Can a Party Back Out of a Mediated Settlement Agreement?

The statute, in one line

Section 154.071(a) of the Texas Civil Practice and Remedies Code says that if the parties reach a settlement and execute a written agreement disposing of the dispute, the agreement is enforceable in the same manner as any other written contract. Subsection (b) adds that the court in its discretion may incorporate the terms of the agreement into its final decree. That is the whole statutory framework for a mediated settlement in a business case. There is no cooling-off period, no revocation window, and no requirement of court approval.

"Any other written contract" is the operative phrase. A mediated settlement is not weaker than a contract signed in a boardroom, and it is not stronger. It is enforced through contract law, with contract defenses.

Why the family-law rules do not apply

Much of what is written online about mediated settlement agreements comes from divorce and custody practice, where the Family Code gives a properly worded agreement special status: binding on signing, not revocable, and entitling a party to judgment without the usual contract analysis. Those provisions are limited to suits under the Family Code. A dispute between business partners, a contractor and an owner, or a vendor and a customer is governed by § 154.071, Rule 11 and ordinary contract law. The agreement is binding, but it is binding as a contract, which means it can be attacked with contract defenses and must be enforced through a contract claim or a motion in the pending case.

Rule 11 and the pending lawsuit

When the mediation takes place during a lawsuit, a second rule applies. Texas Rule of Civil Procedure 11 provides that no agreement touching a pending suit will be enforced unless it is in writing, signed and filed with the court, or made in open court and entered of record. A signed mediated settlement agreement meets the writing and signature requirements. Filing it, or filing it when enforcement becomes necessary, completes the rule. The mechanics are covered in Rule 11 agreements in Texas.

Rule 11 is also why mediators insist on signatures before anyone leaves. In Kennedy v. Hyde (Tex. 1984) the Texas Supreme Court held that a disputed oral settlement of a pending suit is unenforceable under the rule. An agreement reached at 9 p.m. and left for "the lawyers to paper tomorrow" is, until the paper is signed, an agreement the other side can walk away from.

What withdrawing consent actually does

Texas draws a line that confuses many parties. A court may render an agreed judgment only if all parties consent at the moment the judgment is rendered. If one party withdraws consent before then, the court cannot enter the judgment as an agreed one. That is the part people hear and conclude that the deal is dead.

The second half, from Padilla v. LaFrance (Tex. 1995), is that withdrawing consent does not undo the contract. The party seeking enforcement pleads the written agreement, proves it after notice and hearing or on summary judgment, and the court renders a judgment enforcing it. That judgment is not an agreed judgment; it is a judgment on a binding contract. The outcome for the party that changed its mind is the same obligation, reached by a slower road, usually with a fee claim added under the agreement's prevailing-party clause.

When a mediated agreement can be undone

Because the agreement is a contract, it fails for the reasons contracts fail.

• No signature by the party or its attorney. An unsigned term sheet, or one signed by a mediator alone, is not a written agreement executed by the parties.
• A missing material term. If the term sheet leaves out the amount, the payment date, who is released or what happens on default, a court may find an agreement to agree rather than a contract. Terms left to "the formal settlement agreement" are the usual gap. The remedy is to write those terms into the document signed at the mediation, even if it is short.
• Lack of authority. An officer who signs for an entity without authority, or a lawyer who signs beyond the client's instructions, gives the entity an argument. The agreement should recite authority and be signed by someone who plainly has it.
• Fraud, duress or mutual mistake. A settlement induced by a material misrepresentation about an asset, a document or a fact that the other side knew was false can be rescinded like any contract. Exhaustion after a twelve-hour mediation is not duress, and a bad bargain is not mistake.
• Conditions precedent. If the agreement says it is effective only on board approval, lender consent or a confirmatory due diligence step, the condition controls. Make sure it is written as a condition, not as an aside.

What is not a defense: a better understanding of the case the following week, a change in the company's cash position, or a lawyer's advice that the number was too high.

Example

Suppose the two members of a Dallas real estate LLC mediate their buyout dispute. At the end of the day they sign a two-page term sheet: the departing member sells his interest for $650,000, payable $250,000 at closing and the balance over 24 months, with mutual releases and a non-disparagement clause, "formal documents to follow within 30 days." Ten days later the remaining member says a tenant has given notice and he will not pay that price. The departing member moves to enforce. The remaining member cannot stop a judgment enforcing the contract: the term sheet is signed, states every material term, and the reference to formal documents concerns mechanics, not open points. Had the term sheet said "price to be agreed after appraisal," the result would be different, because a material term would be missing.

What a mediated term sheet should contain

Since enforceability turns on material terms, the document signed at mediation should carry them all, even if a longer agreement follows. The money, the dates, the releases and their scope, who is released, confidentiality, dismissal, what happens on default, who pays fees to enforce, and a statement that the parties intend to be bound by this document and that the later agreement will not add or change material terms. A clause that each signer has authority closes the authority defense. The full list of terms is in structuring a business settlement.

If the other side is the one backing out

File the agreement, and move. If the case is pending, a motion to enforce with notice and a hearing is the usual path; the court decides it as a contract question, with summary judgment or a short trial if facts are disputed. If the case had already been dismissed, a new suit on the agreement is the route. Either way the clock matters less than the record: the signed document, proof you performed your side, and the other side's refusal in writing. What enforcement looks like, and what you recover, is in the other side breached the settlement agreement.

Tina Wysk represents businesses at mediation and in the motions that follow when one side tries to undo the deal, in Dallas state and federal courts. Her arbitration and mediation practice page describes that work.