California Court of Appeal Enforces Parties’ Intent in Settlement “Term Sheet” Pursuant Code of Civil Procedure Section 664.6

In BTTHM Berkeley, LLC v. Johnston (No. A163300, filed March 28, 2024 and certified for partial publication), the California Court of Appeal, First District affirmed a trial court’s grant of a motion to enforce a settlement “term sheet” pursuant to Code of Civil Procedure 664.6 and to enter judgment. However, the Court of Appeal found error in the portion of the judgment that awarded plaintiffs prejudgment interest because such award was not part of their term sheet.

The defendant Steward Johnston (“defendant”) and his property manager “Landmark” entered into a letter of intent with plaintiff “BTHHM,” among others (collectively, “plaintiffs”) to lease defendant’s real property for use as a cannabis dispensary. Defendant thereafter refused to perform and plaintiffs thus sued defendant for breach of contract. The parties then attended mediation and executed a Settlement Term Sheet Agreement (“Term Sheet”).

Under the Term Sheet, plaintiffs agreed to release all rights in the leased property upon defendant’s full payment of the settlement amount stated therein. Defendant further agreed to execute a Stipulation for Entry of Judgment (“Stipulation”) in the amount of any unpaid balance owed to plaintiffs, plus liquidated damages. The Term Sheet also indicated that the parties would prepare and execute a final settlement agreement. Finally, the Term Sheet stated the mediator was available to assist as necessary.

Shortly after the mediation, defendant attempted to withdraw from the Term Sheet, asserting he did not understand the meaning of the Term Sheet’s reference to Code of Civil Procedure Section 664.6 or that the Term Sheet was intended as a final settlement. The Court of Appeal rejected this assertion on the basis that the Term Sheet was an enforceable agreement under Code of Civil Procedure Section 664.6 because it reflected a mutual intent by the parties to be bound by its terms.

Specifically, defendant first asserted that the Term Sheet omitted material terms, including a mutual release. The Court found this argument failed because the Term Sheet required each party to dismiss its respective pleading.

Defendant next argued that the Term Sheet was not enforceable because it contemplated future negotiations, including execution of a final settlement document and the Stipulation. The Court of Appeal disagreed because defendant failed to produce evidence that the parties’ agreement to prepare separate documents reflected a failure to agree on the material terms of the settlement as set forth in the Term Sheet.

Finally, the Term Sheet’s provision that the parties could consult with the mediator also did not negate their intent to be bound by the Term Sheet. Parties may seek the assistance of a mediator to flesh out immaterial terms. Moreover, that the parties contemplated doing so only reinforces that they agreed to be bound.

The Court of Appeal further concluded that the Term Sheet’s liquidated damages provision was proper. Each party had counsel and relatively equal bargaining power in reaching this significantly negotiated settlement.

However, the strict interpretation of the Term Sheet also resulted in the Court of Appeal holding that the trial court lacked the authority to award plaintiffs prejudgment interest. Code of Civil Procedure Section 664.6 only authorizes a court to enter a judgment that reflects the terms of the parties’ settlement agreement: “[N]othing more, and nothing less.”

Furthermore, Code of Civil Procedure Section 3287(a) does not authorize prejudgment interest on a judgment entered under Code of Civil Procedure 664.6 where, as in the instant case, the parties reached their own agreement as to damages. Prejudgment interest is an element of damages. The trial court thus committed reversible error by creating a material term that did not exist in the parties’ Term Sheet agreement.

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