Legal Update

FAILURE TO MEDIATE, WHEN REQUIRED BY CONTRACT, CAUSES THE PREVAILING PARTY TO FORFEIT RECOVERY OF ATTORNEY FEES

  • June 26th, 2010
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The California Court of Appeal for the Fourth District ruled that the standard form CAR residential purchase agreement used in California which requires the buyer and seller to mediate as a condition to an award of attorney fees in subsequent litigation is enforceable.  Consequently a prevailing party who failed to mediate prior to commencing litigation was denied recovery of $158,000 in attorney fees. Frei v. Davey  124 Cal App. 4th 1506 (2005)

DECISION: The Court of Appeal begins its written opinion with the observation:  “Mediation using a neutral professional is often an effective and efficient way to resolve legal disputes.”   This statement is illustrative of the court’s fondness for mediation and portends the court’s intention to render opinions which encourage mediation.  This is what occurred here.

Buyer and seller entered into a standard form purchase agreement for the sale of a home in Orange County.  The agreement contained a clause requiring an award of attorney fees to the prevailing party and also requiring that the parties mediate any dispute before resorting to court action.  A further clause stated that failure or refusal to mediate prior to litigation prevents such party from recovering his attorney fees even if he prevails in the litigation.

Here, the seller cancelled the sale and was sued by the buyer for specific performance of the contract.  The case went to trial and appeal.  The seller prevailed and was awarded $158,000 in attorney fees.  However, the buyer appealed the attorney fee award on the grounds that the seller had refused to mediate prior to litigation and should therefore be denied recovery of his fees.

Early in the dispute, the attorney for the buyer had sent a letter to the attorney for the seller demanding mediation as required by the contract.  The seller’s attorney’s response was that his clients “were not interested in mediating the dispute” because “mediation would be fruitless given the [buyer’s] intransigence”.   No mediation occurred but the seller claimed on appeal that he had substantially complied with the mediation requirement by conducting settlement negotiations through counsel.  The court rejected this argument saying “Communications between the parties or their counsel regarding settlement are not the same as mediation. In mediation, a neutral third party analyzes the strengths and weaknesses of each party’s case, works through the economics of litigation with the parties, and otherwise assists in attempting to reach a compromise resolution of the dispute.” 

The prevailing seller’s award of $158,000 in attorney fees was reversed for failure to mediate as required by the contract.

ANALYSIS: This case provides further evidence that mediation is the court’s favored method of dispute resolution.  Where a contract so provides, all parties must mediate before litigation (or arbitration) even if one side is convinced it will prevail and in fact does so.  The litigation victory is incomplete if the prevailing party suffers the expense of litigation without reimbursement from the loser.