A New Twist on a Contractual Mediation Requirement

Arbitration clauses are increasingly common in both commercial and consumer contracts, and some of those clauses now require that the parties mediate before commencing an arbitration.  Such a clause can be beneficial because, while parties all know the advantages of an early settlement, many litigators view an early request for mediation as tantamount to an acknowledgment of the weakness of their position.  A contractual mediation requirement enables early settlement discussions without triggering this real or perceived problem.

One problem with such mediation clauses, however, is that they can be difficult to enforce.  The remedy for a violation of such a clause might be nothing more than a stay of the arbitration pending completion of a mediation, and just asking for such a remedy might trigger the “fear of showing weakness” concern the clause was intended to eliminate.

In Makeen v. Woodstream Falls Condo. Ass’n (In re Makeen), B.A.P. (10th Cir. 2020), the court noted that the mediation clause at issue provided for $25,000 in liquidated damages if a party failed to comply with the mediation requirement, a provision that would seem to single-handedly eliminate any enforcement issues for a mediation requirement.  The court did not, however, deal with whether the liquidated damages provision was enforceable, and Illinois, like virtually all jurisdictions, has specific requirements for such clauses to be enforceable.

My takeaway:  Given that that a liquidated damages provision will not likely cause any harm, and that it also has a fair shot at being enforceable, it would seem worthy of inclusion in many contractual mediation provisions.

Covid Update:  If you’ve been wondering whether to mediate by Zoom or any other video platform, take the leap.  Parties and mediators are getting increasingly comfortable with this procedure and finding similar rates of settlement.

Securing Binding Mediation Agreements in a Virtual World

It is critical, at the end of a successful mediation, to secure a binding agreement to the material terms of the settlement, even if the parties intend to later draft a more formal document. This is typically done by having the parties agree to a settlement term sheet. What you want to avoid is creating any delay in making this term sheet binding, because any delay gives a chance for a party to experience buyer’s remorse and try to back out of the deal.

Securing agreement to the term sheet at the end of a virtual mediation can be tricky unless the parties have an electronic signature program such as DocuSign ready to go. Even emailing a document to each side to print out, scan, and return can create a delay that could unsettle the agreement.

A simple method that I’ve used is where the mediator emails the agreement to both sides and simply asks for a response to that email confirming agreement. This creates a written record of agreement, and can be done while the mediation session is still going on, thereby eliminating any delay in getting a binding agreement.

But is this email system binding? In Overfield v. Starbucks Corp. (D. Kan. 2020), even though there was an in-person mediation, rather than have the agreement signed then and there, the mediator emailed the document to both sides about an hour later, to which both parties responded “Yes, agreed.” The court found this agreement binding. So, emailing an agreement to both sides, and requesting a response indicating their agreement, should be a viable and quick way of securing a binding contract.

Enforcing a Mediation Confidentiality Provision

In Tellis v. LeBlanc, (W.D. La. 2020), in the course of litigating a motion to strike a jury demand, the defendant cited facts it had learned in a prior unsuccessful mediation about the nature of the plaintiff’s case. The plaintiff moved for sanctions based on defendant’s use of that information because the communications in the mediation were supposed to have been privileged and confidential.  The court agreed that the use of the information was improper, but found no evidence that the defendant had acted in bad faith, and therefore denied the request for sanctions. The court noted that the disclosure was made for no purpose other than to highlight a position asserted in a brief, and that there was no effort to prejudice the plaintiff in any improper way.

Takeaway: While assuring privilege and confidentially in a mediation, either contractually, by court rule, or by statute, is essential, it can be difficult to obtain a remedy if one party subsequently violates the confidentiality of the mediation.

Interesting side-note: In the background section, the court noted that the magistrate who conducted the mediation ordered the parties to submit confidential statements before the mediation containing a “bottom-line settlement proposal.”  I have never encountered this, and feel it could well create an obstacle to successful a negotiation.  If anyone has seen this technique used in a mediation, I’d love to hear whether it was helpful or not.

What Can You Do With New Facts Learned In Mediation?

In Homes v. Navigators Specialty Ins. Co. (E.D. Tex., 2019), the plaintiff filed a complaint, six months later the parties mediated unsuccessfully, and a week later the plaintiff sought to amend the complaint to add new parties.  The court denied the motion to amend in part because the plaintiff delayed seven months before seeking to amend when the plaintiff had all the necessary information at the time the case was first filed.

While this holding is fairly straightforward, in its discussion the court noted that had new facts supporting the amended complaint first been learned in the mediation, the amendment might have been timely, because leave to amend was sought only a week after the mediation had concluded. Although not discussed by the court, this poses the challenging question of whether it is allowable to use facts learned in a mediation to amend a pleading, given the confidential and privileged status of all mediation communications.

The answer to this question is far from clear and might vary from state to state. In Illinois, for example, the Illinois Uniform Mediation Act provides that mediation communications are privileged, which means they cannot be used as evidence. This, however, only precludes using a new fact learned in mediation to prove an allegation; it may not be a bar to using a fact learned in mediation to merely allege a new claim.

My standard mediation contract, like those of many other mediators, has the parties agree that mediation communications are confidential and can only be used to resolve the lawsuit. Would a court hold that such a contract precludes amending a pleading based on facts learned in a mediation?  Would a court find that amending a pleading was a breach of such a contract and strike the pleading?

While the law is unclear, from a policy perspective using something learned in a mediation to amend a pleading runs contrary to the goal of enabling parties to talk freely in a mediation without fear of statements later being used against them. My takeaway is that one should be thoughtful before revealing a new fact to the other side in mediation, because it is not clear whether any such fact could or could not be used to make a new allegation. One suggestion would be to disclose the fact in confidence to the mediator, in caucus, and discuss the pros and cons of revealing that fact to the other side.

Is A Mediation A “Lawsuit?”

In Ill. Tool Works, Inc. v. Ace Specialty Ins. Co., 2019 Ill. App 181945 (1st Div. 2019), the plaintiff received a letter threatening a lawsuit (a copy of a proposed complaint was attached), but inviting the plaintiff to participate in a mediation to resolve the matter. The plaintiff accepted the invitation and the matter settled. The defendant insurer then refused to pay the costs of the mediation because the policy provided that the insurer owed a defense only for “suits.” The court agreed, noting that a mediation, by itself, is not a “suit.” The court further noted that the policy had other provisions that referenced “claims,” which is a broader term than “suits,” implying that had the policy provided a duty of defense for “suits and claims,” the mediation would have been covered.

The result itself is not surprising. It is hard to argue that a letter threatening a lawsuit is an actual lawsuit. The important takeaway, however, is that if you choose to mediate a case before a lawsuit has been filed (a great way to save your client time and money), make sure to check any applicable liability policies before doing so.