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For this question let's use the amount of $200,000 owed to the plaintiff by the defendant in a breach of contract dispute. Is there a rule of thumb for calculating how much you should accept in a settlement?

Some factors:

  • The monies owed are for specific damages based on transactions and do not include anything arbitrary such as emotional damages, etc.

  • 50% of the $200K is based on a verbal agreement and past practice

  • If I had to estimate the odds for a trial, I would put them at 70/30 for the plaintiff

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    While this question might require some opinion, it is not "primarily opinion based". – A. K. Apr 1 at 17:12
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    Possible duplicate of How do I tell if a settlement offer is good enough? – ohwilleke Apr 2 at 4:57
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    Please give jurisdiction. I am familiar with valuing settlement offers if in the UK, because things like whether you were given a settlement offer can impact how much in costs you pay, even if you are the successful party – Shazamo Morebucks Apr 6 at 13:39
  • @ShazamoMorebucks I edited the original question. Thx. – Sizzle Apr 8 at 15:41
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Legal question, statistical (economic) answer.

You need to evaluate the expected value of an outcome which is the sum of the product of probability of winning and the gain (or loss) from winning and the product of the probability of losing and the gain (or loss) from losing.

As a mathmatical expression: Expected value = [P(winning) x gain] - [P(losing) x loss]

For your example, for the plantiff it would be: Expected value = 70% * $200,000 + 30% * $0 = $140,000

Take the expected value and compare that to your settlement. For the plaintiff, any settlement offer above $140,000 to a rational plaintiff (can't emphasize rational enough) is a good deal and they should accept. Any offer below $140,000 would be a good deal for a rational defendant. Going to trial is what happens when the parties are either irrational or estimate different/more favorable odds or outcomes.

Now this doesn't account for lawyers' fees incurred which will depend on whether you are on contingency or not but this can change your outcomes. Because of these fees, many insurance companies tend to just pay out for minor claims since the cost of winning in court even if it is certain is a higher cost than the claim.

Addressing Some Good Comments: There are additional factors such as court fees, time value of money (settlement happens now, courts take years), publicity, establishing or overturning precedent, disclosure, marginal utility of money for the plaintiff, emotions from testifying, deterrence of future law suits, and infinitely more possible elements of a lawsuit that all affect the value of a given outcome win, lose or settle. All good points brought up by commenters (Thank you all). These are important considerations that vary the gain (or loss) from winning and loss from losing but are 1.) beyond the scope of this question and 2.) too broad to be addressed if it was. I think it is keep in mind that this is for the person receiving a settlement offer to estimate and decide within the limits of their assumptions, values, and bounded rationality. An amended expression is attached to account for fixed costs of trial:

Expected value = [P(winning) x gain] - [P(losing) x loss] - fixed costs of trial

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    Thanks for the response. There is no insurance company I am aware of, that is involved. I will run this calculation on various winning %s. I think it may be higher than 70% but that seemed like a fair and reasonable assumption. – Sizzle Apr 1 at 18:30
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    Note, of course, that the expected value of a trial may include more than just the expected awards; deterrence, NDAs, and publicity are all considerations outside the award amount that might be considered by a rational actor. – chrylis Apr 1 at 18:36
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    The reason why I would not (and, in my answer, did not) resort to the concept of expected value is that I would not want @Sizzle to be falsely confident that his probability numbers reflect his situation or the reality of litigation & settlements.Insurance companies consider the expected value (and not in isolation, but coupled with other statistics) because they have access to large data samples and actuarial expertise. I presume the OP has neither, so he is better off by focusing on other considerations to decide a one-time issue that is hardly amenable (if at all) to statistical analyses. – Iñaki Viggers Apr 1 at 19:14
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    Also consider the utility of the money, which becomes particularly relevant for large sums. A rational machine won't care between a 50%-50% chance at $10M or $0, and a 100% chance of getting $5M. But $5M is already a life-changing amount, and $10M probably won't change your life twice as much, so many people would prefer the sure thing. Personal appetite for risk also plays a role here, as many people would take a sure thing of lower value than the expected value of a gamble. This isn't a casino where odds average out over the long term, so you can't count on expected value in the long run. – Nuclear Wang Apr 1 at 20:25
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    I really like how you answered the question. Sure you left out some details, but you provided clarity to the principles of the solution. Doing the actual expected value calculation is left as an exercise for the person in question. No need to muck up the answer with every possible contingency. – Pete B. Apr 2 at 13:50
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A problem is that statistical "expectation" answers (percentage chance x value) are not a value one may expect to receive. They are a value which on average may be expected if there were repeated events.

For a lawyer, with many clients and cases, an accurate expectation will suggest how they can maximise their overall case wins.

But its a lot less clear how valid that is for a single client with a single case. An analogy might be - roll a die. If the number is 3 - 6 you double your money, 1 or 2 you lose it all. Now, the expectation is that for every pound/dollar you bet, you'll receive a gain of 33% (bet 6 times => lose 2 units, win back 8 units => long term expected gain is 8/6 x your bet value). Now, I as your friend suggest that as you have an expectation of profit, you should borrow heavily and bet your shirt and all you can on a single roll of the dice, and enjoy the outcome! You probably don't want to. Whereas if I suggested betting many times for £100 each, you'd probably like it, because the expectation (long term) will have a very good chance to play off.

With a single case having a 70% chance of a win and 30% chance of a lose, the risk isn't of a gradual gain/gradual loss. You get a single event only, which is that you roll the dice once, and a significant chance of both major gain and major loss. Expectations and trends and averages just aren't a good way to decide it. It can guide, but it shouldn't decide.

A better frame of mind is this. Here are 3 medical situations (not great analogies, but a high-impact single event choice we are all familiar with):

  1. Suppose you had to consider whether or not to have surgery to fix a disability (representing the damage you're currently living with in the legal situation). The surgery is guaranteed to be quick and pain-free, so the only question is the likely outcome. You have a 60% chance of complete success but 40% chance of making it worse.
  2. As above, but this time there's an 85% chance of success - but also a 15% chance of death.
  3. Finally, suppose you had usually-fatal-in-18-months cancer. Chemotherapy would be painful and cost all you have, but gives you a 20% chance of complete cure, a 20% chance of 2 more years of life, and a 60% chance of completely wasting your money and being painful as well.

Can you see from these 3 examples, how in single event cases, many people might reject an 85% success option, or accept a painful and costly 20-40% chance. Different people with different views will often differ on what they'd do. They probably would not just do a "statistical working" to decide between the options, though.

Tl;dr - expected gain/loss is a helpful hint, but a bad decider.

In a single case, you need to engage your intuition about the other party, and your own needs and attitudes.

You ask for a rule of thumb, but for a single case, the best rule of thumb is to ask, "what do you think is likely to happen, what are the risks and impact if it works/fails, and what are your attitudes to those".

Update + worked example:

A better solution is the negotiator's mindset, which is very similar. You will need to put yourself into the other side's position, and ask how they will see it.

How much is it worth to them, to settle it prior to more expenses, or to avoid whatever risks they may face if it goes to a full court hearing? If you won, how much would a judge (of in some cases jury) feel is reasonable for you to have asked?

Especially in the UK (and perhaps there are similar rules in other countries: check!), you may be required to have made a reasonable attempt to settle before the hearing. If the amount you asked is not seen by the court as "reasonable", or is more than your eventual win, then you might be required to pay the legal costs the other side was forced to incur as a result of you seeking an inflated settlement.

This is a calculation where the 70/30 expectation is not the best guidance. Let's try an example, with lots of data:

Suppose that we ask our lawyer what advice he thinks the other side is getting from their legal advisor. Your lawyer's guess is that they've been told that the damages for written matters (100k) are 50/50, the damages for verbal and past practice matters are 60/40 in their favour, and if they settle now, you don't seem to be claiming for (say) 50k of emotional distress or other things, but in court you'll probably get 15k if any part of your main case wins,and of course they'll have to pay 30k more of fees if it proceeds that far.

Their client now considers. You seem determined but perhaps could be coerced to pay less if they flash some money. Their legal insurance may not cover cover all of it if it goes to court. The lawyer will have told them that generally they don't want to go to a court case if they have less than 65-70% chance of a win.

If it goes to court, the cost of your win, if any, will be compounded by 15k + 30k = 45k. Plus management time, too. Their (guessed) advice is therefore that there's a good chance of a substantial loss (50%), and if it did go to court that loss could easily be quite a lot bigger. They have a good incentive to try and push it to the line, and settle before that lot can happen. You might want to be pushy, and point out the extra claim amounts they face in a claim, if they don't settle, and suggest that an offer of 130k is generous and "aimed at avoiding legal costs for us both".

On the other hand let's change the nature of the case, but not its chances. Suppose the advice they are likely to have been given is that you won't be likely to win more than 40k. However the claim relates to something disreputable that would come out in court (maybe you were a whistleblower and they sidelined you and forced you to resign, after you tried to report some shady practices, or the case relates to sexism/racism/tolerance of bad or harassing behaviour, or boosting invoices and borderline accounting fraud), and you're pretty sure they would lose at least Sizeable Client X and probably suffer commercial and reputational backlash costing 600k revenues over the next 3 years whether they win or lose.

Now the case odds are far more favourable to them and far less favourable to you, but the downside of going to a hearing is far more severe for them, win or lose. You might seek 300k damages, on the basis that "this is the claim I am prepared to accept, for full and final settlement of all breaches, any emotional damage, and all costs".

You anticipate they will tell you it's unreasonable and you will not win that sum, but you also think if you stick to your view, they'll finally offer close to it at the last moment, on the morning of the hearing.

If they don't offer to settle by the start of hearing, you'll offer 250k as you walk in, but you would rather go to court than offer less, even if a court win was only likely to be 150k, because you think they'll settle at some point for over 200-225k, maybe after they see you are determined to see it through, at the end of day 1.

Last, if they have a legal expenses insurer, the insurer will have many cases. Their goal will purely be to minimise their total loss, with no emotional investment, which is different again.

So when it's just one case, these are the kinds of factors to consider.

Remember that like any negotiation, a settlement is worth whatever they and you agree. If it's worth a lot to them, you may in some cases decide to ask them for a lot, because even though costly, its still their cheapest/best option. If you can't settle, then you have to ask what your best alternative is. Do you want the risk of it going to court, and how sure are you?

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    More directly bringing this back to the question: a settlement is a guarantee and going to court is a risk. Would you rather guarantee a smaller amount or risk getting either nothing or a larger amount? This may lead to a settlement that (theoretically) heavily favours whichever party (if either) is well off and not too concerned about the outcome. – NotThatGuy Apr 2 at 9:11
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    In that sense it's a bit like that investment question about attitude to risk - would you prefer more certainty (but a significantly lower recovery than perhaps you might be due, or only covering a majority of your loss), or higher risk (and a chance of higher recovery but also introducing risk of more cost/loss) – Stilez Apr 2 at 9:44
  • @Stilez Thanks for the good examples. I think I could follow along for the most part. I am not sure if he (it is just one guy, not a large company) has insurance for this sort of thing. I have paid my fare and from here on my lawyer will get a % of any award recovered. Is it correct to see this as an advantage? He will likely be paying his current lawyer hourly plus he will need to get a new lawyer if we file - I am based in a different state. – Sizzle Apr 3 at 4:49
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    Sizzle - I can't say if its an advantage. I'm in the UK, totally different rules on legal costs. Remember he has many cases, you have just this one, so become your own expert on the relevant law, and don't be afraid to direct what you want him to do or how you want to play it. However skilled he may be,, you have to live with & be at peace with whatever happens, lifelong, while he can wash his hands of it and move to the next client. Make sure the lawyer you engage, uses his skill to also give you what you need, to make the big client decisions. Only you know the attitudes you have on it. – Stilez Apr 3 at 6:29
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Is there a rule of thumb for determining the amount one should accept for of a settlement offer?

No. It is entirely up to the injured party to decide how much he is willing to irreversibly give away in a settlement. The party should crunch numbers to ascertain the actual amount he would receive after expenses (first and foremost, attorney fees, if he is represented by one).

  • The legal fees are such that a lump sum has been paid and the lawyer gets 30% of money recovered over a certain amount. Thanks for the input. – Sizzle Apr 1 at 18:31
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Yes, you guys are correct that there isn't one standard number, but in general you should look at the amounts given in similar cases.

I know that isn't as long and drawn out as most answers on here, but truthfully you normally look at awards in past cases.

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