Mediator-turned-arbitrator: be careful what you wish for

Settlement agreements reached in mediation commonly include a provision appointing the mediator as arbitrator in the event of a later dispute over the terms of the agreement. Is such a clause enforceable? If so, is it prudent to include one in a settlement agreement? A recent state Court of Appeal decision involving a $48.8 million settlement provides some answers.

Kurtin v. Elieff, 2013 DJDAR 4901 (Cal. App. 4th Dist. April 16, 2013), involved two business partners, Todd Kurtin and Bruce Elieff. Their partnership consisted of several real estate businesses known as the "Joint Entities." After their relationship soured, Kurtin brought suit in 2003 to "separate" himself from Elieff. They attended a mediation to determine how Elieff would buy out Kurtin, and reached a settlement agreement that included an arbitration clause giving the mediator the power to imply reasonable terms in the event issues arose regarding the terms of the settlement.

The arbitration clause stated that the agreement was to be binding and enforceable under Code of Civil Procedure Section 664.6. In the event that any party claimed that material terms were omitted, or that they failed to reach agreement on one or more such terms, or that any other defects existed that would make the settlement agreement unenforceable, the parties agreed to binding arbitration before the mediator. The mediator-turned-arbitrator was to imply reasonable terms consistent with the purpose and intent of the agreement. His "sole act" was to issue an amendment to the settlement agreement "implying such additional terms, curing any ambiguity or otherwise curing any defect" that would make the agreement unenforceable.

After about $26.3 million was paid, Elieff defaulted. Kurtin brought a motion to enforce the settlement agreement to recover the balance due under Section 664.6, which the trial court denied because the Joint Entities were not parties to the litigation. Kurtin then sought arbitration with the mediator. The mediator-turned-arbitrator rendered an "award" setting forth the amount owing to Kurtin at $24.4 million, and determined that Kurtin only had the right to foreclose on Elieff's own interests in the Joint Entities (as opposed to foreclosing on the Joint Entities themselves).

Kurtin subsequently commenced the instant litigation against Eileff and the Joint Entitles under various theories, including suing Eileff for breach of an agent's warranty of authority to bind the Joint Entities under Civil Code Section 2343. The jury ultimately found in favor of Eileff and awarded damages. The appellate court affirmed, but modified the judgment as to an order granting a new trial on the cause of action under Section 2343 because of an anomaly in the jury verdicts.

When drafting settlement agreement provisions that elevate the mediator to an arbitrator in post-mediation disputes, what can we learn from this case?

First, that such a clause is permissible. However, the arbitration clause should carefully set forth the arbitrator's powers. In rejecting Eileff' s res judicata challenge - that the "arbitration" precluded Kurtin from pursuing further litigation to recover the unpaid balance against Eileff under various theories to reach the Joint Entities - the court noted that the arbitrator's "sole act" was limited to interpreting the settlement agreement and, if necessary, inserting an intended but inadvertently omitted material term. Because that is all that the arbitrator did, the only "primary right" adjudicated was not Kurten's right to be made whole, but rather his right under the settlement agreement to have the mediator, who negotiated the settlement agreement, interpret and, if necessary, amend it. Therefore, Kurtin was able to pursue additional claims against Elieff. They were not barred by issue preclusion because of the "arbitration."

Second, less is more. Keep the arbitration clause as simple as possible. Here, the arbitration clause included a "catch-all" provision giving the arbitrator the authority to correct "any other defect" that would make the settlement agreement "unenforceable." Eileff argued that this language restricted the arbitrator's ability to act only if the alleged defect made the settlement agreement unenforceable. Since that was not the case here, Eileff claimed the arbitration award had to be set aside.

After an extensive grammatical analysis - including review of "gerund based parallel construction," and the last antecedent rule - the court rejected the argument. The arbitrator could act even if the defect he was correcting was not one that made the settlement agreement unenforceable. The catch-all surplusage was unnecessary and only gave the opposing party a clever argument.

Is such an arbitration clause prudent?

The Pros. Such provisions afford a relatively quick and cost-efficient resolution on issues that may arise post-mediation before the person who midwifed the settlement. Mediators like to help the parties reach resolution, and want to see the fruits of their labor - the settlement agreement - consummated. Serving as an arbitrator to interpret the settlement agreement provides an added value to the parties.

The Cons. Great care must be taken to address the power given to the mediator-turned-arbitrator. The more extensive the authority, the more important it will become to address what rules will apply during each phase of the dispute resolution process (e.g., mediation confidentiality rules, court-ordered mediation rules, arbitration rules, or some mix). Failure to do so will create uncertainty as to the unenforceability of any subsequent arbitration award.

In addition, even with sophisticated parties and a clear understanding of the process, having the same person serve as mediator and then arbitrator is fraught with peril. The mediator's role as a decision-maker, imposing a binding decision on the parties, is inconsistent and antithetical to the trusting and neutral role of a mediator, where parties are free to share confidences in their efforts to settle the case.

Moreover, parties may develop false expectations of the mediator-turned-arbitrator, and feel betrayed by his or her binding decision. While permissible, the minimal cost-efficiency of having the same person serve as mediator and then arbitrator could be outweighed by the potential for a frustrating experience that neither advances the interests of mediation nor arbitration.

There is an alternative approach that avoids those disadvantages. The parties could agree to mediate any subsequent disputes with the mediator and, if unsuccessful, arbitrate with a different neutral. If the parties have difficulty selecting the arbitrator, they could empower the mediator to appoint one after receiving input from the parties. While the new arbitrator will not have negotiated the settlement, the parties can fill in the detail. In addition, a different neutral brings a fresh perspective to the dispute that may be advantageous.

In short, if the parties believe the pros outweigh the cons, and wish to appoint the arbitrator as mediator, they should draft the arbitration clause very carefully. While permissible, prudence dictates that the powers given must be limited and set forth very clearly.