Trend Report | Part 1 - HiiL

The Many Effects of Having Adjudication Available
1. The threat of involving third parties makes people aware of the need to reach an agreement. If
they do not reach an agreement, then somebody will make a judgement for them.
2. So the adjudication option encourages parties to reach an agreement between themselves, in an
environment where they have a greater degree of control over the outcome than through a third
party.
3. It promotes reasonable offers. Where going to the third party is a credible threat, it places
pressure to make reasonable offers to the other party, and provides weaker parties with the
opportunity to ‘hold out’ for a fair solution from stronger parties.
4. If negotiations get stuck, the judge (or any other adjudicator) can assist the parties in
communication and negotiation, taking on a facilitator role, and lead them towards a decision.
5. Finally, if the problem can still not be resolved by the parties themselves, the adjudicator can
take the decision for the parties. Ideally, the adjudicator then imposes a decision that is
maximally fair, fits the issues and the needs for resolution and is most likely to be acceptable to
both parties, or at least to the broader community. Both in formal legal systems and in informal
processes, a decision that can be explained from norms that are generally accepted as relevant
and applicable will have greater legitimacy.
A Credible Option of Intervention
In order to be a credible option, the third party decision must be fair, fast, affordable, and its decisions
must be likely to be complied with. The challenge for third parties is to meet all of these criteria.
Research has started to make clear what works here and what does not. The literature on litigation and
settlement tends to suggest that a threat with extensive litigation would do the job. Scared by the
prospect of having to spend many days in court, the parties would each give in and settle in a reasonable
way. During the process of litigation, they learn more about each other’s case. The asymmetry in what
they know about the facts will gradually disappear. 217
But one of the problems here is that the threat of extensive litigation is not credible if one of the parties
lacks the money and resources. An extensive program of financing litigants with little money becomes
necessary: legal aid, no-win no-pay arrangements where the lawyer takes a large percentage of the
award, legal insurance or pro bono lawyers. If there is no such arrangement available, the party with the
most resources has a much more credible threat to litigate then the other party and he will end up with a
much better settlement.
Another issue not captured by these economic models is that a rational defendant will start with a low
offer. Why would he offer a reasonable settlement if he knows that the other party still needs to go
through a long process before the court will render a decision? The rational defendant (and some
defendants may be on the stubborn side of rationality) will foresee that there are many opportunities to
settle in the future. There is even a probability that that the plaintiff gives up entirely.
This may be the explanation that many law suits settle on the steps of the courthouse. 218 At that time,
settlements are more likely to be as fair as the expected outcome if the court decides. But just before
the hearing in court, most of the legal costs have already been paid and the parties have already waited
a long time for a resolution of their conflict.
217 Daughety, A. F. and J. F. Reinganum (2008). Settlement. Discussion Paper prepared for inclusion in the
Encyclopedia of Law and Economics (2nd Ed.), Vol. 10: Procedural Law and Economics, Ed. by Chris William Sanchirico
to be published by Edward Elgar in 2012. Spier, K. Chapter 4: Litigation, in: A. Mitchell Polinsky & Steven Shavell,
Editors, The Handbook of Law & Economics (2007), p. 259.
218 Spier, K. E. (1992). "The dynamics of pretrial negotiation." Review of Economic Studies, p. 93-108
HiiL Trend Report – Part 1: Challenges and Promising Approaches 116