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Reforming a Mediated Settlement Agreement When It Contains a Mistake

Mediation mistakeTerm sheets, MOU’s and other forms of abridged settlement agreements hastily drafted and executed at the conclusion of a mediation typically only contain the material terms of the settlement (with the parties contemplating that a more detailed document will be prepared at a later date). Given the time constraints under which such agreements are prepared, and the lack of formalities (many such agreements are handwritten), it should not come as a surprise that material terms upon which the parties agreed are sometimes inartfully drafted or even inadvertently omitted.

When such a blunder occurs, what remedies does the party prejudiced by the error have to conform the settlement to the parties’ agreement? Does mediation confidentiality prevent the party from adducing the evidence necessary to establish there was a mistake?

A South Carolina appellate court recently addressed such questions in the context of a mediated divorce settlement. See May v. May, 2019 WL 3310392 (S.C. Ct. App. July 24, 2019). In May, a husband (represented by counsel) and wife (appearing pro se) reached agreement on the material terms of their divorce at a mediation. The mediator drafted a settlement agreement intended to reflect the agreed-upon terms. The relevant portion of the Agreement provided:

The Wife shall refinance or assume the debt on the home to remove the Husband’s name from the indebtedness to Benchmark Mortgage. The Wife shall refinance or assume the debt on the home to remove the Husband’s name from the indebtedness on or before June 7, 2016. The Husband hereby waives and relinquishes any and all interest in the property and the equity therein. The Wife shall be responsible for any and all debts and liabilities associated with this property and shall hold the Husband harmless therefrom. (emphasis added).

Should the Wife not refinance or otherwise remove the Husband’s name from the Benchmark Mortgage on or before June 7, 2016, the house shall be placed on the market for sale by June 13, 2016…. All net sales proceeds shall be split by the parties on a 50/50 basis.

The husband and wife initialed each page of the agreement and signed the final page. They then appeared before the family court (the husband with his attorney, and the wife pro se), and affirmed they had read and understood the agreement and consented to it.

Subsequently, the wife timely refinanced the mortgage. At that point, the husband claimed that the wife owed him $60,000 from the refinance proceeds for his equity in the home.

The problem is that the provision quoted above does not contain any such term. While it provides for a 50/50 split of the sales proceeds if the wife does not refinance and the house is sold, it is silent concerning the division of the proceeds from a refinance (even though the husband agreed to relinquish his interest in the property in the event of a refinancing).

Supported by affidavits from his attorney and the mediator, the husband moved to reform the agreement to correct what he characterized as a mutual mistake. In opposition, the wife’s affidavit attested that there was no error, and the written agreement reflected her understanding of what had been agreed to at the mediation. She further argued that evidence regarding what occurred during mediation was inadmissible due to mediation confidentiality.

The family court concluded the agreement reflected a mistake and should be reformed. Notably, the family court indicated that it only relied on the affidavits of the husband and his attorney, but not the mediator’s affidavit, in reaching this conclusion. It also stressed the glaring inconsistency in the agreement itself under which the husband received no equity in the marital home if the wife refinanced and he relinquished his interest, but would receive half the equity if the home was sold. That simply made no sense and is not something to which a rational person would have agreed (especially when represented by counsel).

The appellate court affirmed. Addressing the wife’s argument that mediation confidentiality barred the family court from considering any information related to the mediation (which would have rendered the affidavits of the husband, the husband’s attorney, and the mediator inadmissible), the court distinguished between mediation communications (which are privileged) and agreements resulting from a mediation (which are not). It observed that the affidavits of the husband, his attorney and the mediator did not disclose the substance of the negotiations that occurred during the mediation. Instead, they simply attested to what the parties had agreed to at the mediation.

The balance of the court’s decision addressed the wife’s arguments concerning principles of mutual mistake, reformation and parol evidence. Among other things, the wife argued that the husband should have read the agreement more carefully. The court responded:

Although Husband should have read the Agreement more carefully, Wife either neglected to read the Agreement herself or recognized Husband’s error and elected to remain silent. Consequently, we affirm the family court’s decision to set aside the judgment and reform the Agreement to correct the mutual mistake of the parties.

In other words, when one party notices that a mediated settlement contains a clear mistake that is contrary to the agreement of the parties, it is obligated to call attention to the error rather than remain silent.

Of course, there is also plenty of caselaw holding that the failure to carefully read a contract before signing it does not vitiate a party’s obligations under the document. Further, as per previous blog posts (e.g., here and here), courts will enforce a mediated settlement if it contains the material terms of the parties’ agreement, notwithstanding the failure to subsequently draft and execute a more detailed document.

Where courts will draw the line in a particular case is hard to predict. Thus, the moral of May is that, notwithstanding the pressure to quickly memorialize an agreement reached at the conclusion of a mediation before the parties have time to reconsider and get cold feet, parties and their counsel need to carefully review any written agreement before signing it to make sure it is consistent with their understanding of the terms agreed upon.

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