Sunk cost fallacy and the legal system

Laura Keily, Founder of Immediation

It is not uncommon for parties to settle a litigious matter on the doorstep of the court. Despite the considerable amount of time and funds already invested on the road to court, it is often more favourable for the parties to try and settle the case to avoid or minimise the costs and delay associated with litigation. 

However, reluctance to settle from the parties who are ordered or required to attend mediation  may be associated with the significant amount of time, emotion and money already invested in the existing process. 

The belief that it’s too far gone to pivot now

This approach often stems from the principle of the sunk cost fallacy – the idea that the cost incurred in the past should influence future decisions. While an economic principle in nature, the sunk cost fallacy can also apply in the case of litigation. However, the reasoning is in many cases flawed.  

With Immediation’s alternative dispute resolution, we take the view that it’s never too early or too late to mediate. 

The overwhelming majority of matters will not proceed to trial without mediation first occurring. 

For over two decades, a pre-trial court-ordered mediation has been a means for Australian courts to achieve their ‘just, quick and cheap’ objective for various civil matters. In both Victoria and New South Wales, a judge during any stage may make an order referring a case to mediation if he or she is the view that it may assist the parties to resolve the dispute. 

In some cases, such certain family matters, proceedings cannot be issued until mediation has been attempted.  There is an argument that compulsory mediation is contradictory to the voluntary nature of alternative dispute resolution.  

However, the earlier that a matter goes to mediation, the less likely that the parties have become entrenched in their positions, both psychologically and financially.  The earlier that the switch to a mindset of compromise occurs, the better for all parties.

But even if a considerable amount of money has been invested and time has been spent and it is quite late in the game, parties are still likely to be better off settling in many cases than incurring the risk and cost of litigation.  This can be a bitter pill to swallow, meaning that sometimes parties walk away from a settlement having achieved little more than covering their costs.  

We created Immediation’s unique ODR process to try to help parties avoid that scenario by mediating early and quickly.  But even if mediation occurs late in the day, at least the parties will not have incurred the additional costs of trial. 

The transformative impact of innovation

With the rise of technological advancement and the pursuit for justice via new technologies, alternative dispute resolution (ADR) professionals have been looking at online dispute resolution (ODR) as a means to support potential litigants. 

In Australia, where divorcing parties must undertake mediation before going to court, an increasing number of disputes are conducted through technology-supported processes such as video conferencing, Relationship Advisory Line (FRAL) and Telephone and ODR service (TDRS). 

Similarly, technological innovation can help in domestic violence cases, fostering a safe space for vulnerable clients who would have otherwise felt uncomfortable using the more traditional processes available. 

Purpose-built ODR platforms – like Immediation – can benefit disputing parties by reducing delays and broadening the range of existing dispute resolution services. Ultimately, using these platforms can help clients move faster, and reduce both the financial constraints and uncertainty of court-ordered or compulsory mediation.

Taking an alternative path to resolution can be a win in itself

Mediation empowers disputing parties to make a genuine attempt to achieve a settlement while freeing up resources for the courts to deal with more complex, high-value matters. 

Along with the positive attributes of alternative dispute resolution, ODR platforms allow commercial clients to avoid the complexity and disproportionate expenses of litigation in low value disputes, in addition to improving access to justice for vulnerable clients and increasing the efficiency of our justice system. 

While the value and nature of the dispute play a vital role in the parties’ ability to use digital technology and ODR platforms, parties to a dispute should always consider alternatives to litigation as a means to improving the outcome – both in terms of spend and time invested.

Read more about Laura Keily, the Founder of Immediation.

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