Enforcement of Mediation Clauses, Careful Drafting and Separability

Recently, in an unpublished per curiam opinion in USA Flea Market v. EVMC Real Estate Consultants, et al., 2007 WL 2615887 (11th Cir., Sept. 12, 2007), a three-member panel of the Eleventh Circuit reversed summary judgment for a party seeking to enforce a contractual obligation to mediate as a condition precedent to litigation.  Like so many cases involving disputes over the enforcement of mediation and other ADR clauses, USA Flea Market serves as a reminder to lawyers, law students and law professors regarding the importance of thoughtful drafting and the principles of basic contract law. 

Briefly, USA Flea Market and EVMC entered into a written contract, in which USA Flea Market agreed to sell EVMC real property for a purchase price of more than $12 million.  EVMC failed to appear for the closing and failed to respond as requested to USA Flea Market’s notice of default.  USA Flea Market then served EVMC (and the title company) with a demand for payment of the $500,000 earnest money deposit.  When the money was not forthcoming, USA Flea Market sued in U.S. District Court for the Middle District of Florida. 

After some other procedural wrangling, defendant EVMC moved for dismissal or summary judgment based on USA Flea Market’s failure to comply with the following contract provision regarding mediation:

13. RESOLUTION OF DISPUTES.  All claims, disputes or controversies arising out of, or in connection with, or in relation to this Contract, shall initially be submitted to mediation in Pinellas County, Florida. . . . If a dispute has not been resolved within forty-five (45) days after the selection or designation of the mediator. . . the parties shall have the right to pursue resolution of the claim, dispute or controversy by any available legal proceedings in the County of Pinellas, State of Florida.

So far, so good.  But it turns out there was another provision in the same contract—Paragraph 27.1:

 A. If Buyer shall be in breach or default of any of the terms or conditions of this Agreement, then Seller shall give Buyer and Escrow Agent written notice specifying the nature of the default.

B. Buyer shall have ten (10) days from receipt of Seller’s notice of default within which to cure the specified default.  If Buyer does not cure such default within said ten (10) day period or if such default is not waived in writing by Seller, then the Earnest Money Deposit shall be paid over to Seller[,] this Agreement shall automatically terminate[,] and Seller and Buyer shall have no further rights, duties or obligations hereunder except as expressly survive the termination thereof. . .

Paragraph 27.3 further provided that “[t]he provisions of this Section 27 shall survive the termination of this Agreement.”

The District Court granted summary judgment for EVMC based on the mediation clause.  The Eleventh Circuit panel, however, observed that “[t]he contract does not state that the mediation provision survives termination of the contract” and concluded, “If the allegations of USA Flea Market, that EVMC defaulted, received notice of the default, and failed to cure the default, are true, the mediation provision abated upon the termination of the contract.”  Summary judgment was reversed, with a genuine issue of material fact remaining regarding whether or not EVMC was in default.

Besides serving as a cautionary tale regarding the importance of careful drafting and basic contract law—e.g., was there a meeting of the minds here regarding the use of mediation?–this case also got me thinking about the separability of arbitral clauses from the main contracts in which they are found.  In a case similar to this one, would an arbitration clause still be enforced?  I suspect that it would be, despite language like that contained in Section 27 and a party’s demonstrated aversion to the process.  Why not treat a mediation clause similarly, even though one process is  consensual and the other is adjudicative?

Nancy Welsh 

One thought on “Enforcement of Mediation Clauses, Careful Drafting and Separability”

  1. You are right, Nancy, about the “cautionary” aspect of this case. What a lesson to learn too late! The sad thing is that the parties probably did intend paragraph 13 to survive termination of the contract, but it’s the old “four corners” problem.

    My question is, why did the court rule that the contract terminated in the first place? As I read paragraph 27, the termination only takes place once the earnest money is returned, and that never occurred. Obviously, the earnest money was intended to be liquidated damages which would have obviated the need for mediation, litigation, or any other kind of resolution, but if the money was not paid to USA Flea Market, then the condition for termination was never met. If the contract didn’t terminate in the first place, then it wouldn’t matter if paragraph 13 contained a survival clause, because there wouldn’t be anything for it to survive.

    Another argument in favor of enforcing the mediation clause would be the inherent inconsistency between Paragraphs 27 and 13. If the earnest money was turned over as required in paragraph 27, then there wouldn’t seem to be any point to mediation, because the payment was clearly meant to be liquidated damages, and that would end the dispute. This inconsistency can only be resolved by reading paragraph 13 as an alternative to the termination provision of paragraph 27, and to construe paragraph 13 to apply only if the earnest money were not turned over.

    Either way, the 11th Circuit’s treatment of the mediation clause doesn’t seem to make a lot of sense.

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