The Role of Mediation in California Construction Litigation

In California, construction cases frequently use mediation to attempt to resolve litigation disputes otherwise headed for trial. Standard form construction contracts routinely incorporate mediation provisions, sometimes with attorney fees penalties against a party refusing to mediate. There has been a growing trend in California mediation for mediators to begin the mediation process and then attempt to accelerate settlement by making a recommendation of how the mediator believes the parties should settle. But arbitration is the dispute resolution method where the neutral party evaluates the evidence and law and introduces their decision. A mediator is supposed to be a neutral facilitator of negotiations. Stepping outside of that role presents certain complexities. This article shares thoughts on California state court mediation laws, and identifies risks and benefits of utilising a mediator recommendation.

As described in Section 1775 of the California Code of Civil Procedure, the state legislature aims to promote the use of mediation and other alternative dispute resolution methods in court cases to achieve fair, timely, appropriate, and cost-effective resolutions. They recognise that litigation can be costly, time-consuming and stressful for the parties involved and that many disputes can be resolved through less formal processes. Mediation is viewed as an effective means of reducing the cost, time and stress of dispute resolution. The legislature also recognises that early use of mediation and similar processes can have the greatest benefit for the parties involved and can help reduce the backlog of cases burdening the judicial system. The legislature’s hope is to encourage the use of alternative dispute resolution methods in general, and, to save on costs and provide prompt and equitable resolutions to disputes. Courts in Los Angeles County and other counties may refer cases to appropriate dispute resolution processes as an alternative to trial, provided that the parties retain the right to a trial if a dispute is not resolved through an alternative process.

The California Evidence Code, beginning with Section 1115, lays out rules governing mediation, mediators and confidentiality. Mediation is defined as a process in which a neutral party facilitates communication between disputants to help them reach a mutually acceptable agreement. The mediator is a neutral person who conducts the mediation and includes any person designated by the mediator to assist in the mediation or communicate with the participants in preparation for a mediation. The Evidence Code specifies that no evidence of anything said, or any admission made during the mediation is admissible or subject to discovery, and all communications, negotiations or settlement discussions by and between participants in the mediation remain confidential. Additionally, any reference to the mediation during subsequent noncriminal proceedings is grounds for vacating or modifying the decision if it materially affected the substantial rights of the party requesting relief.

The Evidence Code also specifies the conditions under which mediation ends for purposes of confidentiality. These include executing a written settlement agreement that fully or partially resolves the dispute, reaching an oral agreement in accordance with Section 1118 that fully or partially resolves the dispute, the mediator providing the mediation participants with a writing that states that the mediation is terminated, or there is no communication between the mediator and any of the parties to the mediation relating to the dispute for ten calendar days. This Section does not preclude a party from ending a mediation without reaching an agreement, and it does not affect the extent to which a party may terminate a mediation.

However, there are no procedural rules governing the presentation of evidence, legal arguments or the exchange of information in the actual mediation. There is no rule on whether there will be one session or multiple successive mediation sessions. It is generally left to the creative discretion of the mediator. Rule 3.853 of the California Rules of Court outlines the conduct of mediators in California and emphasises the principles of voluntary participation and self-determination by the parties. The mediator must inform the parties that any resolution of the dispute in mediation requires a voluntary agreement of the parties. The mediator must also respect the right of each participant to decide the extent of their participation in the mediation, including the right to withdraw from the mediation at any time. The mediator is not allowed to coerce any party to make a decision or continue to participate in the mediation. The Rule is designed to ensure that the mediation process is fair, voluntary and allows for the parties to make their own decisions in resolving their dispute.

Once mediation begins, and the judge or arbitrator is aware that a mediator is involved, there is usually significant deference to allowing the case to settle in mediation. This can incentivise judges to delay setting the trial date or set the date very far out as a manoeuvre to induce settlement.

A highly skilled mediator who understands and can communicate the likelihood of success at trial can often persuade parties to settle at what they see as the inevitable middle ground. It can be particularly powerful where the attorneys advocating for the parties are too focused on their positions and cannot artfully negotiate.

From the mediator’s perspective, the mediator recommendation tool may be very attractive. A settlement is a win for the mediator. The recommendation can produce the win without requiring as much seemingly overwhelming work of psychological persuasion, deep evidentiary analysis and personal “magic” required from the mediator.

One of the benefits of having a mediator recommend settlement terms is that it can break an impasse in the negotiation process. In construction disputes, there can be many issues to resolve, including contractual disputes, delays, defective work and cost overruns. When parties are unable to resolve these issues, the mediator's recommendation can provide a framework for resolving the dispute. The mediator's recommendation may be based on their experience in the construction industry and their knowledge of construction contracts and relevant laws. By providing their recommendation, the mediator can assist the parties in finding a resolution that is fair and equitable for both sides.

Another benefit is that the mediator's recommendation can save time and money. Mediation is often quicker and less expensive than litigation, but it can still take significant time and resources. If the parties are unable to reach an agreement through negotiation, the mediator's recommendation can provide a final resolution to the dispute, thereby saving the parties further time and money.

However, there are also risks associated with the mediator recommending settlement terms. One of the main risks is that it can undermine the parties' control over the outcome. In mediation, the parties have the ability to negotiate a settlement that works best for them. However, when the mediator presents their recommendation, the parties may feel pressured to accept it, even if it is not in their best interest.

The further risk is that the mediator guesses incorrectly and further polarises the two sides. This can create a scenario where settlement is put further out of reach as the parties have become more entrenched in their positions. One side now believes that the mediator’s recommendation is a more accurate predictor of the results at trial, while the other side believes that the mediator was mistaken. 

This can be particularly problematic where one or both parties have insurance carriers behind the scenes funding the defence and ultimate indemnification of any resulting trial judgment. It is easy for the insurance carrier adjusters to adopt the mediator’s settlement recommendation as political cover to justify their lack of settlement even through an adverse judgment. The problem multiplies where there are multiple parties. It then becomes further complicated when there are multiple carrier policies at issue for each of the several parties. 

Another risk is that the mediator's recommendation can be perceived as biased or unfair. Even if the mediator is impartial, one or both parties may feel that the recommendation is not based on the facts or the law of the case. This can lead to a breakdown in the negotiation process and failed mediation.

In addition, the mediator's recommendation can also be emotionally taxing for the parties involved. If the recommendation is not acceptable to one or both parties, it can cause further tension and stress. This can be especially challenging in cases where the dispute involves sensitive personal or business issues.

Furthermore, the mediator's recommendation can also lead to the setting of a precedent that could be detrimental to future cases. If the parties accept the mediator's recommendation, it can establish a precedent that may not be beneficial in the long term. For example, if the settlement reached is less than what one party would have received in a trial, this could encourage other parties to seek similar settlements in the future.

To mitigate these risks, it is essential for the mediator to communicate clearly with the parties about the potential risks and benefits of their recommendation. The mediator should explain that the recommendation is not binding, and the parties have the final decision on whether to accept it. The mediator should also be transparent about their thought process and explain how they arrived at their recommendation.

In addition, the mediator should ensure that the parties have had ample opportunity to express their views and that all relevant information has been considered before making a recommendation. The mediator should be sensitive to the parties' emotional state and ensure that they are comfortable with the process.

It is also important for the mediator to be aware of any potential conflicts of interest. If the mediator has a personal or financial interest in the outcome of the case, they should disclose this information to the parties and step down from the mediation process if necessary.

A worse scenario is when the mediator makes a recommendation without having complete and clear prior consensus from the parties about whether they should make this recommendation at all. This can occur where a mediator is juggling multiple voices, each with partial settlement authority. 

As courts have encouraged mediation more, California has seen more mediators enter the market. Not all of them have the mediation style to patiently persuade and facilitate negotiations toward settlement. Mediator recommendations are becoming closer to the norm. Parties seeking to settle California litigation through mediation are being advised to investigate before agreeing to a mediator whether and how the mediator employs the mediator recommendation.