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Avoiding Pitfalls in Preparing a Mediation Term Sheet
By John M. Delehanty
Reaching a settlement in mediation is a big accomplishment—but it’s not the finish line.
Ideally, once there’s a meeting of the minds, the parties should draft and sign a formal settlement agreement right away. But in reality, especially after long hours of negotiation, most parties and their counsel opt to draft a term sheet instead. That makes sense—formal agreements like patent licenses often require detailed language and more time to finalize.
Still, term sheets can be tricky. They’re meant to serve as a placeholder, but if not handled carefully, they can cause confusion—or even spark new disputes.
Term sheets present many potential pitfalls and these are some best practices to avoid them.
THE TERM SHEET. While lawyers often have apparent authority to bind clients to a settlement, relying on that can be risky. Even with a signed term sheet, a client might later claim their lawyer lacked authority and try to undo the deal—sometimes bringing in new counsel and sparking a fight over enforceability.
The safest approach? Have the clients themselves sign the term sheet. To avoid any doubt, consider having the mediator witness the signatures.
WHAT’S IN THE TERM SHEET. Term sheets often say the parties will “exchange mutual releases,” but don’t define who’s covered or what claims are being released. That’s a mistake.
The term sheet should clearly state which parties (including any third parties) are included and the scope of the releases.
Releases can be broad — covering all claims between the parties — or narrow, limited to the issues in the case.
Don’t leave those details for the final agreement.
TERM SHEETS SHOULD BE MORE THAN A PLACEHOLDER. Parties often sign a term sheet expecting to finalize a more detailed settlement later. But if that formal agreement never gets signed, one side may argue the term sheet isn’t enforceable. To avoid this, the term sheet should:
- Set a short deadline—ideally within seven days—for completing the formal agreement
- Clearly state that the term sheet is binding and enforceable on its own
- Be specific enough to support enforcement without further negotiation
- Designate the mediator as the final decision-maker for any drafting or additional disputes
These simple steps can help ensure the deal sticks—even if the final agreement doesn’t materialize.
THE TERM SHEET SHOULD CONTAIN A DISPUTE RESOLUTION CLAUSE. Even after a successful mediation, parties often overlook the importance of including a dispute resolution clause in the term sheet or settlement agreement. This is especially critical when the mediation resolves an ongoing arbitration.
If the original contract required arbitration, the term sheet should clarify whether future disputes, especially those about the settlement itself, will also be resolved through arbitration or mediation. Don’t leave it vague. Clearly spell out how any future disagreements will be handled.
MAKE SURE PAYMENT DETAILS ARE DISCUSSED. Some settlement payments are made over time, potentially over six months or even up to a year. While full payment at closing is ideal, it’s not always feasible. When payments are spread out, the term sheet must clearly outline what security the payee will have if the payor defaults.
Typical protections include:
- an acceleration of the full amount due
- a confession of judgment for any unpaid amount
- personal guarantees by the principals
- deposits of assets into escrow
As noted above, if the parties’ efforts to complete a formal settlement agreement are unsuccessful, the term sheet should be enforceable on its own terms and the security provisions are critical to that effort.
AVOID SENDING OFFERS DIRECTLY TO THE OTHER SIDE. Sometimes a party might skip the mediator and send a written settlement proposal straight to the other side—without any disclaimers. That’s risky.
If the proposal is too clear, the other party might accept it as-is and claim a binding deal was made.
A safer approach is to communicate all offers through the mediator during caucus. If the terms are complex, they can be written out for the mediator but not handed directly to the other side. Only one there’s agreement, those terms can be properly captured in a term sheet.
If the parties can’t execute a formal settlement agreement at the mediation, preparing and signing a term sheet that follows the above best practices is an acceptable alternative. If the term sheet contains all of the parties’ agreements and points, and is made enforceable in the absence of a more formal agreement, it should be sufficient to withstand collateral attack and end litigation over the underlying dispute.