On April 5, 2011, the North Carolina Court of Appeals in SPX Corp. v. Liberty Mutual Insurance Co., No. COA10-754 (N.C. Ct. App. Apr. 5, 2011), upheld sanctions against Liberty Mutual Insurance Company (“Liberty” or “Liberty Mutual”) for sending representatives to a litigation settlement conference without binding authority to settle the dispute with SPX Corporation (SPX).

The underlying lawsuit involved a declaratory judgment and breach of contract action filed in the Superior Court of Mecklenburg County, North Carolina, by SPX against various insurance companies that provided liability policies to SPX and its predecessor companies. Over the years, SPX, its predecessors and subsidiaries purchased and used parts containing asbestos in their manufacturing processes. As a result, SPX and its related entities have been implicated in thousands of asbestos bodily injury claims. SPX requested a declaration that it had the right to tender all of the claims to a single insurer and to demand that the chosen insurer pay 100 percent of the defense and indemnity costs.

On December 15, 2008, Liberty Mutual and SPX participated in a mediated settlement conference with the trial court judge, who served as mediator. Prior to the settlement conference, Liberty Mutual and SPX executed a stipulation governing the settlement conference. One term contained in the stipulation required that the parties have representatives physically present at the mediation with the authority to settle the matter or with the ability to “promptly communicate during the conference with person[s] having the decision-making authority to settle the action.” After a three-day mediation, SPX and Liberty Mutual believed they had reached an oral agreement to settle the matter. However, Liberty Mutual’s counsel understood the agreement to be conditional upon approval by Liberty Mutual’s management of an annual cap on deductibles. SPX and its counsel, on the other hand, did not believe that any such contingency existed.

In January 2009, Liberty Mutual informed SPX that its management would not approve the settlement terms. During a February 2009 status conference, SPX informed the trial court judge that Liberty Mutual had withdrawn from the settlement. The trial court judge then entered an order directing Liberty Mutual to show cause why the settlement agreement should not be enforced and why the court should not impose sanctions or other relief against it.

The trial court conducted a hearing on the show cause order, and on March 13, 2009, held that the settlement agreement should be enforced and sanctions imposed against Liberty. The trial court judge denied Liberty’s motions for reconsideration and entered a final judgment in the case on January 6, 2010.

On appeal, Liberty Mutual argued, among other things, that the lower court erred by imposing sanctions against it. The Court of Appeals, relying upon Lomax v. Shaw, 101 N.C. App. 560, 563, 400 S.E.2d 97, 98 (1991), held that the trial court possessed the inherent authority to impose sanctions for willful failure to comply with the applicable rules. The court further held that Liberty violated the terms of the stipulation by failing to ensure that the representatives present at the settlement conference were able to finalize a settlement on its behalf, which resulted in the frustration of the “orderly and efficient resolution of the dispute” between the parties.

This decision is noteworthy because it will impact how parties must prepare for and behave at mediated settlement conferences. The North Carolina rules governing mediated settlement conferences have always required corporate parties to have representatives present at mediations with full authority to settle or the ability to communicate promptly with persons who have such authority. This decision, however, may actually reduce the effectiveness of mediation because parties now have an incentive to declare an impasse once they have exhausted their settlement authority, or risk collateral litigation over whether they mediated in good faith. In the past, it was common for mediators to ask parties to “call and get more authority,” but following the SPX decision there are risks in agreeing to do so. In addition, this ruling emphasizes the importance of documenting all material terms and conditions in the statement that the parties sign at the conclusion of a successful mediation. Historically, parties often have included language in the short-form document prepared by the mediator, which states that the settlement will be subject to the execution of a more comprehensive settlement agreement and release. Following SPX, however, parties should not sign such a short-form agreement unless it includes every non-boilerplate settlement term that would otherwise be included in the more formal settlement agreement.