Litigation game theory

Litigation game theory
06 Jan 2019

Examining litigation and game theory is not a new concept. In South Africa, Taryn Neuhaus has written a fascinating paper titled “Game Theoretic Modeling of Litigation in Engineering Projects” (2015). This article presents some of her premises and conclusions, as well as those of the authorities and academics papers she has referenced.

Litigation is a game. It has players, rules and strategies.

Like all games, Litigation has game theory.

SIMPLE FACTORS IN THE GAME

A rational litigant considers the following simple factors in assessing whether to play the game:

  1. The estimated costs of the litigation; and
  2. The estimated duration of the litigation.
  3. If these factors are affordable then the next consideration is if the case is good in law.

THE LEGAL MERITS

Assessing the probability of success in litigation is far more complex than projecting fees and time. There is an exercise employed by some advocates to demonstrate this complexity. Counsel will ask a litigant in chambers to look at the hundreds of case law books on his shelf. The books are the South African Law Reports that contain all notable judgements which craft the law of the land. Each book is a volume of an individual year containing dozens of cases.

Counsel will then ask:

“How many cases do you think there are in these books…?”

After some moments and the litigant grasping the magnitude of the number, counsel will say:

“It’s thousands of cases…and, in all those cases… both parties thought they were right!”

It’s a sobering exercise…

THE META LITIGATION FACTORS

There are also each individual player’s subjective meta factors to consider.

The meta game takes the matter out of its vacuum and looks at the litigation’s consequences on the litigants both now and in the future. Examples would be reputational damage, opportunity cost, and any long-term loss associated with litigating, and even winning, in the short term.

A party will be acutely aware of its own meta factors and it will also anticipate those of its opponents. This analysis, together with quantifying the simple factors and merits of the case, will determine the litigant’s strategy.

GAME THEORY

Neuhaus describes the game theory of litigation as a “signaling game”.

Signals are revealed through the course of litigation and provide information. A case’s information starts as asymmetrical but improves with each passing stage of the litigation process.

A signal can be as clear as the founding papers in the case or as subtle as the identity of the law firm and counsel who drafted those papers.

Players will interpret these signals and augment or amend their strategy accordingly. The interpretation of the signals will ultimately determine whether a matter proceeds to court, is settled, or abandoned.

As the case goes on, the cost of signaling for a party with an unmeritorious claim or defense will increase substantially given the simple interest on the claim, the cost of the process, and the limited chance of success.

SETTLEMENT

Most litigation ends in a settlement.

At the outset of a claim, a rational litigant will have an inclination as to their highest/lowest settlement threshold. These numbers will fluctuate as the litigation progresses as each party sinks resources into the matter.

The claimant and the defendant will both utilize a strategy in litigation which indirectly aims to either increase or decrease the amount on which the other party is willing to settle on respectively.

Once these two figures overlap, in theory, a settlement should ensue provided the parties are given an opportunity for an agreement to take place. One such opportunity is found at the steps of court.

We have found that as a result of the various signals, a rational defendant will only settle a matter when the following three elements have aligned:

  1. He has sufficient information from signals in the matter to properly consider his position; and
  2. It becomes clear that its prospects of success are not as high as his opponent’s; and
  3. The expected value of proceeding further is not commensurate with either the fees and/or time and/or the broader commercial cost.

The third element is crucial.

THE SIGNAL OF A THIRD-PARTY LITIGATION FUNDER

The presence of a litigation funder is a powerful signal and meta factor in the litigation game.

Disclosing a litigation funder can defeat a dilatory strategy employed by an opportunistic defendant.

See also: Litigation versus arbitration: which to use in a civil dispute?

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Simon Kuper
Simon Kuper

Simon Kuper is the Co-Founder and Executive at Taurus Capital. Simon co-founded Taurus Capital in 2016. He is responsible for engagement with the legal fraternity and the core company legal offering. He also focuses on business development, risk management, underwriting, and monitoring. Simon is an attorney by trade and spent almost a decade post-articles in a specialist commercial litigation and corporate insolvency practice. His experience is a valuable contribution to Taurus’ various committees. When Simon is not spending time with his family, he is training for his next marathon.

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