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Chancery Denies Attempt to Use Mediation Communications to Supplement Mediation Term Sheet

Posted In Chancery, Mediation

Starkman v. O’Rourke, C.A. 2018-0901-KSJM (Del. Ch. Jan. 14, 2019) (ORDER).

Parties who resolve a case through a mediation conducted under Court of Chancery Rule 174 should include all material provisions in any mediation term sheet. As the Order in Starkman demonstrates, Rule 174 provides no opportunity for a party to introduce mediation communications to assert that a signed mediation agreement does not accurately reflect the parties’ discussions.

Starkman involved claims and counterclaims related to a limited liability company. Following Rule 174 mediation, the parties agreed to settlement terms, which they reduced to a Settlement Term Sheet. The Term Sheet purported to state the “terms” upon which the parties “agree[d] to settle” and that it was “binding ... pending the execution of a formal settlement agreement.” (Order ¶¶ 2-3). But in the course of drafting that formal settlement agreement, the parties disagreed whether the company had an obligation to submit corrective tax filings. The defendant (who would have benefited from the filings) asserted that the corrective filings were part of the agreement, even though the term sheet did not expressly mention the filings.

After the defendant refused to sign a formal settlement agreement, the plaintiffs moved to enforce the Term Sheet. In response, the defendant asserted that “amending the tax filings flow[ed] from the agreement to settle,” and thus, “must be read into” the Term Sheet’s release. (Order ¶ 12). Alternatively, he argued that the parties reached a separate, enforceable oral agreement about the tax filings at mediation. As a final fallback, the defendant contended that if there were no enforceable agreement about the tax filings, then there was no meeting of the minds and thus, no agreement at all.

The Court rejected all of the defendant’s arguments because a reasonable person in place of the parties would have concluded that the Term Sheet included all material terms. The Term Sheet stated that it was binding and that it contained the parties’ settlement terms. Moreover, under Rule 174(e), the Term Sheet incorporated all of Rule 174, which prohibits discovery into, and compelled testimony about, mediation communications. Given the Term Sheet’s language, there was no question that the parties reached an agreement, and the agreement’s language plus the Rule 174 context in which it was negotiated made it unreasonable to assert that the Term Sheet was somehow “an incomplete recitation of the material terms of the Agreement.” (Order ¶ 15). Thus, the Court declined to consider parol evidence regarding the mediation communications, and granted the plaintiffs’ motion to enforce the Term Sheet.

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