Why Do Businesses Go to Court?

Litigation imposes high costs on all parties to a dispute, and each side has an interest in avoiding it by reaching an acceptable settlement. Various factors can prevent the parties from coming to an agreement, however, making litigation between the parties more likely.

Pride and Emotion

Relationships can sour quickly, making easily resolvable disputes considerably more complicated. Rather than focusing solely on what is best for the business, disgruntled business partners often let emotion influence their actions. They want to show that they are right—or, more importantly, that the other side is wrong. A triumph in a public forum carries much more clout than negotiating a favorable settlement, and prevailing in a court case establishes once and for all that one partner was the winner and the other was the loser. When attaining such a declaration gains high priority, especially due to someone’s pride getting hurt, disputes have a higher likelihood of escalating to litigation.

Contrasting Expectations of Success

The decision to go to trial depends somewhat on the expected return. Generally speaking, a potential litigant’s expected takeaway from litigation can be approximated by multiplying the damages at stake by the probability of winning, then subtracting the cost of litigating. Parties should, in theory, accept a settlement offer that is higher than the expected takeaway from litigation. When the two sides somewhat agree on who is likely to win they can usually find a mutually acceptable settlement, especially when court costs are high. When the two sides both believe they will win, however, each side expects a high takeaway from litigation. This makes mutually acceptable settlements harder to come by, and increases the chance of going to trial.

Adversarial Negotiation

Litigation is expensive, and most of the time a party benefits more by accepting a slightly lower settlement than by going to court. Yet this holds true for the other side, which also prefers to avoid litigation even if it means taking less money. Negotiating a settlement, then, often resembles a game of chicken—each side threatens litigation to scare the other side into concessions, while also pretending not to mind litigation to avoid making concessions of its own. While this strategy can be effective, especially as the trial date approaches and pressure mounts, it can also result in the parties actually going to trial if neither one backs down.

People cannot always avoid litigation, and under the right circumstances they might not want to. Still, needless litigation wastes time and money, and doesn’t guarantee a better result than that provided by settlement. Recognizing some of the factors that lead to litigation may help parties avoid it, especially when staying out of court presents a better solution.

Leave a Public Comment