In Buyer/Seller Disputes, Does an Initial Refusal to Mediate Bar Recovery of Attorneys’ Fees?

In Buyer/Seller Disputes, Does an Initial Refusal to Mediate Bar Recovery of Attorneys’ Fees?

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Summary

In Evleshin v. Meyer, the California Court of Appeals addressed a significant question regarding dispute resolution in real estate purchase and sale contracts: Does a party forfeit their right to recover prevailing party attorneys’ fees by initially refusing to mediate, even if they later agree to mediate before a lawsuit is filed?

The court held that an initial refusal is not an irrevocable bar to recovering fees. If a party retracts their refusal and offers to mediate before the litigation formally commences, they satisfy the mediation requirement found in the standard Residential Purchase Agreement. This decision reverses a trial court ruling that had denied fees to the prevailing sellers simply because they initially rejected a mediation request, despite subsequently agreeing to the process.

Background

The dispute arose from a 2019 real estate transaction in Santa Cruz County involving a home with wooded acreage. The buyers, the Evleshins, sued the sellers, the Meyers, for breach of contract and fraud after discovering alleged issues with the septic system, property condition, and logging operations on the land.

The transaction was governed by the standard California Association of Realtors (CAR) Residential Purchase Agreement. Paragraph 22A of this contract allows for the prevailing party in a court action to recover attorneys’ fees.  However, another provision of the contract requires the parties to mediate any disputes, and bars recovery of fees to a party who (1) files suit without first attempting to mediate or (2) refuses a request to mediate. 

The conflict centered on a specific timeline of pre-litigation communications:

  • May 2021: The buyers requested mediation regarding their claims.
  • May 31, 2021: The sellers, through their attorney, rejected the mediation request.
  • July 10, 2021: The sellers’ counsel sent an email effectively retracting the refusal, stating that circumstances had changed and inquiring if the buyers still wished to proceed with mediation.
  • July 12, 2021: Two days later, the buyers filed their lawsuit.
  • July 14, 2021: The buyers responded to the sellers’ latest email, stating they were “no longer interested in mediating.”

Following a three-day trial, the sellers prevailed on all claims. However, the trial court denied their request for attorney fees, reasoning that the initial refusal on May 31 triggered the fee forfeiture provision, regardless of the subsequent offer to mediate.

Key Court Findings

The Court of Appeals reversed the trial court’s order, conducting an independent review of the contract language. The appellate justices determined that the trial court’s interpretation was overly rigid and inconsistent with California’s legal policy against forfeitures.

The Ability to “Cure” Before Litigation

The court analyzed the contract language penalizing a party who “refuses to mediate” before an action commences. The justices found this phrasing ambiguous: it could imply that a single refusal is final, or it could imply that the refusal must be the party’s standing position at the time the lawsuit is filed.

Resolving this ambiguity, the court concluded that the provision is designed to encourage mediation, not to punish parties for temporary hesitations. Therefore, a “refusal” is not permanent. If a party initially refuses but then corrects course by offering to mediate before the plaintiff files suit, they have fulfilled the spirit of the agreement and preserved their right to attorney fees.

Distinguishing Frei v. Davey

The trial court had based its decision on Frei v. Davey, a prior case where fees were denied due to a refusal to mediate. The Court of Appeal distinguished the two cases. In Frei, the defendants refused mediation both before and after the lawsuit was filed and never indicated a willingness to participate. In Evleshin, the Meyers actively attempted to open the door to mediation before the buyers resorted to litigation.

Policy Against Forfeiture

The court emphasized that California law disfavors the forfeiture of rights, including contractual rights to attorney fees. Ambiguous contract provisions should be interpreted to avoid forfeiture whenever reasonable. The court reasoned that permitting a party to “cure” their refusal prior to the start of litigation avoids an unjust penalty and acknowledges the reality that parties often need time to reconsider their positions during a dispute.

Key Takeaways

  • Refusal Is Not Irrevocable: An initial rejection of mediation does not automatically strip a party of their right to attorney fees, provided they retract that refusal and offer to mediate before a lawsuit is filed.
  • The “Commencement” Deadline is Critical: The opportunity to cure a refusal generally ends once the action commences. Retracting a refusal after the complaint is filed may not be sufficient to preserve fee rights.
  • Interpretation Favors Resolution: Courts will interpret mediation clauses in a way that encourages dispute resolution and allows for a change of heart, rather than enforcing strict penalties for initial resistance.
  • Mutual Obligation: The duty to mediate applies to both sides. A plaintiff buyer who files a lawsuit without first engaging in mediation may be the one failing to comply with the contract’s dispute resolution requirements.

This case summary is for informational purposes only and does not constitute legal advice. If you are facing a real estate dispute or have questions about the mediation requirements in your purchase agreement, please contact our office to schedule a consultation.