Six Tips for Drafting Binding Term Sheets at Mediation

Successful mediations can be long affairs, often stretching into the evening or night. By the time the parties reach agreement, clients and lawyers are tired and ready to go home. But the next step—memorializing the agreement—can be the most important part of the day. Proper memorialization is particularly important when the parties wish to sign a binding term sheet at the mediation and then execute a longer settlement agreement in the future. As several recent cases illustrate, such term sheets must be carefully drafted or the parties risk being bound by an incomplete agreement or undoing the settlement altogether.

In Habu v. Topacio, No. 79152-4-1, 2020 WL 533947 (Wash. Ct. App. Div. 1 Feb. 3, 2020), a party sought to enforce a term sheet signed after the mediation of real-estate fraud claims. The term sheet provided that “‘[t]he parties agree to memorialize and use their best efforts to fully execute a final Settlement Agreement within thirty (30) days of the mediation,’” and that the settlement agreement “shall contain” certain provisions, including that the plaintiffs be paid $200,000 “within 60 days of the effective date of the agreement.” Id. Negotiations over the settlement agreement fell apart, and one side moved to enforce the term sheet. The Washington Court of Appeals denied the motion, holding that “the term sheet obligated the parties only to engage in further negotiation.” Id. at *5 The court noted that the term sheet “expressly reference[d] the need for further negotiation on certain terms,” was “silent on a number of important issues,” and contemplated that deadlines would run from the effective date of the settlement agreement, not the term sheet. Id.

By contrast, in Starkman v. O’Rourke, No. 2018-0901-KSJM, 2019 WL 7580065 (Del. Ch. Jan. 14, 2019), the term at issue provided that it was “binding upon the Parties pending the execution of a formal settlement agreement.” Id. at *1. Negotiations over a subsequent settlement agreement reached an impasse after the plaintiff would not include a requirement that it amend its tax filings. The defendant asserted that the plaintiff had agreed to do so during the mediation. On a motion to enforce, the chancery court held that the “Term Sheet reflects that the parties viewed it as a ‘binding’ agreement.” Id. at *2 (internal alterations omitted). However, the term sheet did not mention tax filings, and the confidentiality of mediation barred evidence of any agreement regarding tax filings.

When done correctly, a term sheet is an effective way to conclude mediation. It provides certainty to the parties, while giving lawyers time to write a more formal contract. But as Habu and Starkman illustrate, mistakes in term sheets can have serious consequences. If the parties wish to be bound by a mediation term sheet, consider the following tips:

1. Include a statement that the parties have agreed to settle and will be bound by the term sheet.
2. Include all material terms. Draft the term sheet as though it is the only document governing the parties’ settlement. As Starkman illustrates, the confidentiality of mediation could bar evidence—other than the term sheet itself—reflecting the parties’ agreement at mediation. And as Habu illustrates, a term sheet that is silent on key issues may be unenforceable.
3. Avoid triggering deadlines from the date of execution of a final settlement agreement.
4. If the term sheet expressly leaves a term for further negotiation, consider including a generic version of the provision to bind the parties in the interim and then agreeing to further refine the term in a final agreement.
5. When acknowledging the parties’ intent to execute a final settlement agreement, expressly state that the term sheet will bind the parties, whether or not they actually execute a final settlement agreement.
6. Consider including an alternative resolution process for handling any disagreements that arise in drafting the final settlement agreement. For example, including a requirement that the mediator settle any such disputes provides the parties with a quick way resolve their differences. This method also avoids the evidentiary problems in Starkman, as the mediator understands the full context of the parties’ negotiations.

When memorializing settlements at a mediation, lawyers should take care to create a term sheet that can hold up as a standalone contract. Following the tips above and keeping in mind the lessons of Habu and Starkman can help ensure that the parties leave a mediation with a binding and enforceable settlement.