Mediation Message No. 89



Since some mediation settlements include stipulations for judgment, it is appropriate to discuss Greentree Financial Group, Inc. v. Executive Sports, Inc. (2008) 163 Cal.App.4th 495, which holds that such stipulations cannot include unenforceable penalties.
The plaintiff in Greentree sued ESI for $45,000 for breach of contract. Before trial, the parties agreed in a stipulation for judgment that ESI would pay Greentree $20,000, in two installments. If ESI defaulted, Greentree would be entitled to immediate judgment for all amounts prayed in its complaint, including interest, attorney fees and costs, less any amounts already paid by ESI. ESI defaulted on the first installment payment of $15,000. The trial court entered judgment for Greentree for $61,232.50, which included attorney’s fees and prejudgment interest.

The appellate court reversed the judgment because the stipulation resulted in a penalty assessment of $40,000 more than the $20,000 due under the stipulation and, thus, bore “no reasonable relationship to any actual damages that might flow from ESI’s failure to make the first installment payment.” (Id. at p. 501.) The court explained that “The amount set as liquidated damages ‘must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.’ [Citation.] In the absence of such relationship, a contractual clause purporting to predetermine damages ‘must be construed as a penalty.’ (Citation).” (Id. at p. 499.)

MDM’s helpful hints: Greentree does not hold, as is commonly believed, that stipulations for judgment cannot provide for the amount of damages requested in a complaint. The case states only that the amount of the judgment must bear a reasonable relationship to any actual damages that might flow from the defendant’s failure to comply with the stipulation’s financial terms.
• If a plaintiff wants to obtain the damages sought in an underlying complaint, it must establish in the stipulation that such damages shall result from a breach of the stipulation. An admission by a defendant to that effect should suffice. That result could not be obtained in Greentree because ESI had denied wrongdoing. (Id. at p. 500.)
• Consider inserting language in the stipulation that the defendant, if it defaults, shall pay the amount of the complaint because such a sum will encourage it to make the settlements on time and compensate plaintiff for both its loss of use of the money and its reasonable costs in pursuing the payment. (Id. at p. 500.)
• Consider decreasing penalties as payments are made. Greentree criticized the fact that the same penalty resulted whether ESI defaulted on the first or second payment. (Id. at p. 502.)
• Make certain that the stipulation, and not just the complaint, provides for attorney’s fees and prejudgment interest. (Id. at p. 502.)

Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067
(310) 201-0010

Copyright Michael D. Marcus, July 2013

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