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MEDIATION: UNREALISTIC OPENING DEMANDS
by Charles B. Parselle
A party comes to a mediation with an opening demand of $150,000. He settles 2 ½ hours later for $15,000. Is there anything wrong with such an opening? Yes, because by making that demand, the negotiator was compelled to “bid against himself,” and thereby weaken his overall bargaining strength.
The case was not “worth” $15,000 until the moment of settlement. Until then, its value was contingent. If we allow that whatever the case settled for was “necessarily” its true value, then a case which settled for $15,000 was initially within a bargaining range of, say, $5,000 to $45,000. In other words, until the defendant offered at least $5,000 or the plaintiff’s demand was no higher than $45,000, neither party could feel the other was in good faith and "real" negotiations could not begin.
The selection of $5,000 and $45,000 as “the bargaining range” is hardly carved in stone. It is just a simplistic division by three of the offer and multiplication by three of the demand, based on a notional $15,000 value. However, in negotiating, you cannot adopt this "rule of three" as a rule of thumb, because if it was known as a general rule then each party's floor and ceiling, respectively, would be ascertainable by simple division and multiplication, respectively. But there is a point at which a demand or an offer is regarded by the other side as being “in good faith.” Negotiations do not begin in earnest until a party feels the other side is in good faith.
We know this particular case was " worth" $15,000 because that is what it settled for. That is a bootstrap method of determining value, but it is the basic capitalist premise, which states that the value of a thing is whatever a willing buyer will pay a willing seller. However, the parties have to determine, without the benefit of hindsight, what each is willing to give and take, respectively, in order to achieve settlement.
At least the appropriate range of numbers in which the “true value,” meaning the settlement value, needs to be worked out beforehand. Such “true value” is not an exact settlement number; it is, instead, a working hypothesis. The difference between a realistic and an unrealistic demand/offer is “supportability.” A realistic demand/offer bears a supportable relationship to the substance of the case. It is possible to make out a rational argument for that number, even if the negotiator is willing to move off that number.
One can say, as a general rule, that most cases have a value that is determinable within a certain range. Clients sometimes expect huge damages because they have read about such cases. No one can count the number of times “the McDonald’s case” has been cited by expectant clients. But there is a difference between the settlement value of a case and a jury verdict. This article does not deal with the value of cases as expressed in jury verdicts; in general, the range of possibilities is greater. One jury may award large damages; a different jury might have thrown out the same case. Settlements are usually within a narrower range, but then the risk and expense is also much reduced.
The plaintiff with a $150,000 demand in this example was forced to “bid against himself” for a while, because the canny defendant would not respond to such an inflated demand. So the plaintiff had to halve his demand and then halve it again to reach the appropriate negotiating range. Then the real negotiations began. Likewise, a canny plaintiff will not respond to a derisory $250 offer. Both parties have to move into the negotiating range.
The problem for the plaintiff in this example is that he weakened his negotiating strength by being forced to bid against himself. Because the defendant would not respond until the opening demand was seen as being somewhat realistic. Had the plaintiff started more realistically, maybe he could have settled for a higher amount in the final result.
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