Inside Arbitration: Decision Analysis – Putting legal risk in the language of the boardroom

With uncertainty inevitable in complex disputes, HSF's cutting-edge analysis aims to ensure clients can make informed decisions

Making the right choice is hard, even when all the salient facts are at hand. So, when it comes to commercial disputes – events packed with high emotions, higher stakes and unknown variables – making the right call becomes a Herculean task. Whether choosing to launch proceedings, settle or pivot to a different strategy, most avenues in a contentious matter are beset by legal and commercial risk. It is this uncertainty that often frustrates companies striving to deliver predictable results more even than the costs involved.

It is here that Decision Analysis — a service combining data, software and legal know-how — steps in. "We assess litigation risk with tools more often used to model business risk, including decision trees," says Herbert Smith Freehills (HSF) disputes partner Alex Oddy, who established the firm's Decision Analysis service with colleague Donny Surtani. "Legal advice in the form of a long memo which concludes with subjective terms such as 'reasonable prospects' is not what commercial decision makers are looking for. With our offering, we aim to quantify the risk profile of decisions with the dispute and its resolution."

Break it down

At its core, Decision Analysis is a structured process that assesses the factors influencing a dispute and its outcome. This service helps clients to visualise uncertainties, values and commercial preferences and ultimately to make more informed decisions. The legal assessment is presented in a mode intelligible to boardrooms rather than in legal jargon.

Charlie Morgan, a senior lawyer in HSF's London arbitration team, notes: "We are using the same legal analysis and judgement that underpins a note of advice. However, we look to express our conclusions numerically and graphically to remove ambiguity. For example, we don't treat 'chances of success' as a single factor. One often sees success discussed by reference to a single 'win' scenario, but a win can take many forms, not all of which will be as valuable to the business. With Decision Analysis and decision tree modelling, we try to explain the weighted value of the claim based on legal risk that is quantified in relation to all relevant legal and factual issues."

Moreover, Decision Analysis enables our legal teams to assess how particular variables impact outcome in a granular way, illustrating the drivers of risk and uncertainty in a dispute, and where resources should be allocated in response. In all areas of a dispute where uncertainty resides, Decision Analysis looks to make the implicit explicit, whether in complex or routine matters.

The process is also one that can evolve with a dispute — models can be updated to reflect shifting outcome/probability assessments, changing costs and recovery rates. Rather than a one-size-fits-all approach, the service offers bespoke models sensitive to commercial considerations, such as the net present value of a future payment adjusted for factors like varying costs of capital, as well as partial enforcement.

Widening choice

Decision Analysis can be used to support strategic decision-making through the life of an arbitration or litigation. Where there is uncertainty, the process has something to offer.

Tom Furlong, an arbitration partner based in our Singapore office, outlines the kind of questions he has built models for clients in the past: "The modelling can quantify risks at each stage of a claim, such as questions about jurisdiction, liability and quantum. Will I be able to show causation? Which side's damages expert is likely to be relied on more heavily? How will X legal issue impact the ultimate damages number? Even what we might call a simple case might have multiple likely outcomes. We attribute probabilities to each of those and identify an overall value for the claim (or its defence)."

One of the more common use cases for Decision Analysis is around settlement. From sue-or-settle dilemmas to identifying a negotiation range, Decision Analysis offers a structured process that resonates with business professionals. For example, HSF has used the model to successfully settle complex claims by modelling clients' prospects of success on liability and numerous heads of loss (and the likely quantum that would be awarded, if so). The model helps to identify a negotiating range and the visuals and sensitivity analysis communicate the advice most clearly to commercial clients.

"On one of our cases, I presented the range of possible outcomes to a client's board in graphical form. This gave them a clear idea of the risks and opportunities," says Oddy, whose work developing Decision Analysis contributed to him winning most Innovative Practitioner at the 2022 Financial Times Innovative Lawyers Awards. "We also ran sensitivity tests to see the impact of changing probability inputs to more optimistic or pessimistic numbers. Clients can then consider their own risk appetite and decide how the relevant legal risks align with those."

A related use case has been settlement advocacy, where the model has been used to convince an opponent of their exposure and move them away from an entrenched position. Then there are more specialist applications, such as supporting external disputes funding, as third-party investors are more likely to back a case with credible risk analysis attached.

In short, Decision Analysis provides a market-leading means of modelling dispute risk, enabling clients to better calibrate decisions to their commercial objectives and budgets. "It's really rewarding to see the engagement the models generate in our discussions with clients, and how they can dramatically impact upon clients' strategies," says Rutger Metsch, a member of the Decision Analysis team and London arbitration associate.

"Through this service, we aim to speak the language of the boardroom and give the C-suite an edge in strategic decision-making," concludes Furlong. "It's about assessing legal risk quantitatively and shaping strategy through visual representations of risk to help clients make better decisions in disputes."

Knowledge is power — Use cases of Decision Analysis

HSF consultant Donny Surtani discusses practical applications of HSF's dispute analysis service

Illustrating the impact of fresh evidence on projected outcome "We modelled a misrepresentation claim by an Asian state-owned entity in the pre-action phase to put a strategic framework in place that could be updated and modified as the case developed. We used sensitivity analyses to demonstrate the impact of the strength of the evidence on the expected value of the claim, which helped the client understand the benefit of making witnesses available to strengthen key parts of the case."

Analysing a complex insurance claim: "In our largest decision tree to date, we modelled a $1.3 billion insurance claim with over 20,000 potential outcomes. The client's management boards found the model very helpful to support settlement strategy discussions and asked us to maintain it as the case developed."

Setting settlement parameters: "We worked with a major strategic client in connection with a novel tort claim arising out of the insolvency of a regulated financial services provider. The model informed the client's internal assessment of the case and was also used for agreeing settlement parameters with the client's liability insurers."

Click here for more information on HSF's decision analysis offering.