Malpractice Claim Barred due to Mediation Confidentiality

Many litigants want their day in court; however, the vast majority of cases never make it to trial.  Facing heavy dockets, courts are increasingly encouraging parties to resolve claims through ADR methods, like mediation.  In order to foster successful mediation, several states have enacted mediation confidentiality statutes, which prevent mediation discussions from being admitted into court if the mediation is unsuccessful.  While the purpose of these statutes is to encourage parties to speak openly with the mediator, confidentiality may have unforeseen consequences on the attorney-client relationship.

Take, for instance, this recent example out of California.  The plaintiff was a shareholder and officer of an apparel company.  In 2006, the apparel company filed a lawsuit against one of its designers for breach of contract.  The designer filed a cross-complaint alleging fraud against the company and the plaintiff.

While the litigation was pending, the company entered into an agreement to sell its assets to a foreign corporation, contingent upon a favorable resolution of the apparel litigation. The apparel company hired a law firm to represent it in the planned acquisition.  After obtaining a conflict of interest waiver, the firm also began representing the company in the underlying apparel litigation.

Shortly thereafter the parties engaged in mediation in which the plaintiff and his company agreed to pay the designer over $2 million in damages.  But, after the parties executed the settlement, the foreign corporation decided not to acquire the apparel company. The plaintiff claimed that no payment was due to the designer because any payment was contingent upon the sale. The designer declared a default and successfully obtained a judgment under the settlement terms.  Unable to pay the judgment, the plaintiff declared bankruptcy.

Following his bankruptcy, the plaintiff sued his attorneys alleging they committed malpractice by causing him to execute a settlement agreement that converted his company’s corporate obligations into his own.  During his deposition, the plaintiff admitted that all discussions with his counsel regarding the settlement occurred during the mediation in the apparel litigation.  The law firm then moved for summary judgment on the basis that the plaintiff was relying on communications made in connection with mediation, which are barred from being offered into evidence by the mediation confidentiality statute.

The trial court granted summary judgment for the law firm.  The court continued that under the confidentiality statute, all statements and writings prepared in the course of mediation are inadmissible in any judicial proceeding, and that communications and writings protected by the statute remain confidential even after mediation ends.  The court thus concluded that the plaintiff could not prove any act by his law firm caused him to enter the settlement agreement, and thereby suffer the alleged injuries, because all communications were in the context of mediation.

This provides an interesting example of the impact of mediation confidentiality. Since the rules vary depending on the jurisdiction, practitioners would be well served to revisit the rules prior to engaging in a mediation in an unfamiliar jurisdiction. This case also illustrates the importance of ensuring that clients are properly informed about the status of the matter and any facts that may materially affect a client’s interests in the litigation.  This includes informing a client of effects of the mediation confidentiality statute on future malpractice claims.  Failing to properly inform clients could eventually lead to the implementation of waivers or equitable exceptions to the confidentiality provision, which could expose attorneys to increased liability.


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