February 26, 2015

Five Critical Tips for the Successful Mediated Settlement of a Construction Dispute

After more than a dozen hours of tense and tiring mediation, the parties finally reach agreement. No one is happy but everyone is relieved, and now they want to go home. But more work is necessary to make sure that the mediated settlement is properly documented. These five tips will help you to preserve and enforce the terms of a successful mediation.

  1. Oral settlement agreements can be difficult to enforce.

Proving that an oral settlement was reached in a mediation can be very difficult. Most mediations are subject to one or more state laws governing the mediation process. One common such law is the Uniform Mediation Act (UMA). The UMA was drafted in collaboration with the American Bar Association’s Section on Dispute Resolution and establishes a privilege of confidentiality for mediators and participants. Section 4 of the UMA states that mediation communications are privileged and a party may prevent any other party from disclosing such communications. While Section 6 creates an exception for an agreement evidenced by a record signed by all parties to the agreement, there is no exception for oral settlements. Moreover, while Section 7 permits a mediator to disclose whether a settlement was reached, there is no express permission allowing the mediator to disclose the terms of the settlement.

  1. Don’t leave mediation without a written settlement agreement.

Because an oral agreement is so difficult to enforce, it is important to capture the basic settlement terms in writing before ending the mediation. Without a signed writing setting forth the key terms of the agreement, parties have been known to disavow an agreement or dispute one or more of the terms. Without a signed writing, it can be difficult to enforce an agreement reached in mediation. The principal culprit is that which makes mediation so attractive and successful in the first place: the process is confidential. This is the hallmark of mediation. With the possible exception of parties subject to open-meetings and open-records statutes, the results reached in mediation are confidential. This makes proving a settlement reached in mediation challenging if the parties have not executed a writing that at least lays out the critical terms of their agreement.

  1. Include all essential terms in the written settlement agreement.

While it is common practice for counsel to draft a “full” settlement agreement in the days after the parties have reached agreement in mediation, it is important for the writing created at the mediation to contain all the material terms of the parties’ agreement. Two problems can arise if this is not the case. One or more of the parties may find that it “agreed” to something that does not accurately reflect what it thought it had committed itself to. In other words, the agreement may be enforceable but not accurately reflect the agreement reached. On the other hand, the writing may be so incomplete that it is not enforceable. In this case, the parties may have reached agreement, but because the writing does not reflect this fact, there is no enforceable contract.

This is not to suggest that the writing needs to be extensive or complex. In Facebook, Inc. v. Pac. NW. Software, Inc., 640 F.3d 1034 (9th Cir. 2011), the parties disputed the ownership of Facebook. The litigation was complex and the dispute quite convoluted, due in part to a complicated stock purchase arrangement. Nevertheless, the parties settled their dispute which was reflected in a “one-and-a-third page Term Sheet & Settlement Agreement.” A dispute later arose whether there was a binding settlement agreement. The court determined that the term sheet was sufficient to create a binding and enforceable agreement. Moreover, the court held that, if the parties could not reach agreement on some of the non-material terms, it would impose reasonable provisions to fill in the gaps similar to what is provided for under the Uniform Commercial Code.

  1. Pay particular attention to the scope of the release language.

The breadth of release language is often a critical issue in settlement negotiations. While it is preferable to actually spell out the release language, it is not uncommon for the parties to handle this in a shorthand fashion. In Chappell v. Roth, 548 S.E.2d 499 (N.C. 2001), the parties reached agreement in a court-ordered mediation wherein the defendants agreed to pay a sum of money in exchange for a voluntary dismissal with prejudice and a “full and complete release, mutually agreeable to both parties.” After the mediation, the defendants’ counsel delivered a check along with a release for the plaintiff to sign. The plaintiff balked, as the release included a hold harmless provision that had not been discussed at mediation. Rather than return the check, however, the plaintiff moved to enforce the settlement agreement. The court concluded that the settlement agreement did not constitute a binding contract because the parties failed to reach agreement regarding the terms of the release.

  1. Some states require specific language in a mediated settlement agreement.

Some state statutes governing mediation place an obligation on the parties to include specific language in settlement agreements reached through mediation. For example, a settlement agreement governed by the Minnesota Civil Mediation Act must contain specific language in order to be binding. The settlement agreement must contain a provision stating substantially that the parties were advised in writing that (a) the mediator has no duty to protect their interests or provide them with information about their legal rights; (b) signing a mediated settlement agreement may adversely affect their legal rights; and (c) they should consult an attorney before signing a mediated settlement agreement if they are uncertain of their rights. Minn. Stat. § 572.35, subd. 1(1). In Ali Haghighi v. Russian-American Broadcasting Co., 577 N.W.2d 927 (Minn. 1998), the Minnesota Supreme Court held that a settlement agreement signed contemporaneously on each page by the parties attending a mediation session, but which did not contain the magic language that it is a binding agreement, was rendered unenforceable as a mediated settlement agreement.

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