Are Magic Words Necessary to Make Enforceable a Memorandum, Term Sheet or Letter of Intent Signed at a Mediation?
Edited by Judith Stalk
Is a memorandum signed by the parties at the conclusion of a mediation enforceable because the memorandum contains an arbitration provision? If one of the parties to that memorandum insists they always viewed the memorandum as a nonbinding document similar to a letter of intent regarding a proposed business relationship, is the memorandum not enforceable? Is magic language required in a memorandum signed at a mediation to make it enforceable?
Documents prepared for purposes of mediation are generally inadmissible in civil proceedings. Evid. Code, sec 1119(b). However, a signed settlement agreement reached through mediation is exempt from this general rule if it “provides that it is enforceable or binding or words to that effect.” Evid. Code, sec 1123 (b). If the document does not contain this language, the document will not be admissible nor will it be enforceable. Unless otherwise noted, all references are to the Evidence Code.
Was the document signed at the conclusion of the mediation in this case enforceable because it contained an arbitration provision? Or merely an unenforceable ‘term sheet’? The settlement terms in this case are set out below.1
R. Thomas Fair v. Karl E. Bakhtiari, Stonesfair Financial Corporation, Supreme Court of California , 2006 Cal. LEXIS 14727; 2006 Daily Journal DAR 16184, December 14, 2006. Full opinion.
What follows is an excerpt of the opinion.
The aim of section 1123(b) is to allow parties in mediation to draft enforceable agreements without requiring the use of a formulaic phrase. However, the writing must make clear that it reflects an agreement and is not simply a memorandum of terms for inclusion in a future agreement. The writing need not be in finished form to be admissible under section 1123(b), but it must be signed by the parties and include a direct statement to the effect that it is enforceable or binding.
In this case the parties were unable to finalize their settlement following the mediation. One of the defense counsel informed the trial court in a case management document that the parties were unable to reach agreement. Subsequently, plaintiff’s attorney wrote to defense counsel demanding arbitration pursuant to a provision of the settlement memorandum signed at the mediation. Defendants’ counsel rejected the demand, contending the parties had not entered an enforceable agreement. He claimed the settlement memorandum was inadmissible under section 1119(b), which protects confidentiality of writings “prepared for the purpose of, in the course of, or pursuant to, a mediation.” Plaintiff contended the settlement memorandum was admissible on various grounds, including the presence of an arbitration provision that made the parties’ agreement “enforceable” as contemplated by section 1123(b).
“We have repeatedly noted that the mediation confidentiality provisions of the Evidence Code were enacted to encourage mediation by permitting the parties to frankly exchange views, without fear that disclosures might be used against them in later proceedings. (Rojas v. Superior Court (2004) 33 Cal. 4th 407, 415-416; Foxgate Homeowners’ Association. v. Bramale California, Inc. (2001) 26 Cal. 4th 1, 14) Toward that end, “the statutory scheme . . . unqualifiedly bars disclosure of communications made during mediation absent an express statutory exception.” (Foxgate, supra) In this case we construe the exception expressly provided in section 1123(b) for written settlement agreements.
Section 1119 states the general rule that writings prepared for, in the course of, or pursuant to mediation are inadmissible, “except as otherwise provided in this chapter.” Section 1123 states the exceptions applicable to written settlement agreements, including the requirement at issue here: “The agreement provides that it is enforceable or binding or words to that effect.”2 “Words to that effect” reflects a legislative concern not with the precise words of a settlement agreement, but with terms unambiguously signifying the parties’ intent to be bound. (Emphasis added) The phrase “words to that effect” in section 1123(b) refers to language that conveys a general meaning or import, in this instance the meanings of “enforceable or binding.”
The Legislature’s goal was to allow parties to express their intent to be bound in words they were likely to use, rather than requiring a legalistic formulation. The Legislature also meant to clarify the rules governing admissibility and to reduce the likelihood that parties would overlook those rules. To meet these objectives, we must balance the requirements of flexibility and clarity, without eroding the confidentiality that is ‘essential to effective mediation.’ (Emphasis added)
In order to preserve the confidentiality required to protect the mediation process and provide clear drafting guidelines, 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.
A settlement agreement drafted during mediation must be admissible before a court can reach the issue of enforceability. The Supreme Court concluded there was no meeting of the minds of the parties with respect to a critical term and that defendants viewed the document as not final and binding. Thus the agreement signed at the conclusion of the mediation was not admissible and the mere presence of an arbitration provision did not make the signed agreement enforceable.
For more on enforceability of settlement agreements signed at a mediation, see “When Is A Memorandum of Understanding Not Enforceable?” and see “MSJ Granted to Enforce Settlement Agreement Entered at Conclusion of Mediation, Where the Agreement Was Not Signed Personally by All Parties”.
1. “Settlement Terms
- Cash payment of $5.4MM to T. Fair w/in 60 days.
- Payment treated as purchase of all T. Fair’s stock & interests (as capital gain to Fair).
- [Defendants] will not look to Fair for reimbursement or indemnification of any phantom income paid by them to date.
- This provision relates solely to Fair’s right to indemnity and does not preclude other rights of the parties. Fair will be indemnified as a former officer, director & employee of SFC/SMC/SC [the Stonesfair defendants], according to applicable law, against all 3rd party claims, including LPs [limited partners] or IRS, arising from the operation of SFC/SMC. Fair will not make any adverse contacts with IRS [or] LPs re: SFC/SMC at risk of loss of indemnity and will not suggest, foment or encourage litigation by LPs or any individual against defendants, at risk of loss of indemnity.
- Maryann Fair disclaims any community prop[erty] interest in settlement proceeds.
- Parties will sign mutual releases and dismiss with prejudice all claims. Am’t of settlement will be confidential with appropriate exceptions.
- All sides bear their own attorney fees and costs, including experts.
- If Fair needs to restructure cash payments for tax purposes, defendants will cooperate (at no additional cost to defendants).
- Any and all disputes subject to JAMS arbitration rules.”
2. The full text of section 1123 is as follows:
“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:
- The agreement provides that it is admissible or subject to disclosure, or words to that effect.
- The agreement provides that it is enforceable or binding or words to that effect.
- All parties to the agreement expressly agree in writing, or orally in accordance with Section 1118, to its disclosure.
- The agreement is used to show fraud, duress, or illegality that is relevant to an issue in dispute.”