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California's top court provides guidance on mediation settlements.

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Alternatives
TO THE HIGH COST OF LITIGATION
INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION
Alternatives
TO THE HIGH COST OF LITIGATION
Publishers:
Kathleen A. Bryan
International Institute for
Conflict Prevention and Resolution
Susan E. Lewis
John Wiley & Sons, Inc.
VOL. 25 NO. 2 FEBRUARY 2007
Editor:
Russ Bleemer
Jossey-Bass Editor:
David Famiano
Production Editor:
Ross Horowitz
Alternatives to the High Cost of Litigation (Print ISSN 1549-4373, Online ISSN 1549-4381) is a newsletter published 11 times a year by the International Institute for
Conflict Prevention & Resolution and Wiley Periodicals, Inc., a Wiley Company, at Jossey-Bass. Jossey-Bass is a registered trademark of John Wiley & Sons, Inc.
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VOL. 25 NO. 2 FEBRUARY 2007
ALTERNATIVES 19
ADR BRIEF • ADR BRIEF • ADR BRIEF
CALIFORNIA’S TOP COURT
PROVIDES GUIDANCE ON
MEDIATION SETTLEMENTS
A long-pending California Supreme Court
case gives a small clarification on the state
Evidence Code provision that governs mediation practice confidentiality. But high
court mediation cases about failed business
deals are still rare, and as a result, the opinion sounds a loud warning.
The new legal wrinkle, requiring an explicit indication that a mediation settlement agreement is final so it can be enforced, appears self-evident. But practitioners––including neutrals–need to heed
the Court’s instructions about the writings,
because a failure to comply could mean liability instead of resolution.
In Fair v. Bakhtiari et al., S129220
(Dec. 14, 2006)(available at www.courtinfo.ca.gov/opinions/documents/S129220A.PDF), the California Supreme Court explained the need for mediation settlement
clarity, reversing the enforcement of what
appeared to be an agreement. The Court
held that a term sheet devised at a mediation detailing the settlement should have
remained protected under the state’s evidence law. As a result, the Court reversed
an appellate ruling that enforced an arbitration provision in the term sheet, which
was included to settle open issues.
The defendants, who are the owners of
a Burlingame, Calif., apartment complex,
maintained in their Supreme Court arguments that they had no intention to settle,
and now will head to trial–or at least more
litigation. “The opinion is pretty clear: You
have to carefully comply with the Evidence
Code,” says Arthur J. Shartsis, a name
partner in Shartsis, Friese & Ginsburg LLP
in San Francisco who represented the defendants. “It’s a bright-line issue.”
The decision also means that plaintiff
R. Thomas Fair, a San Rafael, Calif., real
estate developer and an inactive member of
the California bar, can’t introduce the term
sheet to enforce its provisions because California Evidence Code Sec. 1123 forbids
the introduction of a mediation document
in court without the parties’ agreement. As
a result, Fair loses a settlement he thought
he had negotiated over a bitter partnership
bust-up that includes, as one of his adversaries, his ex-wife.
The Court provides guidance for practitioners to make sure that a mediation
meeting of the minds really is a final settlement agreement. The opinion notes that
the Fair mediation document was labeled
“Settlement Terms.” It was signed by the
parties, as well as the mediator. Nevertheless, the Court ruled that the mediation
writing wasn’t good enough to back the
plaintiff ’s request to enforce the arbitration
provision it included.
The decision says that California Evidence Code Sec. 1123(b) doesn’t require a
formulaic phrase to indicate that a final
agreement has been reached, but it can’t be
“simply a memorandum of terms of inclusion in a future agreement.”
The decision analyzes Section 1123(b),
a 1997 addition to the state’s mediation
laws. The section states,
A written settlement agreement prepared in the course of, or pursuant to, a
mediation, is not made inadmissible, or
protected from disclosure, by provisions of this chapter if the agreement is
signed by the settling parties and any of
the following conditions are satisfied:
(a) The agreement provides that it is
admissible or subject to disclosure, or
words to that effect.
(b) The agreement provides that it
is enforceable or binding or words to
that effect. . . .
The Court states that the appeals court
erred in interpreting the parts of the section indicating that “words to that effect”
were present.
“The Supreme Court has taken a very
narrow view of Evidence Code Section
1123(b),” says Fair’s attorney, Gilbert R.
Serota, a partner in San Francisco’s Howard,
Rice, Nemerovski, Canady, Falk & Rabkin.
“Ultimately, that’s going to make it harder
for parties to enter into a binding settlement
agreement and easier for parties to walk
away from partial agreements.”
The case went to the appellate court on
a motion to compel arbitration, so that the
agreement’s loose ends could be tied up, as
indicated on the parties’ Settlement Terms
paper. But to do that, the Settlement Terms
document needed to be introduced as the
parties’ agreement.
As part of its holding that the agreement was a protected mediation document,
the Court refused to find that Fair and his
former partners were bound to the settlement because they elected to include the arbitration clause in the Settlement Terms.
“There was a lot of evidence outside
the handwritten agreement to support [finality],” says Serota. “That’s what the appellate court found persuasive.”
Bakhtiari parties’ attorney Arthur
Shartsis says that the small unresolved details, like taxes, weren’t so small. “Our
clients are real estate people,” he says.
“They sign term sheets all the time.”
He explains that mediators usually get
agreements on easy points first. But, he
says, those points in Fair didn’t add up to a
full, enforceable agreement. “Our clients’
position throughout was they never intended to settle,” says Shartsis.
Shartsis says that two key California
mediation confidentiality cases leading up
to Fair–Rojas v. Superior Court, 15 Cal.Rptr.3d 643 (Calif S.C. 2004) and Foxgate
Homeowners Ass’n v. Bramalea California
Inc., 26 Cal4th 1 (Calif. S.C. 2001)—
showed a “real sanctity in mediation confidentiality.” If the Court was “going to open
it up,” Shartsis says, “it has to be on an absolutely explicit basis.” The Court cited
both Rojas and Foxgate in its opinion. [See
the annual Alternatives index on page 28 of
this issue, and older indexes each February
and at www.cpradr.org, for articles on the
cases.]
Neither side is sure of the next step. A
remittitur was issued to the appellate court,
where there were open issues that might be
argued. When the appellate decision was issued, Shartsis left open the possibility that
the case could return to mediation. See
“More Mediation Confidentiality Headed
for the California Supreme Court,” 22 Alternatives 195 (December 2004).
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
***
(continued on next page)
20 ALTERNATIVES
VOL. 25 NO. 2 FEBRUARY 2007
In the wake of the Court’s opinion, California settlement agreements will need to
include a statement that they are “‘enforceable’ or ‘binding,’ or a declaration in other
terms with the same meaning.”
But, the opinion states, arbitration
clauses, forum selection closes, choice of
law provisions, and “similar commonly
employed enforcement provisions negotiated in settlement discussions,” will not be
enough to admit a mediation settlement
agreement for enforcement as an exception
to California’s strict mediation confidentiality laws.
In Fair, the arbitration provision in the
mediation’s “Settlement Terms” didn’t
work like it was supposed to. A trial court
refused plaintiff R. Thomas Fair’s motion
to compel arbitration. The state Court of
Appeal reversed, stating that the memo satisfied Section 1123’s requirement for “enforceable or binding” words.
But the Supreme Court, in reversing
the decision in favor of the ousted partner,
found that the appeals court determination
that the Settlement Terms memo can be
admitted to indicate that the case must be
arbitrated violates mediation confidentiality standards.
“Although the Legislature did not provide the courts with a bright line when it
permitted the admission of signed agreements including ‘words to that effect,’ we
conclude a narrower interpretation of this
clause is required,” writes Associate Justice
Carol A. Corrigan in the majority opinion.
“We are guided by the ordinary meaning of
the statutory language, its context, and the
legislative purposes it was meant to serve.”
In order to protect mediation confidentiality, writes Corrigan, “we hold that
to satisfy the ‘words to that effect’ provision of section 1123(b), a writing must directly express the parties’ agreement to be
bound by the document they sign.”
The Court reasons that including arbitration doesn’t indicate such an express
agreement. Corrigan explains,
Arbitration is a method of enforcement
subject to negotiation, like other settlement terms. A tentative working document may include an arbitration provision, without reflecting an actual
agreement to be bound. If such a typical settlement provision were to trigger
admissibility, parties might inadvertently give up the protection of mediation confidentiality during their negotiations over the terms of settlement.
Disputes over those terms would then
erupt in litigation, escaping the process
of resolution through mediation.
Durable settlements are more likely to
result if the statute is applied to require
language directly reflecting the parties’
awareness that they are executing an
“enforceable or binding” agreement.
***
Does the implicit warning about tying up
loose ends mean liability for those who
don’t?
Indeed, the Fair parties signed the
agreement, and so did mediator Eugene
Lynch, a former federal and state court
judge who is now a neutral in the San
Francisco office of Jams. While a mediator’s signature is unusual, Fair’s attorney,
Gilbert Serota, says that Lynch was merely
witnessing the Settlement Terms. “The reason for that was everybody shook hands
and it was a done deal,” says Serota.
Robert A. Wooten Jr., a litigation partner in the Los Angleles office of Lewis Brisbois Bisgaard & Smith LLP, says that mediators should deal with the issue of admissibility or finality in the forms they bring
for settlement. Alternatively, he says, the
document shouldn’t be used for enforce-
ment. “[Mediators] could say ‘You all are
responsible for yourselves and you didn’t
hire me for that,’” he says.
In fact, California’s trial courts have
such a form, which says that the stipulation is enforceable under the state’s civil
procedure rules, which are discussed below.
The form is available here: http://karpmediation.com/forms/StipulationReSettlementADR03811-03.pdf.
Defense attorney Shartsis doesn’t think
that the mediator or anyone else committed malpractice. “On its face it looks like
an argument could be made that the plaintiff ’s lawyers didn’t do what they were supposed to do,” says Shartsis. “But the fact is
our clients didn’t settle. If the clam is that
[a settlement] slipped away, no, our clients
didn’t settle.”
Mediator Lynch didn’t respond to a request for comment. After the appellate decision in 2004, Lynch told Alternatives that
parties reneging on mediation settlements
happen regularly, and the case would have
little effect on mediation practice. See,
supra, 23 Alternatives at 196.
***
In Fair, Associate Justice Joyce L. Kennard concurred in part with the six-vote
majority, but also dissented in part. She
agreed that the mediation document is inadmissible under the state’s principal mediation confidentiality statutory provision,
Cartoon by Leo Cullum
(continued from previous page)
CERTAINLY
COMPROMISE IS AN ART,
HASKINS,
BUT THE REAL ART IS THE APPEARANCE OF COMPROMISE.
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
VOL. 25 NO. 2 FEBRUARY 2007
Section 1119, and that the Section 1123
exception for enforcement purposes doesn’t apply to the Fair writing.
But she dissented from the holding that
the arbitration clause “can never constitute
‘words to [the] effect’ that a settlement
agreement is ‘enforceable or binding.’”
Kennard’s view was close to the trial
court’s:
[S]ubstantial evidence supports the trial court’s implied finding that . . . the
parties may have subjectively believed
they had reached a settlement agreement, but a key term of the agreement
. . . was ambiguous, the ambiguity
could not be resolved by consideration
of the parties’ outward manifestations,
and later events demonstrated that the
parties did not understand the term in
the same way. This failure to reach a
meeting of the minds prevented the
formation of a contract. . . . Accordingly, there was no “written settlement
agreement” within the meaning of Evidence Code section 1123, and the trial court properly ruled that the document the parties signed during mediation was inadmissible in evidence.
[Citations omitted.]
Kennard concludes by disagreeing
with the Court’s view of including arbitration clauses in the mediation writing. She
writes that an arbitration clause—under
circumstances where a court concludes a
CPR News
(continued from page 18)
ence, focused on the role of the judiciary
in encouraging out-of-court settlements,
and the challenges of creating Nigerian
and pan-African peacekeeping institutions. For more information on the conference, as well as CPR’s participation, see
F. Peter Phillips, “Speeches Spreading the
Word on Business ADR: Assessing Recent Efforts … And Looking Forward—
How Conflict Resolution Emerged Within the Commercial Sector,” 25 Alternatives 3 (January 2007).
Among NCMG’s most notable
achievements is the Lagos Multi-Door
Courthouse, which was established in
2002 as a joint project of NCMG and the
High Court of Justice of Lagos State,
ALTERNATIVES 21
proper written settlement agreement under the statutory scheme exists—“may
properly be viewed as an acknowledgment
by the parties that their settlement agreement is binding and enforceable.”
In the course of her discussion, Associate Justice Kennard also raises in passing the relationship of the Evidence
Code mediation provisions to California
Code of Civil Procedure section 664.6,
another statutory procedure for settling
cases. The civil procedure section says,
“If parties to pending litigation stipulate,
in a writing signed by the parties outside
the presence of the court or orally before
the court, for settlement of the case, or
part thereof, the court, upon motion,
may enter judgment pursuant to the
terms of the settlement. . . .”
It’s possible that a 664.6 document—
which the Fair Settlement Terms, supported
by the parties’ and the neutral’s signatures,
arguably could satisfy—could clash with a
later claim that the Evidence Code makes a
mediation writing confidential and unenforceable in court. Lewis Brisbois’ Robert
Wooten Jr., says that “the expectation you
might otherwise have in 664.6 isn’t there–or
isn’t safe after [Fair]. It certainly adds to our
practice concerns.”
Wooten, emphasizing that his views
are his own and not his firm’s, says that his
department’s policy is to get a waiver of
Evidence Code Section 1123 when concluding a mediated negotiation, so that
the agreement is enforceable in court.
It’s more important after Fair, he
notes. “We’re on notice,” he says, “that we
can’t be sure that anything we produce at a
mediation that is supposed to be a memo
of understanding, [or] a binding contract
under 664.6, . . . will be admissible in evidence unless you have a 1123 waiver.”
The California form discussed above,
ADR 038 11-03 Stipulation re Settlement,
doesn’t refer to the mediation evidence
laws. It provides for enforceability by noting, “This settlement may be enforced
pursuant to California Code of Civil Procedure section 664.6 in the Superior
Court of Los Angeles County. (If parties to
pending litigation stipulate, in writing, for
settlement of the case, or part thereof, the
Court, upon motion, may enter judgment
pursuant to the terms of the settlement.)”
R. Thomas Fair, who is president of
Bronco RE Corp., a San Rafael, Calif., real
estate development management firm, didn’t return two telephone messages and an
E-mail requesting comment on the case
and his view of the liability issue. A California ADR practitioner, when asked about
the case, stopped himself while lamenting
the time spent in litigation since Fair originally believed he had settled the case, and
would receive a $5.4 million payment, in
the spring of 2002. Thanks to rising real estate prices, the attorney says, “Fair will
probably wind up with more.”
which is the city’s trial level court. The
center provides a courthouse-based alternative to litigation, and supplies litigants
with early neutral evaluation, neutral
convening, mediation, and arbitration.
Old colonial courtrooms have been converted into large, medium and small conference rooms and caucus break-out
rooms. A neutrals’ panel is available comprising retired judges, attorneys, bankers,
accountants, and experts in construction,
oil/gas, and other fields.
The NCMG’s innovations are noteworthy in a high-population emerging
nation that has been marked by civil war,
social troubles, and dictatorship.
went to Jennifer K. Robbennolt, of
Champaign Ill., for “Apologies and Settlement Levers,” 3 J. Empirical Studies
333 (July 2006). Robbenolt, a professor
at the University of Illinois College of
Law, uses experimental study methods to
explore how apology fits in settlement
negotiations.
Robbenholt studied the reactions of
more than 500 people regarding their perceptions of the effect of apology in conjunction with other settlement “levers,”
including aspirations and judgments
about fair settlement amounts. The results, Robbenholt writes, suggest that
“apologies can alter perceptions, attributions, and judgments in ways that improve the likelihood of settlement–specifically that apologies result in more positive
perceptions and attributions and influ-
***
This year’s professional articles award
DOI 10.1002/alt.20167
(For bulk reprints of this article,
please call (201) 748-8789.)
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
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