I was initially very surprised when I read the squib of this decision. The conventional wisdom is that when the terms of a written settlement agreement contemplate putting the final version in writing, that offers an escape door since the parties might not agree on the final wording. It’s not an enforceable agreement, since it is understood that there are some details to be worked out in a final written version.
That’s certainly not always the case. Even if the settlement agreement provides for a future written version, a smart attorney can prevent losing the deal by adding a term specifying that if the parties can’t agree on the terms of the subsequent writing, the terms as specified will be enforceable.
This turned out to be that sort of situation, but the case is still noteworthy because it serves to illustrate how loosey-goosey (a legal term of art) a settlement can be, and still be enforceable. As an added bonus, it challenges some cherished beliefs some have about the enforceability of a liquidated damages clause.
BACKGROUND
A company called Landmark and the predecessors of BTHHM entered into a letter of intent to lease real property owned by Johnston. Landmark was Johnston’s property manager. According to the letter of intent and its amendments, BTHHM would pay rent to Johnston to hold the property vacant while BTHHM applied to the City of Berkeley for a permit to operate a cannabis dispensary. The letter of intent provided that, once the city granted the permit, Johnston would turn the property over to BTHHM to operate the dispensary. In return, BTHHM would pay Johnston double the rent required to hold the property vacant. Johnston held the property vacant for 20 months during which time BTHHM paid, and Johnston accepted, rent according to the provisions of the letter of intent and its amendments. But when the city approved the permit, Johnston refused to deliver possession of the property to BTHHM.
BTHHM sued Johnston, asserting breach of contract and related claims, and seeking “at least” $1,545,000 in damages. Johnston filed a cross-complaint against Landmark, alleging that it lacked authority to bind him to the contract with BTHHM, and that Landmark knew Johnston would never agree to lease his real property to a cannabis dispensary.
In October 2021, the parties attended an all-day mediation, the product of which was a two-page term sheet titled “Settlement Term Sheet Agreement,” which provided, in relevant part:
“[The parties] enter into this Settlement Term Sheet (“Agreement”) as of October 27, 2021 and agree as follows
“1. Dismissal of Entire Action with Prejudice: Defendant will dismiss his Cross-Complaint with prejudice upon Cross-Defendant’s payment of its share of the settlement amount. Plaintiffs will dismiss their Complaint with prejudice upon full payment of the settlement amount of $2,200,000 to Plaintiffs.
“2. Settlement Payment:
a. Settlement Payment by Defendant: Defendant shall pay Plaintiffs the total amount of $1,600,000 as follows:
i. $200,000 within (30) days of this agreement;
ii. $700,000 by January 15, 2022 at 5:00 p.m. Pacific time; and
iii. $700,000 by April 15, 2022 at 5:00 p.m. Pacific time.
b. Settlement Payment by Cross-Defendant: Cross-Defendant shall pay Plaintiffs the total amount of $600,000 within thirty (30) days of receipt of a completed W-9
“3. Stipulation for Entry of Judgment/Liquidated Damages: Defendant shall execute and deliver to Plaintiffs a Stipulation of Entry of Judgment in favor of Plaintiffs and against Defendant. If Defendant fails to make any of the payments referenced in Paragraph 2(a) above, then Plaintiffs shall have the right to immediately file the Stipulation for Entry of Judgment in the Action in the amount of the unpaid balance owed by Defendant plus $250,000, and have Judgment entered in accordance therewith.
“4. Code of Civil Procedure § 664.6: Parties agree the Agreement is admissible and enforceable in court pursuant to CCP § 664.6. The parties agree that this is a good faith settlement between adverse parties
“6. Plaintiffs’ Release of Claims To Property: Plaintiffs agree to release any and all rights under the subject Letter of Intent and its amendments, including their right of first refusal on the property [at issue], upon Defendant’s full payment of $1,600,000.
“7. Mutual Releases: All Parties shall fully release each other from all claims he/she/it had or may have against each other, except as to any continuing obligations under this Agreement
“11. Further Documentation: Parties agree to execute a final settlement agreement, which includes a mutually agreeable form for the Stipulation for Entry of Judgment.
“12. Judge Warren’s Availability: Judge Warren is available to further assist the parties as necessary ”
All parties signed the term sheet.
In the ensuing days, the parties discussed execution of the settlement, including drafting a formal settlement agreement pursuant to paragraph 11. During these discussions, Johnston’s attorney informed the other parties that Johnston wished to withdraw his agreement to the settlement. Johnston later explained that he “was exhausted, confused, and feeling ill” at the end of the day of mediation, and that when his attorneys presented him with the term sheet, he signed it without understanding the meaning of the reference to section 664.6 or that it was intended as a final settlement. The day after the mediation, Johnston stated, he instructed his attorney “to immediately rescind and cancel whatever [he] signed,” and roughly a month later Johnston’s attorney confirmed that Johnston would not sign the formal settlement agreement.
BTHHM and Landmark moved to enforce the term sheet pursuant to section 664.6. The court granted the motions, finding that the term sheet was an enforceable agreement within the meaning of section 664.6, that its terms were clear and definite, and that Johnston’s “self-serving” declaration was not credible insofar as he attested that he did not understand the term sheet was meant to be a binding agreement.
Johnston did not pay BTHHM or dismiss his cross-complaint against Landmark as required by the enforcement orders. Landmark did, however, pay BTHHM $600,000.
BTHHM filed a motion for entry of judgment, which Landmark joined. Along with enforcement of the term sheet, BTHHM requested prejudgment interest on the amounts owed by Johnston. Johnston opposed the motion and filed an ex parte application as well as supplemental briefing and supplemental declarations, but did not in his filings oppose the request for prejudgment interest. After hearing, the court granted the motion, awarded prejudgment interest to BTHHM, entered judgment against Johnston, and dismissed his cross-complaint with prejudice.
DISCUSSION
I. Enforceability of the Term Sheet
Section 664.6 seems simple enough, but it has caught many attorneys unawares. It provides that “[i]f parties to pending litigation stipulate, in a writing signed by the parties for settlement of the case the court, upon motion, may enter judgment pursuant to the terms of the settlement.” Just as with any other contract, whether a settlement entered pursuant to section 664.6 is binding and enforceable depends on the parties’ intent, as manifested by the objective language of the writing.
As the trial court noted, the term sheet expressly states that the parties agree that it “is admissible and enforceable in court pursuant to [section 664.6]” and “is a good faith settlement between adverse parties.” The trial court found, and the Court of Appeal agreed, that the term sheet is not ambiguous or indefinite, and objectively reflects a mutual intent to be bound by its terms. The court also found that Johnston’s statements that he did not intend to be bound by the term sheet were not credible. Substantial evidence supported the trial court’s finding that the term sheet’s language evinces the parties’ mutual agreement to settle the case according to its terms.
Johnston argued that the term sheet was not a final, enforceable agreement because it omitted material terms and contemplated future negotiations. First, he argued, the parties agreed in paragraph 11 to reduce the terms of the agreement to a final, formal document with mutual releases. Second, paragraph 3 required Johnston to execute a separate stipulation for entry of judgment that BTHHM could file in the event of a default. Third, paragraph 12 states that the mediator would be available to assist as necessary, implying that the parties perceived the term sheet as incomplete. The Court did not find these arguments to be persuasive.
That the parties intended to incorporate the terms of their agreement into a formal, final settlement document does not negate the parties’ intent that the term sheet itself would bind them. Pappas v. Chang (2022) 75 Cal.App.5th 975 [term in preliminary settlement agreement providing that parties would draft a “more comprehensive settlement agreement” with “a provision for mutual confidentiality” did not render preliminary agreement unenforceable].) The same is true with respect to the parties’ agreement that Johnston would execute a separate stipulation for entry of judgment; nothing in the term sheet indicates that the parties agreed to be bound by its terms only if Johnston executed the stipulation. On the contrary, the term sheet states that the parties agreed to be bound, including that Johnston agreed to prepare a separate stipulation for entry of judgment.
Johnston also asserted that the lack of mutual releases in the term sheet shows that the agreement is missing material terms and therefore is not enforceable. This argument overlooks that both paragraphs 6 and 7 of the term sheet are explicit release provisions. Paragraph 7, in particular, broadly requires “All Parties” to “fully release each other from all claims he/she/it had or may have against each other, except as to any continuing obligations under this Agreement ” And paragraph 1 requires Johnston and BTHHM to dismiss their complaints with prejudice upon performance of the agreement.
The Court also did not find persuasive Johnston’s argument that the parties’ ability, as necessary, to consult further with the mediator negated their express intent to be bound by the term sheet. It would be entirely reasonable for the parties to seek the assistance of the mediator to flesh out—without materially altering—the terms of their agreement in the anticipated formal writing; to further negotiate non-material details of the agreement; to assist them in resolving any disputes regarding performance; or to address other minor issues. That they contemplated doing so only reinforces that they agreed to be bound, while acknowledging that the term sheet was not a formal, long-form agreement.
II. The Liquidated Damages Clause
Paragraph 3 of the term sheet authorized the award of $250,000 to plaintiffs as liquidated damages if Johnston failed to make the scheduled payments. “A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under [Civil Code] section 1671 if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.” Gormley, supra, 84 Cal.App.5th at p. 83. In analyzing liquidated damages provisions in non-consumer contracts, like the one here, the parties’ relative bargaining power, whether they had legal representation, and whether the settlement was the result of “ ‘significant negotiations’ ” rather than being a form contract, are considered.
Here, the parties were represented by counsel and had relatively equal bargaining power. The settlement was not a form contract, but rather the result of significant negotiations, including prior settlement conferences. In addition, the liquidated damages amount of $250,000 was not unreasonably out of proportion to the $2.2 million settlement. The trial court also concluded that Johnston failed to meet his burden to show $250,000 was an unreasonable amount in the circumstances, a determination to which we defer.
III. Prejudgment Interest
On the flip side of the coin, section 664.6 authorizes the trial court to enter a judgment reflecting the terms of the parties’ settlement agreement—nothing more, and nothing less. “Although a judge hearing a section 664.6 motion may receive evidence, determine disputed facts and enter the terms of a settlement agreement as a judgment, nothing in section 664.6 authorizes a judge to create the material terms of a settlement, as opposed to deciding what terms the parties themselves have previously agreed upon.” Osumi v. Sutton (2007) 151 Cal.App.4th 1355, 1360.
Here, the parties reached an agreement about what amount of money would adequately compensate BTHHM for the harm it suffered to warrant BTHHM’s release of claims. That agreement included a liquidated damages provision that would become operative if Johnston failed to make timely payment. By awarding prejudgment interest to compensate BTHMM for damages it suffered by virtue of Johnston’s failure to pay, the court entered a judgment that differed materially from the terms of the parties’ agreement, and to that extent it was unauthorized.
TAKEAWAYS
As an overarching principal, California law holds that people are held to contracts; even bad ones. Attorneys sometimes reason that if they can get a settlement close to what they want, and provide that it will be finalized later in writing, that will provide some wiggle room to either get out of the contract, or add terms that were a bridge too far in the heat of the settlement discussions. This decision illustrates that “close enough” might end up being the deal.
