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MEDIATION

 PART 1-- THE MEMORANDUM OF UNDERSTANDING

Introduction

In Foxgate Homeowners’ Assn. V. Bramalea California, Inc. (2001) 26 Cal.4th 1, the Supreme Court strongly approved alternative dispute resolution and endorsed Mediation, referencing Code Civ. Proc., Sect. 1775 (c): “In appropriate cases, mediation provides parties with a simplified and economical procedure for obtaining prompt and equitable resolution of their disputes and a greater opportunity to participate directly in resolving these disputes….It is in the public interest for mediation to be encouraged and used where appropriate by the courts.”  “ ‘Mediation’ means a process in which a neutral person or persons facilitate communication between the disputants to assist them in reaching a mutually acceptable agreement.” Evd. C. Sec.1115. See Code of Civil Procedure Sections 1775-- 1775.15 further referencing Mediation. For material comparing Mediation, Arbitration and Jury Trial see “Masters in Trial” presented by the Foundation of the American Board of Trial Advocates and the Los Angeles Chapter of ABOTA, December 5, 2003.

All parties have a legitimate interest in reaching finality at the conclusion of mediation. In the usual scenario, the parties execute a document on a form provided by the Los Angeles Superior Court designated a Stipulation Re Settlement. Thereafter, one of the attorneys, generally the defendant’s counsel, is directed to prepare a Final Settlement Agreement and also a formal Release. It is the purpose of this article to alert attorneys and mediators to consider issues that should be addressed in the Stipulation Re Settlement so that the mediation comes to the anticipated successful conclusion. The goal is to ensure durability as well as enforceability.

The Stipulation Re Settlement

Although designated a Stipulation Re Settlement, this document could better be considered as a Memorandum of Understanding as it contemplates the preparation of more formal documents.  The Superior Court form provides in pertinent part as follows: “IT IS HEREBY STIPULATED THAT this matter is deemed settled pursuant to the following terms and conditions: 1.” [This is where the parties insert the basic terms of the agreement.] On the reverse side of the page, the form further provides: “2. The Plaintiff agrees to accept said sum as payment in full of all (his/her/their) claims, known or unknown, arising from the events described in the complaint with the knowledge that (he/she/they) will be barred from proceeding against the Defendant(s) in the future regardless of what might happen. 3. Each party will bear its own costs. 4. Parties shall execute mutual releases. 5. 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.)”.

Drafting the Memorandum of Understanding

As stated, the mediator will urge the parties to draft and sign a Memorandum of Understanding to serve as the basis for a subsequent formal, detailed agreement. Who should prepare that document?

In “Alternative Dispute Resolution” by Jacqueline M. Nonlan-Haley, the author references Drafting the mediation Agreement at p. 74 as follows: In some cases, the parties’ lawyers or the mediator may draft a memorandum of understanding at the completion of a mediation session before the official mediation agreement is drafted.” (emphasis added).

In “Mediation in a Nutshell”, Kimberlee K. Kovach states at p.205 that once the parties have reached resolution that: “This is followed by drafting the agreement or in some cases, the memorandum of agreement. In many, if not most, instances, responsibility for drafting the agreement rests with the mediator. In some cases, however, for a variety of reasons, parties or their representatives (usually lawyers) assume the task of preparing the agreement.” (emphasis added).

However, in addressing the issue of who drafts the agreement, Allan H. Goodman , author of  Basic Skills for the New Mediator, states categorically, at p. 91: “First, let me emphasize, that the mediator does not draft the settlement agreement.”  (emphasis in the original). Continuing, “Even if you are an attorney, you do not want to put yourself in the position of representing both parties, or having liability arise from drafting the settlement agreement”.

Compare the opposite recommendation contained in Mediation Practice Guide by Bennett G. Picker, at p. 50. The author describes a useful technique for resolving a dispute that otherwise appears to be at an impasse. Described therein as the “one text” approach, he states “…, the mediator will draft a document of potential agreement. The mediator will then pass it back and forth or circulate it among the parties. As the text circulates and the concerns of the parties surface, the mediator will revise the text to reflect the parties’ concerns.” “, … this approach may be a good tool for reaching agreement.” (emphasis added).

Regardless of who drafts the agreement, the mediator should be satisfied that: 1. It covers the essential points agreed upon at the mediation; 2. The parties understand the agreement; 3. The parties express agreement to it; 4.The parties state that the agreement is intended to be binding and enforceable; and 5. The actual parties to the agreement sign the Memorandum of Understanding while at the Mediation. 

Enforcement of the Memorandum of Understanding

The Memorandum of Understanding is a contract. Accordingly, it is governed by the legal principals applicable to the enforcement of contracts in general. Nicholson v. Barab (1991) 233 Cal. App. 3d 1671, 1681; Gopal v. Yoshikawa (1983) 147 Cal App. 3d 128 (specific performance).

However, the most common method of enforcement of a mediated settlement is under the summary procedure by way of motion as provided by Code of Civil Procedure Section 664.6, referenced above. 

 Note that CCP Section 664.6 requires that the agreement be reduced to writing, or it cannot be enforced. This follows from the fact that the parties are “outside the presence of the court” in a mediation proceeding. Murphy v. Padilla (1996) 42 Cal. App. 4th 707, 713-715, 49 Cal. Rptr. 2d 722. See Evidence Code Section 1118 that provides for a very limited exception for enforcement of an oral agreement that is reliably reported and thereafter signed by the parties within 72 hours after it is recorded.

Another significant requirement for utilizing the summary procedures of 664.6 is that the agreement must have been signed by the actual parties to the pending litigation. Accordingly, the court cannot enter judgment upon the stipulation unless the parties to the litigation themselves have signed the agreement. It is not sufficient that their agents, representatives or even their attorneys have done so. Wackeen v. Malis (2002) 97 Cal. App. 4th 429, 440, 118 Cal. Rptr. 2d 502. ; Harris v. Rudin, Richman & Appel (1999) 74 Cal. App. 4th 299, 305-6; Levy v. Superior Court (1995) 10 Cal. 4th 578, 580, 584-586 & n. 4, 41 Cal. Rptr. 2d 878,900 P. 2d 171; Gauss v GAF Corp . (2002) 103 Cal. App. 4th 1110, 1118-1121, 127 Cal. Rptr. 370 (Code Civ. Proc. Sect. 664.6 could not be used to enforce settlement against non-signing asbestos company, because settlement was reached and signed by agent corporation formed by asbestos companies specifically to manage and settle asbestos litigation claims).

Terms and Conditions of the Memorandum of Understanding

Since the Memorandum of Understanding provides the framework for the final settlement agreement, parties should be certain that all relevant terms are considered, resolved, and incorporated in the preliminary agreement. This may be as simple as a short listing of the main points of the agreement. On the other hand, there are situations that require reflection upon specific provisions that might be required to carry out the settlement. Where the details are important or may be involved, the Memorandum should set forth what action is required of each party in a clear and concise fashion. The objective is to assure that the ultimate agreement does not become the source of an additional dispute.

Reference list for issues to consider

Because the specific terms of an agreement vary so widely, it is not possible to list everything that should be incorporated in a particular Memorandum. However, the following may provide guidance as to what points should be considered when preparing the document:

1.      The basic terms of the settlement

2.       Promises to perform or not perform certain actions

3.      Specific provisions regarding the payment of money

4.      The actions required to carry out the agreement

5.      Designation of the persons responsible for carrying out each action

6.      A schedule for implementing actions

7.      Criteria for measuring the effectiveness of compliance

8.      Future relationship, if any, between the parties

9.      Identifying any special conditions required for final approval

10.  Specific representations relied upon as material inducements to the settlement

11.  Confidentiality

12.  Release Terms

13.  Dismissal

14.  Enforcement procedures

15.  Procedures for resolving remaining issues

16.  Mechanism for resolving disputes that arise in drafting or carrying out the settlement agreement

Reliance upon Material Representations

The Memorandum of Understanding typically is silent regarding any representation made by a party during the Mediation proceeding. Moreover, the typical final settlement and release documents signed by the parties will contain a provision to the effect that the releasor does not rely upon any inducement not set forth in the release nor upon any representation made by any party.  Civil Code Sect. 1625 provides that “ The execution of a contract in writing , . . . , supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument.” Finally, the Confidentiality provisions of California Code of Civil Procedure Sections 1775 to 1775.15; Evd. Code Secs. 703.5 and 1115 through 1128; California Rules of Court Rules 1630 et seq. and the written agreement customarily signed at the start of Mediation all provide that what is said at a Mediation hearing cannot be disclosed. Cf. Olam v. Congress Mortg.Co. ,68 F Supp 2d 1110, 52 Fed R. Evd. Serv. 834 (N.D. Cal. 1999).

Accordingly, if a party relies upon a material representation that is not set forth in the Memorandum of Understanding or is not incorporated into the final Settlement Agreement, the inability to vary the terms of a written instrument, coupled with the confidentiality of mediation, virtually preclude setting aside the Agreement for any alleged misrepresentation.

In “The Truth about Deception in Mediation”, Pepperdine Dispute Resolution Law Journal, Vol. 4, Number 2 by Jeffrey Krivis, Esq., the author examines the prevalence of deception in negotiating techniques encountered at mediation. But what if the misrepresentation relates to fundamental issues, such as the financial condition of a party, the nature and extent of insurance coverage, the status of a party, or the existence of a particular fact or document material to the settlement agreement?

In addressing this issue in California Torts by Levy, Golden & Sacks (Lexis Nexis—Matthew Bender) the authors make a recommendation that where in fact there is reliance upon a material representation, that it be expressed in the agreement. Thus at page 73-40 they state:

“If a settlement agreement is entered into based on the representations of a party regarding certain facts and circumstances, it is prudent practice to include those representations in the written agreement to provide a basis for rescission if the material facts were misrepresented. Should the factual basis subsequently be discovered to be false, the factual statement may provide a basis for rescission of the contract on the grounds of fraud. For example, if a defendant represents that limited assets are available for settlement of a claim and the plaintiff relies on the representation in agreeing to the compromise of his claim, the plaintiff may later plead fraud as a basis for rescission of the settlement agreement if it is later discovered that the defendant had undisclosed assets.” (emphasis added).

Procedures for resolving issues remaining after mediation

Some mediations end with only partial resolution of the differences between the parties. Provision should be made for addressing any unresolved matters utilizing some alternative dispute mechanism, where possible. For a description of a wide variety of alternatives, see “Mediation, The Art of Facilitating Settlement, Straus Institute for Dispute Resolution, Pepperdine University School of Law (Designer Dispute Resolution Processes) at pp. 2:16-2:39. Some of the options listed include binding, non-binding, bracketed (high-low), incentive or final offer arbitration; summary “mock” jury trial; neutral evaluation; neutral expert or joint fact-finding; mini-trials; med-arb or arb-med or final offer med-arb (baseball); settlement conferences; special masters or referees and more.

Liquidated Damages

Not infrequently, one or both parties to a mediated agreement seek to include some penalty for delay or non-performance. This might be sought to enforce a provision in the agreement regarding confidentiality, non-disparagement, or some other issue where it would be difficult to measure damages.

Civil Code Sect. 1671 sets forth the provisions relating to the VALIDITY OF LIQUIDATED DAMAGES. With a number of specific exceptions, liquidated damage provisions that approximate actual damages, rather than a penalty, are likely to be enforced. Accordingly, they may be upheld “unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” Also see the Uniform Commercial Code Section 2-718(1) and Restatement 2nd of Contracts Sec. 356(1). McCarthy v. Fally (1956) 46 C.2d 577; Witkin, Contracts (9th ed) Sect 503 et seq. Also see Civ. Code Sect. 3275 and 3358-59.

Retaining Jurisdiction

The parties may agree to a provision in the agreement to resolve any dispute related to the final settlement agreement and release issues. This can take the form of a provision to return to mediation, to appoint the mediator (or another) to serve as an arbitrator or have the court retain jurisdiction to enforce an order pursuant to CCP 664.6. Such a provision is often accompanied by a clause that states that if a dispute arises, the prevailing party is entitled to attorney’s fees.

Conclusion

Thought given to drafting the Memorandum of Understanding will go a long way toward ensuring satisfaction with the Mediation results and provide the best assurance that the formal Settlement Agreement and Release subsequently prepared meet the needs of all concerned.

 

Copyright October 28, 2004 by Sandy Gage



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