The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

As a mediator, I am in the business of getting lawsuits settled, so I take special note of court opinions where a party tries to get out of a settlement by alleging such things as fraud, economic duress, and most recently in Starpoint Properties, LLC v. Namvar, a California Court of Appeal case, coercion. Early in my career I settled a lawsuit during trial but the plaintiff attempted to back out of the deal. It took several months and additional legal fees to finally get a court order to enforce the settlement. As a result, I like to report on “settlements gone bad” cases to illustrate how settlements can fall apart and help others learn from what I and others have learned from the school of hard knocks.

The Starpoint Properties case, involving allegation of breach of contract and fraud, was settled when the parties agreed that the lawsuit would be dismissed in exchange for the right to purchase certain real property owned by the defendants in Los Angeles. The settlement agreement also included a stipulation for entry of judgment, which provided that Starpoint would be entitled to judgment in the amount of $8,362,000, plus interest, against all of the defendants named in the complaint, if any one of four events was to occur. Additionally, the stipulation expressly stated that defendants had waived their right to appeal any judgment issued pursuant to the stipulation, as well as any right to receive notice that judgment would be entered pursuant to the stipulation. When negotiating the terms of the settlement agreement and the stipulation, all parties were represented by counsel.

After three of the four events listed in the settlement agreement and stipulation occurred, Starpoint filed the stipulation and judgment was entered ex parte.  Defendant’s attempted to set aside the judgment by alleging that Starpoint coerced them into entering the settlement agreement. However, the trial court found that the claim of coercion was unfounded, and denied the motion. Defendants then appealed but the Court of Appeal found the appeal was untimely; it also noted that the matter would have failed on the merits of the case. Finally, the Court awarded attorney fees to Starpoint as the settlement agreement provided that the prevailing party would be awarded attorney fees in any action to enforce the settlement agreement.

Lessons Learned

Perhaps the most important take-away from the Starpoint case is that settlement agreements have consequences, and the courts will enforce the intent of the parties as expressed in the agreement, as it would for any contract. The court rejected many of the claims on appeal based upon the language of the settlement agreement. For example, the defendants claimed that the trial court erred in entering judgment against them on an ex parte basis, without giving them an opportunity to appear. The argument, however, was found to be without merit because appellants expressly waived their right to receive notice in the settlement agreement, and such waivers are valid under California law.

The Court of Appeal also noted other aspects of the settlement contract that could not be ignored: it expressly stated that the parties had entered into the agreement”voluntarily,” and “with full knowledge of its significance,” and that its terms had been “negotiated at arms’ length among sophisticated Parties represented by counsel.” Some may view such language as “boilerplate”, but unambiguous terms of a settlement agreement will be enforced by the courts. In this case, the Court of Appeal could not find any reason to overturn the order of the trial court-even in the face of a claim of coercion.

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I like to read and report on appellate court cases that illustrate the benefits of self-determination in the mediation process as opposed to court-imposed adjudication in the civil trial process. It may involve a little "Monday morning quarterbacking,"  but I don't consider it to be second quessing anybody but more like watching game film to learn from past competitions and prepare for the next contest.

Today I want to report on a new California Court of Appeal case involving a homeowner and a condominium owners’ association.  It addresses the voluntary dismissal of some but not all causes of action, the question of who is the prevailing party for purposes of awarding attorney fees, and the consequences of a fully executed settlement agreement that includes a waiver of known and unknown claims. These are typical issues in every lawsuit but looking at them from a “post-mortem” perspective can increase our capacity for pre-trial solutions.

WHAT HAPPENED

It is never a good sign when an appellate court admonishes one of the parties to get her “ducks in row,” but that is what happened in this condo case. The court stated:

 A party contemplating litigation to enforce the covenants, conditions, and restrictions of a condominium project should get the "ducks in a row." That is to say, such party should be ready to go forward procedurally and prove its case substantively. Failure to do so subjects the losing party to an award of attorney fees. Here, a condominium owner filed against a condominium association. In defending the suit, the Association incurred attorney fees of a quarter million dollars. Based on faulty reasoning, the owner dismissed eight of the ten causes of action on the eve of trial. She prevailed on no level whatsoever, let alone on a "practical level." But the trial court denied the Association any attorney fees, and the Association appealed. We conclude that the denial was an abuse of discretion as a matter of law. The condo owner did not realize her "litigation objectives" on these causes of action. The Association did realize its "litigation objectives" and was the prevailing party on a "practical level." It is entitled to attorney fees as mandated by the Legislature.

Dismissal

There are potential consequences when a lawsuit is dismissed either voluntarily, as was the case in the condo case above, or involuntarily due to some court action. Depending on the state statute, the court will determine which side is the prevailing party and award that party the costs of litigation and under certain conditions, attorney fees. In the condo case, the plaintiff may have to pay up to $250,000 in attorney fees to reimburse the condo association, the prevailing party. It should be noted that a trial court can also award litigation costs and attorney fees to the prevailing party after a civil trial.

When conducting a pre-trial risk assessment, I believe it is imperative that all parties to a lawsuit consider the possibility of having to pay not only their own costs and fees but also the costs and fees of the other side. Parties must be realistic about the risks posed by the prevailing party statutes, especially given the discretion courts are given in making the determination of who is the prevailing party.

Attorney Fees

In most states, such as California, attorney fees are awarded to the prevailing party if there is a contractual or statutory basis for such an award. For example, many contracts have attorney fee provisions which provide that in the event there is litigation over the subject matter of the contract, the prevailing party will be awarded its attorney fees. Some states have enacted laws to advance a favored public policy that include attorney fee provisions to the prevailing party. In the condo case, for example, the condo association filed a motion pursuant to California Civil Code section 1354, subdivision (c), which provides: "In an action to enforce the governing documents" of a common interest development, "the prevailing party shall be awarded reasonable attorney's fees and costs."  

Litigants should be aware of the potential for having to pay the other side’s costs and attorney fees and conversely, that the other side may have to reimburse them if they prevail. Both sides of the issue should be considered when evaluating the risks and benefits of trial. Paying the other side’s attorney fees and costs is a bitter pill to swallow, especially if the issue was not fully evaluated and discussed prior to trial.

My friend at Construction Law Musings, Chris Hill, has a good post today on attorney fee provisions in construction contracts at www.constructionlawva.com.

Settlement Agreements

Settlement agreements generally contain very broad language to ensure that all claims and causes of action related to the issues in dispute are forever discharged and released. In California, Civil Code section 1542 provides that a person cannot release unknown claims. However, it is a common practice among lawyers to include a waiver of section 1542 so that the settlement and release agreement resolves all known and unknown claims that exists between the parties. This issue came up in the condo case.

The homeowner filed suit against the condo association in 2004 and settled the case in 2005, resulting in a settlement and release agreement that included a provision waiving all rights to known and unknown claims. The homeowner filed a second lawsuit against the condo association in 2008. In response the condo association argued that the homeowner’s claims were barred by the terms of the 2005 settlement agreement. The trial court agreed and so did the California Court of Appeal:

 Accordingly, we reject [homeowner's] argument that the 2005 release did not apply to unknown claims against Association that arose prior to the release. If an argument such as this were given currency, a release could never effectively encompass unknown claims. A releasor would simply argue that release of unknown or unsuspected claims applied only to known or suspected claims, making it ineffective as to unknown or unsuspected claims.

Settlement agreements are contracts. They are subject to the rules of evidence and are interpreted by the courts according to state contract law. They should be carefully drafted and reviewed before they are signed. You must be sure to precisely limit the release language to what is intended by both parties. For example, in the condo case the defendant condo association carved out of the release the homeowner’s obligation to pay monthly homeowner dues and assessments. Sometimes it is simply a point of negotiation, with the defendant wanting the release to be as broad as possible and the plaintiff wanting it to be as narrow as possible. Broad or narrow, both parties must think through the consequences of the release agreement so as to avoid any future surprises.  

As a mediator, I am an advocate for clarity, objectivity, reason, finality, and fairness. Cases like the condo case reinforce what I learned over a twenty-five year career as a trial lawyer: the outcome of a trial is never certain. The most effective trial lawyers are also effective problem solvers and counselors at law. They thoroughly consider each aspect of the dispute, they weigh the risks and rewards of trial, and they carefully explain all of the facets of the litigation to their clients. In my experience, well-prepared attorneys and well-informed clients can usually find a way to resolve a lawsuit prior to trial. Being part of the process that includes such preparation and perspective is one of the great privileges of being a mediator.

Resolving disputes through mediation is both challenging and rewarding. However, the certainty and finality of mediation also means there is less drama and truama when compared to a civil court trial. No "hail Mary" passes to win the game; no last second field goals to save the day. Instead the steady and sure process of mediation is more like the "Three Yards and a Cloud of Dust " reference that was used in the 1960's and '70's to describe the Ohio State Football teams of the legendary coach Woody Hayes, who famously said that when you throw the football three things can happen and two of them are bad(an incomplete pass or an interception). He preferred to run the football even if it meant a gain of only three yards and then a cloud of dust when the runner was tackled. A football team that strings together enough three yard gains (3.4, to be exact), will eventually cross the goal line. And so it is with mediation: parties that stick with the procees and grind it out will usually reach the goal of resolving their dispute, and when that happens, both sides win.

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Judges are people too. Some of them even have a sense of humor. Years ago Justice Sills of the California Court of Appeal began his opinion in a mechanic’s lien case I was handling with these words: “This case presents a real doozy of a puzzle in mechanic’s lien law.” At that point in my career I didn’t know that judges used words like doozy in their learned opinions.

Recently, as reported in the legal humor blog Lowering the Bar (and repeated in the Wall Street Journal Law Blog), Kentucky state judge Martin Sheehan penned a doozy of a ruling that expressed his feelings about the settlement of a case that had been set for trial in his courtroom. The judge wrote:

Such news of an amicable settlement [has] made this court happier than a tick on a fat dog because it is otherwise busier than a one legged cat in a sandbox and, quite frankly, would have rather jumped naked off a 12 foot step ladder into a five gallon bucket of porcupines than have presided over a two week trial . . which, no doubt, would have made the jury more confused ...and made the parties and their attorneys madder than mosquitoes in a mannequin factory.

Continuing his humorous theme, the judge concluded his ruling by asking his clerk to “engage the services of a structural engineer to ascertain if the return of the file to the clerk’s office will exceed the maximum structural load of the floors of said office.”

Over the years I have seen judges equally happy about the settlement of a case, although they were a tad more reserved about it than Judge Sheehan. But in my opinion their joy came from more than just the relief that the settlement helped to free up a busy court calendar or even the recognition that the settlement would result in cost-savings to the county. No, my sense of things is that judges really are people with hearts and feelings. They are public servants who are dedicated to serving people, and they know people are often best served when the fighting stops and healing begins. They know that parties who settle their lawsuits are happy as clams at high tide.

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Settlement agreements should not be the product of a cookie cutter operation. They must be carefully crafted to fit the laws and facts of the case. Considerable thought should be given to the scope of the release language in the agreement. We are again reminded of these fundamental principles by the unfortunate result in a California Court of Appeals case called Leung v. Verdugo Hills Hospital, a case in which the appellate court apologetically reached its conclusion while asking the California Supreme Court to reconsider a common law rule regarding releases that led to a very harsh result. 

The facts of the case are very sad: an infant suffered irreversible brain damage when his "bilirubin" reached toxic levels. In the medical malpractice action against the pediatrician and hospital, the parents of the child settled with the doctor for $1 million, the limits of his malpractice insurance, in exchange for a release of liabiity.  The trial court ruled that the settlement did not meet the standard of good faith under California Code of Civil Procedure sections 877 and 877.6, because it was grossly disproportianate to the doctor's potential exposure in the case. Nevertheless, the parents and doctor decided to go through with the settlement.

The case was tried to a jury, which found both the hospital and the doctor negligent, and awarded damages of $78,000 for past medicals, $250,000 for noneconomic damages, $82 million for future medicals, and $13 million for loss of future earnings. Apportioning fault, the jury found the hospital was 40% negligent, the doctor 55% negligent, and the parents 5% negligent. The trial court entered judgment which declared the hospital was jointly and serverally liable for 95% of all economic damages and severally liable for its 40% share of noneconomic damages.

The hospital appealed, claiming that the release and settlement agreement with the doctor acted as a release of the hospital's joint and several liabilty for economic damages. The hospital argued that in cases where there is a single injury:

Under the common law release rule, a release for consideration of one tortfeasor operates as a release of the joint and several liability of the other joint tortfeasors.

The Court of Appeals agreed and reversed the judgment of the trial court as to the hospital's joint and several liabilty for the economic damages. The judgment was affirmed insofar as it imposed several liability on the hospital for $250,000. Unless the California Supreme Court grants review of the case and decides to change the common law rule that led to this unintended outcome, the settlement and release agreement with the doctor wiped out $95 million, money that the jury felt was necessary to care for the future medical and finanicial needs of the child.

Lessons Learned

1. The Court noted that plaintiff could have avoided the result had the settlement agreement contained a covenant not to sue agreement rather than a release of liabilty. That way there would not have been a release of all who were potentially jointly and severally liable, only a promise that the party paying the money would not be subject to future collection efforts.

2. Plaintiffs must be very cautious about the scope of the release. Be sure you are releasing only those rights you intend to let go.

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The Facebook litigation has been resolved...again. It was first resolved by way of settlement after a day of mediation. Then the Winklevoss twins claimed the settlement agreement was not enforceable on the grounds of fraud. As the Ninth Circuit Court of Appeals noted in affirming the decision of the district court: "For whatever reason, they [the Winklevosses] now want to back out [of the settlement]. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end.That point has now been reached." (Click here to read the case.)

I posted an article about this case on March 4, 2011. (See: The Social Network: Communications During Mediation Are Not In The Public Domain.) Based upon the questions of the Court during oral argument, it appeared the Winklevosses were waging an uphill battle. (See March 4 post featuring video of the hearing.) I was right.

The Ninth Circuit summarized the case as follows:

After a day of negotiations, Connect U, Facebook and the Winklevosses signed a handwritten , one-and-a-third page "Term Sheet & Settlement Agreement' (the Settlement Agreement). The Winkelvosses agreed to give up Connect U in exchange for cash and a piece of Facebook. The parties agreed that the Settlement Agreement was "confidential," " binding" and "may be submitted into evidence to enforce [it]. The Settlement Agreement also purported to end all disputes between the parties.

What struck me most about the opinion is how well the Court was able to simplify a complex case using plain English. I was also impressed  how important it is for clients to know what they are getting into when they sign a release. Courts will interpret release language broadly to effectuate the public policy that encourages settlements. In this case, "the Settlement Agreement grants 'all parties' 'mutual releases as broad as possible'; the Winklevosses 'represent and warrant' that '[t]hey have no further right to claim against Facebook' and 'no further claims against Facebook & its related parties.'"

Finally, it is important to point out the key role the confidentiality agreement had in the reasoning of the Court. The Winklevosses attempted to demonstrate fraud in the inducement of the settlement agreement by introducing evidence of what Facebook said during the mediation. The district court would not consider the evidence because of the protections afforded by the confidentiality agreement.

I'll end this post with the Court's matter of fact assessment of how all of this came down:

The Winkelvosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winkelvosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity.

Chief Judge Kozinski authored the opinion. It's a classic.  

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The California Supreme Court has reaffirmed confidentiality as a core principle in the mediation of disputes in California. The plaintiff in  Cassell v. Superior Court sued his former lawyers, Wasserman Comden, for legal malpractice arising from a mediated settlement, and he wanted to use information from the mediation session to prove his case. (More about that case later.) A more high profile case has the 9th Circuit Court of Appeals currently wrestling with mediation confidentiality in the Facebook litigation where the Winklevoss twins have appealed to the 9th Circuit Court to get out of a settlement that reportedly gave them $20 million in cash plus 1.25 million shares of Facebook stock (estimated to be currently worth $150 million). An interesting side note is the Winklevoss twins also had a dispute with their lawyers, Quinn Emanuel, arising out the mediation that lead to that settlement with Facebook, the settlement they are now trying to get out of. (Click here to read the Supreme Court of New York's opinion about the $13 million dollar attorney fee dispute.)

Public policy favors the pre-trial settlement of disputes, and mediation is considered by many to be  the most effective alternative dispute resolution procedure. To encourage parties to openly discuss their disputes without fear of having their communications turned on them at trial,  the California legislature enacted confidentiality laws to keep mediation information private. When people try to get out of a settlement agreement by claiming  fraud, economic duress, or some other legal theory to rescind a contract, and they attempt to use confidential information from a mediation, the courts are reluctant to consider such information. For example, during oral argument in the Winklevoss' appeal to the 9th Circuit, the judges expressed concern about  letting them use information obtained in their mediation with Facebook. Check out this YouTube video of the oral arguments by two exceptional attorneys before three outstanding jurists.  

Unlike the the Facebook litigation where one party is attempting to use confidential mediation information against the other party to the lawsuit, the new California Supreme Court case of Cassell v. Superior Court presents a situation where the client is suing his lawyer for malpractice based upon the words and conduct of his lawyer during the mediation. In essence, the client argued that the lawyer used undue influence, pressure, and fraud to induce him to settle the lawsuit for an amount that was less than they had agreed upon in their planning meeting before the mediation.

Prior to the trial of the malpractice lawsuit, the defendant lawyers asked the court to exclude any evidence of their words and actions related to the mediation based on the confidentiality laws. The trial court agreed that such communications were confidential, even in malpractice actions filed by clients against their lawyers. The client appealed the case and the Court of Appeal reversed, reasoning that the confidentiality provisions of the Evidence Code applied to disputes between parties to a lawsuit but such protections should not be extended to disputes between clients and their lawyers. The California Supreme Court disagreed, saying that the applicable statutes mean what they say: all communications related to a mediation are confidential. 

Instead, such attorney-client communications, like other communications, were confidential, and therefore were neither discoverable nor admissible-even for proving a claim of legal malpractice-insofar as they were "for the purpose of, in the course of, or pursuant to a mediation...."

Lessons Learned and Some Practical Applications

• Mediations really are confidential.
• Mediations are not mandatory; they can end at any time or be continued to another date. If you are too tired to proceed, take a break. One of the complaints of the plaintiff in the Cassell case was that the settlement happened after 14 hours of mediation; he was tired and felt pressure from his lawyers to settle the case.
• Mediations, like trials, can terminate a lawsuit; therefore preparation is essential, and it is the key to success in mediation. Lawyers must be prepared to clearly present the law and facts of the case; just as importantly, they must ready their clients for the mediation experience.
• It is good to set a settlement value before the mediation but you should remain flexible during mediation in case you learn something new or gain a different perspective during mediation. The plaintiff in the Cassell case based his malpractice action in part on the fact that the case settled for less than he and his lawyers had agreed upon before the mediation. That is not unusual. A good mediator can help parties see cases from a fresh perspective which may alter the reasonable settlement value of the case. Better to get that perspective from a mediator than from a juror in an interview after an expensive trial that may bring you less than you expected.
• The Winklevoss twins argued that the term sheet that memorialized the settlement deal did not contain the essential elements of an enforceable contract. If you had a chance to look at the YouTube video of the oral argument before the 9th Circuit Court of Appeal, you saw Chief Judge Kozinski and the Winklevoss' lawyer debating the sufficiency of the term sheet as an enforceable settlement contract. Judge Kozinski noted that the term sheet included the number of shares, the amount of cash-"everything you would want in a contract." Nevertheless, in the lessons learned category, it is important to remember that a settlement agreement is a contract and must meet the minimum requirements to be enforceable.

One final note, a humorous one( to me, anyway),  from the oral argument in the Facebook litigation. Senior Judge J. Clifford Wallace asked how the brilliant, Harvard-educated Winklevoss twins, who were being advised by high-powered lawyers and their father who is a business expert, could have been tricked into settling their lawsuit.

"Isn't it a little difficult to say...that they were taken advantage of?" Judge Wallace asked them.

The Winkevoss' lawyer responded that it was true his clients " were not behind the barn door when brains were passed out." But, he said, "The same is true with Facebook."

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Benjamin Franklin, born 305 years ago this month, famously said, "A place for everything, everything in its place."  This is true for many things, including settlement agreements which are really just contracts for the resolution of disputes. However, like all contracts, settlement agreements have a place for certain things and certain things, such as provisions which identify the consideration being given, the scope of the release and waiver of rights, and much more, must be in their place. Most states have enacted laws that encourage the settlement of civil disputes and attempt to prevent them from being broken. Today's featured case is an example of the underlying public policy that favors the settlement of disputes.

In Blix Street Records v. Cassidy , the plaintiff tried to get out of a settlement agreement, initially lost at the trial court level, then won on appeal, but lost again at trial and ultimately on a second appeal.  Plaintiff's actions were emblematic of another Ben Franklin saying, "Necessity never made a good bargain."

Eva Cassidy was a popular singer and song writer who died in 1996. A dispute arose over royalty payments and motion picture rights associated with Ms. Cassidy's career. A trial began with the empaneling of a jury. During an extended break in the trial, the parties engaged in a mediation which resulted in a settlement. The handwritten settlement agreement contained a release and specified it was subject to judicial enforcement. The parties also agreed that they would prepare a formal settlement agreement after the mediation.

The parties sent an e-mail notification of the settlement to the judge. Later, however, the plaintiff owner of Blix Street Records, an attorney, began to have concerns about the settlement agreement. He believed it was one-sided in favor of the Cassidys, that material terms were missing, and that some of the existing terms were ambiguous. These concerns were not expressed to the other side nor to the court. As a result, the trial court, based on the representations of the parties that the case had been settled, dismissed the jury.

Subsequently, Blix Street Records hired another attorney who informed the Cassidys that the settlement agreement was neither binding nor enforceable. The Cassidys then successfully moved the trial court for an entry of judgment based on the settlement agreement. On appeal, the court held the settlement agreement was not enforceable because it lacked the necessary signatures of certain parties, and the case was remanded to the trial court. The Cassidys then amended their cross-complaint to add a breach of settlement contract cause of action, and the trial court ruled that even though the settlement agreement was not enforceable per the court of appeal's decision, Blix Street Records was judicially estopped from denying the enforceability of the settlement agreement because the court discharged the jury based on the representations of the parties, including Blix Street Records, that the case had been settled. Judgment was entered in favor of the defendants, and plaintiff appealed. In affirming the ruling of the trial court, the court of appeal stated:

Based on the facts, the trial court had sufficient evidence to conclude that Blix Street took two totally inconsistent positions in judicial proceedings—originally that there was an enforceable settlement agreement, but later that the settlement agreement was not enforceable. Blix Street was successful in asserting the first position because the trial court accepted Blix Street‟s position by terminating the trial and discharging the jury.There is no indication that Blix Street took the first position—that the contract was enforceable—as a result of ignorance, fraud, or mistake. Indeed, Straw, a lawyer, conceded that he believed the settlement agreement lacked material terms at the same time Blix Street was taking the position in the trial court there was an enforceable settlement agreement. Accordingly, the doctrine of judicial estoppel legally could be applied in this case.

 There is some Franklinesqe wisdom that can be taken from this case:

1. Undoing a settlement can put you in a worse position than the actual terms of the settlement. Here, Blix Street Records is subject to the terms of the release but some of the other parties are not. Addressing this anomoly, the court said: "Estoppel-whether judicial, equitable, or promissory-can, however, be used to bind a party to what would otherwise be an unenforceable contract."
2. If you have doubts, shout them out. Blix Street Records had misgivings about the settlement before the trial court dismissed the jury. This would be a different case had those concerns been expressed to the court earlier.
3. An ounce of preparation is better than a pound of cure, or something like that. Take a laptop to the mediation that is loaded with your standard form settlement agreement. That way you don't have to waste time and effort ensuring that your standard provisions are in place which will give you more time to thoughtfully draft any complicated provisions. 
4. If you can't dot every "i" be sure to cross every "t". In California, there is more than one way to enforce a settlement. If you can not get everyone's signature on the agreement, ask the judge to order everyone to court so the agreement can be put on the record. A settlement agreement is enforceable if it is in a writing signed by the parties or if the parties so stipulate before the court. (CCP 664.6)
5. Settlement agreements containing executory provisions benefit from 800 pound gorilla  riders. Under 664.6, if requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement.

I'll end with one more quote from Ben: "A slip of the foot you may soon recover, but the slip of the tongue you may never get over." 

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Back in the day, the late, great actor Karl Malden pitched American Express Travelers Cheques in television commercials that depicted vacationers being robbed of their cash, followed by Karl’s earnest exhortation, “American Express Travelers Cheques: don’t leave home without them!” The point was that people could protect their money if they would use travelers checks while on vacation. Today I want to “pitch” the benefits of California Evidence Code Section 1123 (and similar statutes of other states) in securing your mediated settlements, and urge you not to leave a mediation without reference to Section 1123 in your settlement agreements. With a nod to Mr. Malden, I present the following scenario for your consideration.

Your mediation lasts late into the night and after many rounds of negotiations, you finally get to “yes,” that is, you reach a settlement. The parties then prepare and sign a term sheet setting forth the basic parts of the deal, with each side agreeing that a formal settlement agreement containing the “usual provisions” would be prepared within a few days. You shake hands with opposing counsel and return home with the feeling you have done a good day’s work. In a few days the unthinkable happens: instead of receiving a draft settlement agreement from opposing counsel, you get a call telling you the deal is off. Wait a minute, you think. California Code of Civil Procedure Section 664.6 says a written settlement agreement signed by the parties can be reduced to a judgment upon motion to the court, right? As you begin to prepare your points and authorities in support of your righteous motion, you decide to check out the chapter on mediation in the California Evidence Code. In shock, you read section 1119 and learn your settlement agreement may not be enforceable because agreements reached in mediation are deemed confidential, and are therefore inadmissible and not subject to disclosure.

You also read Fair v. Bakhtiari (2006) 40 Cal 4^th 189, which held a certain settlement agreement inadmissible under section 1119 because the agreement did not comply with Evidence Code Section 1123. Nervously, you turn to section 1123, hoping to find an exception to the general rule. You read the head note: “Written Settlement Agreement-Conditions for Disclosure.” Hallelujah! There is hope yet. You then read the magic language that makes settlement agreements reached in mediation admissible:

A written settlement agreement prepared in the course of…mediation is not made inadmissible if…any of the following conditions are satisfied:

(a) The agreement provides that it is admissible or subject to disclosure, or words to that effect.

(b) The agreement provides that it is enforceable or binding, or words to that effect.

(c) All parties to the agreement expressly agree in writing …to its disclosure.

(d) The agreement is used to show fraud, malice, illegality that is relevant to an issue in dispute.

Armed with this information, you argue in your motion that your signed settlement agreement somehow or in someway evidences the parties’ intent that it be admissible, binding, enforceable, subject to disclosure, or words to that effect. You promise yourself, however, that the next time you settle a case in mediation, the term sheet will include clear language that complies with one or more of the provisions of Section 1123, so the settlement, if necessary, can be enforced under CCP Section 664.6. While it would seem reference to any one of Section 1123’s subdivisions (a)-(c) is sufficient, you may want to use a “belts and suspenders” approach to your mediation term sheets by including something like the following provision:

It is the intent of the parties that this agreement is admissible, binding, enforceable, and subject to disclosure as provided by Evidence Code Section 1123 (a),(b), and (c), and while maintaining all other aspects of the mediation privilege, this agreement will not be deemed inadmissible under the provisions of Evidence Code Section 1119. In the event a formal settlement and release agreement is not prepared and executed by the parties within 15 days from today’s date, this agreement may be enforced pursuant to Code of Civil Procedure Section 664.6 and the court shall retain jurisdiction until its terms have been fully performed.

Alternatively, if you a prefer a bullet point format for the term sheet, you might add the following:

·        The parties intend this agreement to be admissible, binding, and subject to disclosure as provided by Evidence Code Section 1123.

·        This agreement is neither privileged nor inadmissible under Evidence Code Section 1119.

·        This agreement is enforceable pursuant to Code of Civil Procedure Section 664.6.

There is a lesson to be learned from the sad tale described above: You can protect and enforce your mediated settlement by taking the time to add a few additional words to your agreement that evidences the parties’ intent that it be admissible, binding, and subject to disclosure. If you don’t make the effort, like the vacationers whose cash was stolen in the old television commercials, your settlement could be taken from you.

Evidence Code Section 1123: don’t leave the mediation without it!

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The airwaves are full of cooking shows. Rachel this and Iron Chef that. But for me, it is the Man v. Food show that takes the cake and,  if you have ever watched the show, a lot more than that. The star of the show, Adam Richman, goes around the country taking on a variety of eating contest: eat a bucket of hotter- than -blazes chicken wings in 30 minutes, down 6 mammoth milkshakes in 90 minutes, and much, much more. My family has actually gone to eat at two of the restaurants featured on the show: a BBQ place in St. Louis and a Mexican food place in San Diego. Although we have not attempted the food eating challenges, we have enjoyed the meals and in unison have repeated Adam's mantra upon partaking of the delicious food-"Oh my goodness, oh my goodness." Anyway, in honor of Man v. Food, here is this week's post, subtitled The Secret to Cutting Onions and Deals(Without Crying).*

Resolving disputes is a little bit like cutting an onion: you have to pass through several layers before you get what you want, and along the way you will likely feel some discomfort. The secret to cutting an onion without crying is a primer for "getting to yes" in the world of dispute resolution.

·         Know the score about onions (and litigation). Onions are chock-full of a chemical compound called sulfoxide. When onions are cut, this compound is released into the air as a vapor. When the vapor encounters your eyes, it dissolves into a form of sulfuric acid, and your eyes become irritated. Armed with this knowledge, you can employ techniques that will minimize the discomfort, some of which are noted below. In litigation, you must know that 95% of all civil court cases are settled prior to trial (the percentage is even higher in Federal Court). Establish a litigation plan with that reality in mind. Take steps for an early evaluation of the strengths and weaknesses of your case. Early evaluation leads to early resolution, and early resolution will minimize your client's discomfort; and you will be considered a wise and trusted counselor

·         Use a sharp knife (to carve out your discovery). A dull knife will crush the onion cells more than a sharp blade, and the crushed cells will release more of the onion vapor into the atmosphere. Therefore, use a sharp knife! In litigation, you may be tempted to use discovery to crush your opponent. In reality, the dull knife of discovery can crush your ability to resolve your dispute in a reasonably efficient manner. You must use a sharp knife as a discovery tool! If your discovery plan is inefficient, the enormous cost of litigation for both sides may affect your ability to settle your case.  

·         Slice the onion under running water (and keep your vision clear).
In theory, if you cut an onion under running water the sulfoxide will not become airborne, and the irritant will not get into your eyes. Lawyers and their clients encounter many irritants in our adversarial system of justice that can blur their vision about the realities of their cases. In preparing for mediation, you must run your claims and defenses under the cool waters of reason, logic and experience. You must factor in your trial judge's practices, procedures, and proclivities with respect to the evidence you intend to present at trial. You must objectively consider whether you will be able to get into evidence all facets of your case in chief in order to properly evaluate the risk of trial.

·         Cover your eyes with protective goggles (but don't forget about the other people in the room).
This is a viable solution because the irritants in the air are prevented from touching your eyes, but the goggles will not protect anyone else in the room. Often, litigants will have the protective cover of counsel and feel confident about their chances at trial, but they may not consider the risks or consequences to the other people who may or may not be present in the conference room during negotiations: spouses and children; business associates; shareholders. Unless they've been through it before, your clients will not appreciate the personal and professional toll that is paid at trial. But you know, and you must help your client understand what a trial entails, not just in dollars and cents, but in terms of common sense. How many days or weeks of work will your client miss due to the trial? Will a spouse or child be required to testify at trial? These kind of questions must be fully considered before your client can reasonably gage the impact a trial will have on his personal and professional life.

·         Chill onions (and emotions) before cutting.
When onions are chilled the vapors are less likely to become airborne when the onion is cut. Similarly, emotions that rise up in litigation must be cooled down before mediation. Your fiery brand of advocacy that is so effective in trial will not serve you well during settlement negotiations. Such emotions will certainly offend the other side and most likely render you unable to read the signs and posturing that would otherwise signal progress toward settlement.

·         Don't chop the onion root (or settlement opportunity) until the very last.
The vapor that irritates your eyes is highly concentrated in the root end of the onion. You can minimize the tears by cutting the root end of the onion last. Likewise, you should never cut off the possibility of settlement, or at least be absolutely sure there is no possible way to resolve the dispute without a trial. Before terminating settlement discussions, you should always consider your BAT NA-best alternative to a negotiated agreement-before proceeding to trial. In other words, if you don't settle the case, what is the most likely outcome if the case proceeds through trial? What are the chances of prevailing? What will it cost in terms of time and money? Conversely, what are the chances you could lose the case at trial? If that were to happen, would your client have to pay the fees and costs of your opponent? These issues and many others must be clearly understood before cutting off settlement negotiations.

        Let's face it, no matter how you slice it, some cases must be tried. But given the statistical likelihood of settlement at some point prior to trial, it is essential that you develop the skills and aptitude of a problem solver. Granted, a serious discussion about dispute resolution skills does not often include references to onions, but a recognition of the irritants that often cloud a litigator's perspective can help you develop a conscious strategy to avoid them.

*Adapted from "The Secret to Cutting Onions Without Crying" cited in Wikipedia, "Onions".

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The first sentence in an appellate opinion can strike fear in the heart of any advocate. I should know. Nearly twenty years ago the California Court of Appeal began its opinion on a losing appeal of mine with this sentence: “This case presents a real doozy of a puzzle in mechanic's lien law.” Last week, in a case involving an attempt to undo a settlement agreement by way of subrogation and reverse an award of expert witness fees, the California Court of Appeal began its opinion even more dramatically: “What the heck?!? At one point, the trial court commented, ‘This is one of the most screwed up cases I’ve ever seen.’ We heartily agree.” Click here to read the opinion.

Why highlight such a “screwed up” case in a blog dedicated to helping people resolve construction disputes? Well, we can learn a lot from the opinion-someone else’s pain can be our gain, so to speak. First, the case reminds us that settlement agreements are contracts with consequences. And second, rejecting statutory settlement offers also has consequences.

Facts About the Case

A man was injured when he stepped on a nail in a restaurant that was being refurbished. As a result of the accident, the man’s leg was amputated, and he sued the restaurant and property owner, alleging that they “negligently managed, controlled and supervised the demolition being done on the premises, and failed to take reasonable precautionary measures to protect him from a risk of harm, which caused his injuries.

Essex Insurance Company provided a defense to the purported property owner who was not its named insured, but did not discover its mistake until after judgment was entered following a jury verdict in the plaintiff’s favor. Litigation ensued over Essex’s obligation to pay the judgment. Essex eventually entered into a global settlement with the plaintiff that had the effect of resolving three lawsuits, including the personal injury action and a bad faith action plaintiff brought against Essex, in exchange for a lump sum payment. The settlement agreement did not allocate the payment among the three lawsuits or resolve issues regarding the identity of Essex’s insured.

Essex then sought indemnity from plaintiff’s physician who had treated him after the accident with the nail, on a theory of equitable subrogation for his proportionate liability for the amount Essex paid in settlement. The doctor filed a motion for summary judgment, which the trial court granted on the basis that Essex had waived any claim for equitable subrogation. In a post-judgment order, the trial court also awarded the doctor the cost of his expert witness fees. On appeal, Essex challenged both the judgment and the order. The Court of Appeal " agreed with the trial court that Essex must lie in the bed it made,” and affirmed.

Settlement Contract

The settlement agreement between Essex, the property owner, and the plaintiff included a lump sum payment of $700,000 which resolved three pending cases, including a bad faith action against Essex. The settlement agreement did not allocate payment amounts among the three pending cases; there was no statement about how much was being paid to compensate plaintiff for his personal injury. Accordingly, the trial court found Essex had impliedly waived its subrogation rights when it failed to enter into separate settlement agreements or otherwise apportion the amount paid among the three lawsuits. The Court of Appeal agreed:

Essex’s contention, however, shows why an implied waiver is applicable here — without resort to extrinsic evidence that is most likely inadmissible, it is impossible to prove how much was paid to settle each claim. Moreover, Essex ignores the other issues it failed to address in the settlement agreement apart from apportionment of the damages between the three lawsuits that shows it did not step into its insured’s shoes in paying the settlement, such as the failure to identify its insured or to apportion damages between economic and non-economic damages.

On appeal, Essex contended the trial court should have considered the inference that the settlement payment was compensation for the personal injury claim of the plaintiff and even suggested that evidence outside the body of the settlement contract could be offered to show the intent of the parties. The Court disagreed, stating that such extrinsic evident would most likely be inadmissible and that in any event, Essex waived its right to equitable subrogation by its actions.

Expert Witness Fees

The doctor made a statutory offer of settlement to Essex in compliance with California Code of Civil Procedure section 998. (Click here for a previous post on statutory offers: Settlement Negotiations: Don't Get Smacked by the Statutory Stick.) The good doctor’s offer to Essex was this: dismiss your claims for a waiver of costs. Essex did not accept and after the trial court ruled in favor of the doctor, he asked for an award of costs that included payment of his expert witness fees of $28,000. Essex opposed the award on the grounds that the statutory offer for a waiver of costs was not given in good faith. In denying Essex’s challenge to the order to pay expert fees, the Court of Appeal noted:

An offer to compromise may be “realistically reasonable” and justify cost shifting even though the party receiving the offer is unlikely to accept it as a consequence of the party’s skewed valuation of the case. Here, Essex recovered nothing from Dr. Heck. Dr. Heck’s offer is presumed reasonable and it is Essex‟s burden to show otherwise.

As a result, Essex was ordered to pay the doctor's expert witness fees. Thus, not only did Essex lose the right to shift the burden of its settlement payment to the doctor through equitable subrogation, the doctor was able to shift the costs of litigation onto Essex through the statutory offer procedures of Code of Civil Procedure section 998.

Lessons to be Learned

1. Settlement Agreements are contracts. They will be interpreted and enforced according to the standard rules of contract interpretation and the laws of evidence. Therefore, settlement agreements must be written with the utmost care. In particular, one should be concerned about the scope of the release to be sure that the intent of the parties is accurately reflected.
2. Statutory offers must be considered in the light of the laws of the local jurisdiction where the case is pending. It is not wise to react emotionally to a statutory offer of settlement. One should seek to evaluate such offers based upon objective criteria rather than the party's skewed valuation of the case, as noted in the Essex case. Remember, the party challenging the statutory offer generally has the burden of proving it is unenforceable.

So now you know about the "What the heck?!?" case. I hope it will help you when you are attempting to resolve your next case, even if it presents a "doozy of a puzzle."

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