Understanding your BATNA is a crucial element to achieving good outcomes in litigation and arbitration. The term BATNA is a phrase sometimes thrown around in settlement discussions and negotiations. It can be a very useful tool, but like all acronyms and specialised jargon, it can cause confusion when its meaning is not clear.
Let’s sort out what BATNA (Best Alternative to a Negotiated Agreement) and WATNA (Worst Alternative to a Negotiated Agreement) mean in a dispute resolution context and hopefully clear up the confusion around their meaning.
BATNA is a term made known by Roger Fisher and William Ury in their book “Getting to Yes”. It is described this way:
“The reason you negotiate is to produce something better than the results you can obtain without negotiating. What are those results? What is that alternative? What is your BATNA — your Best Alternative To a Negotiated Agreement? That is the standard against which any proposed agreement should be measured”
The term WATNA is not used by Fisher and Ury. (If you happen to know where it was first used, please reach out and let us know!)
BATNA in a dispute resolution context
Let’s say we’re sitting down to negotiate with a customer who is refusing to pay the agreed-upon one million for a piece of machinery we’ve installed. The customer argues that the delivery does not meet the specifications – and even if it does – the price is unreasonably high.
Past discussions have made it clear that if we don’t reach an agreement today, the customer will refuse to pay anything. So, what are our best and worst alternatives we can choose from if we fail to agree? In our case, and typically in a dispute resolution context, there are two alternatives available when a defendant will not negotiate. We can choose to:
- Drop the claim and accept that we will get nothing.
- Bring our claim to court (or arbitration) and try to compel the other party to pay.
(Perhaps we could also sell the claim to a third party, or take some other action, but let’s keep our example simple).
What is our best alternative to a negotiated agreement?
The goal of the meeting is to reach a Negotiated Agreement, or in other words, a settlement. To understand what our BATNA (and WATNA) is, we need to assess the value of our two alternatives.
The value of dropping the claim is easy to assess. It has a value of zero as we are sure to get nothing.
Choosing to go to court is more difficult to assess, because the outcomes are uncertain. We list the potential outcomes based on our best understanding.
- Good outcome — We win and get our million, and the customer pays all legal costs. We believe this is the most likely outcome (60% chance).
- Average outcome — We win, but the amount we’re awarded is reduced to 500k by the court. The customer pays all legal costs (20% chance).
- Bad outcome — The court finds we did not deliver according to specifications. We get nothing, and we must pay all legal fees totalling 500k (20% chance).
So, what is the overall value of proceeding to court? Multiplying the monetary value of each outcome by its probability gives a probability-weighted value:
Good outcome: 1 million x 60% = 600k
Average outcome: 500k x 20% = 100k
Bad outcome: -500k x 20% = -100k
Total value: = 600k (sum of the above)
The value of 600k is the probability-weighted value of the above outcomes, also known as the expected value. The term is a mathematical term, rather than “the value we’d expect”.
See the image of our risk profile above, which illustrates these three outcomes, their respective likelihood, and the expected value of all three outcomes.
Our best alternative to a negotiated agreement, our BATNA, is therefore to go to court, as its value of 600k is clearly higher than the worst alternative, the WATNA, which would be to drop the claim, as that alternative has a value of nothing.
(The value of going to court may be affected by other aspects such as risk tolerance, interest rates and external values, but again, let’s keep the example simple).
How do we use our BATNA?
Let’s say that after lengthy discussions, the customer stands up to walk away and says: “I can pay you 650k now and we leave it at that. Otherwise, I won’t discuss your claim any further.”
Obviously, we’d love an alternative where we’d get our full million. But we can’t simply choose to go to court and win. If we don’t reach a settlement, our only options are to drop the claim or go to court—where we may win, partially win or lose. Since the 650k offer is more than the 600k probability-weighted value of going to court (our BATNA), it makes sense to accept it.
If dropping the claim was not an option, then going to court would be both the WATNA and the BATNA—since it would be the only option.
In cases where the risk of losing is high, legal fees are substantial, or the defendant’s financial status is questionable, the option to go to court can mean a negative value for the claimant. In such situations, surrendering and getting nothing would be our BATNA, while the negative value of going to court would be our WATNA. If that were the case, any settlement offers higher than zero would be preferable to either surrendering or going to court.
BATNA is sometimes referred to as the “walk-away value”. In our case, we should walk away from settlement offers under 600k, as they’re worth less than our expected value of going to court. Entering negotiation with a “walk-away value” may however limit our chances of finding a creative resolution to a dispute, and it may be better to keep it as a reference value in relation to settlement offers.
Potential confusion from alternative uses of the term
It very common to think of the best possible court outcome as your BATNA. However, if you choose to proceed to court you don’t yet know the court decision; you must accept the risk of a bad outcome as well as an average, along with the good one. Therefore, you must use the expected value as the “alternative” to compare with.
According to the Harvard Negotiation Program, BATNA is a course of action and if that cause of action is uncertain, then BATNA is the expected value of that action:
“Establish your BATNA. Choose a course of action that would have the highest expected value for you. This is your BATNA—the course you should pursue if the current negotiation fails.”
However, other sources describe BATNA as the best possible outcome of an alternative action, for example from Thomson Reuters’ Practical Law:
“BATNA is the best result a party could hope for if it called off negotiations, for example, by terminating mediation.”
There are many other sources describing BATNA this way, and it has become a common way to understand the term – but it is perhaps not a very helpful interpretation. Knowing the best possible outcome in court is definitely useful, but its chance of occurring needs to be taken into account for this value to have real relevance. Parties always have the ability to buy a lottery ticket and hope for the top prize, but the low likelihood of that happening means we don’t regard it as a valuable alternative. So too must the likelihood of different court outcomes be taken into account when considering the value of proceeding to court, and these outcomes are best understood when weighted by their probability of occuring, which is the expected value.
(Some try to solve the issue of an unattainable best possible outcome by inventing the term MLATNA, Most Likely Alternative to a Negotiated Agreement, but this quickly causes more confusion if there are many outcomes. In our case the MLATNA would be the same as the best possible outcome).
In summary
BATNA is a term that describes the best alternative action to a negotiated agreement. Some use BATNA to describe the best possible outcome of their alternative action, e.g. the biggest award they could achieve in court. This confusion can lead to uncertainty.
What is not uncertain is that it is always crucial to know the best and worst possible outcomes in a court or arbitration, but even more importantly, the overall probability-weighted value of such a path. This value, and the risk profile that goes with it, are crucial comparison tools to any settlement alternatives, and help parties to make decisions around their disputes.
