George J. Siedel: Are Negotiators Subject To Liability For Using Their BATNA Power?

From George J. Seidel, Williamson Family Professor of Business Administration and Thurnau Professor of Business Law at the University of Michigan’s Ross School of Business:

Many thanks to John Lande, Hiro Aragaki, and Sanda Kaufman for their recent posts that have clarified the meaning of “BATNA.”  BATNA is an important concept because it is often a key factor in determining a negotiator’s power.  As noted in Getting to Yes (emphasis in original), “The better your BATNA, the greater your power … . In fact, the relative negotiating power of two parties depends primarily upon how attractive to each is the option of not reaching agreement.”

One question missing from the posts—and from most discussions of BATNA—is whether reliance on BATNAs during negotiations can result in liability.  Coauthor Greg Marsden and I explored this question (in light of a possible duty to negotiate in good faith) in a recent article published by the Berkeley Business Law Journal.

Greg is the Dean of Postgraduate Study at Facultad Libre de Derecho de Monterrey (a leading independent law school in Mexico) and his background in civil law enabled us to compare civil and common law approaches to the question.  We concluded that the duty to negotiate in good faith under civil law weakens the ability of negotiators to rely on their BATNA power and subjects them to the possibility of reliance damages when they violate the duty.

Under the common law approach used in the United States, there is generally no duty to negotiate in good faith, and negotiators can exercise their BATNA power unless they decide to assume the good faith duty. The risk of assuming this duty increases when negotiators use preliminary agreements—such as term sheets, memoranda of understanding, letters of intent, and agreements in principle.

Following a Delaware Supreme Court decision allowing the plaintiff to recover expectation damages, the consequences of breaching the duty to negotiate in good faith can be severe. In that case the court affirmed a Chancery Court order requiring one of the negotiating parties to pay $113 million in expectation damages, plus $78 million in pre-judgment interest. SIGA Technologies, Inc. v. PharmAthene Inc., 132 A.3d 1108 (Del. 2015).

On a separate note relating to teaching BATNA strategies,  a recent ABA report titled “Defining Key Competencies for Business Lawyers” (published in 2017 in The Business Lawyer) drew on the framework of the earlier MacCrate Report (“Legal Education and Professional Development–An Educational Continuum”).  Both reports emphasize the importance of negotiation as a key lawyering skill.  As the 2017 report notes, “A business lawyer should be a competent negotiator who is able to work with clients …” before, during and after negotiations.

The reports also discuss the analytical skills that lawyers must possess when participating in negotiations.  The MacCrate report, for example, emphasizes that all lawyers must—in addition to skill in evaluating alternatives—be able to (1) determine the bottom line; (2) identify outcomes from the negotiation; (3) analyze whether the negotiation is zero-sum, non-zero-sum, or a mixture of the two; and (4) examine the negotiation from the perspective of the other side.

I have developed a free teaching package that includes a (1) negotiation exercise with two roles, (2) a Teaching Note, and (3) Powerpoint slides. I have tested the exercise in courses and seminars that have included law students, attorneys and judges.   Please feel free to use the package to help your students develop the skills mentioned in the reports.  For example, the exercise illustrates how a zero-sum negotiation can be transformed into an expanded pie that benefits both sides.  And they will gain an understanding of BATNA strategies and a realization that BATNA is not necessarily the same as a bottom line (a point made in the recent Lande-Aragaki-Kaufman discussions).

I have also developed a website (with links to free apps) that includes a negotiation planning tool.  The planning tool includes questions that encourage negotiators to think about their and the other side’s BATNA.  Another tool at the website enables negotiators to assess their negotiating style, which is especially useful in cross-cultural negotiations.

You have my permission to use anything in the package or at the website.  My only request is that I hope you will provide feedback if you have suggestions for improvement.  Thank you.

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