Litigation Cost Strategies, Settlement Offers and Game Theory
University of Oxford - Saint Cross College; Middle Temple; Minerva Chambers
Starting with a simple economic model of the value of civil litigation from each side's perspective, this paper analyses a wide range of potential litigation cost strategies, settlement offers and negotiations, together with relevant applications and insights from game theory. Specific issues examined include: optimal settlement agreements, optimal settlement timing, optimal choice of lawyers; principal-agent problems aligning lawyer cost incentives; optimal client-lawyer contracts; "Conditional Fee Agreements" (CFAs); success rules and size of success premia; the exploitation and mitigation of liquidity and bankruptcy constraints; impact of collateral, "Security for Costs" and "Freezing Orders"; optimal "Part 36 Offers"; public and "without prejudice" offers; fixed rate and state-contingent offers; the role of mediation and alternative dispute resolution (ADR); the effect of litigant group size, co-ordination and class actions; rationale for confidential no-liability settlement agreements; effects of legal aid; time-value to trial and optionality of news; the impact of the "Law of Costs"; optimal trial cost applications and requests for "leave to appeal". Both familiar and paradoxical new results are confirmed by the analysis.
Keywords: Litigation, settlement, offer, game theory, principal, agent, mediation, ADR, negotiation, law of costs, cost applications, appeal, class action, freezing order, security for costs, part 36, CFA
JEL Classification: C71, C72, C73, C78, D81, D82, D83, D84, K40, K41
Date posted: May 31, 2007 ; Last revised: January 26, 2011