Litigation Cost Strategies, Settlement Offers and Game Theory

Rupert Macey-Dare

University of Oxford – Saint Cross College; Middle Temple; Minerva Chambers

Summer 2007

Abstract:

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.

Litigation Cost Strategies, Settlement Offers and Game Theory