"Good Faith or No Faith?"

I had the recent privilege of interviewing Lord Harry Woolf of Barnes, former Master of the Rolls and Lord Chief Justice of England and Wales.  We touched on the seminal Halsey Case, which levied costs against a party that had prevailed, but had unreasonably refused to mediate as urged by the counterparty, thereby burdening the courts and the parties in requiring litigation of a matter that might have been resolved earlier.

We discussed the onus upon judges to “put teeth into” orders or suggestions to mediate, but Lord Woolf (surprisingly) backed off a bit from Halsey.  He cited the difficulty of distinguishing between parties who, pursuant to court order, mediate “in good faith or no faith,” and noted that a small but growing area of litigation was arising from the question.  And so it is in the United States, as two recent court decisions illustrate.

In Grenion v. Farmers Insurance Exchange, (E.D.N.Y. March 14, 2014), plaintiff was awarded costs of its expenses in participating in a court-ordered settlement at which the defendant insurance company had allegedly acted in bad faith.  The court had ordered each party to be represented at the settlement conference by a person “who has full authority to settle the matter.  Having a client with authority by telephone is not an acceptable alternative.”  The representative of Farmers stipulated that “the decision has been made that we don’t want to make an offer to settle,” and that he was “not in a position today to change the decision of the company that it will not pay any money on the case.”  The court held that, while it is “axiomatic that a court may not try to coerce parties into settlement,” the troublesome issue was not whether the defendant made an offer to settle, but rather “whether defendant failed to participate in good faith in a mandatory settlement conference.”

The holding:  “Where, as here, a corporation produces a representative who lacks authority to change the settlement position of the corporation, sanctions may be imposed” pursuant to Rule 37.

The second case of note is the outcome of an appeal from a previously posted case from the U.S. Bankruptcy Court for the Southern District of New York, In re A.T. Reynolds & Sons, Inc.  There the lower court had sanctioned Wells Fargo for failing to comply with a mediation order.  Wells Fargo and its counsel had taken a no-pay position and the mediator had reported to the court [sic] that they had failed to “go through risk analysis, [and] simply reiterate[d] the position they walked into the room with.”

Upon review, the District Court reversed.  “Contrary to the Bankruptcy Court’s determination, Wells Fargo was within its rights to enter the mediation with the position that it would not make a settlement offer.  It was also within its rights to predetermine that it was not liable and to insist on being dissuaded of the supremacy of its legal position”  (internal quotes removed).  It is not required that a party undergo risk analysis where “it determined that it was not liable and adhered to this position at the mediation; such conduct is entirely consistent with a rational analysis of risk.”

Lord Woolf was right to note that Halsey — and indeed all court-annexed ADR — is a “double-edged sword.”  Courts require (or strongly encourage) mediation because, as the court in Grenion observed,

Most cases settle.  The juncture at which voluntary resolution is reached has a significant impact upon the parties and the public; prolonged litigation processes impose significant litigation expense, disruption and, in some cases, distress on litigants and increase the cost to the public  of managing congested dockets.  In response, courts have created mechanisms — including streamlined discovery and court-supervised settlement discussions — designed to facilitate early settlement.

In purely voluntary mediation or settlement negotiation, no one seeks judicial relief for “bad faith negotiation,” yet in court-annexed mediation entire standards of law are being promulgated to apply consistent measures to the bevy of claims that are asserted.  Litigating “bad faith negotiation” was a nonsense until the courts became involved in requiring parties (and counsel) to talk to each other.

How ironic that judicial efforts to reduce litigation have had the effect of promoting it!

(The interview with Lord Woolf is available as a podcast to members of the ABA Business Law Section.)

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