Mediation: Not to be overlooked

Anyone who has litigated knows how to start a lawsuit: File a complaint. You might send a pre-filing demand letter in order to frame the plaintiff's claims or in order to prepare the defendant for an upcoming lawsuit, but there's usually not much more to getting things started.

Or is there? What about mediation? Personal injury and employment attorneys don't usually propose mediation prior to filing a lawsuit. Often mediation isn't even discussed until depositions are taken, subpoenas have been served, records produced and experts consulted.

With real estate and construction cases things can be different. The California Association of Realtors publishes a form of purchase contract titled as "California Residential Purchase Agreement and Joint Escrow Instructions." This contract form is unquestionably the most commonly used form in California residential real estate transactions. The contract includes a clause that provides that in any action, proceeding or arbitration arising out of the contract, the prevailing party will be entitled to an award of attorneys fees against the non-prevailing party. The contract further provides that the parties will mediate any dispute arising between them before instituting an arbitration or court action. The contract states that if any party commences an action without first submitting the matter to mediation, or any party refuses to mediate after a request has been made, then that party shall not be entitled to recover attorneys fees even if they would otherwise be entitled to such fees.

These two provisions can have significant consequences. Real estate litigation can be lengthy, complex and expensive. Some real estate disputes involve many percipient witnesses, which means that there can be high deposition costs. They can involve significant construction issues, which can be time-consuming to identify and resolve. It's not uncommon for each party to incur hundreds of thousands of dollars in attorneys fees in a hotly contested dispute.

So just how strictly are such "Mandatory Mediation" clauses enforced? The answer is "It depends." When a party fails or refuses to mediate before instituting legal action, courts have demonstrated a ready willingness to deny them any award of their attorneys fees. See Frei v. Davey (2004) 124 Cal. App. 4th 1506.

Frei concerned the sale of a single family residence. Buyer and Seller entered into a form of purchase contract which included a clause requiring the parties to submit any dispute to mediation before resorting to litigation or arbitration. The fees clause provided that any party that failed to so mediate would not be entitled to an award of their attorneys fees. After the contract was formed the Sellers unilaterally canceled it. The Buyers requested mediation. Thirteen days later, the Sellers had not responded and the Buyers filed suit. After several weeks the buyers renewed their request for mediation and the Sellers responded that they were "not interested" in mediating. On the eve of trial, nearly a year after the buyer's initial request for mediation, the parties did mediate their case. But the court of appeal held that a mediation after such delay was insufficient to comply with the contractual mediation requirement. The parties ended up litigating their claims over the course of two trials and three appeals. The Seller ultimately prevailed and received an award of their attorneys fees in trial court, but the court of appeal reversed the fee award because of the Seller's refusal to mediate.

Prevailing at trial and appeal only to lose your right to recover attorneys fees can be a dismaying result for a party. In the Frei case, the prevailing Sellers argued that the Buyers were absolutely intransigent; the Sellers further argued that through the course of informal settlement negotiations, the contract's mediation requirement had been effectively satisfied. The Court of Appeal was unmoved. No mediation meant no attorneys fees (even though the parties did in fact mediate nearly a year after suit was filed).

As held by the Court of Appeal, no mediation means no attorneys fees award. But there can be exceptions. Many real estate contracts provide that a party who files suit without first mediating in order to preserve a statute of limitations will not be deemed to have violated a "Mandatory Mediation" clause. See Kahn v. Chetcuti (2002) 101 Cal. App. 4th 61. The same is true for parties who file suit without first mediating in order to record a lis pendens. See Greif v. Sanin (2022) 74 Cal. App. 4th 412, 454-455. Other exceptions provided in a contract can also excuse a party's filing of suit without first requesting mediation. Unless an exception applies, the Frei case clearly holds that parties who violate "Mandatory Mediation" clauses do so at their own peril. For a more detailed discussion of forfeiture of a right to recover attorneys fees in connection with pre-litigation mediation requirements, see California Real Property Remedies and Damages (CEB) 2nd ed. §§14.11, 14.56-14.57.

In addition to appearing in contracts for the purchase of California residential real estate, Mandatory Mediation clauses can be found in construction contracts and leases. There does not appear to be any bar to including such clauses in other types of contracts as well. As a result, before filing suit or instituting arbitration proceedings counsel should always review the contract at issue to determine whether it requires disputes to be mediated.

Robert Jacobs is a full-time neutral with Judicate West. After litigating cases in California State courts for more than 30 years, he now mediates real estate, construction, business, personal injury, employment and trust litigation matters. He can be reached at bob@attorney-mediator.law.