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By Jeffrey L. Marcus*
June 2005
Introduction:
If you fail to request or refuse mediation when required
by a contract to which you are a party, you may lose the
right to recover your attorney fees even if you win in
litigation.
Many contracts include a provision requiring parties to
mediate before filing a lawsuit and conditioning
recovery of attorney fees on an attempt to mediate. For
example, the standard form California residential
purchase and sale agreement contains a clause providing
that a prevailing party in litigation refusing a request
to mediate or failing to request mediation before the
commencement of such proceeding is barred from
recovering attorney fees. Recently, the California
Court of Appeal concluded such a clause is enforceable.
[Michael J. Frei v. Walter T. Davey, Jr. (2004)
124
Cal.App.4th 1506, 22 Cal.Rptr.3d 429].
The Frei Case, A $500,000 Disaster.
The Freis sued the Daveys for breach of a residential
real estate purchase and sale agreement. The agreement
required mediation in order to recover attorney fees.
After the Daveys cancelled the purchase agreement the
Freis demanded mediation in connection with an $18,000
dispute. The Daveys refused mediation. Through
cross-actions, trials and appeals, the attorneys’ fees
tallied over $500,000. By defeating the Freis’ breach
of contract claim, the Daveys won and sought attorney
fees. The Appellate Court rejected the Daveys’ claim
for attorney fees because of their refusal to mediate.
Discussion.
Mediation is a confidential process through which a
neutral third-party intermediary, usually selected by
the parties, attempts to facilitate a settlement. The
parties control the mediation process. Unlike trial or
arbitration, the mediator cannot impose a particular
result on a party. If all parties cannot agree, the
dispute remains unresolved and litigation commences or
moves forward.
The Frei case is an example of how attorney fees can
spiral out of control. A mediator’s explanation of the
likely litigation expenses and the pros and cons of the
parties’ respective positions may have avoided the Frei
disaster.
Conclusion.
The purpose of early mediation is to minimize the cost
and risk of litigation and to attempt to buy peace with
a negotiated settlement.
When drafting your contract, a provision requiring
mediation prior to litigating is an effective tool to
facilitate an early resolution without incurring
significant litigation costs. Generally, there is
little resistance to inclusion of a mediation clause as
part of your contract negotiations.
After a contractual dispute arises and if you are unsure
whether the contract provides a mediation requirement
prior to litigation, consult your attorney. As in the
Frei case, the refusal to mediate can have drastic
consequences on your ability to recover attorney’s fees.
This
quarterly newsletter is published for the interest of
friends, clients and prospective clients of the Law
Offices of Jeffrey L. Marcus and should not be relied upon
or considered as legal advice.
*Jeffrey
L. Marcus, Esq. provides litigation services and
transactional advice to the firm’s clients.
He has more than 14 years’ experience in private
and corporate practices involving business transactions
and real estate. Mr.
Marcus can be contacted at jeff@marcuslawgroup.com
or at the above address/telephone number.
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