The Supply Dispute Negotiation
Supplier A and Buyer B are in a four-year supply contract. B terminates early; A claims $6.5m in lost profits. B admits liability for wrongful termination but disputes quantum. A's lawyers estimate a 60% chance of recovering $4.5m at trial, with 18 months to judgment, $700,000 in legal fees, and a 10% annual discount rate. B's lawyers estimate that if A wins, B will pay $4.5m plus 60% of A's costs, and B's own costs will be $400,000. B's board has authorised a maximum of $3.4m, payable over 30 months. A's board has instructed 'no less than $2.8m cash at closing.' A values a continued supply relationship at $500,000; B values A's technical support at $300,000. B opens at $1.1m with a 36-month payment plan. The mediation is in two days.
1. Calculate both sides' reservation prices and the ZOPA. State your assumptions and explain how the payment timetable changes the analysis.
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For A, expected trial recovery is 60% x $4.5m = $2.7m. A's own costs are $0.7m. If A recovers 60% of its costs when it wins, expected cost recovery is 0.6 x $0.7m = $0.42m. Expected net recovery is $2.7m - $0.7m + $0.42m = $2.42m. Discounting 18 months at 10% gives $2.42m / (1.1)^1.5, about $2.10m. If A ignores cost recovery, its BATNA is about $1.73m. A's board floor of $2.8m cash is therefore above its BATNA, so the floor is a mandate constraint, not a valuation.
For B, expected damages are $2.7m, expected contribution to A's costs is $0.42m, and B's own costs are $0.4m. Expected total outlay is $3.52m. Discounted over 18 months, that is about $3.05m. B's board maximum of $3.4m payable over 30 months has a present value of roughly $3.0m at 10%, because the average payment is about 15 months away. The ZOPA in present-value terms is therefore narrow: approximately $2.80m to $3.00m. If B insists on 36 months, the present value falls further and may eliminate the ZOPA unless A is compensated through price or relationship terms.
2. B opens at $1.1m payable over 36 months. How should A respond, and what package could create value?
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A should not counter at $6.5m or accept the anchor. The $1.1m figure is far below B's own expected litigation cost and is best treated as an opening move, not a serious valuation. A should reframe around expected value: B faces an expected outlay of about $3.5m before discounting, and A's BATNA is about $2.1m. A should also challenge the 36-month timetable because it reduces present value and shifts financing risk to A.
A can propose a package: $2.9m cash at closing, plus $400,000 contingent on B achieving agreed sales volumes over 12 months, plus a two-year technical-support agreement priced at $150,000. A values continued supply at $500,000, while B values technical support at $300,000; those different valuations create room to trade. A can offer priority allocation and a modest price discount in exchange for a higher cash component. B can offer a longer supply commitment or a public reference. A should set a deadline, ask B to justify the 36-month plan with financial evidence, and keep the relationship terms separate from the damages number. The goal is to expand the pie before splitting it.
3. A's board has set a $2.8m cash floor. What are A's negotiator's obligations and options if the best available package is $2.7m cash plus relationship terms?
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The negotiator is an agent and must not exceed actual authority. If the board's instruction is a genuine cash floor, the negotiator cannot accept $2.7m cash without going back to the board. The negotiator should not pretend to have authority it lacks, and should not imply that the board will accept a lower figure when it will not. At the same time, the negotiator should explain to the board that the floor may be above the BATNA and that the relationship terms have value. The negotiator can seek authority for a package that includes $2.7m cash plus a supply commitment, technical support or a contingent payment whose expected value exceeds $100,000.
If the board refuses, the negotiator should tell B that the cash floor is a real constraint and ask B to restructure. Options include a $2.7m cash payment plus a $300,000 escrow released on performance, a higher total price with earlier payment, or a third-party guarantee. The negotiator should not use a false deadline or misrepresent the board's position. If no acceptable package is available, the negotiator should recommend continuing mediation or preparing for trial rather than signing outside authority. The ethical duty is to be honest about authority while advocating A's interests.