Home « Mediation, Employment, Civil Rights « Fashioning Durable Settlements

It Ain’t Over Till It’s Over:
Fashioning Durable Settlements

Alternatives to the High Cost of Litigation
International Institute for Conflict Prevention & Resolution
Vol. 27 No. 3
March 2009

It’s 7:00 p.m., and after a long hard mediation, the case has settled. The plaintiff prepares to move on with his life. The defendant’s representatives, the lawyers, and the mediator promptly turn to their next task. And everyone breathes a sigh of relief — perhaps too soon.

In employment mediation practice, instead of being the beginning of the end, the handshake agreement often merely signals the end of the beginning.

Informal resolution too frequently serves only as a prelude to quarrels over what exactly was agreed to, delays in delivery or signature of the formal documents, pitched battles over boilerplate language, and neglect by the company to follow up with punctual payments.

At times, attorneys’ inattention to their clients after the mediation session allows employees to become disaffected, or managers to act in ways perceived as retaliatory. The bad feelings caused by post-mediation failures in follow-up and communication can derail hard-won settlements. Derailment can also result from simple procrastination, as parties fall prey to settlers’ remorse.

These types of problems are probably more endemic to employment matters than to other business cases since feelings play such a large role in the underlying conflict, and plaintiffs may appear pro se. But the principles apply to mediation across the board.

To avoid a breakdown, the mediator must take steps to ensure that any settlement is durable. During mediation, he or she has to try to anticipate barriers to lasting agreement and try to overcome them. Probing potential weak points entails the risk of exposing a “settlement that isn’t” — a risk worth taking to guarantee that a seeming bargain really is one.

As to unforeseen or unforeseeable obstacles arising after mediation, the mediator has to be ready to help the parties hold onto, or repair, their deal. Abetting transient or illusory understandings should give the mediator no satisfaction since these do not serve the clients’ interests.

Creating Durability

Problem: Incompleteness, misunderstanding or lack of recall.

Solution: Ask questions and seek accord on the finer points of agreement; encourage the parties to enter into a memorandum of understanding, or MOU.

Although everyone may be anxious to finish, a good mediator prods the clients and their counsel to smoke out latent problems. Attention to these matters is most useful while all participants are still present and in mediation mode.

After nailing down all of the salient provisions, the parties should sign an MOU. At the very least, it ought to set out the “dickered” terms, such as the amount and timing of payments, or stipulations for a neutral reference or resignation in lieu of discharge. Such a precaution is a no­brainer, guarding against not only genuine misapprehensions, but also lack of recollection or bad-faith reconstruction of what occurred during the session.

Less obvious, but often equally important: The writing should contain a reference to significant standard contract provisos such as waiver and release of claims, confidentiality, non-disparagement, agreement not to seek re-employment, and characterization of settlement awards for tax purposes.

One example of a landmine lurking in boilerplate arose in a case of a longtime hotel concierge seeking to conclude a buyout arrangement. Focusing on the MOU’s no- rehire provision made the parties recognize that the employer’s usual language would have barred the employee from working at any of hundreds of affiliated entities, potentially wrecking his career. The early alert prompted them to reach accord on narrower wording — the former employee was barred from applying to the core hotel group, but could seek work with its franchisees — which averted an explosive situation down the road.

A more common source of trouble stems from a failure to consider the deal’s tax implications. Since 1996, almost every type of settlement payment to a plaintiff in an employment dispute has been subject to taxation. But particularly when larger sums are changing hands, designation of all or part of the amount as pain and suffering, as opposed to compensation — which determines whether it will be “1099’d” or “W-2-’d” — can make a difference to the employee, both financially and psychologically.

Not only does a 1099 avoid certain payroll deductions; it also defers, and places on the employee, the responsibility for paying taxes. That gives the employee the time value of the money, and prevents sticker shock caused by a check smaller than what the employee bargained for.

But in return for this favorable treatment, the employer usually will insist on a so-called clawback provision obligating the employee to indemnify it against any assessment flowing from the IRS’s rejection of such characterization. If unforeseen, the surfacing of these sensitive matters after the session can delay or scuttle the deal.

Cold Feet

Problem: Settlers’ remorse — backing out of the bargain, or reconstructing its terms.

Solution: Ensure that all practically and legally necessary people attend; encourage the parties to make the MOU binding, and consider including a merger clause stating that the writing comprises all material terms. Alternatively, when possible, execute final documents on the spot; create relationships of confidence and trust that will help the mediator resurrect dying deals.

Parties back out of agreements for various reasons. One person may simply get cold feet after the session; another may speak to a friend or relative who tells him he made a bad bargain.

At times, people learn new facts that affect the matter’s value. For example, in a pregnancy discrimination suit, a newly disclosed doctor’s report revealed that the plaintiff was not yet pregnant when she was fired. A client or attorney may have acted in bad faith, never intending to honor an ostensible “understanding,” or viewing it as an option at most. Perhaps the plaintiff feels sandbagged by an unforeseen boilerplate term.

Not all such reversals are avoidable — or even undesirable, as in instances of fraud or mutual mistake. Yet most generate negative effects. At worst, they can lead to satellite litigation over whether the agreement was meant to be enforceable absent formal documentation.

Further disputes will embroil the participants if someone seeks the mediator’s testimony and the neutral moves to quash the subpoena. Even when the injured party accepts the other side’s withdrawal, mistrust and anger caused by the latter’s change of heart will likely impede future efforts to achieve closure.

Fortunately, the mediator can take, or advise, reasonable precautions to reduce the incidence of certain kinds of predictable problems.

For one thing, the mediator should make sure that all essential people come to the mediation. “Essential” refers not only to individuals with settlement authority for the employer, but also to those significant others without whose advice or consent the employee will hesitate to conclude a bargain. Whether or not the defendant assents to a plaintiff’s friend or relative attending a joint session — none of this author’s clients have excluded such a person — he or she can participate in caucuses involving the plaintiff.

The mediator should tell parties and counsel that you can’t argue with empty chairs, and that the telephone is a poor substitute for actual presence. It is all too easy for spouses, siblings and parents in the background to sabotage deals when the mediator can no longer counter pleas like: “You promised you wouldn’t take less than six figures!”

By contrast, a family member or friend on whom an employee relies can sometimes see what the plaintiff cannot — the dispute’s emotional toll, for example — and thus may play an important role in producing agreement in the first place.

The mediator also should offer the parties the option of making their MOU an expressly binding and, in some instances, wholly integrated contract. The critical need for such provisions became apparent in the case of a pro se plaintiff who, with the aid of pro bono counsel for mediation purposes only, had struck a very favorable bargain for a $20,000 payment.

At the last minute, the defendant hospital’s representative kindly volunteered to see whether an affiliated university would treat the employee’s severe dental disease without charge. Clearly, no results were promised. But the MOU did not mention this collateral matter — let alone, contain a “best efforts” promise or a merger clause, or state that the parties were legally bound absent further documentation. (Minimally, it is wise to have the writing state its binding or nonbinding nature.)

When the hospital failed to procure free treatment, the plaintiff reneged, claiming that receipt of this afterthought benefit had been a condition of his assent. The hospital countered by moving to enforce the MOU. It took the author weeks of work with the disaffected client to put this Humpty Dumpty of a deal back together again. Hindsight reveals that better MOU drafting could have prevented this near-debacle.

Still, raising these potentially thorny issues at the end of a long mediation takes courage. Caution may seem to counsel against it. Because settlement entails compromise, one or more of the clients may be figuratively holding his nose and thinking: “I can always change my mind.” Should the mediator jeopardize the painfully constructed deal?

Paradoxically, it is most important to take that risk when the mediator senses the arrangement may be unstable. As previously noted, better to unearth underlying problems when further discussion can likely unravel them than to let them surface after the session’s momentum has dissipated.

Moreover, even if parties are unwilling to make the term sheet legally binding, they should have no reluctance to memorialize what they have agreed to. While a merger clause generally appears in a final, formal contract, some settlements, such as out-of-court agreements or those without attorney involvement, do not contemplate intricate paperwork. In any event, a defendant can gain considerable protection by a simple sentence in the MOU such as: “No consideration has been promised [Employee] in return for his release of claims against [Employer] except for $20,000 and a neutral reference.”

One way to avert these difficulties is to have the clients execute all necessary documents at the mediation. Some lawyers bring form agreements on their laptops for this purpose. But immediate sign-off may prove impossible, especially in complex matters, or a law like the Older Workers’ Benefit Protection Act imposes a cooling-off period before the employee can effectively waive rights. In such cases, the mediator can only advocate for a well- drawn MOU in which the parties promise to use their best efforts to formalize the term sheet and, ideally, to return to the mediator to resolve disputes arising from the process.

Finally, throughout the mediation, the mediator should work to earn the participants’ trust. Successfully doing so not only will help the neutral create agreement initially, but also will increase his or her effectiveness in cementing a “done deal.”

Combating Disintegration

Problem: Delay in delivery or signature of documents, or in payment.

Solution: Spur the dilatory party to action.

Even well-done MOUs cannot cover every contingency. Gratuitous procrastination or unforeseen problems also may hinder the deal’s culmination. The employer — usually the initiator — should dispatch the paperwork promptly, and perform no later than the agreement calls for. Otherwise, the employee may feel neglected, disrespected or even cheated. Such negative emotions tend to overshadow the rational considerations that originally led to settlement and thereby place the transaction at risk.

Employers also may get cold feet if employees delay in executing the contract.

Breakdown is a particular danger when either side has reservations about the agreement or, on the employer’s side, new decision-makers replace the ones who signed off on the bargain. Accordingly, the mediator should prod the party causing the holdup.

Sometimes a simple phone call will resolve the problem. Especially when corporate bureaucracy has slowed things down, the mediator can recount horror stories of deals that almost, or actually, fell apart because of a failure to move forward promptly. The mediator also can stress the waste of time and money an eleventh-hour collapse would create. While pleas by plaintiffs or their lawyers usually fall on deaf ears — a typical reaction being “Your case isn’t the only one I have!” — the neutral is likelier to be heard, and less likely to be resented. Pushing people is his or her job.

For a real-life example, when an employer claimed that it was unable to cut a check during the Christmas holiday season, the author noted that the employee might well have grounds for skepticism since the company was a bank! The bank took the point, and sent the payment the next day.

Mediator Help

Problem: Battles over boilerplate, or other terms not focused on at the mediation; trouble resolving a condition precedent to final resolution.

Solution: Make drafting suggestions; again, prod and cheerlead to produce closure; confront and alleviate irrational concerns.

In general, after the session the mediator should remain in the wings, ready to step in when needed to get the settlement back on track. Even if there is no duty to ensure the bargain’s implementation, often at least one of the parties will contact the mediator when breakdown looms. While the mediator should not intervene officiously — it is the clients’ agreement, not the neutral’s! — he or she should try to aid willing clients. The mediator must stop short of becoming an advocate for a particular side, however, thus compromising impartiality.

Most often, initial understandings threaten to founder because of disputes about specific provisions or language parties want included in the formal documents. The mediator is well-equipped to assist the clients in reaching closure in such situations, especially as they often involve concerns that are not strictly rational.

The author’s most difficult case of this kind featured a tenacious pro se employee whose pervasive distrust and anxiety were allowed to smolder untended. The employer had failed to send the employee documents to sign for several months following mediation. When the employee received the papers, she went to war with the boilerplate — perceiving either insult or risk in the most routine terms.

A unifying theme of the employee’s complaints was a sense of resentment at the one-sided nature of standard provisions like non-disparagement, confidentiality, non-admission and release. The employer agreed to make these mutual, despite the fact that it had no interest, for example, in publicizing a rather generous payment to her, nor did it have any claims against her. (As was pointed out with respect to the latter: “It costs nothing to release nothing.”)

Unfortunately, the employee insisted that the contract language be fully reciprocal even where this was patently senseless. Corporations, she was told, do not have “heirs” or “executors.” Moreover, she really had no need to protect her “immediate family members, current heirs, attorneys” or other representatives from defamation by the employer.

Trading on the established relationship as well as a shared sense of humor, the mediator convinced the employee that some of her demands were ridiculous. As to the rest, the company was persuaded to defer to her since doing so caused no damage except, perhaps, embarrassment over the peculiar verbiage. Notably, although the author offered few original drafting suggestions, intervention was required to overcome each party’s reactive devaluation of the other’s proposals and to defuse the plaintiff’s global suspicion of the defendant’s motives.

The oddness of this pro se employee’s desires should not obscure the broader point that even well-represented parties sometimes need the mediator’s help in sealing the deal after the mediation has ended. In particular, the lawyer-neutral can work with the clients to come up with specific language designed to accommodate practical concerns or dignitary needs.

For example, either a heightened burden of proof or a smaller amount can ease the sting of a liquidated damages provision — often inserted by a defendant as an in terrorem measure to avoid breach of confidentiality. An employer’s opposition to a mutual non-disparagement clause, based on reasonable fears of virtually unlimited exposure, may be addressed by inserting a list of covered individuals and a definition of forbidden behavior. A cure proviso might mitigate a party’s worry that the slightest breach will land it back in court again; so, too, may a term obligating the signers to attempt mediation before filing suit on the settlement contract.

More globally, the mediator can remind employers that boilerplate biased in their favor is not tantamount to Holy Writ — much of it can be discarded without jeopardizing their interests. Similarly, the mediator should help employees distinguish truly adverse provisions from harmless, if annoying, form language.

At times, substantive work must be done before the parties finalize the paperwork. Composition of a “good” reference letter, to be incorporated into the document, is an employment case example. In fact, such letters tend to cause problems because the employer wants to say little, while the employee expects a glowing testimonial to his or her many skills and achievements. The mediator can referee the war of the drafts by proposing compromise wording and pointing out to the employee that anything sounding too good to be true will be viewed as puffery, and thus backfire.

Defusing Disaster

Problem: A party’s dumb or provocative behavior.

Solution: Attempt damage control, ordinarily with counsel’s aid.

Clients may act in ways guaranteed to sabotage settlements. In another contentious case, where the employee was still on the job, final papers had actually been signed by both parties. But the Older Workers Benefit Protection Act requires a seven-day revocation period after execution, when a worker is releasing a claim under the Age Discrimination in Employment Act, or ADEA.

The employer, a hospital, suspended the employee, a nurse, two days later.

Nothing she had done warranted this extreme reaction, especially since the brokered accord called for rescission of a prior suspension. Predictably, the furious employee withdrew her consent. She decided to “run the clock” until she could resign with full retirement benefits. As a result, the hospital had to endure a yet more difficult and hostile employee for the better part of a year, or fire her and risk a union grievance, a serious retaliation charge, or likely both. Possibly, the employer’s lawyer, coached by the mediator, could have forestalled this unfortunate outcome had he kept closer tabs on the client during the crucial post-signature week.

With 20-20 hindsight, perhaps this mediator should have asked the defendant’s attorney if he really needed to include an ADEA waiver, since the suit involved only allegations of racial bias. Had the nurse wanted a revocation clause, she could have tried to bargain for it. On balance, raising this issue might have risked the appearance of mediator partiality. In addition, some deals are so unstable that they deserve to founder. Perhaps this was one.

Usually, though, the mediator, with or without counsel’s help, can defuse a bad situation before the damage becomes irremediable. For example, in a case against a bank, the employer reported that the employee had discussed a mediation session with a colleague in violation of confidentiality. The employee independently complained that a supervisor had retaliated against him. By promptly spurring the plaintiff’s lawyer to take the employee to task, and the defendant’s counsel to have the bank control its managers better, the author smoothed the path to closure.

Pro Bono Play

Problem: One side’s refusal to proceed for no clearly avoidable cause.

Solution: Relying on the goodwill established earlier, first establish the problem’s cause, and then find ways to address it. Typical responses include trying to sweeten the deal, caucusing with the recalcitrant party to overcome emotional barriers, and talking to the client alone when counsel has become an obstacle.

When the employee reneges — the more

frequent scenario — he may be brought back on board by a larger package. In approaching the defendant with a new demand, the mediator must tread carefully so the employer doesn’t view the actions as encouraging, or even collaborating in, extortionate conduct.

But if the mediator cannot convince the plaintiff to adhere to the stated bargain, enhancing it is worth a try. A proposal to add value in nonmonetary terms, such as expunging a disciplinary record, furnishing a more detailed reference, or helping the worker get a new job, may stand a better chance of acceptance even when it translates into dollar terms — for example, providing additional outplacement services.

Psychologically, it might appear less of a holdup to the employer than a bald request for more money. Practically, it may possess the virtue of drawing on a different budget or not surpassing an insurance adjuster’s settlement guidelines. Once in a while, the author has privately asked the employee’s lawyer whether he might consider taking a smaller percentage of the settlement than stipulated in the retainer. Since this obviously is a delicate subject, the author raises it solely with attorneys who strike her as truly concerned for the client’s welfare — and mainly where she is acting pro bono. This ploy avoids the problems of reopening talks with the employer.

Sometimes, a party’s reservations stem less from financial motives than from the kind of negative emotions that likely engaged the neutral’s attention during mediation. Anger, misery, humiliation and similar feelings may resurface in the guise of dissatisfaction with the bargain, but ordinarily cannot be dealt with by focusing only on objective value. The mediator needs to confront the real barriers to closure.

In one instance, a man discharged, arguably unfairly, was so married to his pain — blaming not only his financial woes but also his divorce and diabetes on the employer — that his lawyer and the mediator had to spend many hours rehearsing again the psychic benefits of letting go and moving forward. Eventually, stating that he appreciated the efforts and the patience, he opted to proceed with the deal.

In another matter, in which New York City had agreed to pay an elderly plaintiff a generous amount, she suddenly balked at executing the formal papers. Not knowing what to make of her frivolous objections, her lawyers begged to schedule a second session with her. At the next meeting, she was wholly docile, claiming that she had merely wanted to see this mediator again. Maybe this was an example of too good a mediator-client relationship! She signed the document without a murmur.

Although no ethical precepts forbid a neutral from talking alone with a represented party even without counsel’s consent, usually both professional courtesy and sound strategy dictate working through the attorney. When a client wishing to renege calls the mediator, the first attempt should be to redirect the client to his or her lawyer; the author may contact counsel directly.

Because lawyer-client relations often descend to their nadir after a “successful” mediation — the client may feel that the attorney coerced a settlement in order to collect his or her fee, or that the attorney has stopped paying attention to her — many lawyers are happy to have the mediator caucus privately with the party.

Once, however, the author learned through an employee’s attorney that in- house counsel for the defendant, a state agency, was stalling to try to kill a deal that was deemed too favorable to the plaintiff. Among other things, the agency had promised to furnish the now-uninsured woman, who required expensive drugs to continue to combat breast cancer, gap coverage during the weeks before her new employment started. Rather than press her urgent case with an unsympathetic lawyer, or risk denial of a request to speak to the client’s representative, this mediator called the Human Resources Director and asked her to look into the matter. The director sidestepped the obstructive attorney and brought the matter to a prompt conclusion.

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Stephen A. Hochman, a veteran New York ADR practitioner, often says that the six qualities most needed by a good mediator are “patience, perseverance, patience, perseverance, and patience and perseverance.” I agree. These are required not only to produce the “handshake” deal, but also to ensure that it reaches fruition.