The process of deciding what to do is very important.
Many contracts have mandatory arbitration clauses. That is, the parties must go to arbitration (or sometimes mediation, a different animal) before filing suit. An interesting variation of arbitration is to require both parties to submit their desired outcomes. The arbitrator is constrained to chose only one of the proposals. They cannot be merged or split down the middle.
This constraint requires a different response from the “Demand the moon and everything else” method of opening a negotiation. In open negotiations both parties find it in their interests to present their settlement demands biased towards their side. Most negotiations end up settling somewhere in the middle, so if you present a totally fair settlement for consideration and your opponent comes in with an outrageous one, you will likely settle on terms unfair to you.
Two-choice arbitration eliminates any middle ground. Think about how the rules of this arbitration changes your strategy in presenting a proposed settlement. There is what you want; what you should get to be fair; what is legally required; and what is likely to happen. These can all be different. What do you do?
But suppose your disputed contract does not require arbitration. Then you would normally negotiate with your opponent, and if no agreement is reached, you file a law suit. But the process is not over. Going to court is expensive and someone will pay the extra costs. So the negotiations continue and most disputes are settled immediately before the court date.
I would like to think that logic and decision theory plays a major role in settlements, and maybe they do in disagreements between large corporations who can afford a lot of justice, but for normal folks with a grievance, we wing it and try to minimize our maximum losses.
When talking to our attorney to estimate what our costs would be under various scenarios, he told an interesting anecdote involving a case that was defended by an insurance company. No agreement was reached, and they were headed to court. The attorney asked the adjuster what was going on. This was an open and shut case. The insurance company would settle a day or so before the court date which was a long way off. Why not just settle and get on to other things? The adjuster was open and frank. He said that if he settled immediately and did not show a good fight even though he knew how it would end, his work record would not look as good as it would if he showed how he fought right to the doors of the courthouse. He valued his job, and so he would fight even though he and everyone else knew how it would end.
That sort of real parameter is easy to overlook when analyzing a situation from a decision theory point of view.
Will we sue? The contractor has done nothing to correct our situation and his insurance company has stopped talking to us. What is the cost to the Association if we do nothing. What is the probability of prevailing, and what is the cost of going to court? Note: if we file, we must hire outside experts to validate our claim and that is likely to be a $25,000 out-of-pocket expense which we will only recover if we win. That makes you stop and think. It is a large ante.
In the next post, we can consider the options of paying our attorney hourly to pursue our case or agree to a contingency contract in which he gets a fraction of any final award, but we only pay the expert expenses, and he pays the rest.