In his article “Do You Use ‘BATNA’ Wrong” (Mediate, January 3, 2018) and in a subsequent blog titled “Confusing Dispute Resolution Jargon” (featured at Mediate, January 9, 2018), John Lande raises interesting questions about BATNAs (“Best Alternative to a Negotiated Agreement”). Understanding BATNAs is especially important in mediation because they provide disputing parties with power. As noted in Getting to Yes (emphasis in original), “The better your BATNA, the greater your power . . . . In fact, the relative negotiating power of two parties depends primarily upon how attractive to each is the option of not reaching agreement.”
This article discusses a practical tool mediators can use to calculate BATNAs, and a risk they and disputing parties should understand. The tool is decision tree analysis, which is especially useful when the BATNA is litigation. The risk is that disputing parties who rely on a strong BATNA might face liability for substantial damages.
The Decision Tree Tool
John’s blog discusses decision tree analysis, which is an especially useful tool for mediators because it enables them to calculate an expected value when the BATNA is litigation. This calculation, in turn, provides mediators with an opportunity to engage the parties in reality testing as they compare a settlement offer with the expected value (and hassle) of litigation.
Decision tree analysis has other benefits as well. First, the process enables mediators to ask disputing parties to work together when diagramming the conflict in the form of a tree. This might help mediators (in the words of Getting to Yes) to “separate the people from the problem” by encouraging both sides to focus on the issues depicted in the tree rather than attacking each other.
Second, asking the disputing parties to assign probabilities to each uncertainty depicted in the tree (which they will probably do in caucus because of the confidential nature of this information) can help facilitate communication with their own attorneys. For example, when attorneys advise their clients that “it is likely” they will win, the attorneys might be thinking there is a 60% chance of winning while the clients might be thinking 90%. Assigning probabilities to verbal statements helps avoid misunderstandings.
Third, assigning probabilities to the uncertainties depicted in the decision tree might aid mediators in their attempt to pinpoint the issues in dispute. In a mediation with three key issues in dispute, for example, if the parties have the same assessment of one side’s probability for success on two of the issues, discussion can focus on the third issue.
The Risk of Relying on a Strong BATNA
While the authors of Getting to Yes are correct in asserting that BATNAs are an important source of power, mediators should alert the parties in either a dispute-resolution or deal-making mediation that in some situations they might face substantial damages for abusing this power. To illustrate this risk, assume that A is negotiating a licensing agreement with B. When the negotiation began, A had a weak BATNA. Later the BATNA improves and A decides to terminate the negotiation because of its new-found power. Can B recover profits that were lost because A backed out of the negotiation?
The answer depends on the governing legal system. Most countries have civil law systems, where the law typically includes a duty to negotiate in good faith. In these countries, negotiators who terminate negotiations because they have strong BATNAs face potential liability to the other side for breaching the good faith duty.
Under the common law in countries like the United States, negotiators generally do not have a duty to negotiate in good faith. But US negotiators can override this legal rule by agreeing to negotiate in good faith. For instance, preliminary agreements—such as term sheets, memoranda of understanding, letters of intent, and agreements in principle—often contain good faith negotiation clauses.
The Delaware Supreme Court, in a case similar to the A-B scenario above, has decided that a company that agreed to negotiate in good faith was liable for $113 million in damages to cover profits lost by the other side when company representatives terminated the negotiation after its BATNA improved. The company was also liable for $78 million in pre-judgment interest. As a result of this decision, mediators should caution parties that in some circumstances they face liability for substantial damages for walking away from a mediation to a strong BATNA.
Additional Information
The package has been used for in-house training by the World Bank and a large US company. No permission is necessary to use the exercise. I want to thank the University of Michigan for support in developing this package and encouragement to make it available for free distribution outside the university. If you decide to use the exercise, I would appreciate your comments and recommendations for improvement.
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