Uncertainty in enforceability of settlement agreements is a phantom menace casting a pall over the development of ADR in Minnesota.
For movie buffs, the summer’s phantom menace was “Episode I,” a “prequel” to the popular “Star Wars” trilogy that opened on movie screens in 1983. A year later, the Minnesota Legislature enacted the Civil Mediation Act.1 For Minnesota lawyers and their clients, it is the act, not George Lucas’ latest summer blockbuster, that may be the real phantom menace.
Certainly the drafters of the Civil Mediation Act were concerned about the fairness of the mediation process. Unfortunately, the act suffers from inconsistent policy choices, lack of integration with other statutes and rules, and ambiguous and incomplete language. Mediation in Minnesota is supposed to be an open process, one in which parties can freely participate without the guidance and expense of trained legal experts. Consequently, parties in mediations may have varying skills in negotiation, access to information, and ability to understand the “legal” implications of their situation.
To “protect” the parties in mediations, the act creates a series of technical and formalistic rights reminiscent of earlier days in the development of classical contract doctrine when formality and technicality prevailed over parties’ expectations and reasonableness. With such a clear link to the distant past, it seems particularly fitting that the Civil Mediation Act, just like this summer’s hit movie, is the “prequel” to its own unique trilogy, Haghighi v. Russian American Broadcasting.2
The Haghighi Trilogy
The Haghighi trilogy begins innocently enough in 1995 as a breach of contract dispute between Ali Haghighi — an international distributor of foreign language radio programming — and Russian-American Broadcasting Company (hereinafter RAB), which provides ethnic radio and cable programming in Minnesota and other areas. RAB denied the breach and counterclaimed for alleged overdue payments. In an attempt to find peace, the parties agreed to mediate the dispute, and signed a written mediation agreement aimed at complying with the Minnesota Civil Mediation Act. After a day of mediation on Valentine’s Day in 1996, the parties reached agreement. Both parties were represented by counsel who drafted a handwritten three-page settlement document incorporating the terms of the agreement. The attorneys initialed each of the terms and the principals signed each page. The agreement had a clause that stated that it was a “Full and Final Mutual Release of All Claims” but did not have a clause that specifically said it was a “binding agreement.”
Haghighi subsequently moved for an order “declaring” that the settlement agreement was valid and the defendant was in breach. In opposing the enforcement action, RAB relied on the Civil Mediation Act, which provided:
A mediated settlement agreement is not binding unless it contains a provision stating that it is binding and a provision stating substantially that the parties were advised in writing that (a) the mediator has no duty to protect their interests or provide them with information about their legal rights; (b) signing a mediated settlement agreement may adversely affect their legal rights; and (c) they should consult an attorney before signing a mediated settlement agreement if they are uncertain of their rights.3
RAB’s argument was a short and airtight syllogism. The statute provides that mediated settlement agreements are not binding unless there is a clause that says they are binding. This mediated settlement agreement did not say it was binding; therefore, it is not binding. Much like the Jedi Knight Wui-Gon Jinn, who early in “Episode I” wisely notes, “things are not as they seem,” federal district court Judge Donald Alsop took a step back.
Before him stood sophisticated parties who signed a settlement agreement drafted by counsel that said it is a “Full and Final Mutual Release of All Claims.” If the parties believed at the time they signed the agreement that it was a valid agreement, surely, Judge Alsop reasoned, the agreement is not unenforceable simply because it lacks a formalistic recitation that would be meaningless in this context. Judge Alsop concluded the Minnesota Legislature would not have intended such a result that would create a “trap for both the unwary and the wary” participants in mediations in Minnesota.4
Subsequently, after an evidentiary hearing, Judge Alsop determined that the parties intended the document to be enforceable, that the agreement was enforceable, and defendant was in breach. On appeal, the federal court of appeals certified the following question to the Minnesota Supreme Court:
Whether a handwritten document prepared by the parties’ attorneys at the conclusion of a mediation session conducted pursuant to the … Act and signed contemporaneously on each page by the respective parties attending the mediation session but which does not itself provide that the document is to be a binding agreement, is rendered unenforceable as a mediated settlement agreement by virtue of Minn. Stat. §572.35, subd.1?5
The Minnesota Supreme Court answered the question in the affirmative. In its opinion, however, the Court made it clear that its decision is based on the issue certified and therefore assumes that the mediation was conducted pursuant to the Civil Mediation Act.6
The Court bought into RAB’s syllogism applying a literal interpretation of the statute. According to the Court, this is a simple case, assuming the act is applicable. The Court found no ambiguity in the statute. The Legislature said that the settlement agreement had to include certain “magic words”; these words were lacking; therefore, the settlement was not binding. Chief Justice Blatz, writing for the Court, noted that this result is not necessarily an absurd result. The Legislature may have intended that a settlement document must have the “magic words” so that parties can feel free to sign anything without fear that what they sign (even if it says it is a Full and Final Mutual Release of All Claims) can be used against them.
Back at the 8th Circuit, the saga continued. Haghighi’s attack on the sufficiency of the “Agreement to Mediate” was rejected as already implicitly decided by the nature of the question certified to the Supreme Court. The Court also was not persuaded by Haghighi’s argument that the act was inapplicable because settlement was reached after conclusion of the mediation. And, with a foreshadowing of future conflict that even George Lucas would appreciate, the Court declined to decide several additional arguments, specifically: 1) that recital in the agreement that it is a “Full and Final Mutual Release of All Claims” complies with the statutory requirement that the agreement state that it is binding; and 2) that in any event the Court should reform the settlement agreement to conform to the intent of the parties. No doubt, the stage for Haghighi IV is set. Finally, the Court rejected Haghighi’s suggestion that RAB waived the requirements of the act because RAB failed to include binding language in later settlement proposals its counsel drafted. According to the appellate court, the trial judge’s discussion of waiver was dicta, there was no direct evidence of waiver, and waiver would be counter to the public policy at the heart of the act.
A Phantom Menace
Now, after some four years of litigation in three different courts with three published opinions and numerous hearings litigating the applicability of the Civil Mediation Act to a mediation that does not literally fit under the act, the matter is back where it began, in front of the trial court. Perhaps this case with its multiple opinions could be cited as an example of the failure of the technical, slow and expensive litigation process, a further inducement to encouraging ADR processes as the preferred mechanism for dispute resolution. But the reality is that if the parties had not agreed to mediation and had engaged in private negotiation, this simple breach of contract case would have been settled or tried and appealed to conclusion years ago!
The case demonstrates the danger, the menace of including the worst of the litigation process — allowing formal technical rules unrelated to reasonable expectations – to take over the process of mediation. The mediation process, after all, was originally designed to avoid technical, formal rules in order that parties might act reasonably and reach reasonable accords. The menace — the phantom menace — is embodied in the Civil Mediation Act, an act that was designed to encourage mediation in its goal of reducing costs and empowering parties to reach reasonable accords. While the litigation process is moving away from a highly technical and formal rights-based approach to dispute resolution, the mediation process may well be going in the other direction.
A Fatally Flawed Statute
When is the Act Applicable? The Civil Mediation Act does not adequately define the scope of its coverage. While a short list of cases are expressly exempted from coverage by the enforcement provisions of the act,7 other statutes governing enforcement of mediated settlements8strongly suggest additional case types are also outside the scope of the act.
Moreover, the act provides no definition for mediation and defines a mediator as “a third party with no formal coercive power.”9 Thus, a judge assigned to a case and perhaps a court-appointed referee presiding over settlement negotiations would not be mediators under the Civil Mediation Act. In contrast, under the definition of mediation in Minn. R. Gen. Pract. 114.02 (a) (7), a mediation is:
A forum in which a neutral third party facilitates communication between parties to promote settlement. A mediator may not impose his or her own judgment on the issues for that of the parties.
Under this definition, parties could engage in a mediation presided over by a judge or an employer with coercive power, as long as the person presiding is “neutral” and does not exercise any coercive power to impose his or her “own judgment” on the agreement.
Putting aside type of dispute or professional identity of the neutral, the act applies only when a mediator strives to promote and facilitate a voluntary settlement of a controversy identified in an “Agreement to Mediate.” An ombudsperson or neutral mediating a dispute pursuant to company policies or other source of authority is not governed by the act. Moreover, “Agreement to Mediate” has a technical definition. It must:
- Be in writing;
- Identify the controversy between the parties;
- State that the parties will seek to resolve the controversy through mediation;
- Provide for termination of mediation upon written notice from with either party or the mediator delivered by certified mail or personally to the signers of the agreement;
- Be signed by the parties and the mediator;
- Be dated.10
Many mediations in Minnesota, including the one at issue in Haghighi, are carried out without agreements to mediate signed by the parties and the neutral that include the mandated termination clause. That default alone arguably brings those mediations outside the purview of the act.
When Does a Mediation Under the Act End? The act provides that mediation can be terminated by certified mail or personal notice to all parties and the mediator. Indeed, during the mediation effort, and until 20 days after proper notice of termination, the act suspends the running of the statute of limitations.11 Absent the required written notification of termination, which undoubtedly is not routinely utilized in the state, mediations continue indefinitely. Many disputes settle days or months after scheduled mediation sessions. Presumably, the requirements of the act, rather than normal contract principles, might govern enforcement questions in such cases. Moreover, the act is inconsistent with Minn. R. Gen. Pract. 114.10(d), which contemplates that the mediator will communicate to the court after a mediation has been concluded, but does not require certified mail or written personal notice to the parties.
Which Settlement Agreements Are Governed by the Act? The requirements in the act apply only to mediated settlement agreements, which are defined as:
- A written agreement;
- Setting out the terms of the full or partial agreement;
- Signed by the parties and dated.12
What about oral settlement agreements? Nothing in the act makes oral settlement agreements nonbinding; thus, the literal interpretation of the statute would lead to the result that oral agreements need no special clauses,13 but written mediated settlement agreements must have certain “magic words” in order to be binding.
Magic Words: A Return to the Seal
Notwithstanding the Supreme Court’s conclusion that Minn. Stat. §572.35, subd. 1 is not ambiguous, a fair reading of the statute on its face gives rise to numerous issues of interpretation. Initially, the statute is applicable only to “mediated settlement agreements,” thus incorporating all the ambiguity in the preceding discussion. More importantly, the two sentences in subdivision 1 are literally inconsistent. The first sentence states that the effect of mediated settlement agreements is governed by principles of contract law; thus, settlements in mediations would be treated the same as settlements in negotiations that were not mediated. The second sentence, however, says that a mediated settlement agreement under the act will not be treated like a negotiated settlement or simple contract, but will only be enforced only if it includes certain magic words, to wit:
1. That it is binding;
2. A provision stating that the parties were advised in writing that:
a. the mediator has no duty to protect their interests or provide them with information about their legal rights;
b. signing a mediated settlement agreement may adversely affect the parties’ legal rights; and
c. the parties should consult an attorney before signing a mediated settlement agreement if they are uncertain of their rights.
The requirement that the agreement include the term “it is binding” might have some historical justification. A threshold and elusive issue in many contract disputes is whether parties have entered into an agreement or are still at the negotiation stage. Have they agreed to agree? This problem was obviated at early common law when courts required, not magic words but a magic seal, and only contracts under seal were enforceable. This requirement of course made the issues of contract formation more certain, but proved unworkable when courts became unwilling to neglect parties’ legitimate interests in fair agreements simply because of the lack of the needless formality of the seal. Negotiated settlement agreements (and perhaps mediated oral settlement agreements) are enforceable without these magic words, and there is no reason why otherwise fair, mediated settlement agreements should not be enforceable.
There is also confusion inherent in the clause requiring parties to be advised in writing about the mediator’s role, the fact that signing a settlement may adversely affect the parties’ legal rights, and that parties should consult an attorney before signing a settlement if they are uncertain of their rights. First, the statute does not indicate who should inform the parties in writing about these rights. If the parties are not represented by counsel, who, if not the mediator has the duty to tell them in writing about these enforcement provisions of the act? Although a mix of movie metaphors, surely this is a perfect Catch-22: the mediator is compelled to state on the one hand that he or she has no duty to protect interests or provide parties with legal information, but is also required to provide legal information if the parties are to have any chance of enforcing their agreements! Second, if the mediator informs the parties orally, or no one in writing tells represented parties that they can consult with a lawyer, why should a court refuse to enforce an otherwise valid and fair agreement that is the result of a fair mediation process?
Having dramatically different rules for enforcing negotiated settlements as opposed to mediated settlements causes uncertainty and unfair surprise. Clients represented by experienced lawyers might be well-protected, but because of the ambiguity about when the act applies, even wise and experienced lawyers may not adequately protect their clients. Parties without lawyers or without wise and experienced lawyers will be in jeopardy. This potential harm is unnecessary given that most Minnesotans understand that by signing documents, they may well be agreeing to terms on the document they signed. Further, they understand that they can consult an attorney, if they choose.
The Minnesota Legislature, in response to the Supreme Court’s decision in Haghighi, recently amended the act by adding a second clause to Minn. Stat. §572.35, subd. 1: “or (2) the parties were otherwise advised of the conditions in clause (1).”14 Literally, the amendment renders mediated settlements binding if: 1) the written settlement agreement has a provision stating that it is binding (magic words); or 2) the parties were advised that any agreement is not binding if it lacks a clause saying it is binding. This amendment makes no sense. So if RAB were advised, which they were in their agreement to mediate, that mediated settlement agreements are not binding without a clause stating that they are binding, then the court would enforce the agreement without the clause in the settlement agreement itself.
Perhaps the Legislature meant that the agreement without the magic words saying “it is binding” is enforceable if the parties were otherwise advised that the agreement was binding.15 According to the trial judge, the parties in Haghighi believed that the agreement was binding, but there is no evidence that anyone “advised” them that it was binding. Literally, to comply with the other conditions in the clause, if a mediated settlement agreement does not have a clause stating that the parties were advised in writing about the mediator’s duties, the effect of signing, and right to consult counsel, the agreement can still be enforceable if the parties were advised (by someone) that they had been previously so-advised in writing.
Obviously, testimony about what the parties were advised may run into privilege problems. If a party is represented by counsel, private confidential legal advice may be privileged. If a party is advised by the adverse party, the communication may be privileged under the mediation privilege.16 If the parties were advised by the mediator, then in addition to other privilege sources, the advice may be unavailable for evidentiary use because of the ADR neutral privilege/competency statute.17
Reformation and Confidentiality
Minn.Stat. §572.36 provides that a mediated settlement agreement can be set aside or reformed based on common law principles or if “there was evident partiality, corruption, or misconduct by a mediator prejudicing the rights of a party.” Typical grounds for setting aside a contract include duress, mutual mistake, unilateral mistake accompanied by concealment, fraud, or unconscionable overreaching. Contracts can be reformed when a mistake in integration is made and the written contract does not represent the agreement reached. In Haghighi, plaintiff raised a claim late in the process that the contract should be reformed to include a clause that it was binding to accurately reflect the underlying agreement. Since the issue was not directly raised at the trial level, the Court of Appeals, and the Minnesota Supreme Court have not ruled on this issue.
Although the Civil Mediation Act contemplates that parties can seek to have the agreement set aside or reformed, the moving party may be unable to produce the necessary evidence.18 The general mediation privilege19 protecting all communications, and documents made or used because of a mediation pursuant to “an agreement to mediate” has an exception for matters relating to actions to reform or set aside mediated settlements. However, the third party neutral privilege/competency statute20 would not permit the neutral to testify or provide evidence. If the mediation is court-annexed under Rule 114, absent agreement of all parties and the court, no fact concerning the mediation can be used in any proceeding involving any of the parties or issues in the mediation.21 Further, notes, records, or recollections of the neutral cannot be disclosed absent agreement of all parties and the neutral unless required by law or professional code. Thus, at least in Rule 114 mediations, the opportunity to produce evidence to reform a contract is slight.
Although the issue has largely been ignored,22 there is no exception that would permit a party to introduce evidence of a mediated settlement agreement for the purposes of enforcing an agreement. In Haghighi, the court ruled that the mediator could not be subpoenaed pursuant to the ADR neutral privilege/competency statute but allowed the parties to testify freely about facts and communications that took place during the mediation session without addressing the privilege question.23
Like it or not, there are two more films to come in the Star Wars saga. Another good bet is that the Haghighi trilogy will not be a trilogy for long. But the Civil Mediation Act’s days should be numbered.
In specialized contexts, let there be specialized enforcement rules if needed. In all other settings, contract law should control enforcement. And, while there may be some merit from a consumer protection perspective in encouraging certain disclosures by mediators, such as information about the mediator’s training and experience,24 or the wisdom of consulting legal counsel, any statutory scheme designed to encourage such disclosures should be unlinked from limits to enforceability of fairly mediated settlements. Uncertainty in enforceability of settlement agreements is a phantom menace casting a pall over the development of ADR in Minnesota.
James R. Coben is clinical professor of law at Hamline University School of Law. He formerly served as director of the Dispute Resolution Institute.
Peter N. Thompson is professor of law at Hamline University School of Law. The authors thank Raymond Peterson for his assistance in this article.
1 Minn. Stat. §572.31 et. seq.
2 Haghighi v. Russian-American Broadcasting Co., 945 F. Supp. 1233 (D. Minn. 1996); Haghighi v. Russian-American Broadcasting Co., 577 N.W.2d 927 (Minn. 1998); Haghighi v. Russian-American Broadcasting Co., 173 F.3d 1086 (8th Cir. 1999).
3 Minn. Stat. §572.35, subd. 1 (1998).
4 945 F. Supp. at 1234.
5 577 N.W.2d 927 (Minn. 1998).
6 Perhaps the greatest irony in the Haghighi trilogy is that the “Agreement to Mediate” did not comply with the prerequisites in the Civil Mediation Act because it did not include a provision that the parties can terminate upon written notice from either party or the mediator delivered by certified mail or personally. Nor could the parties provide proof that the mediator had signed the agreement, which is also a prerequisite to the applicability of the act.
7 The statutory exclusions include criminal and most family law proceedings, as well as guardianship, conservatorship, and civil commitment cases. Minn. Stat. §572.40.
8 See e.g. Agricultural Marketing and Bargaining Mediation, Minn. Stat. §17.697, subd. 11; Farmer Lender Mediation, Minn. Stat. §583.26, subd. 9; Special Education Mediation, Minn. Stat. §125A.43(b).
9 Minn. Stat. §572.33, subd. 2.
10 Minn. Stat. §572.31, subd. 3.
11 Minn. Stat. §572.39.
12 Minn. Stat. §572.33, subd. 4.
13 See Vo v. Honeywell, C3-97-1393, 1998 WL 15909 (Minn. App. Jan. 20, 1998) (mediated oral settlement agreement enforced).
14 1999 MN S.F. 1093 (enacted May 21, 1999).
15 In light of Justice Blatz’s opinion enforcing a strict literal interpretation of this statute, it might be risky to assume the courts will construe this statute in terms of what the Legislature meant and not on what the Legislature said.
16 Minn. Stat. §595.02 subd. 1(l), or, if a Rule 114 mediation, Minn. Gen. R. Prac. 114.08.
17 Minn. Stat. §595.02, subd. 1a.
18 See generally Peter Thompson, “Confidentiality, Competency and Confusion: The Uncertain Promise of the Mediation Privilege in Minnesota,” 18 Ham. J. Pub. L. & Pol’y 329 (1997).
19 Minn. Stat. §595.02, subd. 1(l).
20 Minn. Stat. §595.02 subd. 1a.
21 Minn. R. Gen. Pract. 114.08 (a).
22 No one raised the issue in Haghighi that the communications and documents, including the purported settlement agreement, are privileged. Pursuant to motion, Judge Alsop did rule that the mediator could not be subpoenaed pursuant to Minn. Stat. §595.02, subd. 1a. 945 F. Supp. at 1235.
23 See also Gant v. Gaffney, C2-90-938, 1990 WL 157443 (Minn. App. Oct. 23, 1990) (mediator precluded from testifying about alleged party admission made during mediation); Sonenstahl v. L.E.L.S., Inc., 372 N.W.2d 1 (Minn. App. 1985) (subpoena to mediator quashed).
24 Currently, the act “criminalizes” the failure of a mediator to provide the parties in writing with a statement of educational background and relevant training and experience in the field prior to beginning mediation. Minn. Stat. § 572.37 (petty misdemeanor). The resources in the criminal justice system surely have better uses than policing good practices for mediators.