Oral Agreements to Settle at Mediation: Do Not Count Chickens Before They Hatch

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1 Nathalie C. Hackett Clausen Miller, P.C. 1 Chase Manhattan Plaza, 39th Floor New York, NY Oral Agreements to Settle at Mediation: Do Not Count Chickens Before They Hatch I. Introduction Mediation is often hailed as an effective means of facilitating an open discussion amongst Parties regarding unresolved issues in a case, which, in effect, moves the Parties towards a middle ground and, hopefully, results in an amicable resolution. Compared to litigation, Mediation is quick, less expensive, and less formal, and allows Parties to resolve their disputes and depart with their dignity. Once an agreement is reached and celebratory handshakes are exchanged, Parties sometimes overlook the detail of memorializing their settlement in writing. Whether it is due to the informality of Mediation proceedings, or the relief that the ordeal is over, the failure to reduce the terms of a settlement to writing before the conclusion of Mediation often leads to yet another dispute requiring judicial intervention, when a Party changes his mind. The Parties' failure to commit to a signed writing at the conclusion of a successful Mediation is, more often than not, a non issue when the Parties in fact wish to be bound by the terms of the agreement. Arguably, Defendant has made an informed and calculated decision to part with something in order to buy his peace, Plaintiff has made an informed and calculated decision to take the money and run, and both Parties are happy to have avoided the gamble of placing their fate in the hands of the trier of fact. Nevertheless, there are instances where a Party walks away from a Mediation with buyer s remorse. The question then becomes: What happens to the oral agreement of settlement reached at Mediation if a Party has second thoughts? If, despite the handshake, a Defendant refuses to abide by the terms discussed, or a Plaintiff refuses to release its claims, is either party bound? Put another way, is the oral, or handshake, agreement of settlement reached at Mediation legally enforceable, absent a writing, executed by both Parties? In some jurisdictions, oral agreements of settlement during Mediation are enforceable, subject to certain conditions. In other jurisdictions, an agreement of settlement reached at Mediation is unenforceable absent a writing signed by both Parties. An agreement reached by the Parties at Mediation to settle a dispute is a contract that is governed by basic contract principles. See Alford v. Kuhlman Elec. Corp., 716 F.3d 909, 912 (5th Cir.2013); Welch & Forbes, Inc. v. Cendant Corp., 233 F.3d 188, (3d Cir.2000).

2 Regardless of how courts have decided the issue of the enforceability of oral versus written mediated settlement agreements, the common thread that runs throughout the case law is the basic principle of contract formation which requires mutual assent of all Parties. The remaining elements of contract formation: consideration, capacity and legality are ancillary to this topic. Thus, while some jurisdictions may, in theory, recognize oral agreements of settlement reached in Mediation, in practice, such a writing is often the only clear cut means of evidencing that the Parties reached a binding and conclusive agreement. II. Governing Case Law Several states have decided the issue of the enforceability of oral agreements of settlement in one form or another. In a number of jurisdictions, a mediated settlement agreement is not binding unless it is confirmed in writing. See Beazer East, Inc. v. Mead Corp., 412 F.3d 429, 436 (3d Cir. 2005); Vernon v. Acton, 732 N.E.2d 805 (2000) (Indiana); Willingboro Mall, Ltd. v. 240/242 Franklin Ave., L.L.C., 215 N.J. 242 (N.J., 2013); Forcelli v. Gelco Corp., 972 N.Y.S.2d 570 (2013); Reese v. Tingey Const., 177 P.3d 605 (Utah, 2008). Some courts deem the writing requirement satisfied, if the Parties have an alternative, tangible means of establishing intent to enter into the settlement agreement. See Ebates Performance Marketing Inc. v. Integral Technologies Inc., 2013 WL at *2 (N.D.Cal., August 15, 2013) (settlement agreement was reached before a judge, recited on the record, and orally executed in court by all counsel); see also Willingboro Mall, Ltd., 215 N.J. at 263, in which the court stated, We also see no reason why an audio or video recorded agreement would not meet the test of an agreement evidenced by a record signed by all parties to the agreement. Other States have held that oral settlement agreements purportedly reached during Mediations, but not evidenced by an executed writing, are nevertheless enforceable. For example, in Connecticut, a settlement agreement, not reduced to writing or signed by the Parties is legally binding. See Ackerman v. Sobol Family Partnership, LLP, 298 Conn. 495 (2010). In Kansas, the court recommends that Parties document an agreement of settlement reached at Mediation in a signed writing, but this writing is not, in and of itself, required in order to enforce the agreement. Baraban v. Hammonds, 312 P.3d 373 Kan.App. (2013). Similarly, in Ohio, an oral settlement agreement is enforceable under Ohio law if there is sufficient particularity to form a binding contract. Tocci v. Antioch University, 2013 WL (S.D.Ohio August 26, 2013) (citing Kostelnik v. Helper, 96 Ohio St.3d 1, 770 N.E.2d 58, 61 (2002). Still, other States distinguish between court ordered Mediation and voluntary Mediation, in determining whether the ensuing settlement must be committed to writing in order to be enforceable. In Missouri, for example, a settlement reached during court ordered Mediation is not enforceable unless it is reduced to a written agreement which sets forth the

3 essential terms of the settlement and bears the signature of all Parties. See Williams v. Kansas City Title Loan Co., Inc., 314 S.W.3d 868, Mo.App. W.D. (2010) (citing Missouri Supreme Court Rule (d)). However, in the instance of a voluntary mediation, oral settlement agreements are legally enforceable, to the extent the terms of the settlement are determinable. See id. at 872 (citing B Mall Co. v. Williamson, 977 S.W.2d 74, 77 (Mo.App. S.D. 1998); see also, e.g., Owen v. Hankins, 289 S.W.3d 299 (Mo.App. S.D.2009); Kenney v. Vansittert, 277 S.W.3d 713 (Mo.App. W.D.2008)). Under Delaware law oral settlement agreements reached among the parties to a dispute are, generally, legally enforceable. United Health Alliance, LLC v. United Med., LLC, 2013 WL at *6, (Del. Ch. November 27, 2013) (citing Corbesco, Inc. v. Local No. 542, 620 F.Supp. 1239, 1244 (D.Del.1985); see also Rowe v. Rowe, 2002 WL , at *3 (Del. Ch. May 28, 2002). However, if the Parties reach settlement in a voluntary mediation in the Court of Chancery, Rule 174 (g) applies, which requires the resulting settlement agreement to be reduced to writing and signed by the Parties and the Mediator. See Wilmington Hospitality, L.L.C. v. New Castle County ex rel. New Castle Department of Land Use, 788 A.2d 536, 540 (Del.Ch. 2001). Whether a jurisdiction requires settlements reached in Mediation to be in writing, in order to be enforceable, one commonality is apparent: the requirement of sufficient evidence to establish the terms of settlement and the future responsibility of each party. Settlement agreements are not exempt from the indispensable elements of a contract, which include an offer, acceptance, contractual capacity, consideration (the bargained for legal benefit and/or detriment), legality and a meeting of the minds as to the essential terms of the contract. The essential terms of an enforceable settlement agreement must be reasonably certain and clear. Even in the case of an oral settlement agreement there must be sufficient particularity to form a binding contract, in order for the court to enforce it. Otherwise, the agreement is unenforceable. Without a writing manifesting the intent to settle and the terms of settlement, the Party seeking to enforce an oral settlement agreement must rely on extrinsic evidence to establish mutual assent to all essential terms. Generally, extrinsic evidence is any evidence that relates to a contract, but is not contained within the document itself. This evidence often includes circumstances surrounding the negotiations of the contract. However, in the context of enforcing an oral settlement agreement, a Party s freedom to offer extrinsic evidence to support that an agreement was reached is encumbered by the public policy in favor of protecting communications made in the course of Mediation. Thus, while some States enforce oral settlement agreements upon a showing of a meeting of the minds, in reality, Parties are very limited in what they can introduce as extrinsic evidence, in support of this claim. III. The Confidentiality Factor

4 Confidentiality is a crucial element to the success of Mediation. Public policy dictates that in Mediation, the Parties must feel free to advance tentative solutions and to make statements without fear that they will later be used as a basis for liability or as a measure of damage. Kenneth R. Feinberg, Mediation A Preferred Method of Dispute Resolution, 16 Pepp. L.Rev. S5, S28 29 (1989). Accordingly, the content of the Mediation is often protected from disclosure by laws governing confidentiality in Mediation. Communications made during the course of a Mediation are generally privileged and therefore inadmissible in another proceeding. One obvious exception to this general rule is a written settlement agreement, which confirms the amicable resolution of the underlying matter and the terms of settlement. Another oft cited exception is an express waiver of the mediation communication privilege by the Parties. See e.g. Willingboro Mall, Ltd., 215 N.J. at 245; see also Delaware s Court of Chancery Rule 174(d); North Carolina s N.C.G.S. 7A 38.1( l ) and Colorado s (2), C.R.S. (2008), all of which generally prohibit any Party or the Mediator from voluntarily disclosing or being required to disclose any information concerning any Mediation communication or any communication provided in confidence to the Mediator. If oral settlements reached during a Mediation session are enforceable, to the extent the terms of the Parties' agreement are determinable, the Mediator s testimony would seem to be a natural way of confirming whether a final and binding agreement was, in fact, reached. However, such testimony is often expressly prohibited as a violation of the rules governing the confidentiality of communications taking place during Mediation. Once the testimony from a Mediator, or any Party, about the content of communications exchanged during Mediation is excluded, the remaining evidence often does not suffice to establish the terms of a settlement. A court cannot enforce the terms of an oral agreement reached in Mediation without requiring Parties to disclose, and the court to consider, confidential settlement negotiations. Absent the use of this evidence, it is virtually impossible to prove that the Parties reached an oral settlement agreement, or the terms of the agreement. Under basic contract principles, these terms must be established if the settlement is to be enforced. For this reason, many oral agreements of settlement reached in Mediation will not survive judicial scrutiny, even in jurisdictions that recognize such agreements. IV. Conclusion As a practical matter, settlement agreements reached during Mediation should be confirmed in writing. Requiring written agreements, signed by the parties, is more likely to maintain mediation as a viable avenue for clear and enduring dispute resolution rather than one leading to further uncertainty and conflict. Vernon, 732 N.E.2d at 810. While some jurisdictions claim that oral agreements of mediated settlement are enforceable, as with any

5 contract, the agreement to settle must be manifested by mutual assent of the parties to the terms. In addition, the terms of the settlement agreement must be clear, and unambiguous. Thus, unless there is adequate extrinsic evidence to (1) establish mutual assent to settle and (2) establish the terms of settlement, which would enable the court to enforce said agreement, absent a writing signed by the Parties, the only means of establishing the Parties intentions regarding settlement would require the disclosure of communications made during the Mediation. A legal proceeding enacted to enforce an oral agreement allegedly reached during Mediation inevitably prompts the Parties to disclose the content of discussions during Mediation, in order to make their case that Mediation did or did not result in a binding agreement. In many jurisdictions, however, communications made between the Parties in the course of, or pursuant to Mediation are generally confidential, and not subject to disclosure in the underlying dispute, or in an ancillary dispute for the enforcement of the purported settlement agreement. Absent the use of this evidence, it is virtually impossible to prove that the Parties reached an oral settlement agreement, or the terms of the agreement. Thus, even in jurisdictions that enforce oral agreements of settlement stemming from Mediation, without a writing to confirm the terms of settlement, the agreement is essentially unenforceable.