Settling Out of Court: Negotiating in the Shadow of the Law

By following best practices for settling out of court, you can keep your dispute private—and turn it into a value-creating deal.

By — on / Dispute Resolution

settling out of court

When disputes arise, negotiators face the difficult question of whether to try to reach a settlement on their own or hand decision-making power over to a judge, a jury, or an arbitrator. Parties often benefit from settling their disputes before going to court, write Robert H. Mnookin, Scott R. Peppet, and Andrew S. Tulumello in their book Beyond Winning: Negotiating to Create Value in Deals and Disputes (Harvard University Press, 2000). Yet disputants and their lawyers typically overlook the potential costs of a legal battle. We review why that is so and how you can increase your odds of settling out of court, while also discussing instances when litigation might be preferable to negotiation.

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Settling out of court vs. the costs of going to court

Settling out of court can eliminate any number of barriers to negotiation. The drawbacks of involving lawyers in your dispute and preparing for a lawsuit can be considerable.

1. Transaction costs.

Parties can incur significant transaction costs from a looming lawsuit, including legal fees and the loss of their precious time. In fact, one or both sides to a dispute may try to persuade the other party to make concessions by deliberately attempting to increase the other party’s transaction costs—for instance, by requesting mountains of documents and presenting long lists of questions that take many billable hours to answer. Your own legal team may also have financial incentives to drag out a discovery process to pad its fees—to your disadvantage. And when estimating likely legal fees, disputants often fail to factor in the time and expense of further litigation if they end up in court and the “loser” decides to appeal the court’s decision.

2. A lack of cooperation.

The widespread misconception that the best lawyers are aggressive and rigid, and never collaborative or accommodating can lead clients to hold back their legal team from exploring creative (and money-saving) tradeoffs. For lawyers, a client’s expectations of toughness can become a self-fulfilling prophecy. It’s not uncommon for both sides in a dispute to begin puffing up their positions and claims and to give the impression that they won’t back down under any circumstances. In this environment, parties unfortunately tend to perceive concessions and compromise as signs of weakness and vulnerability rather than as potential value-creating moves, write the authors of Beyond Winning.

3. Damaged relationships.

Negotiators often fail to thoroughly consider the effects of legal action on their relationships with the other side and with other interested parties. “Disputes may strain relationships,” writes Harvard Business School professor Deepak Malhotra in a past Negotiation Briefings article, “but litigation tends to destroy them.” To take an obvious example, a divorcing couple that is able to negotiate a child-custody arrangement with the help of a neutral mediator may be more likely to build a productive post-divorce relationship, to the benefit of themselves and their children, than a couple that hires two “sharks” to attack each other’s character in court.

These drawbacks of litigation aside, it can sometimes be the best means of helping you meet a particular set of goals.

When litigation is the best option

Though negotiation (whether conducted through lawyers, mediators, or on your own) should lead to better outcomes for disputants in most cases, litigation may be preferable in the following situations, writes Jeffrey R. Seul in a chapter in The Handbook of Dispute Resolution (Jossey-Bass, 2005):

  • An uncooperative counterpart. If your adversary stalls or refuses to negotiate in good faith, you might turn the case over to courts to ensure that it will eventually be resolved (though not necessarily in your favor). Court-ordered discovery will also legally compel a recalcitrant counterpart to supply information he might have held back during a dispute-resolution process.
  • A desire for openness and publicity. If you want to draw attention to your counterpart’s behavior or clear your name, you might choose to pursue a litigation process in which the outcome may be publicized, instead of private negotiations.
  • Deterring false charges. If you have been the repeated victim of false claims and opportunism, taking such cases to court may (if you win) deter others from targeting you in the future.
  • Settling legal questions. If deciding a dispute according to established legal norms or potentially setting new precedents is important to you, you might prefer to give decision-making authority to the courts.

Settling out of court

The following guidelines can help you settle out of court and reach creative, mutually beneficial resolutions to your disputes, with or without lawyers at the table.

1. Make sure the process is perceived to be fair.

Before tackling your dispute jointly, negotiate key elements of the process with your counterpart, such as how you will choose experts and whether lawyers will be involved in negotiations. Doing so will increase the odds that both sides will view the final outcome as unbiased and fair. In addition, you might suggest that you jointly hire a professional mediator to lead the settlement process instead of turning the process over to your lawyers.

2. Identify interests and tradeoffs.

Even when we’re determined to settle out of court, the win-lose format of a looming litigation can encourage us to view negotiation as a battle. Unfortunately, the desire to prove we’re right can distract us from pursuing our underlying interests. It can also propel us all the way up the courthouse steps if our adversary refuses to meet our needs.

Just as in business dealmaking, you can expand the pie of value in a dispute by opening up about your key interests and preferences, which can help you identify potential tradeoffs. Revisit the following questions often during the dispute-resolution process:

  • What are my true underlying interests?
  • How can I best achieve them?
  • How much am I willing to pay just to be able to say that I won?

It’s also important to encourage the other party to open up about her interests and to keep those interests in mind as you negotiate.

3. Insist on decision analysis.

Lawyers are often hesitant to quantify their clients’ odds of winning court cases, write Mnookin, Peppet, and Tulumello in Beyond Winning. Yet you need a thorough analysis of the risks and opportunities of litigation to make informed predictions and decisions about how to move forward. Any lawyers you hire should be well versed in decision-analysis tools such as decision trees and dependency diagrams and ready to use them to help improve the quality of your decisions.

4. Reduce discovery costs.

Disputants who are considering a lawsuit often become trapped in a lengthy and time-consuming discovery process that includes searching through reams of data and conducting depositions. You should be able to reduce these expenses by negotiating a low-cost exchange of essential information with your counterpart, write the Beyond Winning authors. When you can keep costs down, both sides win.

Do you have experience settling out of course? What happened? Leave a comment below.

Claim your FREE copy: Dispute Resolution

Discover how to improve your dispute resolution skills in this free report, Dispute Resolution: Working Together Toward Conflict Resolution on the Job and at Home, from Harvard Law School.

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