Contracts: California Appeals Court Won't Enforce a 'Binding Mediation' Clause (Web)

In Lindsay v. Lewandowski, No. G033173, 2006 WL 1479775 (Cal.App. 4th Dist. 2006)(available here), California's Fourth District Court of Appeal held that a stipulation for settlement is unenforceable when the term identifying the settlement method, "binding mediation," is vague.

Despite the binding mediation contract designation, the unanimous appellate panel found the term to be unenforceably vague because there was no agreement by the parties on a recognized procedure to resolve the payment term dispute.

Betsy and Michael Lindsay, and Ultrasystems Environmental Systems Inc. (collectively, Lindsay) appealed from a judgment on the stipulated settlement agreement in favor of appellees Piotr and Joan Lewandowski and the Hydro Co. that paid them $190,000 via a “binding mediation ruling.” Lindsay argued that the stipulated settlement agreement is unenforceable.

The opinion focuses on section 3 of the stipulation for settlement, which states that "'Lindsay pays to Lewandowski the sum of $190,000 with cash, payment terms, security arrangements and stipulations regarding non-dischargeability in bankruptcy 'reasonably' agreeable to both parties but to be submitted to ‘binding’ mediation . . . if no satisfactory agreement on terms in [sic] entered within five days of commencement of negotiations between the parties on this issue."

The court addresses what the parties meant by the material term "binding mediation." A settlement agreement, like any other contract, is unenforceable if a material term is not reasonably certain. In order to ascertain the meaning of the words binding mediation, the court looks at other references made to alternative dispute resolution procedures in the stipulation for settlement.

First, Fourth District Court of Appeal Associate Justice William W. Bedsworth in the opinion analyzes the provision that states that the parties agreed to binding arbitration of Ultrasystems Environmental Systems’ claims against Hydro. But in the original document, the word "arbitration" is typed in above the line, directly above the word "mediation," through which a line is drawn. The court finds that this insertion of one word for the other is evidence that "binding mediation" did not have the same meaning as "binding arbitration."

Then, after finding that binding mediation does not mean binding arbitration, Bedsworth examines the two versions of the stipulation for settlement; one signed by two of the parties that provided for resolution of a "'dispute as to the term of the settlement' by 'return[ing] to the mediator for final resolution,'" and another agreement signed by all of the other parties to the dispute which provided for resolution "'by returning to the mediator for final resolution by binding arbitration.'"

The second version further muddles the definition of "binding mediation," as it is at odds with another provision which provides for resolution of the payment term dispute by "binding mediation."

In dicta, Justice Bedsworth points out that while there are not any recognized rules governing binding mediation, it would still be possible for parties to agree to proceed to arbitration in the event of a failed mediation.

He also writes that in the only other case on the issue, a Michigan court found that "binding mediation is functionally the same as arbitration." The case, Frain v. Frain, 213 Mich.App. 509, 511-512. (1995), supports of the contention that in cases like Lindsay, where parties authorize a mediator to render a binding decision, the procedure used in the process effectively becomes an arbitration.

In a concurring opinion, Presiding Justice David G. Sills points out the misleading and deceptive nature of the term binding mediation via a possible interpretation of the term: "If a settlement is not reached, then, puff, the mediation becomes an arbitration."

He also notes the inapplicable, literal interpretation of the term: compulsion to attend and participate in mediation.

Sills writes that "binding mediation" may just be a kinder, softer, P.R.-friendly name for "arbitration." He believes that the word "arbitration" implies that a decision will be made and it will not necessarily please both parties, while "mediation" implies that the matter or dispute will be resolved in a way that is mutually satisfactory.

He also points out the practical problem that parties may not be as open and candid with a mediator if they know that he may switch roles and become an arbitrator.

Justice Sills contrasts the voluntary mediation process, with its "inherent lack of consequences," that allows for participants in mediation to be open and candid. He points out the self-contradictory nature of the term "binding mediation," explaining that "binding” connotes the product of a decision maker who is authorized by the government, and “mediation” connotes a voluntary result.

He then summarizes the Lindsay process: "Parties submit ‘bids' in the form of settlement offers (and some written argument), and the mediator/arbitrator then selects one."

Sills notes that if the court had not dealt with the agreement on contractual grounds and had instead chosen to invoke the California Rules of Court, the process used by the Lindsay parties may have violated some of the rules. He cites rule 1620.7(g), which provides that each party must be given an opportunity to select another neutral to conduct the proceeding if the mediation is converted to an arbitration.

In his concluding paragraph Justice Sills offers some advice to lawyers who hope to avoid the "low-quality arbitration" he writes that Lindsay contemplates. He advises lawyers that “clarity of language and informed consent” are the keys to ensuring that a clearly written agreement signed by the parties will be successful in morphing a failed mediation process into a de facto arbitration.

–John Ousley, CPR Intern