In this case, Horvitz & Levy LLP represented the prevailing defendants before the California Supreme Court, which reaffirmed that communications made during mediation are inadmissible in civil proceedings absent an express statutory exception, and held that a “term sheet” signed by the parties to a mediation at its conclusion did not fall within any statutory exception. The Fair decision is significant because mediators commonly attempt to procure a “deal points agreement” – that is, a list of points on which the parties have reached consensus with regard to tentative terms of settlement – before the end of a mediation session. Thus, the decision implicates thousands of cases statewide.

One statutory exception to the rule of confidentiality governing mediation communications is prescribed by Evidence Code section 1123(b), under which a document produced during mediation is admissible in later civil proceedings if the document expressly “provides that it is enforceable or binding or words to that effect.” The Fair case arises from a mediation that produced a handwritten draft of settlement terms, including a term that the parties would arbitrate any disputes regarding the settlement. The draft document did not state that it was binding or even an agreement, and there was evidence that the defendants did not intend it to be either.

Thus, the primary issue before the California Supreme Court in Fair was whether the arbitration clause made the draft document admissible under Evidence Code section 1123(b) in a proceeding to enforce the draft document’s terms, on the theory that the arbitration clause constituted “words to the effect” that the draft would be enforceable and binding.

The plaintiff sought to use extrinsic evidence and certain accepted contract interpretation tools to show that the handwritten draft of settlement terms constituted an “agreement” meeting the requirements of section 1123. The Supreme Court rejected that approach because the writing on its face did not plainly demonstrate that the requirements of section 1123 were met, and extrinsic evidence would have been needed to fill the gap. The court held that plaintiff’s proffered extrinsic evidence could not be considered because “the statute is designed to produce documents that clearly reflect the parties’ agreement that the settlement terms are ‘enforceable or binding.’” The court similarly rejected plaintiff’s attempt to use ordinary contract interpretation rules to determine the mediation writing was admissible under the section 1123 exception because that approach “would render the statutory exception superfluous.” The court explained that, independent of extrinsic evidence and interpretive tools, “the parties [must] affirmatively provide that their agreement is enforceable or binding.”

The Fair decision is important because the lower appellate court’s contrary decision would have created a powerful incentive for the parties to eschew arbitration provisions in deal points agreements in order to avoid the risk of binding the parties to settlement terms that are only tentative. Absent the Supreme Court’s reversal, the lower court’s decision would have led to an avoidance of arbitration provisions and a setback for alternative dispute resolution (ADR).

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