What happens when a party tries to back out of a mediation settlement agreement?

Statistically speaking, most lawsuits settle. But settlement is not easy. The parties are often sent to mediation and they try to reach an agreement with a neutral mediator. Often, emotions get in the way of settlement. And sometimes, a party agrees to settle but changes their mind the next day. What happens next?

The case is Murphy v. Institute of International Education, issued on April 26. After plaintiff filed this employment discrimination case, the trial judge referred the case to mediation, where the parties reached a settlement and signed a "Mediation Agreement" at the session, which stated an "agreement has been reached on all issues." The agreement stated the settlement would provide plaintiff with a years' worth of salary, two months of COBRA contributions, and regular pay and benefits through a certain date. All parties signed the agreement. This often happens at mediation: the parties reach a settlement and agree on the main terms before writing it down on a legal pad with everyone's signature. The lawyers then begin working on a more comprehensive agreement. That's what happened here, and comprehensive agreement contained the details, including a confidentiality clause, a penalty for violating confidentiality, a non-disparagement clause, and other general provisions that we often see in comprehensive agreements.

But three days after signing the mediation agreement, plaintiff changed her mind and wanted to revoke the agreement. As the Court of Appeals puts it:

Murphy said that she was nervous and confused during the mediation and that  she  told  her attorney  that  she  was  not  comfortable  signing  the  mediation agreement.  She also said that she called her mother, and her mother told her not to sign the mediation agreement.  Murphy wrote that her attorney advised her that mediation “was the nicer portion of [her] lawsuit” and that the mediator told her that if she continued, she “would be stuck in a room filled with white men that would question every aspect of [her] life for hours,” the thought of which Murphy found intimidating.  Murphy said that she then took ten minutes outside the room to clear her head and that when she came back, she asked if she could have until Monday to think over the mediation agreement. According to Murphy, she was told no and that the mediation agreement included the most compensation she would ever receive. Ultimately, Murphy said, she signed the mediation agreement because she “was so sad and felt [she] had no choice but to sign.”

This about-face may surprise non-litigators, but I have seen things like this happen. How does the court deal with this? The Court of Appeals (Sullivan, Carney and Menashi) tackles this issue for the first time, classifying mediation agreements in two ways: Type I and Type II. A Type I agreement “occurs when the parties have reached complete agreement (including the agreement to be bound) on all the issues perceived to require negotiation.”  Type II agreements "expresses mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that remain to be negotiated.” In the Type II, the parties “bind themselves to a concededly incomplete agreement in the sense that they accept a mutual commitment to negotiate together in good faith in an effort  to reach  final  agreement  within  the  scope  that  has  been  settled  in  the preliminary agreement.” The Second Circuit takes this model from a SDNY case from 1987.

Plaintiff had an enforceable Type I agreement because the parties intended to be bound by it and they were not delaying any agreement on the important settlement terms that can make or break a deal. "This is not a case in which  the  language  of  the  agreement  merely  committed  the  parties  to  work together in accordance with the terms and conditions outlined in the agreement, which would be a Type II agreement to continue negotiating." In addition, "the language of the mediation agreement reflects that the terms included in the agreement were the material  terms." Any open issues in a Type I agreement like would be relatively "trivial" so long as the parties did  not foresee any disputes relating to the boilerplate. In addition to finding there was no evidence that plaintiff signed the agreement under duress, the Court states, "In sum, there can be no doubt that the parties here 'intend[ed] to be bound' by the mediation agreement, and the fact that they may have anticipated 'lawyers’ embellishments' in a final formal agreement, in no way makes the mediation agreement unenforceable."