Most contracts used in the hospitality industry, such as management agreements, franchise agreements and technical services agreements, call for mediation to take place before a party can file suit or demand arbitration. Even if there’s no agreement for such “pre-suit” mediation, judges almost always require mediation during the pre-trial part of the litigation process.

There is widespread agreement that mediation is a great tool to help parties settle their disputes. In the hospitality industry, where long-term relationships are the contractual norm, early settlement of disputes is essential to preservation of the relationship. The concept of mediation is quite simple: a neutral party meets with the disputing parties in both joint and private sessions, exploring the essence of the dispute and possible avenues of settlement. Having the neutral party listen and ask questions can often create progress whereas face-to-face confrontations between and among the parties often yields impasse and entrenched positions.

Successful Mediation = Real Savings to the Parties

Beyond the critical preservation of the relationship, successful mediation of disputes provides real savings to the parties in terms of litigation costs, attorneys’ fees and distraction from more productive aspects of each party’s business. A mediation settlement agreement in each case is the goal of the process. It all sounds terrific so far, but there can be some deep potholes on the road to resolution.

Where contracts call for pre-suit mediation, the rules under which the mediation will be conducted (such as the American Arbitration Association) are specified. If the mediation is court-ordered, the various states have rules that will govern the mediation conference and the settlement agreement process, including enforcement of the settlement agreement and the confidentiality of the negotiations. In almost all cases, if the parties do reach a settlement, the mediation settlement agreement must: (a) be in writing and (b) be signed by both the parties and their respective counsel.

Responsibility for the drafting of the mediation settlement agreement lies with the parties and their counsel. The mediator’s role is limited to guiding the parties as they craft the settlement agreement. The mediator must not act as an attorney or the contract scrivener, since that is outside the scope of the mediator as neutral. Often, cases are settled after a long day (or several days) of intense discussion and negotiation. When the parties “reach a settlement,” typically everyone wants to quickly “finish it up and get out of there.” That’s understandable, but it’s also where problems are created.

The old adage that “haste makes waste” may never be truer than in the context of mediation settlement agreements. Who would want to trade their original dispute for a new one that seeks, depending on which side one is on, to either enforce a mediated settlement agreement or set one aside. That’s like the old television commercial that asked the question, “Would you trade a headache for an upset stomach.”

Simple Hospitality Disputes: Are They Non-Existent?

In a simple case, where one party is paying the other a stipulated sum of money within a specified period of time in exchange for a dismissal of a lawsuit with prejudice, it is important, and generally a legal requirement, that a brief, handwritten settlement agreement is signed by the parties and their counsel; this is easy enough to accomplish and unlikely to evolve into a dispute. On the other hand, when was the last time you saw a “simple” dispute in the hospitality industry?

Problems with mediation settlement agreements most often occur when the “agreements” read more like a memorandum of intent and contemplate the subsequent preparation and negotiation of other agreements, such as general releases, non-compete agreements and modification of existing agreements between the parties. That’s a blue print for “déjà vu all over again.” Thanks, Yogi Berra.

Broad, loose language too often finds its way into mediation settlement agreements. Phrases like “contingent upon approval of ...,” “payment to be made upon sale of the project,” and “the parties will execute a final settlement agreement” are bound to create questions about the contractual validity of the mediation settlement agreement and set up a return to the courthouse to litigate enforcement of the settlement agreement. Mediation settlement agreements are evaluated by the same rules as other contracts: the terms must be sufficiently specific and agreed upon by the parties. Reading settlement agreement cases indicates that specific facts and the findings of courts can widely vary as to who prevails. Some courts have concluded that subsequent documents such as the form of the general releases are “mere contingencies” that were not essential to the settlement agreement drafted at mediation. Other courts totally disagree and reach the opposite conclusion. That kind of uncertainty does not help the process or the parties.

What, Then, Is the Solution?

There are two basic paths that will provide a solution for effective mediation solutions:

  • One strategy is for the mediator, with the concurrence of the parties, to adjourn the mediation conference to a set future date during which counsel for the parties can finish, with the benefit of time and clear heads, the negotiation and drafting of the additional terms or documents. In this method, the mediator can be available to assist if the parties can’t resolve the specific language. If they are ultimately unable to agree, then there really was never a settlement in the first place.
  • The second strategy is for the mediator to request that the parties bring samples of the boilerplate language that they would want to see on those subjects (such as confidentiality, general release, non-compete, non-disparagement, payment terms, reservation of rights, etc.) that are relevant to the current dispute. In very complex matters or those in which the litigator handling the mediation does not feel comfortable in drafting certain provisions, the mediator may suggest that the litigator have a transactional lawyer “on standby” should the mediation conference be successful and result in settlement. If the parties are willing to stay and hammer out the agreement form with everyone present, having base language to work with can make the process go much more quickly.

The benefit of taking this additional time and effort is that the likelihood of a successful challenge to the mediation settlement agreement is greatly reduced, but that should enforcement of the agreement be necessary, success is far more likely. When done properly, the parties, their counsel and the mediator can all be proud of having achieved a settlement that’s worth having.

The old proverb, “A bad settlement is better than a good lawsuit,” probably needs to be changed to: “A bad enforceable settlement is better than a good lawsuit.