Litigation Outcomes & Settlement Stratgies.

There was a fascinating talk I attended recently about the role of game theory in litigation outcomes & settlement strategies. This builds on the work done by RPC on game theoretical approaches to achieving optimal settlement outcomes. And it highlighted something that is often lost in the adversarial noise of legal disputes: the fact that most litigation outcomes are not defined by binary win/lose outcomes at trial, but by a negotiated settlement somewhere along the way.

And crucially, what that settlement looks like is not just about legal merits or final numbers — it’s about timing, risk tolerance, costs of capital, reputational drivers, and the often-complex psychology of the parties involved.

One of the key concepts from game theory that applies here is the idea of a “zone of possible agreement” (ZOPA). This is the range between the lowest figure a claimant would be willing to accept and the highest a defendant would be willing to pay, when viewed through their respective lenses of risk, cost, and value.

Early in a dispute, that zone is typically very wide and very unstable. Parties are still posturing, information is incomplete, and perceptions of risk and value are often wildly divergent. But as time progresses — and as the realities of litigation cost, management distraction, emerging evidence and judicial signals start to crystallise — the ZOPA tends to narrow considerably.

Understanding how and why that zone shifts over time is critical to effective settlement strategy. And one of the most powerful tools to analyse this is to view the economics of the case in net present value (NPV) terms, rather than purely nominal ones.

The Role Of NPV In Litigation Outcomes & Settlement Strategies

It is a basic principle of corporate finance that a pound received today is worth more than a pound received two years from now. Yet this is often forgotten in litigation strategy. Many parties become anchored on the headline settlement figure, without properly discounting future outcomes for risk, time, and opportunity cost.

Different organisations will have different NPVs for the same nominal figure, depending on their cost of capital and strategic priorities. For example, a regulated utility with a low cost of capital and stable earnings profile will value certainty and risk elimination more highly than a VC-backed tech startup in rapid growth mode, where management time is scarce and distraction carries a very high opportunity cost.

In other words, the true economic value of a £5m settlement today may well be worth considerably more to one party than another. Structuring settlement offers and negotiations around this understanding — rather than fixed numbers alone — can open the door to creative and mutually acceptable deals.

The Hidden Costs: Beyond Legal Fees

Alongside NPV considerations, smart litigators and their clients should factor in a broad range of non-financial costs into their decision-making framework.

One of the biggest is management time. Litigation can become a huge distraction for senior executives, particularly in smaller or fast-moving companies. The hidden cost of hours spent preparing for depositions, reviewing documents, attending hearings and managing the case can far exceed the external legal spend. And it often falls on the people whose focus is most valuable to the business.

Reputational impact is another key factor. Not all disputes are equal in the court of public opinion. A settlement that prevents sensitive documents becoming public, or that allows a company to resolve an issue quietly without admissions of liability, may carry enormous brand value — even if the financial terms are not ideal. Conversely, some parties may be driven to litigate beyond what makes pure financial sense in order to demonstrate a “zero tolerance” stance or to deter copycat claims (the so-called floodgates concern).

This is why it is critical to approach settlement strategy in a multi-dimensional way, weighing financial, reputational, operational, and human factors holistically rather than in isolation.

The Dynamics of Negotiation Over Time

Game theory also teaches us that the negotiation dynamic itself evolves during the lifecycle of a dispute.

Early in litigation, parties often engage in high-variance signalling behaviour — making aggressive offers or demands that are designed to shape perceptions of strength or resolve. At this stage, the ZOPA may not even exist in practical terms, because the parties’ views of risk and value are too far apart.

As the case progresses, information asymmetry reduces. The costs of litigation start to bite. Preliminary judicial indications, witness evidence, and expert reports narrow the range of likely outcomes. The reputational temperature of the case becomes clearer. At this point, the ZOPA starts to stabilise — and skilled negotiators will look to close a deal before the window narrows too far or hardens into entrenched positions.

The mistake many parties make is to view early offers as "failure" if not accepted. In reality, these are part of the iterative signalling process. Offers and counteroffers serve not just to propose terms but to communicate risk appetite, valuation logic, and potential pathways to agreement.

The Behavioural Side: Rationality and Counterparty Dynamics

No model, however sophisticated, can remove the human element of litigation.

A critical part of any game-theoretic settlement strategy must involve a clear-eyed assessment of the counterparty’s likely rationality and behavioural drivers.

Is the other side a well-advised corporate with a disciplined risk appetite? A litigation funder with asymmetric upside? An individual claimant driven by principle, anger, or revenge? A regulator with political motivations? A counterparty’s non-economic goals may override what looks logical on a spreadsheet.

Similarly, the power dynamics of the case matter enormously. Parties with deeper balance sheets, greater tolerance for legal spend, or more flexible risk appetites may be able to pursue strategies that economically weaker counterparts simply cannot match. This can create leverage that shapes the ZOPA significantly.

Finally, one must consider who is really running the defence or driving the claim. An insurer controlling the defence will have different motivations than an in-house legal team managing its own budget. A funder backing the claimant may view litigation as a portfolio asset rather than a unique battle.

Toward Smarter Settlement Thinking

Ultimately, adopting a structured, game-theoretic approach to settlement can help move parties away from binary thinking (“Did we win? Did we lose?”) and toward value-optimising outcomes.

It allows boards and legal teams to:

• Model likely settlement values dynamically over time

• Understand the true cost of delay and distraction

• Make better trade-offs between financial and non-financial factors

• Engage more constructively in negotiation, armed with a realistic view of the other side’s incentives

  
  

The work of firms like RPC and others in applying game theory and other statistical based approach in litigation is helping to professionalise this approach.

The more we can move clients and counterparties toward this way of thinking, the more likely it is that we can resolve disputes efficiently and intelligently — and avoid the all-too-familiar spectacle of cases grinding toward trial simply because parties misunderstood or misplayed the evolving negotiation game.

As with all games, those who understand the rules — and the players — are best placed to win.