Confidentiality: California's Top Court Reverses a Settlement Agreement's Enforcement (Web)

The California Supreme Court has clarified the need for mediation settlement clarity. A December 2006 decision provides California mediation practitioners a new standard for acknowledging the binding nature of their settlement agreements.

The Court reversed an appellate ruling sending a disagreement between parties to arbitration under the terms of their mediation settlement agreement. Fair v. Bakhtiari et al., S129220 (Dec. 14, 2006)(not yet approved for publication)(available at http://www.courtinfo.ca.gov/opinions/documents/S129220A.PDF).

The Court ruled that a mediation writing wasn’t good enough to back the plaintiff’s request to enforce an arbitration provision it included. The decision says that California’s 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.”

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,” the opinion holds.

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 the state’s strict mediation confidentiality laws.

In Fair, the mediation’s “Settlement Terms”–after tough negotiations over a partnership’s dissolution--called for arbitration over disputed terms. 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 reversed a decision in favor of an ousted partner’s appellate win that sent the case to arbitration. The result is 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. The case goes back to the trial court.

The Supreme Court’s 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: . . . (b) The agreement provides that it is enforceable or binding or words to that effect.”

The Supreme Court states that the appeals court erred in interpreting the part of the section indicating that “words to that effect” were present. The Court doesn’t believe that words signifying that Fair and his former partners were bound to the settlement by the arbitration clause’s inclusion in the settlement terms.

“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.

Associate Justice Joyce L. Kennard concurred in part with 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, Section 1119, and that the Section 1123 exception for enforcement purposes doesn’t apply to the Fair writing.

But she dissents from the holding that the arbitration clause “can never constitute ‘words to [the] effect’ that a settlement agreement is ‘enforceable or binding.’”

Kennard, instead, concludes that “substantial evidence” supports the trial court’s original ruling that the mediation agreement was not an effective written settlement agreement.

            Writes Kennard,

[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 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.”

–Russ Bleemer, Editor, Alternatives