Negotiating a Settlement in a Business Dispute

Why You Should Consider Settling a Business Dispute

If you’re running a small business, the last thing you need is the distraction of litigation drawing management time away from your operations, where your focus should be. Therefore, if you have a dispute with another company, it makes sense to try to settle it outside of court.

There are two other very important reasons to try to settle early:

1. There is always a risk, no matter how strong your case, that you will lose in court and get nothing at all; and
2. Whether you win or lose, the only real winner will be the lawyers. You will spend a lot of money on lawyers if you insist on going all the way to trial, and this will eat into any award you may ultimately secure, so there is no scenario in which you will get 100% of what you want anyway. As a general rule of thumb, most large companies try to avoid spending more than 5% of any amount they are trying to recover through litigation on legal fees. If your dispute is worth less than half a million dollars, going all the way through a trial will almost certainly do that.

Get a Lawyer Even If You Intend to Settle

Sometimes, to effectively settle a dispute early, it may still be necessary to engage a lawyer to send a letter of demand first, so that the other side knows you are serious about going to court if necessary, but the objective should be to negotiate a settlement that both parties can live with, while diverting as little cash as possible out of the settlement pot to pay the lawyers.

Lawyers love the kind of client who walks into their office and proclaims that their dispute is not about the money – “it’s about the principle!” This kind of client will fight to the bitter end over $1,000 while the lawyer happily bills him all the while. Don’t be this client. You are there only because you have suffered some kind of loss – try to recover as much of it as possible as early as possible and leave the principle at the door.

How to Start the Settlement Process

Once your lawyer has fired the warning shot with a letter of demand, and no payment from the other side materialises, reach out to them to propose a good faith, without prejudice meeting to try to settle the matter amicably.

Ask them to send someone who has the authority to agree to a settlement on the spot. Some companies may need a little time to arrange board approval for such authorisation before a meeting can be held. This is fine – just check with your lawyer to make sure that the statute of limitations on your claim is not in danger of expiring, in case the other side is just trying to stall.

By the time you meet, you should already have learned the following information about your dispute from your lawyer:

1. Roughly how likely are you to win in court;
2. If you win in court, roughly how much are you likely to be awarded;
3. Roughly what will your total legal bill look like if this dispute goes all the way to the end of a trial;
4. What are the strong and weak points of your case; and
5. What are the strong and weak points of their case.

Armed with this information, you will be able to recognise when you are negotiating from a position of strength or weakness and the rough sweet spot within which any settlement proposal you make will be credible.

How to Calculate the Settlement Amount

Never go into a negotiation ready to propose that the other side pay 100% of what they owe. That’s not how it works. You will never get 100% anyway so forget about the principle of it. In a dispute, everyone loses. The goal is to find a number that represents a loss for each party that they can each live with.

To find this number, start with the total amount owed. Then deduct from this the total estimated legal fees you would have to pay to secure this amount in court. Then deduct any interest you had included.

Then, consider the amount of time and effort you and your staff would need to spend putting together your case for court, spending time with your lawyer, reading and writing emails about this matter and actually going to court. How much more revenue could your company actually generate with that time? Deduct this amount.

If your case is legally an extremely strong one, you are now approaching the ballpark. If your case has any weaknesses that might just result in you losing, reduce that amount further in proportion to how significant your lawyer thinks those weaknesses are. You should now have a rough figure that should represent a starting point for negotiations.

If your adverse party is smart, they will have done the same calculation and will come ready to pitch a number that is a bit lower than that. If you can meet somewhere in the middle, then that’s probably as close as you’ll ever come to a win-win. Shake on it and have your lawyers draw up a settlement agreement for that amount.

The calculations above are not straightforward and assume a certain amount of knowledge about your case and how the courts would treat it in order to be accurate. Furthermore, negotiation is a specialised skill that takes years of practice to hone. For this reason, it is always preferable to let your lawyer do the talking at a negotiation.

However, if the amount in dispute is very small, that simply isn’t feasible. In those cases, hopefully the information above will be useful, but there is no substitute for professional legal advice and representation from a lawyer who knows what he / she doing.

If all negotiations fail, talk to your lawyer about mediation before pulling the trigger on all-out litigation. Sometimes, all it takes to convince the other side is to hear a neutral third party make the same point you have already made many times before. Mediation resolves the majority of disputes within one day and is significantly cheaper than litigation. If mediation doesn’t produce a result you are happy with, you are free to walk away and start litigation the very next day.