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Case Asks When Is Mediation Binding?
Daily Journal Newswire Articles, ALTERNATIVE DISPUTE RES., Oct 28, 2005
by Eron Ben-Yehuda
Case Before High Court Could Discourage Use of Mediation
LOS ANGELES - A case pending before the state Supreme Court threatens to discourage the use of mediation, an appellate lawyer and part-time neutral said.
Mediation's popularity may decline because of fear that tentative agreements could become binding, said Oakland attorney Jon B. Eisenberg, who volunteers as a mediator.
"Mediation becomes dangerous stuff," Eisenberg of Horvitz & Levy said.
The question before the high court is, When do parties intend settlement terms reached in a mediation to become enforceable? Fair v. Bakhtiari, S129220.
Many sessions end without a complete deal, and this case highlights the potential risk in a common technique relied on by neutrals to bring the sides closer to agreement: Get something in writing before the parties leave.
Eisenberg's clients became embroiled in a business dispute with former associate R. Thomas Fair.
A mediation with a JAMS neutral took place, at the end of which the parties came up with a document titled "Settlement Terms," which Fair contends shows their intent to enter into an enforceable agreement.
After all, everyone, including the mediator, signed the document, and, according to Fair, it contained all the material terms for a deal, including the provision that "any and all disputes subject to JAMS arbitration rules."
The 1st District Court of Appeal found that the arbitration clause satisfied the statutory requirement that the writing contains words to the effect that it is binding.
But Eisenberg said the court didn't apply the correct standard, which requires that the terms "unambiguously" signify the parties' intent to be bound.
"The arbitration clause is nothing like words to the effect of enforceable or binding," Eisenberg of Horvitz & Levy said.
The parties had produced nothing more than a "deal-points memorandum" or "term sheet," Eisenberg said.
"I don't think there was a settlement here. Period," he said.
Fair's counsel, Gilbert R. Serota of San Francisco's Howard Rice Nemerovski Canady Falk & Rabkin, declined to answer questions.
But in a prepared statement, Serota said that the appellate court made the right decision.
In court papers, he claims that defendants have "manufactured" a dispute because they suffer from "settlor's remorse."
In general, what happens during a mediation is confidential. No one can disclose communications made during a session unless they fall within statutory exceptions, one of which is a written settlement agreement that is "enforceable or binding or words to that effect," according to Evidence Code Section 1123(b).
In May 2001, Fair sued his former wife, Maryanne E. Fair, and Karl E. Bakhtiari for allegedly forcing him out of real estate investment and management companies that he built in the early 1990s. He claims that the parties denied him his fair share of income and profits.
In an attempt to resolve the suit, the parties stipulated before the trial court to participate in private mediation. They chose JAMS neutral Eugene F. Lynch, a retired federal judge.
On March 21, 2002, the parties signed and dated the handwritten document that set forth nine terms, including that Fair would receive $5.4 million for "all T. Fair's stock & interests (as capital gain to Fair)."
Another provision said they would sign mutual releases and dismiss all claims. The arbitration clause was listed last.
Through a company spokeswoman, Lynch and JAMS declined to comment.
Serota states that the defendants confirmed in writing and on the record before the trial court that the case had settled.
"In our view, the defendants are misusing and misapplying the mediation privilege simply to renege on their agreement," Serota said in a statement.
Eisenberg counters that his clients told the court only that they "anticipated" a settlement.
Disagreement arose over what stock and other interests Fair had to tender as well as the way to structure the settlement for tax purposes.
Fair tried to compel arbitration under the settlement terms.
The defendants opposed the motion, which San Mateo County Superior Court Judge George A. Miram denied.
Fair appealed. In October 2004, the appellate court reversed, finding that the inclusion of the arbitration provision "is consistent solely" with the parties' intention for the document to be enforceable or binding.
The court noted that "the Legislature's concern was not with the precise words used in a settlement agreement, but with the need for the words to unambiguously signify the parties' intent to be bound."
Eisenberg said that reasoning should compel a different result.
"You want to reach an agreement, say so," he said. "It's easy. It's so easy."
Inserting words such as enforceable or binding is not required, he said.
Eisenberg contends that it would suffice to say, "This is it. We're done. Nothing is going to change this forever and ever."
A veteran mediator not involved in the case said that type of wording might have helped but the issue in the case is whether the parties intended to be bound.
"I think intent is demonstrated," San Diego neutral Scott S. Markus said.
The defendants wanted a better deal even though they had reached a binding agreement, Markus said.
"That's not to say there aren't loose ends," said Markus of Markus Kruis Mediation.
But the parties put in a mechanism, the arbitration clause, to address problems that might arise, he said.
"I think the one side is trying to figure out a way to back out of this," Markus said. "My view is that the [appellate] court got it right."
Berkeley mediator Ron Kelly disagrees.
"I don't buy it," Kelly said. "I think the Court of Appeal got it wrong."
The arbitration clause is not evidence of an intent to be bound, he said.
Eisenberg warned that the court's approach is bad policy because participants would be loathe to agree to anything in writing.
Eisenberg also foresees arbitration clauses possibly falling into disfavor.
Let's say Eisenberg is representing a client in mediation and the neutral wants to create a list to show the progress the two sides have made.
"If [the neutral] starts to write arbitration, I will say, 'Get that out of there. Let's not talk about arbitration right now,'" Eisenberg said.
Kelly said that, although Eisenberg's concerns are legitimate, they can be addressed easily.
"I think he's correct, but I don't see this as a big-impact decision," Kelly said. "If you want your party not to be bound by deal points, don't have them sign it."
Markus also said that the problem that arose in this case is avoidable.
Term sheets often create more problems than they solve, because of their ambiguities, he said.
Markus suggested having a final typed settlement agreement instead of leaving the details for the lawyers to work out later.
"You sign it and put it in your file, and you're done," he said.
The Fair case is fully briefed, but no date is scheduled for oral argument, which may occur as soon as early next year.
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