ADR Case Updates
Binding Mediation: An Oxymoron?, 07/11/2012
In Bowers v. Raymond J. Lucia Companies, Inc., (2012) 206 Cal. App. 4th 724, a $5 Million binding mediation award was held enforceable under California Code of Civil Procedure Section 664.6 because the parties mutually agreed to proceed to a full-day mediation as part of a settlement agreement and authorized the mediator to render an award if the case did not settle.
The case began when plaintiff sued for defamation and related business torts. The defendant compelled arbitration pursuant to an arbitration agreement between the parties. After several days in arbitration, the parties reached a settlement whereby they would proceed to a "mediation / baseball arbitration." If the matter was not resolved at the conclusion of an all-day mediation, the mediator would "be empowered to set the amount of the judgment" against the defendant "at such amount between $100,000 and $5,000,000 ...".
At the end of the mediation, the plaintiff demanded $5 million and defendant offered $100,000. The mediator ultimately chose $5 million. The plaintiff filed a petition with the trial court to confirm the mediation award. The trial court determined that only an arbitration - and not mediation - award could be confirmed. Instead, the trial court enforced the settlement agreement and subsequent mediator's award under Code of Civil Procedure Section 664.6, and entered judgment against defendant for $5 million. The defendant appealed.
In affirming the judgment, the appellate court observed that Section 664.6 provides that if parties to pending litigation stipulate to settle the case, the court may enter judgment pursuant to the settlement. The record - including the transcript of the arbitration hearing, and then in a subsequent written settlement agreement and release - reflected a clear agreement between sophisticated parties providing for a full day mediation. If the matter was not resolved, the mediator was to select either the last demand or offer. The mediator chose the last, and apparently only, demand - $5 million - and the trial court properly entered judgment accordingly.
However, in Lindsay v. Lewandowski (2006) 139 Cal. App. 4th 1618, the appellate court reached a different result, and reversed a judgment based upon binding mediation. There the case settled in a "binding mediation," where the parties agreed that any impasse in the negotiation would be resolved by the mediator. Impasse was reached and the mediator rendered a "binding mediation ruling" that was between the last demand and the last offer. The trial court then entered judgment under Section 664.6 on a motion to enforce the stipulation for settlement over objection of one of the parties.
According to the appellate court, "binding mediation" is a deceptive, self-contradictory, and misleading term. Because mediation is a voluntary process, giving the mediator the power to bind the parties converts the mediation to "low-quality arbitration," without the procedural and substantive safeguards that govern arbitration.
That being noted, the court made it clear that the parties are not prohibited from agreeing that, if the mediation fails, they will proceed to arbitration. But if the same person is to serve as both mediator and arbitrator, great care must be taken to address what rules will apply during each phase of the dispute resolution process (e.g., mediation confidentiality rules, court-ordered mediation rules, arbitration rules, or some mix). Since that was not done, and there was some uncertainty as to the binding mediation process, the stipulation for settlement was unenforceable.
The Bowers court acknowledged the Lindsay decision and went to great lengths to distinguish it, primarily relying on contract principles and the modern trend that disfavors holding contracts unenforceable because of uncertainty. Thus, the current state of the law in California is that binding mediation is permissible so long as the parties are clear on the binding mediation process.
Permissible, but prudent? The more interesting question is whether it is prudent to give the same person, a mediator, the power to impose a binding decision on the parties. Effective mediation depends on candid and confidential communication between the parties and mediator, which is less likely to occur with the specter of a subsequent mediation award if the case does not settle.
Even in a case like Bowers, with sophisticated parties and a clear understanding of the process, mediating with the same person serving as mediator and then "binding mediator," is fraught with peril. The mediator's role as a decision-maker, imposing a binding decision on the parties, is inconsistent and antithetical to the trusting and neutral role of a mediator, where parties are free to share confidences in their efforts to settle the case.
Moreover, parties may develop false expectations of the mediator-turned-arbitrator, and feel betrayed by his or her binding decision. While permissible, the minimal cost-efficiency of having the same person serve as mediator and then arbitrator is outweighed by the potential for a frustrating experience that neither advances the interests of mediation nor arbitration. Binding mediation is an oxymoron.
Prevailing Party Waives Right to Attorney Fees By Refusing to Mediate
In Cullen v. Corwin (2012) 206 Cal. App. 4th 1074, the appellate court held that defendants who refused requests for mediation on grounds of incomplete discovery cannot recover attorney fees upon dismissal of the case notwithstanding plaintiffs' initial failure to request mediation before filing suit.
Plaintiffs purchased residential property from defendants. The parties used the standard California form purchase agreement providing that the prevailing party in any subsequent dispute shall be entitled to reasonable attorney fees. That right was subject to a condition precedent of mediation: "If, for any dispute ... to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after [the making of] a request ..., then that party shall not be entitled to recover attorney fees ...". (Emphasis in original.)
Seven years later, plaintiffs sued defendants for nondisclosure of a defective roof-condition without first requesting mediation. After suit was filed, plaintiffs then made two requests for mediation. Defendants declined to mediate because discovery was not yet completed, and then moved successfully for summary judgment. The trial court dismissed the case, and awarded defendants $16,500 in attorney fees and cost over plaintiffs' objection that defendants were not entitled to attorney fees because of the refusal to mediate. Plaintiffs timely appealed.
The appellate court reversed in part. The term in the purchase agreement "barring recovery of legal fees by a prevailing party who refuses a request for mediation means what it says and will be enforced." In addition, there is a strong public policy of promoting mediation as a more cost-efficient way to resolve disputes. The mediation clause in the purchase agreement was "designed to encourage mediation at the earliest possible time," and does not mean that a party can postpone mediation until after completion of discovery. Such an interpretation would undermine the purpose of mediation as an expeditious alternative.
Finally, defendants may not rely on the fact that plaintiffs failed to initially request mediation before filing suit. That fact would merely preclude the plaintiffs from recovering attorney fees against defendants if plaintiffs prevailed. Plaintiffs' failure does not negate defendants' separate obligation to mediate once the request was made. Since defendants refused to mediate after plaintiffs' two requests, defendants are not entitled to recover fees. Two wrongs don't make a right. Thus, the trial court's order granting defendants attorney fees was error and reversed.
Recent Cases Pertaining To Arbitration:
Arbitration provision in employment contracts are unconscionable and unenforceable where plaintiffs were required to sign contracts and not provided translation or copies (Samaniego v. Empire Today, LLC (2012) 205 Cal. App. 4th 1138);
Defendant may not compel arbitration against signatory plaintiff under equitable estoppel because claims were not founded upon agreements containing arbitration provision (DMS Services, Inc., v. Superior Court (Zurich Services Corp.) (2012) 205 Cal. App. 4th 1346);
Defendant construction company may not recover attorney fees where it was not prevailing party, even though it successfully defeated motion to compel arbitration on earlier appeal (Frog Creek Partners, LLP v. Vance Brown, Inc., (2012) 206 Cal. App. 4th 515);
In light of AT&T Mobility LLC v. Concepcion (2011) __ U.S. __, 131 S. Ct.1740, arbitration agreement containing class action waiver is enforceable where arbitration agreement is neither procedurally nor substantively unconscionable (Iskanian v. CLS Transportation Los Angeles LLC (2012) 206 Cal. App. 4th 949);
Motion to compel arbitration is properly denied where parties waived arbitration agreement by refusing to agree on how to pay arbitration fees (Cinel v. Barna (2012) 206 Cal. App. 4th 1383);
Existence of invalid release of wage claim in employment agreement under California Labor Code Section 206.5 is no defense to a motion to compel arbitration (Pulli v. Pony International, LLC (2012) 206 Cal. App. 4th 1507); and
In dispute over charter school conversion, courts should refuse to compel arbitration of collective bargaining provisions in conflict with California Education Code (United Teachers of Los Angeles v. Los Angeles Unified School District (2012) 54 Cal. 4th 504.).
Recent Case Pertaining to Good Faith Settlements:
Good faith settlement offer cannot be appealed by non-settling party on final judgment grounds where party failed to first file writ (Oak Springs Villas Homeowners Association v. Advanced Truss Systems, Inc., (2012) 206 Cal. App. 4th 1304).
The opinions are posted at: http://www.courts.ca.gov/opinions.htm.
Steve Kruis sends periodic case updates by e-mail that summarize recent developments in the Alternative Dispute Resolution area. If you would like to be included on our distribution list, please send us an e-mail or call 619.233.1323.