Are You Bound by Terms Reached During Mediation?

Insights

Overview

At various inflection points in U.S. litigation, parties will often enter mediation — either by court order or party agreement. There are multiple mediation formats, but the goal is always the same: leave with terms each party can accept to resolve a dispute, in whole or in part.

There are two potential outcomes of particular interest here. First, a mediator can be successful in finding common ground between the parties; in that case, the parties can build on that foundation by leaving the mediation with an agreed-upon term sheet. Second, when a mediator is unsuccessful at reaching an agreement during the session but still believes a deal is possible based on the common ground identified, the mediator can propose a foundation likely to be acceptable to the parties, which both sides can accept or reject. If accepted, the parties again leave mediation with agreed-upon terms. In both cases, the way forward is the same: the parties work together to draft a long-form settlement agreement reflecting the general terms agreed upon at mediation.

But the question inevitably arises: what happens when the parties disagree on the long-form settlement agreement? One option, of course, is that the parties walk away from the deal and resume litigation. But that is not the only option. A party can seek to enforce a term sheet or accept the mediator’s proposal. In that case, courts will look to the bare-bones term sheets to determine whether a contract was formed. If a term sheet contains all material and essential terms of the deal and the parties intend to be bound by those terms, a court may enforce those basic terms even if the parties cannot agree to a long-form agreement.

Professionals

Key Takeaways

When considering a mediator’s proposal, pay particular attention to the terms proposed and consider whether they contain the requisite specificity to resolve the issue each term purports to address. Gambling that ambiguous terms can be favourably clarified during the negotiation of a long-form agreement carries unnecessary risk. Communicating acceptance of a proposal upon the condition that specific terms have an unambiguous meaning is advisable.
When accepting a deal, clearly state your intent, particularly if you do not want to be bound by a mediator’s proposal or term sheet. There is a public policy favouring settlements, so courts will strive to find an enforceable agreement where they can. If you intend the deal reached in mediation not to be binding — and instead to be an unenforceable agreement to draft a long-form agreement — state that explicitly.
If you do want the deal to be binding and to be able to enforce it against your opponent, make sure you’ve included all aspects that you believe to be material and essential. A court will evaluate what is material and essential based on context and the negotiations, so if something is important, make sure it is included. It is common practice to state in the term sheet that the parties intend to be bound by its terms.
If intentions are clearly stated at the mediation, when drafting a long-form settlement agreement and fleshing out the terms, you will be armed with knowing whether you can successfully bring your opponent back to terms as agreed upon at mediation — which is useful leverage in negotiations.