Mediation Minute

If You Read Only One Thing About Mediation, Read This: The Critical Role of the ‘Henry Term Sheet Rule’ in Mediation

July 12, 2022

Some may have experienced what I call the “Friday afternoon problem” in mediation. After a long day, you have hammered out the four corners of a deal. Everyone can summarize the deal on a couple of pages, but the final settlement document will require additional language including, for example, mutual releases, some carve-outs, amendments to an existing contract, or confidentiality provisions. Everyone is tired and they want to go home.

You draft a “mediation agreement” and quickly summarize the deal terms and include language on this document that includes the main bullet points. The document says a final settlement document will be prepared by defense counsel next week. Everybody goes home in good faith believing they have a deal with some paperwork to follow, but the matter is settled.

On Monday morning, the defense attorney sends over a settlement document rehashing the Friday mediation agreement and adds new things the client forgot to mention that are not specifically included in the Friday document. Maybe there is a release of an additional insured included which was not discussed. There might be an onerous confidentiality clause not anticipated, a revised non-compete, non-disparagement terms, no-trespass language that is problematic, or the Medicare language is unacceptable to the Plaintiff.

Conversely, the Plaintiff may need a carve-out that wasn’t previously discussed. On Monday, one or both sides can want changes to the previously negotiated terms.

One side or the other balks at signing the “Monday” settlement document with the new terms. The side resisting the new terms claims there was a deal reached on Friday and that they do not have to agree to the proposed changes.

Now we are at loggerheads. One side wants to pay or be paid, and the other side says the Friday “deal” was not complete, and we don’t have an enforceable deal.

I have a preventative measure at mediation to avoid this enforceability issue which I call the “Henry Term Sheet Rule.” If the document you sign during mediation contemplates the execution of another typically longer and more comprehensive document that must be agreed and signed later, you have no real agreement during mediation, and no deal until the later instrument is signed.

If the first writing anticipates a second writing that must be mutually agreed upon later, your putative Friday afternoon “agreement” (however named or described) is not a complete and enforceable agreement; it is an agreement to agree in the future and should be called a term sheet to reflect that is unenforceable.  Your “Friday” document might well be a term sheet disguised as a “mediation agreement” unless you draft THE ONE AND ONLY DOCUMENT during mediation and there will be no others.

Some lawyers worry that if the Friday deal is not really a final agreement, the other side can back out. Yes, that is true, but so what? The risk of buyer’s remorse is remote. This pales in comparison to the other much larger problem. Ninety-nine percent of the time, there is no problem on Monday after the Friday mediation. The Henry Term Sheet Rule deals effectively with the 1% problem where the Monday papers look a little different than what was discussed and written down on Friday.

Religious enforcement of the Henry Term Sheet Rule is the only sure method I know to avoid disagreements over what constitutes an enforceable agreement with all essential terms. It is mediation malpractice to have the parties leave mediation not knowing if the deal is done.

Why do I insist on calling a document a term sheet? Because it precludes someone from filing a motion to “enforce” the Friday deal terms when everyone knew on Friday that a longer document needed to be signed later.

When we have a dispute over whether an enforceable deal made on Friday, we are in procedural no-man’s land. A claim for breach of the Friday mediation agreement is one in contract and by settled law not within the jurisdiction of the court presiding over the underlying dispute. A breach of contract claim is independent of the litigation from which it sprung. The rights of non-parties are affected.

Think about the proof problems. Disputes over whether we have contract formation on Friday quickly lead to troublesome mediation privilege and confidentiality issues. Judges hate these sorts of problem motions or supplemental pleadings for many reasons. Mediation was ordered to eliminate judicial labor not create more of it.

If someone does file a motion to enforce the Friday term sheet, you will case-law making some inartful distinction between documents that have all of the “essential” terms and are therefore enforceable, and those term sheets or letters of intent that lack all of the “essential” terms and are by judicial fiat unenforceable. The inconsistent case law on “agreements to agree” creates a swirling sucky eddy of contradiction in the sea of jurisprudence that would challenge the most intrepid sailor.

The courts fail to recognize that “essentiality” depends on the viewpoint of the parties, third-party beneficiaries, non-parties, the venue, and a host of factors. For example, insurance carriers are non-parties but have demands separate from the insured that need to be “part of the deal” even if irrelevant to the insured. Essentialness, like beauty, lies in the eye of the beholder.

The advantage to the “Henry Term Sheet Rule” is that there is no ambiguity over whether and when we have a final deal, and it is fully consistent with the case law holding agreements to agree to be unenforceable.

Folks say they want a final settlement on Friday, but they also want and need to exchange another, longer settlement document to button everything up. You cannot have it both ways. The Friday deal is either enforceable or it is not the moment you leave, and it is mediator malpractice to leave with a potential dispute over whether an agreement was reached.

As urged in my engagement agreement, the best practice is to draft partial settlement language in advance. That is not always easy to do absent clairvoyance or if there a lot of parties. When drafting a term sheet on Friday afternoon, I urge the parties to include language reading “this is not an enforceable deal.” A mediator must make sure the parties agree on when contract formation, i.e., final settlement, occurs.

Failure to follow the Henry Term Sheet Rule invites ugly fights over contract formation that makes the clients unhappy, and the lawyers and mediator look bad. The rule protects everyone in the process. Unless we have drafted the full and complete deal terms on the day of mediation, you have an agreement to agree, and the deal is only considered done when the second, comprehensive settlement document is fully agreed and signed.