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When to settle out of court: A simple guide

When to settle out of court: A simple guide

May 14, 2018
Posted by Jeff Kerr

Calculator balance

The vast majority of civil cases never go to trial. Some are dismissed because the pleadings are deficient and others are closed at a later stage, but many are settled. A settlement can feel like a win or a loss, depending on the figure. If the defendant can make the plaintiff "go away" for a nominal value, then that's probably a win. If the plaintiff obtains a big check, it's a different story.

Still, a question that both clients and lawyers struggle with is "When should I settle?" We too often rely on our gut instinct or simply consider the wrong factors when evaluating this option. Fortunately, there's a precise way of deciding when to settle that anyone can use — it just takes a little practice.

First, let's be clear that deciding when to settle is a separate issue from negotiating. You should negotiate as well as you can to get the best possible offer and then start your settlement analysis. Here we'll start by considering the options presented to the plaintiff in a lawsuit where the plaintiff is seeking money damages and has received a settlement offer.

Related: Tips for Securing a Good Litigation Settlement for Your Client

Now that the plaintiff has an offer, she has a binary decision: to settle or not. Each option will result in a different outcome, and the task at hand is to decide which outcome is better for your client, considering all of the plaintiff's needs and interests. Don't forget to think through other, non-monetary concerns as well, like the need to avoid suffering additional stress or, in contrast, the need to obtain public vindication in the form of a verdict.

settlement divorce agreement

All of the plaintiff's interests matter and must be taken into account when making a decision. But here's the rub: to run a precise analysis, you need to put a price tag on everything.

Here's how it works. You need to start by building a "tree" of possible realities that branch from the decision of whether to settle or not. Each possibility will then be assigned a value and a probability. By completing this exercise, you can literally compute whether it makes sense to settle for a particular offer.

The tree of possibilities has two main branches: (1) the branch where you settle and (2) the branch where you don't. The value of the settlement branch is fairly easy to compute, as it will obviously equal the monetary amount of the settlement. The branch where you don't settle is more interesting.

If you don't settle, the future is uncertain. Several different outcomes could occur. In this scenario, the two main outcomes to consider are (1) going to trial and winning or (2) going to trial and losing. The first analytical step is to make your best guess of the probability of these different options. If you have a strong case, you might decide that you have a 60% chance of winning if you go to trial — and hence, a 40% chance of losing.

Next, for each outcome, compute the value (in dollars) of each category of benefits and costs — i.e., the amount of the verdict, the costs award, the stresses of trial, out-of-pocket costs of proceeding to trial, and the cost of the time required to go to trial. You can have more than two possible scenarios in the branch where you don't settle, but the probabilities of the different scenarios must total 100%.

When To Settle Out of Court Example

If you've set up the value and probability for each of the branches, all that you need to is add the weighted value of the scenarios together in each branch. Here's an example:

courtroomSettle now

100% probability if chosen; value of $150,000.

Do Not Settle

  1. Win at trial (60%); value of $250,000; expected value of $150,000 (250,000 * 0.6)
  2. Lose at trial (40%); value of -$80,000; expected value of -$32,000 (-$80,000 * 0.4)

Expected value of not settling: $128,000 ($150,000 - $32,000)

In this very simplistic scenario, the value of settling is $150,000, whereas the expected value of not settling is $128,000. In this case, you should advise your client to settle.

You'll generally want to put these calculation into a spreadsheet (e.g., Excel, Google Sheets, AirTable, Coda) so you can fiddle with the probabilities, add more categories of benefits and costs, and even add net present value calculations. You can see a simple example that I created in Google Sheets here.

Related: 3 Simple & Effective Uses of Excel for Litigation

In my experience, deciding whether to settle can be an emotionally wrenching process in many cases. In fact, settlement negotiations almost always are emotional for the parties on both sides. Given what's at stake, anything that can help the parties clarify their decision-making process is valuable. By applying some simple math, you can create a model for making a decision that takes your client's needs and goals into account.

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