Two Mistakes Parties Make During Settlement: Why "More" is Often "Less"
The overload within the Georgian court system—characterized by a shortage of judges and administrative staff—is the primary reason for prolonged disputes. The reality is that even the simplest case can last for years, resulting in additional costs and uncertainty for businesses. This is precisely why a settlement is the best way to resolve a dispute.
Nevertheless, when it comes to settling in court, we often encounter two critical mistakes made by the parties:
- • Parties refuse a reasonable amount available today because they hope to receive more years later; or
- • They agree to receive the desired amount, but scheduled over a long period of time.
In neither of these cases do the parties usually consider the Time Value of Money (TVM).
Let's look at a concrete example expressed in numbers:
Imagine a plaintiff has suffered $100,000 in damages. The defendant offers:
- $20,000 immediately;
- $120,000 after 5 years.
At first glance, the plaintiff receives $140,000—more than the actual damage incurred. But is this "$40,000 surplus" a real gain? To answer this question, we must use the Present Value (PV) formula:
PV=FV/(1+R)t
Using this formula, and applying a 10% discount rate, it turns out that the present value of the $120,000 to be received in 5 years is only $74,510.
Consequently, the total present value of the $140,000 to be received by the plaintiff, if discount rate is 10%, is only $94,510, which fails to compensate for the actual damage of $100,000.
Conclusion
Settlement is an art that is not based solely on legal knowledge. Ignoring financial factors can turn a "won" dispute into a loss.
At Union Legal, we believe that effective dispute management means bringing not only legal, but also economic benefits to the client.
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