13. We are indebted to both Gary Friedman and Jack Himmelstein, with whom Mnookin has taught mediation for more than a decade, for the use of the word “loop” to describe the process of active listening.
14. The following questions are adapted from Madelyn Burley-Allen, Listening: The Forgotten Skill, pp. 129–130 (2d ed. 1995).
15. For a useful discussion of the ways in which our mindset can undermine productive conversations, see Douglas Stone, Bruce Patton, and Sheila Heen, Difficult Conversations: How to Discuss What Matters Most (1999).
3 The Tension between Principals and Agents
1. This chapter draws on important intellectual contributions from the new “institutional economics.” This new field flows from research by Ronald Coase, Oliver Williamson, Michael Spence, Richard Zeckhauser, and many others. See generally Ronald H. Coase, The Firm, the Market, and the Law (1988); Ronald H. Coase, “The Nature of the Firm,” 4 Economica 386 (1937); Ronald H. Coase, “The Problem of Social Cost,” 3 Journal of Law and Economics 1 (1960); Oliver E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (1985); A. Michael Spence, Market Signalling: Informational Transfer in Hiring and Related Screening Processes (1974); John W. Pratt and Richard J. Zeckhauser, Principals and Agents: The Structure of Business, pp. 1–35 (1985). For a recent series of essays on agency and negotiation, with an annotated bibliography, see Negotiating on Behalf of Others: Advice to Lawyers, Business Executives, Sports Agents, Diplomats, Politicians, and Everybody Else (Robert H. Mnookin and Lawrence E. Susskind, eds., 1999).
2. Zeckhauser has called these three types of differences “the golden triangle.” Richard J. Zeckhauser, “The Strategy of Choice,” in Strategy and Choice (Richard J. Zeckhauser, ed., 1991) (we have used the label “preferences” in lieu of his label “valuation”).
3. See Ronald C. Rutherford, Thomas M. Springer and Abdullah Yavas, “Conflicts Between Principals and Agents: Evidence From Residential Brokerage,” p. 3 (unpublished manuscript on file with authors, March 1999) (suggesting that brokers sell their own homes for an average of 3 percent more than the price they get for their clients’ homes). See also Dinah Wisenberg Brin, “Real-Estate Brokers Get a Higher Price When Selling Own Homes, Study Finds,” Wall Street Journal, p. B3 (April 19, 1999).
4. See Ronald J. Gilson and Robert H. Mnookin, “Disputing Through Agents: Cooperation and Conflict between Lawyers in Litigation,” 94 Columbia Law Review 509 (1994).
5. See, e.g., Geoffrey P. Miller, “Some Agency Problems in Settlement,” 16 Journal of Legal Studies 189, 210 (1987); Benjamin Klein and Keith B. Leffler, “The Role of Market Forces in Assuring Contractual Performance,” 89 Journal of Political Economy 615 (1981); David Charny, “Non-Legal Sanctions in Commercial Relationships,” 104 Harvard Law Review 375, 392–94 (1990).
6. See Herbert M. Kritzer, “Contingent Fee Lawyers as Gatekeepers in the American Civil Justice System,” 81 Judicature 22 (1997). See also Robert H. Mnookin, “Commentary: Negotiation, Settlement and the Contingent Fee,” 47 DePaul Law Review 363, 367–369 (1998).
7. Marc Galanter and Thomas Palay, Tournament of Lawyers: The Transformation of the Big Law Firm, p. 52 (1991).
8. Traditionally, the common law insulated an attorney from any negotiation-related malpractice claim arising out of a settlement, even if the attorney was negligent in advising the client to settle. This rule prevailed in many states as late as the 1970s. See N.A. Kerson Co. v. Shayne Dachs et al., 59 A.D.2d 551 (New York 1977). Slowly, however, the common law rule gave way to the now-dominant “ordinary skill and knowledge” standard. See Grayson v. Wofsey et al., 646 A.2d 195 (Connecticut 1994); Rizzo v. Haines, 555 A.2d 58 (Pennsylvania 1989); Ziegelheim v. Apollo, 607 A.2d 1298 (New Jersey 1992).
9. See McMahon v. Shea, 657 A.2d 938 (Pennsylvania 1995); Albert Momjian, “Lawyers’ Duty to Clients Clarified,” Pennsylvania Law Journal Weekly, p. 13 (April 17, 1995). For an overview of the cases in this area, see Ronald E. Mallen and Jeffrey M. Smith, 3 Legal Malpractice, § 29.38, pp. 742–743 (4th ed. 1996).
10. See Grayson v. Wofsey.
11. See Rizzo v. Haines, No. 79–623, slip op. at 21 (Pa. C.P. Phila. June 20, 1985), aff’d in part and rev’d in part, 357 Pa. Super. 57, 515 A.2d 321 (1986), aff’d, 520 Pa. 484 (1989).
12. See Gilson and Mnookin, “Disputing Through Agents.”
13. Roger Fisher and Wayne Davis, “Authority of an Agent: When is Less Better?” in Negotiating on Behalf of Others, p. 74 (Robert H. Mnookin and Lawrence E. Susskind, eds., 1999).
14. See id., p. 68.
4 The Challenges of Dispute Resolution
1. See William L. F. Felstiner, Richard L. Abel, and Austin Sarat, “The Emergence and Transformation of Disputes: Naming, Blaming, Claiming,” 15 Law and Society Review 631 (1980–81).
2. See Marc A. Franklin, Robert H. Chanin, and Irving Mark, “Accidents, Money, and the Law: A Study of the Economics of Personal Injury Litigation,” 61 Columbia Law Review 1, 10–11, 32 (1961); Marc Galanter, “Reading the Landscape of Disputes: What We Know and Don’t Know (And Think We Know) about Our Allegedly Contentious and Litigious Society,” 31 University of California at Los Angeles Law Review 4, 27 (1983).
3. Pierce O’Donnell and Dennis McDougal, Fatal Subtraction: The Inside Story of Buchwald v. Paramount, pp. xvii-xviii (1992).
4. See Robert H. Mnookin and Lewis Kornhauser, “Bargaining in the Shadow of the Law: The Case of Divorce,” 88 Yale Law Journal 950 (1979).
5. See N.Y. Civil Practice Law and Rules, §1411 (Consol. 1999).
6. A dispute’s net expected value is also affected by how long it will take to secure a court judgement. Because of the time value of money, a legal system that can try a case in six months makes a claim more valuable than the same substantive claim in a system that takes five years to get to trial. Obviously there can be interaction between procedural rules and how long one expects a case to take to be adjudicated. One consequence of liberal discovery is that it will often permit a plaintiff or defendant to delay a trial for a considerable period of time.
7. “Loss aversion,” which is discussed in Chapter 6, may also make it more difficult to settle. Loss aversion suggests that decision makers may tend to attach greater weight to prospective losses than to prospective gains of equivalent magnitude. As a consequence, to avoid what is perceived as a loss, a party may prefer to gamble. See Daniel Kahneman and Amos Tversky, “Conflict Resolution: A Cognitive Perspective,” in Barriers to Conflict Resolution, pp. 54–60 (Kenneth Arrow, Robert H. Mnookin, Lee Ross, Amos Tversky, and Robert Wilson, eds., 1995).
8. See George L. Priest and Benjamin Klein, “The Selection of Disputes for Litigation,” 13 Journal of Legal Studies 1 (1984); Samuel R. Gross and Kent D. Syverud, “Getting to No: A Study of Settlement Negotiations and the Selection of Cases for Trial,” 90 Michigan Law Review 319 (1991).
9. See Margaret Cronin Fisk, “Ford Thinks It Has a Better Idea: Hardball,” National Law Journal, p. A1 (March 18, 1996).
10. Transaction costs have been explored by various scholars. See Peter Toll Hoffman, “Valuation of Cases for Settlement: Theory and Practice,” 1991 Journal of Dispute Resolution 1, 22–28 (1991) (discussing litigation expenses, the time value of money, taxes, and collectability and subrogation); Avery Katz, “The Strategic Structure of Offer and Acceptance: Game Theory and the Law of Contract Formation,” 89 Michigan Law Review 215, 225–226 (1990) (discussing the costs of implementation and the costs of strategic behavior); Robert C. Ellickson, “The Case for Coase and Against ‘Coaseanism’,” 99 Yale Law Journal 611, 614–616 (1989) (discussing chronological differences between prebargain, bargain and postbargain costs, and the functional differences between “get-together,” “decision and execution,” and “information” costs).
11. See Howard Raiffa, The Art and Science of Negotiation, p. 52 (1982); Don Andrew Moore, “The Unexpected Benefits of Negotiating under Time Pressure” (unpublished Ph.D. diss., Northwestern University,
June 2000).
12. Barbara W. Tuchman, The First Salute, p. 154 (1988).
13. Jeffrey Z. Rubin, Dean G. Pruitt, and Sung Hee Kim, Social Conflict: Escalation, Stalemate, and Settlement, p. 159 (2d ed. 1994).
14. Id., p. 111.
15. See Martin Shubik, “The Dollar Auction Game: A Paradox in Non-Cooperative Behavior and Escalation,” 15 Journal of Conflict Resolution 109–111 (1971).
16. Federal Rule of Civil Procedure 26.
17. See Stephen B. Goldberg, Frank E. A. Sander, and Nancy H. Rogers, Dispute Resolution: Negotiation, Mediation and Other Processes, pp. 272–287 (3d ed., 1999); Robert H. Mnookin, “Creating Value through Process Design: The IBM-Fujitsu Arbitration,” Arbitration Journal 6–11 (Sept. 1992).
18. See Jonathan R. Cohen, “Advising Clients to Apologize,” 72 Southern California Law Review 1009 (1999).
5 The Challenges of Deal-Making
1. See William A. Sahlman, “Note on Financial Contracting: Deals,” Harvard Business School Case No. 288–014 (1989) at p. 1. Other commentators define “deals” as transfers that involve “capital assets.” See also Ronald J. Gilson, “Value Creation by Business Lawyers: Legal Skills and Asset Pricing,” 94 Yale Law Journal 239, 249 (1984) (defining capital assets as “assets whose value is determined solely by the income, whether in cash flow or appreciation, they are expected to earn.”). This definition excludes assets held for their consumption value.
2. See Uniform Commercial Code §§ 2–314, 2–315 (establishing, respectively, the implied warranties of merchantability and fitness for a particular purpose).
3. Another key determinant of whether lawyers are involved in deal-making is the ratio of the value they are likely to add compared to the scale of the transaction. Using lawyers in deal-making is somewhat akin to buying insurance. It may make little sense to buy insurance if the premium is very high in relation to the potential risks.
4. Some deals must be documented in writing to make them legally binding. Courts will not enforce some oral agreements, no matter how much the extrinsic evidence points toward a contract. The Restatement (Second) of Contracts §110 (1981) specifies five categories of contract that must be in writing in order to be legally enforceable: (1) a contract of an executor or administrator to answer for a duty of his decedent; (2) a contract to answer for the duty of another (the suretyship provision); (3) a contract made upon the consideration of marriage (the marriage provision); (4) a contract for the sale of interest in land (the land contract provision); and (5) a contract that is not to be performed in one year from the making thereof (the one-year provision). In addition, the Uniform Commercial Code similarly restricts: (1) contracts for the sale of goods for the price of $500 or more (Uniform Commercial Code §2–201); (2) contracts for the sale of securities (Uniform Commercial Code § 8–319); and (3) contracts for the sale of personal property not otherwise covered, to the extent of enforcement by way of action or defense beyond $5,000 in amount or value of remedy (Uniform Commercial Code § 1–206). See generally E. Allan Farnsworth, Contracts, § 6 (2d ed. 1990).
5. See James C. Freund, Anatomy of a Merger: Strategies and Techniques for Negotiating Corporate Acquisitions, p. 44 (1975).
6. See Ronald J. Gilson and Bernard S. Black, The Law and Finance of Corporate Acquisitions, p. 231 (2d ed. 1995) (“Anticipating and controlling strategic behavior is among the principal ways that advisors can add value when they participate in business transactions.”).
7. See Paul H. Rubin, Managing Business Transactions: Controlling the Cost of Coordinating, Communicating, and Decision Making, pp. 162–164 (1990); Paul Milgrom and John Roberts, Economics, Organization and Management, p. 167 (1992).
8. See Freund, Anatomy of a Merger, pp. 193–195.
9. 2000 U.S. Dist. LEXIS 1088 (Decided February 4, 2000).
10. See Wendy Bounds, “Parting Shots: Why a Former CEO Says Federated Still Owes Him $47 Million,” Wall Street Journal, p. A1 (April 20, 1998).
11. We are indebted to James C. Freund for highlighting the importance of these contractual terms in deal-making negotiations. See Freund, Anatomy of a Merger, p. 153.
12. See Gilson, “Value Creation by Business Lawyers,” p. 260 n.52 (“The asymmetry between the extent of the buyer’s and seller’s representations and warranties results from the different character of their roles in the transaction. At the extreme, in an all-cash transaction that is both executed and closed at the same time, the only fact concerning the buyer that will be of interest to the seller is that the check be good. As the time between execution and closing grows, and as the character of the consideration moves from cash to a form like stock or debt, the value of which depends on the future performance of the buyer, the seller begins to take on some of the attributes of a buyer and the asymmetry in the extent of representations and warranties is reduced.”).
13. See Freund, Anatomy of a Merger, p. 156.
14. Gilson, “Value Creation by Business Lawyers,” p. 261.
15. Ian Ayres and Robert Gertner, “Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules,” 101 Yale Law Journal 729, 730 (1992); Milgrom and Roberts, Economics, Organization and Management, p. 127.
16. Legal scholars have devoted substantial attention to the significance of incomplete contracts. Two strands of literature have emerged. One focuses primarily on the types of default rules that should be supplied in the absence of express contractual provisions. See e.g., Ayres and Gertner, “Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules;” Ian Ayres and Robert Gertner, “Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules,” 99 Yale Law Journal 87 (1989). The second strand of literature, pioneered by Ian Macneil, explores the sociological or relational dimension of long-term business contracts. Macneil’s central thesis is that business deals are embedded in a set of social relations that imbues its members with behavioral norms and that delivers reputational and interpersonal sanctions against deviant behavior. As Macneil and others have observed in several empirical investigations, disputes in long-term contracts are for that reason often resolved “relationally” rather than through litigation. The literature does not conclude that businesspeople are not strategic or do not capitalize on advantageous contract terms; rather, it asserts that social networks sometimes constrain excessive strategic behavior. See, e.g., Ian R. Macneil, The New Social Contract (1980); Ian R. Macneil, “Relational Contract: What We Do and Do Not Know,” 1985 Wisconsin Law Review 483 (1985); Ian R. Macneil, “Contracts: Adjustment of Long-Term Economic Relations under Classical, Neo-Classical, and Relational Contract Law,” 72 Northwestern University Law Review 854 (1978).
17. See Milgrom and Roberts, Economics, Organization and Management, pp. 127–129.
18. See Steven Shavell, “Damage Measures for Breach of Contract,” 11 Bell Journal of Economics 466, 468 (1980) (“[B]ecause of the costs involved in enumerating and bargaining over contractual obligations under the full range of relevant contingencies, it is normally impractical to make contracts which approach completeness.”).
19. See “Note on Financial Contracting: Deals,” p. 1.
20. See Edward A. Bernstein, “Law and Economics and the Structure of Value Adding Contracts: A Contract Lawyer’s View of the Law and Economics Literature,” 74 Oregon Law Review 189 (1995).
21. See Rubin, Managing Business Transactions, pp. 31–32. See also Oliver E. Williamson, “Credible Commitments: Using Hostages to Support Exchange,” 73 American Economic Review 519 (1983).
22. See Williamson, “Credible Commitments,” p. 527.
23. Rubin, Managing Business Transactions, p. 34.
24. Id.
25. For a discussion of relationship-specific prospective advantage, see David Charny, “Non-Legal Sanctions In Commercial Relationships,” 104 Harvard Law Review 375, 392–394 (1990). See also L. G. Telser, “A Theory of Self-Enforcing Agreements,” 53 Journal of Business 27, 28 (1980) (“[O]ne of the strongest incentives for honesty o
f a seller is his desire to obtain the continued patronage of his customer.”); Rubin, Managing Business Transactions, pp. 29–31.
26. See Rubin, Managing Business Transactions, p. 30.
27. Telser, A Theory of Self-Enforcing Agreements, p. 44.
28. There is a rich theoretical literature analyzing “repeated games,” which explores how rational players might behave in the context of a long-term relationship. See Roger B. Myerson, Game Theory: Analysis of Conflict, pp. 308–310, 337–342 (1991); Jean Francois Mertens, “Repeated Games” in The New Palgrave: Game Theory, pp. 205 (John Eatwell, Murray Milgate, and Peter Newman, eds., 1989). Duncan Luce and Howard Raiffa demonstrated unraveling in 1957. See R. Duncan Luce and Howard Raiffa, Games and Decisions: Introduction and Critical Survey, pp. 97–102 (1957).
29. The following discussion is drawn from Victor P. Goldberg, “The Net Profits Puzzle,” 97 Columbia Law Review 524 (1997).
30. Id., pp. 543–544.
31. Geoffrey S. Renhert, “The Executive Compensation Contract: Creating Incentives to Reduce Agency Costs,” 37 Stanford Law Review 1147, 1159 (1985).
32. The law governing the enforceability of these preliminary agreements is convoluted. As Farnsworth writes, “Although it is often said that a mere reference in a preliminary agreement to a ‘formal agreement to follow’ may be some evidence that the parties did not intend to be bound by the preliminary agreement, it is just as often said that it does not conclusively show this. . . . It would be difficult to find a less predictable area of contract law.” E. Allan Farnsworth, “Pre-contractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations,” 87 Columbia Law Review 217, 258–260 (1987). Courts consider various factors when deciding whether “preliminary agreements” are legally binding. “The amount of specificity expected will depend on the magnitude and complexity of the transaction and on what is usually done in similar transactions.” Id., p. 260.
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