Is Your Pre-Litigation Mediation Clause Well-Drafted? A Cautionary Tale from Hawaii

Given the increasing popularity of pre-litigation mediation clauses, we continue to keep an eye out for new decisions addressing enforcement of such clauses.  In a past post, we discussed the importance of fixing deadlines to both commence and complete pre-litigation mediation. A Hawaii federal court recently held that the relevant contractual language must also unambiguously state that mediation is a condition precedent to litigation. Hans Franke et al. v. Julia Yates, et al., 2019 WL 4856002 (D. Haw. Oct. 1, 2019).

In Hans, the plaintiffs (an elderly couple named the Frankes) purchased a two-million-dollar home in Hawaii, which they rented to two Hawaii real estate agents (the Yates). Upkeep of the home became a hassle, and the Frankes retained the Yates to sell the property pursuant to a listing agreement. After the Yates sold the home to one of their friends (acting as a dual agent), the Frankes directed the escrow agent to withhold the Yates’s commission on the ground that they had failed to maximize the sales price.

The Yates sued the Frankes in Nevada  for breach of contract and unjust enrichment, while the Frankes sued the Yates in Hawaii, asserting claims for fraud, breach of fiduciary duty and elder abuse. The Yates sought dismissal of the Hawaii action on the ground that the listing agreement contained the following clause:

If any dispute or claim in law or equity arises out of this Contract, and the parties are unable to resolve the dispute, Seller agrees to attempt in good faith to settle such dispute or claim by non-binding mediation . . . If the mediation is not successful, then Seller will consider arbitration and may seek legal counsel to make this determination.

The court cited the consensus view that failure to mediate a dispute under a contract making mediation a condition precedent to filing a lawsuit warrants dismissal under Rule 12(b)(6). It held, however, the clause cited above did not unambiguously make mediation a condition precedent to commencing an action.

To qualify as a valid pre-litigation mediation clause, the court held, a provision should both mention the concept of filing a lawsuit, and require mediation before a lawsuit is filed. The court cited sample clauses from earlier decisions that met these requirements.

For example, in one case, the Northern District of California enforced a clause providing that the parties “agree to enter into mediation of all disputes involving this Agreement or any other aspect of the relationship, for a minimum or four (4) hours, prior to initiating any legal action against the other.” (emphasis added).

In another case, the District of Oregon declined to strike an affirmative defense alleging that the plaintiff had breached the underlying agreement by failing to comply with a clause providing that “if any dispute, controversy, or claim arises out of or relates to this Agreement, the Parties agree first to try in good faith to settle the dispute by non-binding mediation before resorting to arbitration, litigation, or some other dispute resolution procedure.” (emphasis added).

Thus, the language missing from the clause construed in Hans was “before filing a lawsuit,” or even better, “as a condition precedent to filing a lawsuit.” Without those magic words, the court held, the provision created a “promise” to mediate, but did not unambiguously require the Sellers to do so before exercising their right to sue.

On the other hand, if the clause created a “promise to mediate,” how and when did the parties contemplate that the Yates would enforce that promise if not before the filing of a lawsuit? The court noted that “parties often engage in mediation during litigation,” but by then the value of the clause will have been lost. Does not the court’s conclusion render the mediation clause meaningless in violation of principles of contract construction?

Arguably, the court should have concluded that the clause was ambiguous, and perhaps permitted limited discovery to adduce evidence concerning the parties’ intent (much as a court may permit limited discovery when a party moves to dismiss for lack of personal jurisdiction). What do readers think?

A possible explanation for the court’s ruling emerges from another interesting feature of the clause in Hans, not discussed by the court, which obligated only the sellers to mediate, but not the real estate agents. It’s possible this lack of reciprocity troubled the court. Indeed, one gets the sense from the facts that the real estate agents were aggressive entrepreneurs who sought to take advantage of an elderly couple suffering from medical conditions who lived far away from Hawaii. This may have been on the court’s mind, and if so, it found a way to prevent the defendants from getting the case thrown out of the Frankes’s chosen forum.