Member Article

If all’s fair in love and war, and business is war, it must follow that all is fair in business. We should therefore not concern ourselves with fairness in our business dealings, but focus on maximising our personal gain, irrespective of the impact of our decisions on others. 

Adopting the above approach is not only likely to harm you but also your business. People are social beings and have evolved to reward cooperation and punish avarice. Take two individuals - Mr Smith and Mr Jones. Give Mr Smith £100 to share with Mr Jones in any manner he chooses, but tell him that there is a proviso. He can offer any proportion of the £100 he wants, but Mr Jones then has the option of either accepting or rejecting the offer. If Mr Jones accepts the offer, the pair keep the £100 in accordance with the agreed division. However, if Mr Jones rejects the offer, neither player will receive the money. 

Scientists conducted a series of experiments on variations of this premise in the 1980s, known as the ultimatum games, to investigate the importance of perceptions of fairness in social interactions. Rationally, Mr Jones should always accept Mr Smith’s offer, no matter how unequal the suggested division. After all, Mr Jones is receiving a windfall whether he receives £10 or £90. Equally, if neither party was motivated by fairness, Mr Smith should offer the minimal amount possible to maximise his gains. However, in reality, participants in the role of Mr Smith typically offered between £30 and £50 to participants in the role of Mr Jones. Where ‘Mr Smith’ offered less than £30 (and in some instances even £30 or £40), ‘Mr Jones’ typically rejected the offer. People are willing to act irrationally to punish behaviour that they perceive as unfair. 

What is fair?

A party’s idea of what is fair can be grouped into four basic principles – Equality, Equity, Need and Precedent. To help illustrate these principles, imagine a discussion between Mr Smith and Mr Jones about how to distribute the profits of a joint venture they are planning. The idea for the business of the joint venture came from Mr Smith, but Mr Jones is supplying the funds needed to establish it. 

If guided by the Equality principle, they would agree to share the profits equally. Under the Need principle, Mr Smith would receive the lion’s share of the profit, given his comparative impecuniosity. The parties would distribute the profits relative to their respective contributions if they favoured the Equity principle. Lastly, the Precedent principle dictates that previously agreed terms or acknowledged practice should be the benchmark for determining fairness. For example, if Mr Smith had agreed to split the profits of a prior joint venture in a particular way, it would be unfair for him to now demand a greater share of the profits on the new venture.

Evaluating contributions

In determining the value of a party’s contributions, negotiators are likely to be affected by many factors which may include any of the following:

Self-interest 

People are egocentrically biased; they value their own contributions much more highly than they value the contributions of others. When faced with the choice of how to determine fairness, people will subconsciously veer towards the determinant which most favours their position. Hence, not only would Mr Smith consider that he had made the more valuable contribution to the joint venture than Mr Jones’s, he is more likely to consider Equality or Need the fairest determinants for profit share rather than Equity or Precedent.  

Social relationship 

If no relationship exists between the negotiators, self-interest will guide their valuation. However, where there is a negative relationship, the priority of Mr Jones or Mr Smith might change from their personal reward to the other’s loss. For example, research indicates that Mr Jones is more likely to want a £100 loss if it meant Mr Smith lost £150 than a £100 gain if Mr Smith therefore gained £150. On the other hand, where a positive relationship exists, Mr Smith or Jones will tend to employ the Equality principle placing primary value of the continuation of their relationship ahead of any monetary gain.  

Cultural norms 

As negotiations become increasingly global and virtual, cross-cultural negotiations are becoming more commonplace. Some cultures are known for placing greater emphasis upon maintaining social relationships ahead of attaining individual objectives. Those that do are more likely to choose harmony-enhancing principles such as the Equality, Need to distribute benefits. 

How can you use fairness negotiations?

Previously agreed or acknowledged precedent is a powerful determinant of ‘fairness’, even where its outcome conflicts with the Equality, Equity or Need principles. For this reason, dispute resolution lawyers stress to contract negotiators the importance of agreeing the method of determining disputes in advance. If there is a pre-determination regarding how to resolve a situation, it is unlikely for a party to consider the resultant outcome as unfair.

When parties with opposing interests are presented with an impasse, it is easier to agree a fair means of resolving the issue than it is to determine the outcome itself. For this reason, parties should negotiate objective criteria or methods to resolve as many issues as possible, such as determining a fair price by reference to an independent expert. 

Following the conclusion of negotiations or the resolution of a dispute, a party’s perception of whether the outcome was fair is influenced by how they felt they were treated during the process. A litigant is more likely to appeal a judgment when they have felt that they were not provided with a fair opportunity to be heard. A negotiator is likely to be satisfied with the outcome of negotiations where his opponent has: provided him with a fair opportunity to be heard; listened to what he had to say; and has acted even-handedly.  

Where parties have perceived themselves as being treated in a procedurally fair manner, they are more likely to judge the outcome as fair and are therefore more likely to comply with the outcome.

You can get a donkey to do more with a carrot than with a stick. In essence, if you treat your opponent in a dignified manner during dispute resolution or negotiation exchanges, you are more likely to achieve a desirable result than if you treat them rudely and unfairly. By treating them fairly, you are not only more likely to be able to persuade the opponent to accept your position but also they are more likely to commit to their obligations afterwards. 

Parties’ aspirations and actions will be significantly influenced by the culture and context within which they are negotiating, their own self-interest, and their sense of connection to each other. As commerce becomes increasingly global and virtual, these principles will become increasingly important to future negotiations and dispute resolutions processes.