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Case Summary: Fair v. Bakhtiari, 40 Cal. 4th 189, 147 P.3d 653 (2006)

Issue: In this case, the California Supreme Court was faced with the question of whether an arbitration clause in a proposed settlement agreement resulting from mediation was a sufficient indication that the parties intended the agreement to be binding, satisfying the statutory exception to California's rule that documents prepared for mediation are inadmissible in civil proceedings.

Rule: An arbitration clause in a proposed settlement agreement from mediation did not sufficiently indicate the intent of the parties to be bound such that the document would satisfy the exception to California's rule preserving the confidentiality of mediation communications.

Facts: Plaintiff R. Thomas Fair brought suit against his former business partner Karl Bakhtiari, his ex-wife Maryanne Fair, and several businesses that the Court collectively referred to as "Stonesfair defendants," alleging that the defendants wrongfully excluded him from real estate syndications, did not provide him with compensation that he was owed, misappropriated profits, and committed other financial misconduct. Moreover, the plaintiff claimed that Bakhtiari physically assaulted him. The parties mediated the dispute and after two days of negotiations, counsel for Mr. Fair circulated a handwritten document memorializing settlement terms and this memorandum was signed by the parties and the mediator. The parties filed case management reports that communicated to the Superior Court, San Mateo County, that the case had settled through mediation. After these filings, the attorney for the Stonesfair defendants drafted a settlement and release agreement that was shared with the other parties. However, prior to the Case Management Conference, counsel for Stonesfair learned from Fair's attorney that the plaintiff did not believe the settlement agreement required him to transfer certain assets. At this time, the attorneys also discussed outstanding tax issues. At the Case Management Conference, the trial court granted the continuance requested by Bakhtiari's attorney so that the parties could finalize a settlement agreement. A subsequent case management document filed by the defendants informed the court that a mutually agreeable settlement had not been reached and proposed that the dispute be resolved in litigation. Plaintiff's lawyer wrote to the defendants requesting that the dispute be submitted to arbitration, a request that was rejected by the defendants on the grounds that no enforceable agreement to arbitrate had been reached.

Plaintiff moved to compel arbitration, claiming that the settlement memorandum signed by the parties during mediation indicated an intent to be bound such that any disagreements over the agreement were to be resolved in arbitration. Defendants opposed the motion and objected to plaintiff's introduction of the settlement agreement and mediation communications. Plaintiff insisted that the settlement memorandum satisfied California's exception to the rule providing for the confidentiality of mediation communications, a contention that was rejected by the trial court, which denied the motion to compel arbitration. The Court of Appeals reversed the trial court's decision, holding that the arbitration clause indicated that the parties intended to be bound by the settlement agreement, and therefore the statutory exception to the confidentiality of mediation communications was satisfied, and the settlement agreement was admissible. The California Supreme Court accepted the defendants' petition to review the decision of the Court of Appeals.

Discussion: The California Supreme Court reversed the Court of Appeals' decision and held that the arbitration clause in the settlement agreement did not sufficiently indicate the parties' intent to be bound in order to satisfy the relevant statutory exception to the requirement of confidentiality for mediation communications. Initially, the Court noted its longstanding recognition that the confidentiality requirements for mediation communications were "enacted to encourage mediation by permitting the parties to frankly exchange views, without fear that disclosures might be used against them in later proceedings."[1] Section 1119 of the California Evidence Code covers "writings prepared for, in the course of, or pursuant to mediation" and provides that they "are inadmissible, '[e]xcept as otherwise provided in the chapter.'"[2] Plaintiff argued that the settlement agreement fell under § 1123(b) which states that written settlement agreements coming out of mediation are not required to be confidential if "[t]he agreement provides that it is enforceable or binding or words to that effect."[3]

In examining whether the settlement agreement at issue was sufficient to satisfy § 1123(b), the Court looked at reports from the California Law Revision Commission to determine the intent of the legislature in enacting the exception. The Court noted that the purpose behind § 1123(b) was to make sure that a settlement agreement coming out of mediation would be admissible, making sure that parties did not waste the time and energy to conclude a mediated agreement that would later turn out to be inadmissible. In addition, the Court recognized that the inclusion of the phrase "words to that effect" in the statute indicated that the legislature was chiefly concerned not with formalism, but the intent of the parties to the agreement. Rejecting the reasoning of the appellate court, the Supreme Court found that the inclusion of an arbitration clause in the settlement agreement was not sufficiently indicative of the intent of the parties to be bound. The Court believed that § 1123(b) was to be narrowly interpreted and held that to satisfy the "words to that effect" provision of the statute "a writing must directly express the parties' agreement to be bound by the document they sign."[4] In the Court's view, an arbitration clause could be included in a working document without the parties intending to be bound and it saw that "[a]rbitration is a method of enforcement subject to negotiation, like other settlement terms."[5] The Court feared a flood of litigation if a standard provision like an arbitration clause could destroy mediation confidentiality and held that § 1123(b) should require "language directly reflecting the parties' awareness that they are executing an 'enforceable or binding' agreement."[6]

Plaintiff pointed to the defendants' conduct in the case management conference as indicating that they believed that the memorandum was a binding settlement agreement. The Supreme Court rejected this contention, saying that it did not believe that the legislature wanted courts to examine extrinsic evidence to determine if parties wanted to be bound under § 1123(b). Furthermore, the Court did not accept plaintiff's argument that language in § 467.4 of the Business and Professions Code indicated that the legislature did not intend to require specific language indicating an intent to be bound in order for settlement agreements reached in mediation to be admissible. Section 467.4 provides that settlement agreements reached through dispute resolution programs administered under the auspices of the California Department of Consumer Affairs are inadmissible unless they include "a provision that clearly states the intention of the parties that the agreement . . . shall be so enforceable or admissible as evidence."[7] The Court did not find that the differences in the statutory language indicated a different legislative intent concerning the requirements for admissibility of settlement documents. Moreover, the Court also rejected the plaintiff's argument that the arbitration clause could be severed from the settlement agreement and enforced and it explained that the agreement would have to be admissible before enforceability could be examined.

[1] Fair, 40 Cal 4th at 194.

[2] Id. at 195 (citing Cal. Evid. Code § 1119 (2006)).

[3] Id. at 196 n. 5 (citing Cal. Evid. Code § 1123(b) (2006)).

[4] Id. at 197.

[5] Id.

[6] Fair, 40 Cal 4th. at 198.

[7] Id. (citing Cal. Bus. & Prof. Code § 467.4 (2006)).