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When is a settlement following a legal mediation not really a settlement?  And if a party or parties choose to ‘back out’ of what was ostensibly agreed by all participants on the day, how do other parties try to salvage what they thought was a binding settlement?

The courts and tribunals deciding these matters have often applied the objective, reasonable third party test, where such disputes arise.  This ‘reasonable bystander’ test asks whether an objective third party standing in the shoes of any of the active participants to the mediation would have concluded, on the known facts, that a final and binding settlement had been reached by the close of the mediation.

In deciding that point, regard can be had to not only the communications at the mediation on the day but also statements made in the intervening period after the mediation, and any communications between the parties, up until that time when a dispute first arose on whether there was a binding settlement (or not).  

The principles as to whether the parties have entered into a binding contract are well settled and not controversial.^[1]A summary of those principles was adopted by the Court of Appeal in Sully v Englisch [2022] VSCA 184 at [62].  A mediation had been “left open” by the Mediator and no written terms of settlement had been executed, however the Court of Appeal held that Ms Sully had discharged her onus of proving that the parties had intended to be immediately bound by the agreement they reached on the day of the mediation.  The Builder claimed that there was no binding settlement.

Amongst other things, the Court of Appeal confirmed the position that where the parties agreed that they would prepare a written document later on, setting out terms of agreement, the Court may consider the three categories of contract set out by the High Court in Masters v Cameron [1954] HCA 72. These categories describe circumstances in which:

• the parties intend to be bound immediately, though expressing a desire to draw up their agreement in a more formal document at a later stage;
• the parties intend to be bound immediately, but may wish the operation of a particular clause or term to be delayed pending the drawing up of a more formal document; or
• the parties intend to postpone the creation of contractual relations until a formal contract is drawn up and executed.

Since Masters v Cameron was decided, Courts have recognised a fourth category – that being where the parties intend to be bound immediately by terms which they have agreed upon, while expecting to make a further contract in substitution for the first contract containing, by consent, additional terms. 

The question in Sully v Englisch was whether the parties had agreed to be immediately bound by an agreement they reached on the day of mediation, even though no terms of settlement were signed on the day of mediation or in the subsequent weeks.  The trial judge had said that the relevant legal questions included (at paragraph 62):

• What each party, by its words or conduct, would have led a reasonable person to believe; and
• Whether, in all the circumstances, the parties objectively intended to reach a binding agreement.

The Court of Appeal said (at paragraph 63 of the decision) that the overarching question was “whether Ms Sully discharged her onus of demonstrating, on the balance of probabilities, that she and Mr Englisch intended the agreement they reached at the mediation to be immediately binding on them”.  

The Court of Appeal concluded, following a review of the facts, that by the end of the mediation the parties had agreed to enter into a legally binding settlement, even though it was later to be reflected in a written document (being a signed agreement that in fact never eventuated).  

Ms Sully had therefore discharged her onus of proof in arguing that there was a binding settlement agreement. (See paragraph 67 of the decision).  The Court found further (at paragraph 76) that: “…a reasonable person observing the mediation would have concluded that, by the end of the mediation, the parties had made a binding agreement”.

The Court also approved of Ms Sully’s reliance on the observation made in the decision of Delaney v Delaney [2002] VSCA 48 (McLeish, Kennedy and Macaulay JJA) at [87] to [88] and [99] to [100], that in relation to whether there is a binding settlement, “where all or nearly all of the important matters are addressed, the conclusion that the parties intended to be immediately bound will be difficult to resist.”   (Refer to paragraph 78).

In Sully the Court found, as had the trial judge, that at the mediation the parties had in fact reached agreement on the key terms of their settlement, leaving only the “machinery” for implementation of those terms to be worked out (see paragraph 78).

It is implied from this that the Court believed that the fundamental and substantive terms that comprised the settlement agreement had been agreed on by both parties, even though they were not contained in terms of settlement signed by the parties.

Finally, the Court found also:

(i)         If a mediator states that the mediation was left ‘open’, this does not require a conclusion that that the parties did not intend to be immediately bound by the “settlement” (paragraph 85);

(ii)        The existence of a common practice amongst lawyers of reducing any agreement reached at a mediation to writing does not compel a conclusion that, at a mediation where the parties do not reduce their agreement to writing, they do not intend to immediately bound (paragraph 88); and

(iii)       The Court concluded that “Ms Sully had discharged her onus of proving that the parties intended to be immediately bound by the agreement they reached on the day of the mediation; and the trial judge erred in concluding otherwise” (paragraph 102).

Having said this of course, it is always wiser for legal advocates and parties at a mediation to do their level best to ensure that all parties sign terms of settlement by the conclusion of the day of mediation, if it is any way logistically possible to do so.

Only that way can one be sure that no party to the controversy does not try to resile from the agreement ostensibly reached after the day of mediation, or later refuse to sign terms of settlement, or only agree to terms which the other party / parties believe are fundamentally different to what was agreed on the day.

That is fine in theory and most definitely best practice, but the ‘fly in the ointment’ is where there are a multitude of parties to a mediation on the day and where, for instance with Owners Corporation parties, it is stated by the Owners Corporation that time is needed to confirm the agreement with lot owner members following the day of mediation.  An alternative argument though is that the Owners Corporation representative should have the requisite authority to reach an agreement that binds the Owners Corporation on the day of the mediation.

In Sully, there had been some post-mediation communications between the parties about an agreement or settlement that had been reached “in principle”.  Historically, the courts have not found the reference to “in principle” to be conducive to a conclusion that a binding settlement has been reached.  However, this was not fatal to Ms Sully’s case that there was a binding settlement in this case, and other factors, including in particular what had been decided or communicated on the day of mediation were seen as more determinative of the final result.

The reasonable person test and what such a person would decide objectively on whether a settlement has been reached, sounds nice in theory, but disputation can evolve around whether all that was notionally agreed were fundamental terms, and no fundamental terms were left out.  And also, whether any terms not yet decided were no more than “machinery” conditions to put a settlement into effect.   

All cases are different on their facts of course, and therefore a reasonable person test is not the full answer to every situation and it is little more than a guiding principle or starting point.  Each fact situation must be analysed on its own merits and in context.

This article is intended to be general commentary only and should not be relied on as legal advice.  For expert legal advice in relation to all construction law matters, do not hesitate to contact expert construction lawyers to seek assistance tailored to your specific needs.

By Justin Cotton, Director of Lovegrove & Cotton Pty Ltd

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^[1] See the summary in Sully v Englisch t/a Alpine Property [2022] VSCA 184 at [62]

Disclaimer
This article is for general informational purposes only and does not constitute legal advice. For advice specific to Owners Corporations, building defects, or dispute resolution, please contact Lovegrove & Cotton at enquiries@lclawyers.com.au or call (03) 9600 4077.

Image Acknowledgements:

The digital renders used in this article were developed collaboratively by Lovegrove & Cotton and ChatGPT. The photo images that are not the digital renders are stock images sourced from Shutterstock.