Think about the last time you engaged in an otherwise cordial bargaining session that reached an impasse. Maybe you were far apart on price or disagreed about who was responsible for a serious problem. In such cases, parties often have different views about what constitutes fairness in negotiation.
That’s what happened in 2014, when negotiators from Citigroup and the U.S. Department of Justice (DOJ) were trying to decide what penalties the bank should accept for allegedly defrauding investors in 2006 and 2007 by selling mortgages with underwriting defects.
Citigroup made its opening offer: $363 million. Try again, the DOJ told the bank. Citigroup bumped the offer up to $700 million. The DOJ responded by demanding $12 billion.
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The two sides were so far apart that the odds of a deal seemed low. Making matters worse, they were relying on different measures to calculate the extent of the harm Citigroup had inflicted, according to the New York Times. Citigroup based its offers on the bank’s relatively small share of the market for mortgage securities. But the DOJ said Citigroup should be penalized based on its level of culpability, as reflected in damning emails and other evidence.
As we’ll see, the fairness standards we cite to support our positions can prolong impasse. Moving toward an interest-based approach can facilitate more creative negotiations.
Moving Beyond Impasse
There are three fundamental ways of moving beyond impasse, write William L. Ury, Jeanne M. Brett, and Stephen B. Goldberg in Getting Disputes Resolved: Designing Systems to Cut the Costs of Conflict. First, parties can reconcile their interests—the needs, desires, concerns, and fears underlying their stated positions. Through negotiation or mediation, disputants can probe for underlying concerns, search for creative solutions, and make tradeoffs across interests.
Second, negotiators can resolve disputes on the basis of power, typically by imposing costs on the other party or threatening to do so. Labor unions, for example, sometimes try to harness their power by threatening to strike.
Third, disputants can try to resolve their differences by determining who is right. They often do so by referencing fairness in negotiation, as the DOJ and Citigroup did, or by allowing the courts to decide who’s right.
Our perceptions of what constitutes fairness in negotiation are biased by our perspective and goals. Often, each party can make a strong case for its view, with each view slanted by self-interest.
Citigroup negotiators argued that the market-share argument was the proper standard to apply in the negotiations, while the government negotiators viewed culpability to be the fairest standard. Not surprisingly, Citigroup’s fairness standard supported a low settlement, and the DOJ’s supported a much higher one.
When each side argues that its standard will lead to fairness in negotiation, the parties become locked into their positions and incapable of seeing the other side’s perspective.
Asserting your rights and exercising your power can be valid negotiating strategies. But, when possible, Ury, Brett, and Goldberg encourage us to focus on reconciling interests. Interest-based negotiators are more satisfied with their outcomes than those who focus on asserting their rights or power, and they also tend to incur lower costs and fewer subsequent disputes. Yet in negotiation, most of us assert our rights and power more often than is necessary.
From Concerns about Fairness in Negotiation to Interests
To see how to avoid arguing over rights and fairness in negotiation, consider how the Citigroup negotiation unfolded. After the bank upped its offer slightly from $700 million to $1 billion, it learned through news reports that the DOJ was planning to take it to court. The threat—a power play that could have settled the fairness question—inspired Citigroup to move beyond its market-share argument.
Finally, the parties began brainstorming options. The DOJ, for instance, wanted Citigroup to provide substantial mortgage assistance to struggling homeowners. But because Citigroup’s mortgage business had diminished since the financial crisis, the bank said it couldn’t grant significant homeowner relief. Noting that many people who lost their homes during the financial crisis were now renting, the DOJ persuaded Citigroup to provide $180 million to build affordable rental housing in areas where the cost of living is high, according to the Times.
Citigroup also expressed a desire to avoid future encounters with government negotiators. In return for higher penalties, the DOJ agreed not to pursue cases related to Citigroup’s pre-2008 sale of collateralized debt obligations.
A deal emerged thanks to “a simple feat of accounting,” according to the Times: Citigroup agreed to shift a portion of the settlement from state attorneys general to the DOJ. This prevented the bank from claiming a tax deduction on the settlement, a concession the DOJ highly valued.
Through creative negotiating, the two sides reached a mutually beneficial agreement. Citigroup agreed to pay a $4 billion cash penalty; $2.5 billion to finance rental housing, mortgage modifications, and other consumer relief; and $500 million to state attorneys general and the Federal Deposit Insurance Corporation.
The parties moved beyond referencing fairness norms in negotiation by an assertion of power and rights—the DOJ’s threat of a lawsuit. Clearly, though it pays to focus on interests in negotiation, power and rights also have their place.
Do you have advice on dealing with concerns about fairness in negotiation?
Claim your FREE copy: Dispute Resolution
Discover how to improve your dispute resolution skills in this free report, Dispute Resolution: Working Together Toward Conflict Resolution on the Job and at Home, from Harvard Law School.
