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When Is A Memorandum of Understanding Not Enforceable?

by Paul Fisher, Edited by Judith Stalk

At the conclusion of a successful mediation, how should the settlement be documented? Is a memorandum of understanding sufficient or is a complete settlement agreement preferred? More specifically, to what degree must either format reflect “the parties all agreed ‘upon the same thing in the same sense’” in order to be enforceable? Does reciting Code of Civil Procedure, Section 664.6 in a memorandum of understanding assure enforceability?

Two recent (April, 2005) Court of Appeal cases, though unpublished, and two published Court of Appeal cases make this an always timely issue. Goodrich Corporation v. Autoliv Asp (unpublished, and citation omitted) illustrates a problematic of settlement approach. After an all-day mediation the parties signed a handwritten memorandum of settlement. The memorandum of settlement recited that it was intended to settle all issues raised in the action, and was intended to be “binding and admissible for purposes of a motion to enforce this agreement pursuant to Code of Civil Procedure, Section 664.6.” When the parties were unable to agree on final terms, plaintiffs moved for judgment under section 664.6, which was granted by the trial court. On appeal, defendants contended the memorandum of settlement could not form the basis for a judgment under section 664.6 due to lack of mutual assent.

The Goodrich court cited Weddington Productions, Inc. V. Flick (1998) 60 Cal.App.4th793, “The parties’ outward manifestations must show that the parties all agreed ‘upon the same thing in the same sense.’ (Civ.Code, sec 1580) If there is no evidence establishing the manifestation of assent to the ‘same thing’ by both parties, then there is no mutual consent to contract and no contract formation.” In Weddington, supra, in the course of a mediation with a private judge, the parties entered into a “Deal Point Memorandum”, including a clause requiring the parties to formalize a licensing agreement that would include a “fully paid up license to Flick for use in sound editing services… ” Neither the term “Licensing Agreement” nor “fully paid up license” was further defined. The Court of Appeal reversed, concluding no contract had been formed because the parties never objectively manifested agreement to the essential terms of the licensing agreement, including the scope of the license, permitted uses, grounds for termination, and indemnity provisions.

In contrast, however, Tender Loving Things, Inc. (TLT) V. Robbins, (unpublished, and citation omitted), also citing Weddington, supra, illustrates a memorandum agreement that was enforceable. Following a mediation, the parties and counsel entered into a written eight page “Stipulation For Settlement” which “extensively listed numerous detailed terms” of the agreement regarding the disputed subject matter. The stipulation for settlement contemplated a more formal “final agreement” that would contain additional “incidental terms, including an ADR provision, to be agreed upon between parties.” The stipulation also provided that the stipulation itself could be enforced as a judgment pursuant to CCP Section 664.6. After months of unsuccessful negotiation, TLT sought enforcement of the settlement stipulation under the terms of CCP, sec. 664.6. At the trial court level and on appeal, Robbins argued that the stipulation for settlement was uncertain and that the lack of resolution of certain terms proves the parties did not intend it to be a binding contract. The Court of Appeals found “The language calling for preparation of a final agreement merely reflects the parties’ desire, ascertainable from the stipulation for settlement itself, to flesh out some of the incidental details, including, for example, more specific provisions regarding arbitration of disputes.”

The court in Weddington, supra, quotes from Ersa Grae Corp. V. Fluor Corp (1991) 1 Cal.App.4th 613, 624) 1991 Cal.App. LEXIS 1398, explained “The fact that an agreement contemplates subsequent documentation does not invalidate the agreement if the parties have agreed to its existing terms. Any other rule would always permit a party who has entered into a contract like this… to violate it, whenever the understanding was that it should be reduced to another written form, by simply suggesting other and additional terms and conditions. If this were the rule the contract would never be completed in cases where, by changes in the market, or other events occurring subsequent to the written negotiations, it became the interest of either party to adopt that course I order to escape or evade obligations incurred in the ordinary course of commercial business.” The court in Weddington, supra, [link] concluded “the absence of a more specific agreement on this topic is not fatal. Under the circumstances, the addition of a specific alternate dispute resolution provision as a remedy for a breach of the agreement would be a minor or incidental term that does not go to the heart of the settlement agreement, or impair its enforceability. (See Weddington, supra)