EnGage Mediation
10284 Century Woods Dr
Los Angeles, CA 90067
Phone: 310 273-0904
Fax: 310 282 9964

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As noted, at the conclusion of mediation the parties customarily execute the Stipulation re Settlement/Memorandum of Understanding and request that the defendant prepare and circulate the final Settlement Agreement and Release documents for approval and signatures. Unless specifically stated, the time for circulation and completion would be a reasonable time. Consideration should be given to including the Stipulation as an exhibit to the recital portion of the Settlement Agreement. The parties could provide in the Memorandum, that if they cannot agree on the specific language or terms of the Agreement, it could be brought back to the mediator for further resolution. In the rare instance where the parties anticipate the possibility of a dispute over the precise wording of the agreement and release, they may agree in advance to give the authority to the mediator to act as an arbitrator regarding the wording of the final documents.


Notice of Settlement and Request for Dismissal

If a case is settled, the plaintiff is required immediately to give notice of the settlement to the court and any other court-connected ADR neutral involved in the case. (Cal. Rules of Ct. Rules 225(a). The plaintiff also is required to file a request for dismissal within 45 days of the settlement or the court must dismiss the case. Cal. Rules of CT., Rule 225(b)

The terms of the dismissal should be agreed upon at the mediation and any issues regarding who or what is to be dismissed and under what conditions should be resolved.  A dismissal with prejudice bars another action by either party in the same case. Robinson v. Hiles (1953) 119 CA 2d 666.

Terms of the Settlement Agreement

Since the facts specific to each case will vary, the provisions of the mediated agreement likewise will vary considerably. However, important matters should be discussed, resolved and incorporated into the agreement to avoid any subsequent misunderstanding or unwillingness to abide by its terms. On the other hand, care should be taken to balance the risk that excessive discussion of unnecessary, minute details not unduly lengthen the session or even undo a potential agreement. 

 The terms of the Settlement Agreement can range from provisions not to compete or not to disparage; an injunction containing a notice and cure provision; a requirement for periodic payments in a medical malpractice case; the correction of a personnel file to include a neutral reference or a letter of recommendation in an employment case; drafting of a letter of apology; cancellation or transfer of a lease, deed, franchise, or other contract; a hiring agreement; a stipulation for judgment; a stipulated judgment; a lien, a guarantee or other security interest; the requirement to remove mold or remedy a construction defect; and innumerable other requirements that a party do or refrain from doing something. What is important is that the parties and mediator give thought to what is to be agreed upon and what will be required to carry out the agreement. Giving thought to such matters and discussing them during the mediation process is more likely to insure that each party gets what that party bargained for. Where the items are integral to the agreement, reference should be made to those details in the Memorandum of Understanding and subsequently incorporated in the final Settlement document. 

Details regarding the payment of money

Most mediated settlements end up requiring one or more parties to pay money to another. In many cases there is a reliable, solvent party or insurer and payment is thus virtually assured.  However, there are other cases where the parties should address the details of payment during Mediation and incorporate it in the Memorandum and final Settlement Agreement

Consideration of possible specific terms of payment might include the following, among others: designating the persons to whom payment will be made and whether to include the attorney, a spouse, a lien claimant or other person or entity; the form of that instrument; designating the payor and the source of funds; the time for payment; the method and location of delivery; payment of lien claims; specifying guarantees, liens or other security for payment; stipulations to enter judgment; stipulated judgments; escrow of funds or documents; periodic or time payments; consequences for the delay in payment such as interest or an increase in the amount what becomes due; acceleration of payments for default; provisions for withholding the delivery of documents, releases or dismissals until performance has been completed; identifying contingencies affecting payment or time of payment such as board approval or financing issues; tax treatment of proceeds; provisions for indemnification and attorney’s fees and costs to the prevailing party should litigation be necessitated for delay or noncompliance with the agreement; liquidated damage provisions or other enforcement mechanisms


Allocation and description of Damages—Tax considerations

The purpose of including a reference to tax consequences in this article is to alert the practitioner to give consideration to how damages are referenced in the settlement agreement. This mediator does not purport to be an expert on issues of taxation. What follows is information gleaned from discussions with others and is offered only to raise the issues, not answer the questions. The law in this area is more intricate than the brief material that follows and these general observations should not be relied upon. Instead, should such issues exist, knowledgeable tax advisors should be consulted in your individual case, preferably in advance of the mediation.

It seems obvious that although the parties may allocate damages in their Settlement agreement, the IRS is not bound by that language and may make its own allocation. However, where the allocation is justifiably supported by the facts, the description might aid in a determination of whether proceeds are likely to be deductible by the party paying and/or non-taxable to the party receiving payment.

There currently appears to exist an ongoing issue with respect to the taxability and deductibility of damages and attorney’s fees in connection with damage claims. Prior to 1996, awards for personal physical injury or sickness, or emotional distress, were excluded from taxation under IRS Code section 104(a)(2). Then, someone let the cat out of the bag. Although that section still provides that “the amount of any damages (other than punitive damages) received on account of personal physical injuries or physical sickness” is excluded from the recipient’s gross income, at the time of writing this article it appears that the IRS takes the position that “emotional distress” damages must be included in the recipient’s income unless the emotional distress had it’s origin in observable physical injury or sickness. Moreover, physical injury refers to those injuries that stem from “direct unwanted or uninvited physical contacts resulting in observable bodily harms such as bruises, cuts, swelling, and bleeding” or causing pain. Thus, emotional distress injuries alone may not enjoy tax-exempt status.

 Punitive damages are included in the recipient’s gross income. Query their deductibility by the payor? Similarly, medical expenses that already have been deducted are not excludable. The IRS also apparently takes the position that to the extent the plaintiff’s recovery is exempt from taxation, that the legal expenses incurred in the suit are not deductible, basing its contention on the last sentence of IRC Section 104(a). Taxpayers have had some success in arguing that this amounts to double taxation, as attorney’s fees are includable in the attorney’s return.

With respect to proceeds received for non-personal injury and non-physical personal injury, there exists no statutory exclusion for payments received pursuant to a judgment or settlement. Accordingly, since the income is includable in the return, the plaintiff may be able to deduct the legal expenses incurred in the suit under section 162 as “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Under section 212, taxpayers who are not carrying on a trade or business arguably may deduct the “ordinary and necessary expenses” that are made pursuant to an income-producing activity as miscellaneous itemized deductions, which however are subject to some additional limitations. Likewise, the payor may be able to deduct the legal expenses incurred in the suit as a business expense under section 162 or an income-production expense under section 212.

In discussing the complexities of the Tax Code, it came to my attention that there may be specific statutes that are applicable to particular types of claims and it may be that different portions of a payment may face different tax treatment depending on what each represents (e.g., replacement of lost wages, reimbursement for medical expenses, punitive damages, whether personal or professional injury, Civil Rights, Discrimination, etc.). Not only does it appear that the law is in flux but there appears to be considerable legislation pending in Congress that might affect the whole issue of the treatment of damages and expenses connected thereto. In a case involving significant sums, awareness of the latest developments in tax treatment of the amount involved, might provide an important benefit to the client in connection with drafting the Settlement Agreement.

Periodic payments 

Although settlements based upon periodic payments have fallen out of favor somewhat because of low interest rates, a better understanding of what they actually cost, the existence of companies that will buy them up, thus undermining their primary function, questionable tax advantages, and the failure of some insurance companies guaranteeing payment, they still may be useful in a given situation. If contemplated, the attorneys should be sure to spell out the precise terms involved and the parties should understand the cost, structure and any other issues involved. See CCP Section  667 regarding the requirement for periodic payment of future damages in an action against a Health Care Provider for medical malpractice.


Indemnification issues

The parties may provide that if there is subsequent litigation by others over the terms of the agreement that one party must indemnify the other. 

Penalties and Liquidated Damages 


In some cases, consideration should be given to providing a mechanism for dealing with any violation of the intended agreement or penalties for noncompliance. Such provisions will vary considerably depending on the kind of issues the discussions will raise. While Draconian penalties generally will not be enforced, their mere discussion and/or existence will generally compel compliance.

The request to insert a liquidated damage provision generally arises at the concluding phase of a mediation. The context usually relates to how a particular provision of the contemplated agreement will be enforced. Illustratively, it might arise in connection with a provision relating to confidentiality, agreement not to disparage, return of documents or completion of a task where it would be extremely difficult to measure damages for noncompliance.

Although often contentious, such a provision can be incorporated in the settlement agreement.  Civil Code Sect. 1671 sets forth the provisions relating to the validity of liquidated damages. With some exceptions, they are valid “unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” Also see the Uniform Commercial Code Section 2718(1) and Restatement 2nd of Contracts Sec. 356(1). McCarthy v. Fally (1956) 46 C.2d 577; Witkin, Contracts (9th ed) Sect 503 et seq. Also see Civ. Code Sect. 3275 and 3358-59.

Attorney’s fees provision

It is very common for parties to provide that if a dispute arises with respect to the agreement and litigation is initiated, that the prevailing party will recover attorney’s fees and costs. This provision helps to avoid a frivolous failure to complete the terms of the Settlement Agreement and applies mutually to all parties 

Considerations involved with court, governmental or board approval 

In those instances where settlement is subject to such contingencies as court approval such as the settlement for a minor or incompetent;(Code Civ. Proc. Sect. 372(a); Prob. Code Sect. 3500(5)) or where settlement is conditional upon approval of some board, organization, or group that has final authority; or it depends upon some other contingency, the final outcome of which is unknown to the parties, a provision should be considered as to whether all action on the litigation is to be stayed pending such approval, and also, what should be done to resolve the matter in the event such authority is not forthcoming. It is also important to set some sort of time limit for action or payment.

Recent mediations have indicated that approval for payment in some cases can take more than a year. Where such a situation exists, that fact has to be evaluated and should be acknowledged in the Settlement Agreement.

A case also might involve reporting requirements such as those that relate to Medical Malpractice Claims; Licensing Bureaus, such as contractor’s boards; Consumer complaints to Department of Insurance, State Bar; Civil compromise of criminal matters; and the like. Are the allegations to be withdrawn or otherwise resolved? Will the parties agree to issue a joint statement regarding high profile cases? Will there be a provision for confidentiality or return of documents? Answers to these questions should be included in the final settlement agreement.

Return or destruction of documents produced during discovery

During the discovery phase of a case, issues regarding the production of confidential or privileged documents or testimony often arise. Courts routinely issue stipulated protective orders based on the need to protect privacy and sensitive commercial information. Sometimes documents surface inadvertently and must be dealt with on motion. See CCP Sections 2017; 2019; and 2021.  Orders could be obtained for documents to remain sealed; redacted; returned; and a procedural mechanism put in place to challenge the confidential designation of a document. See eg. Flagship Federal Sav. Bank v. Wall (S.D. Cal 1990) 748 F. Supp 742,749. Illustrations of types of documents that might be protected abound: claims manuals; procedure manuals; customer lists; logs; experts reports; financial records; sales records; methodology; psychiatric, sexual or medical records; business practices; responses in depositions; answers to interrogatories; compilations of information and summaries of various sorts.

Mediation can provide a potentially significant benefit to a litigant that has had to part with such documents. The terms of the court order can be incorporated in the settlement agreement. Where there is no order or it does not sufficiently cover the return, destruction, limitation of distribution, or sealing of the file containing such documents, the settlement agreement could do so. 

Confidentiality in Mediation 

The most significant recent pronouncement by the Supreme Court of California in connection with confidentiality related to Mediation is the case of Rojas v. The Superior Court, Julie Coffin Real Party in Interest, ----------The lower court had held that it would apply the discovery statute approach to determine what documents should be produced, thus protecting as absolutely privileged documents containing the attorney’s impressions, conclusions, opinions, legal research or theories from discovery, but applying a qualified privilege “good cause approach” to produce derivative materials such as “charts and diagrams, audit reports, compilations of entries in documents, records and other databases, appraisals, opinions, and reports of experts employed as nontestifying consultants” and finally that  “non-derivative material such as “raw test data, photographs, and witness statements”  would have to be produced. In reversing the lower court, The California Supreme Court strongly supported the confidential nature of mediation proceedings. Its opinion cited Evidence Code section 1119 (b) that states:  “No writing,…, that is prepared for the purpose of, in the course of, or pursuant to, a mediation,…, is …subject to discovery,…”  In a unanimous decision, the Court precluded the defendant from obtaining any of the material that plaintiff alleged was prepared for the purpose of mediation, despite the fact that the information regarding the condition of the premises and the existence of toxic mold at the premises was no longer available.

What impact this case will have in the future regarding the discovery and production of documents and the need to secure protective orders remains to be seen. However, it is likely that the issue will resolve around the question of whether such materials were generated for the purpose of mediation or otherwise.

Confidentiality of the Settlement Agreement itself

In Foxgate, supra, 26 Ca.4th at p. 14, the California Supreme Court emphasized the importance of confidentiality of Mediation proceedings stating: “confidentiality is essential to effective mediation” because it “promote[s] ‘a candid and informal exchange regarding events in the past….This frank exchange is achieved only if participants know that what is said in the mediation will not be used to their detriment through later court proceedings and other adjudicatory processes.’” Thus, what occurs at the proceedings themselves remains confidential.

But there is another issue regarding confidentiality relating to the terms of the settlement itself. One of the very common requests by one or both parties at mediation is to keep the terms or even the existence of the settlement itself, confidential. Obviously, if the matter proceeds to trial, confidentiality is lost. In cases involving allegations of fraud, sexual harassment, discrimination, bad faith, violation of statute, wrongful conduct by a professional or a well know businessman or company, or where success in the litigated matter might engender multiple similar cases, confidentiality at the conclusion may be more important to a party than the merits of the underlying claim.

There are a number of instances in which all parties desire confidentiality, such as those involving employer-employee, landlord-tenant, harassment, or other situations where there is an ongoing relationship. While it is most common for a defendant to seek confidentiality, not infrequently it is the plaintiff who desires anonymity and confidentiality. The plaintiff may not want friends or family or neighbors to know that he or she has received a substantial amount of money or would like to avoid embarrassment from any discussion of the details of the case.

While in the routine case the issue of confidentiality concerning the terms of the settlement is merely mentioned as an additional term at the end of the settlement negotiations, where it appears that it might be a matter of considerable importance, or might be controversial, it should be addressed as part of the overall mediation process and not left as a last minute tag on.

As a practical matter, once the parties have agreed to confidentiality regarding the terms of the settlement, the matter usually takes care of itself. However, there might be an unusual case where consideration should be given to specific details such as precisely who is bound; how one would prove a violation of the provision; what penalty may apply. (See the section on penalties)

Provision not to disparage 

A provision not to disparage differs from confidentiality. Confidentiality protects against disclosure of the terms of the settlement and precludes discussion of the facts surrounding the incident. But suppose you have a dispute involving next-door neighbors; tenants in the same building or area; parties in the same profession or occupation or business; employer-employee; or other situations where there is still an ongoing interaction. It may be important to proscribe adverse comment about the other beyond merely agreeing not to discuss the terms of the settlement.

Retaining Jurisdiction 

The parties may agree to a provision in the agreement to resolve any dispute related to the Memorandum, the Settlement Agreement or Release issues. This can take the form of a provision to return to mediation, to appoint the mediator (or another) to serve as an arbitrator or have the court retain jurisdiction to enforce an order pursuant to Code Section 664.6.

 Stipulated withdrawal of decision or reversal of judgment

Occasionally the parties turn to mediation after a case has been tried to verdict or even on appeal. There is a strong policy of the law that favors settlement even after judgment. Indeed, there now is a panel of Appellate Mediators to try to resolve cases on appeal. There may be instances where the defendant wants to avoid the onus of an adverse judgment and seeks to negotiate to undo the verdict. In an extreme example, the California Supreme Court held that a court of appeals should grant the parties’ stipulated request to set aside the judgment in order to effectuate their agreement to settle their dispute and terminate further litigation. Neary v Regents of University of California, (1992) 3 Cal. 4th 273, 275,278, 284  10 Cal. Rptr. 859, 834 P.2d 119. Cf. Lucich v. City of Oakland (1993) 19 Cal. App. 4th 494, 500-503, 23 Cal. Rptr. 2d 450.


Adequate preparation for Mediation includes giving forethought to important details that may arise in drafting the initial Memorandum of Understanding; the terms of the final Settlement Agreement and the specific terms of the Settlement Release. The parties and the Mediator should consider the various issues that are relevant to resolving the litigation so that each party will conclude the Mediation with a high degree of satisfaction.


Copyright October 28, 2004 by Sandy Gage

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