There comes a point in all mediations where the parties need to decide whether or not to accept an offer. To make that decision they need to compare the offer on the table with what would happen if they rejected the offer. Rejection usually means going to court. Going to court means risk and uncertainty. No matter how bullish the advice a party receives, there is always a chance that a judge may see things differently. So how do you decide if the offer on the table is better than going to court in the face of this uncertainty?
There are various tools to help put a value on an uncertain future event. At the heart of most approaches is the notion of “expected value”. If I toss a fair coin with £10 on heads and nothing on tails, then the expected value is £5. This is calculated as (£10 x 0.5) + (0 x 0.5) = £5. Similarly, if your chances at court are 50-50 and you get £10m if you win and nothing if you lose, then the expected value is £5m. If the offer in the mediation is greater than this, say £6m, then it is clear that you should accept the offer rather than go to court: £6m is better than £5m.
Things are often a little more complicated. For example, it is rare that you won’t end up paying anything if you lose in court. Extending the 50-50 example above, consider if you lose you have to pay £2m (in costs and legal fees, for example). Now the expected value is (£10m x 0.5) – (£2m x 0.5) = £4m.
You could also change your estimates of success in court. You may think that your chances are better than 50-50, say 80% chance of winning. Now the expected value is (£10m x 0.8) – (£2m x 0.2) = £8m – £0.4m = £7.6m. If the offer is still £6m you would have to think long and hard about the £1.6m discount you were giving to the certain £6m offer versus the uncertain, but expected £7.6m if you reject the offer.
You can use this simple logic to help you decide whether or not the offer on the table is a good one. Indeed, you can put yourselves in the shoes of the other side and work out what you think their expected value is. In these circumstances, you are calculating the other side’s bottom line – a powerful piece of intelligence in any negotiation.
There are many advantages to doing this kind of simple analysis before or during mediation. The main downside is the risk of garbage in meaning garbage out if estimates of costs, awards or probabilities are wrong. However, 5 minutes calculating an expected value will undoubtedly help you clarify your thinking when it comes to accepting or rejecting that offer.