ADR Case Updates
Plaintiff�s Failure To Mediate Precludes Attorney Fees; Settlement Agreement May Not Contain Liquidated Damages Provision, 07/09/08
In case you have not seen them, two recent California Court of Appeal cases are relevant to mediation. The first demonstrates the importance of mediating before filing a complaint in order to recover fees if required by the underlying contract between the parties. The second reveals the danger of including liquidated damages in a settlement agreement with a stipulation for entry of judgment in the event of installment payment default — a common practice pitfall that may be avoided as suggested below.
In Lange v. Schilling, (June 16, 2008, Third District) 78 Cal. Rptr. 356, Plaintiff, a real estate broker, bought a lake property using the standard California residential purchase agreement that contained an attorney fee clause authorizing an award of reasonable attorney fees to the prevailing party. The purchase agreement also contained a mediation clause requiring the parties to first mediate any dispute before filing an action, or forfeit the right to recover fees.
After close of escrow, Plaintiff sued the sellers and listing agent for nondisclosure without first attempting to mediate. Not knowing sellers� whereabouts, Plaintiff was unable to serve the complaint, and hired a private investigator, who found a mailing address. Plaintiff served the complaint by mail. Sellers� default was entered.
The parties then communicated through counsel. Plaintiff�s counsel wrote a letter to Defendants� counsel offering to stay the litigation and mediate the dispute. The record does not contain a response to that letter, but the parties stipulated to set aside the default, Defendants answered, and the matter proceeded to jury trial.
Plaintiff ultimately prevailed and recovered a judgment against Defendants for $13,475. The court awarded Plaintiff $80,710.26 in fees, an amount reflecting the fees incurred after Plaintiff�s offer to mediate. Defendants appealed the fee award.
Reversed. Plaintiff filed the action first, and then sought to mediate. Seeking mediation is a condition precedent to the recovery of attorney fees. It is no defense that Plaintiff was unaware of sellers� whereabouts. He should have hired his investigator to locate sellers before filing the action. If they could be found for service of process, they could have received a mediation demand by mail.
Moreover, the doctrine of substantial compliance is not applicable. The letter from Plaintiff�s counsel offering to mediate after the complaint was filed, but before Defendants answered, does not meet the clear and unambiguous requirement to mediate before the action is filed. Therefore, the fee award must be reversed.
In Greentree Financial Group, Inc., v. Execute Sports, Inc. (May 28, 2008, Fourth District, Div. Three), 163 Cal. App. 4th 495, Plaintiff sued Defendant for breach of contract arising from Defendant�s alleged failure to pay $45,000 for financial services rendered. On the day set for trial, the parties settled the case for $20,000 payable in two installments. The terms of the settlement provided that if Defendant failed to make a payment, Plaintiff could file a stipulation for entry of judgment for $45,000 plus prejudgment interest, costs, and attorney fees. After Defendant failed to make the first payment, the trial court entered judgment for $61,232.50. Defendant timely appealed.
Reversed and remanded with directions to reduce the judgment to $20,000 plus postjudgment interest and costs. The judgment constitutes an unenforceable penalty because it bears no reasonable relationship to the range of actual damages that would flow from breach of the settlement agreement.
This common practice pitfall for the unwary — increasing the amount of any judgment in event of default to motivate a defendant to pay in full — may be avoided by taking the opposite approach. Provide in the settlement agreement that defendant agrees to pay the larger sum, say the amount sought in the complaint, but plaintiff will accept less if timely paid — a bird in the hand is truly worth two in the bush. Instead of impermissible liquidated damages upon breach, the parties simply agree to a discounted amount if paid pursuant to agreed-upon terms. Since any judgment entered upon default would be for the amount sought in the complaint, the court would be hard-pressed to construe the �discount� as liquidated damages.
Both cases may be viewed at: http://www.courts.ca.gov/opinions.htm.
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