A Mediator/Arbitrator Malpractice Lawsuit: Haven’t Seen This Before!

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Satisfying the standard of care

By: Donald L. Swanson

This doesn’t happen every day:

  • A mediator’s engagement agreement authorizes the mediator to arbitrate disputes about any settlement agreement the parties might reach in mediation;
  • The mediation achieves a settlement agreement, but a dispute arises over an alleged mistake in the agreement document; and
  • The mediator attempts to arbitrate the dispute and is sued for malpractice in attempting to do so.

This actually happened—in New Zealand. And the Court of Appeal of New Zealand issued its ruling on the matter. [Fn. 1]

The Facts

Here’s what happened.

The case involves the mediation of a bitterly contested dispute between a farmer and his three daughters from a first marriage. The mediation results in a written settlement agreement, in which a specified number of shares of New Zealand Dairy Group Ltd stock (i.e., 21,530 shares) were to be transferred from the farmer to these three daughters.

A few days after the mediation, the daughters’ solicitors claims that a mistake had been made in the number of shares to be transferred. They say the daughters should have received 59,430 shares, because of a bonus issue of stock that occurred in 1997, which the parties overlooked in the mediation.

The farmer denies the mistake claim.

–Engagement Agreement

The agreement engaging the mediator includes arbitration provisions for disputes relating to any settlement agreement between the parties. Clauses 12 & 13 of the engagement agreement provide that any of the following types of disputes between the parties will be submitted to the mediator for a “final and binding” determination (i.e., for arbitration):

Clause 12: Any dispute over “an omission or uncertainty” in the terms of a settlement agreement; and

Clause 13: Any dispute over “the interpretation or implementation” of the engagement agreement

–Mediator Acting as Arbitrator

The daughters’ solicitors ask the mediator to arbitrate the mistake issue concerning number of shares to be transferred. The mediator agrees to do so, despite farmer’s opposition.

The mediator determines that he holds jurisdiction over the dispute, under clause 13 of the engagement agreement, because the dispute concerns the “interpretation or implementation” of the settlement agreement.

After receiving input from the parties, the mediator-turned-arbitrator rules in daughters’ favor on the mistake issue as follows:

  • The settlement Agreement’s reference to 21,530 shares of stock is a mistake and should, actually, reference 56,954 shares; and
  • If farmer fails to promptly transfer all 56,954 shares, daughters will be entitled to specific performance of the settlement agreement, “as amplified and interpreted by this separate binding determination.”

Litigation: Agreement Enforcement and Malpractice

Farmer refuses to comply, so daughters sue him to enforce the settlement agreement as modified by the mediator/arbitrator. Farmer contests the suit.

Then, farmer sues the mediator/arbitrator, seeking damages for professional negligence and alleging that mediator/arbitrator had no jurisdiction over the mistake dispute. Farmer’s claim damages, including $25,000 for “trauma, worry, stress and the upset suffered of ongoing litigation with daughters for a three year period.”

The trial court holds that mediator/arbitrator had jurisdiction over the mistake dispute and that his determination should be upheld.

The trial court also holds that mediator/arbitrator had immunity from malpractice liability under clause 9 of the engagement agreement, which provides:

“The parties jointly and severally release, discharge and indemnify the Mediator in respect of all liability of any kind whatsoever (whether involving negligence or not) which may be alleged to arise in connection with or to result from or to relate in any way to this mediation.”

Reversal of Jurisdiction On Appeal

The appellate court reverses on jurisdiction. Here is their rationale:

The mediator/arbitrator exceeded his jurisdiction under clause 13 of the engagement agreement because he did not engage in “interpretation” of the settlement agreement—“It was quite clear that 21,530 shares were, pursuant to an express provision of the document, to be transferred”—nor did he address “how the agreement should be implemented”; and

Instead, he determined that the agreement “required correction” and substituted a 56,954 figure for the 21,530 figure in the document—that was “an exercise of rectification of contract and cannot properly be said to have been merely a matter of interpretation or implementation”; but

A different result might have occurred, if the mediator/arbitrator had been acting under clause 12—but his actions cannot be supported under clause 13.

Mediator/Arbitrator Wins, Anyway

Notwithstanding the reversal on jurisdiction, the mediator/arbitrator wins anyway. Here’s how.

–No Malpractice

The appellate court finds no malpractice:

The mediator/arbitrator, while lacking jurisdiction, did not depart “from the standard of care to be expected of a reasonably careful mediator” in “embarking on the determination”;

“We ourselves have not found the question of jurisdiction straightforward”;

Farmer’s solicitors had objected to jurisdiction, but they did so for the erroneous reason that “it was too late to raise” the mistake issue, since the shares identified in the agreement had already been transferred; and

Such erroneous reason, (i) “may in fact simply have distracted” the mediator/arbitrator from “the real doubt about his jurisdiction,” (ii) was not raised until after the mediator/arbitrator’s determination had been made, and (iii) reinforces the view that the actions of the mediator/arbitrator “did not fall short of the standard of care to be expected of a person in his position.”

–No Release of Liability

The appellate court does not need to apply the release of liability language in clause 9 of the engagement agreement because the mediator/arbitrator “was not negligent.”

Had the mediator/arbitrator been negligent, however, the release of liability language in clause 9 would not have protected him:

Such release language relates only to acts and omissions that occur while acting as mediator—not while acting as arbitrator;

The acts in question occurred after execution of the mediated settlement agreement—which terminated the mediation; and

“Clear and unambiguous language would be required” in clause 9 to make the release of liability language apply beyond the scope of the mediation—and the “natural meaning” of words in clause 9 words do not qualify as such.

–No Causation Shown

If farmer had been able to establish the mediator/arbitrator’s malpractice, he would still be required to show a causal link between the malpractice and “the particular losses” being asserted.

Doing so appears to be a matter of some difficulty, the appellate Court says. Farmer, for example, did not rely on the mediator/arbitrator’s determination—instead, he promptly “rejected it” as invalid.

Moreover, daughters can still file a lawsuit challenging the specified number of shares as a “mistake” that needs to be reformed and rectified.

Accordingly, the appellate court dismisses the appeal and awards legal fees and costs in favor of daughters and against farmer.

Conclusion

This New Zealand case involves a set of facts that appear, at the same time, both similar and foreign to common practice here in the U.S.A.

So . . . what lessons might we learn, from this New Zealand case, for mediating disputes here in the U.S.A.?

—————————–

Footnote 1: A link and citation to the opinion are, McCosh v. Williams [2003] NZCA 192 (12 August 2003).

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