Justify Your Offers

Potential litigants in Singapore are now required to give an offer of amicable resolution that is valid for at least 14 days before commencing legal proceedings. While it does not seem that the court has the power to examine the offer to see whether it is a serious compromise (as it did under the previous Rules of Court), giving the other party an offer with a clear basis and reasoning is important because it facilitates, and sometimes even expedites, the settlement process.

Researchers like Daniel Kahneman have written extensively about the anchoring effect, where information that is first presented can influence later decisions by becoming the quick reference point. In other words, the first position can cause stickiness by causing the recipient to evaluate whether later options are favourable in comparison with the first.

In business disputes, the anchoring effect usually presents itself in the following ways:

1.When counsel first meet their client and evaluates their legal position – this can cause tremendous stickiness and great difficulty in reaching compromise later. I experienced this in a recent mediation where my opposing number did nothing but shake their head at every offer which we made, simply because it was nowhere near their preferred numerical position. They had done such a good job of creating an anchoring effect that it allowed them to sit back during the mediation process without the client questioning their lack of participation!

2.When parties first present offers of settlement to each other – even if the initial offer may not be well justified, a party may rely on the initial offer to position any deviation as a substantial compromise, and to resist counter-offers asking for more.

Showing the basis for an offer to may either displace the anchoring effect of an undesirable position, or create a strong anchoring effect for the desired standards in evaluating options to be negotiated. As an example, here is a summary of another recent (and successful) mediation where I represented a minority shareholder seeking a buyout on grounds of minority oppression:

a. In our pre-action offer (which also contained an offer to mediate), we explained how we arrived at the proposed figure by calculating the net asset value from the company’s most recently filed financial statements. That showed that we were prepared to accept the majority’s position of the company’s finances (notwithstanding that my client had suspicions about the same statements).

b. In our opening brief to the mediator, we reiterated the basis for our offer. The majority gave a flat counteroffer, without any explanation, that was effectively half of what my client sought. Although we knew that Singapore courts had the discretion to order a minority discount as part of a buyout order, the mediator recognised that it was unprecedented to force the minority to take a 50% haircut. Therefore any other offer had to start from a different basis.

c. The mediator sought to rely on other standards instead of net asset value. However the majority could not provide enough information to support the alternative valuations, and even then the other alternatives produced prices which were even higher than what we had intially offered.

d. We eventually reached settlement with an offer that varied minimally from our first offer, without having to table any new offers on our end.

Some people might say “what a waste of time!”, but considering that my client had a lump sum payment within weeks, didn’t have to spend more time being stressed out about the proceedings and never had to deal again with persons that she thought to be untrustworthy – I take that as a positive outcome.

Having put a justified offer on the table for both the counterparty and the mediator to consider also meant that we got to cut down on time spent having to horse-trade. The mediator also leaned onto the other party more because he could see that we had done our homework rather than try to anchor the discussion to extreme values. Being able to justify an offer usually produces a better outcome faster.