What Is a Settlement Agreement?
A settlement agreement is a binding contract between two or more parties that resolves an existing dispute. They are commonly used in employment and severance situations, but can also be relevant to general contract negotiations, family law matters, or any other legal controversy. In simple terms, they are structured attempts to amicably resolve underlying legal issues without the need to appear before a judge, jury, or another decision-maker.
A settlement agreement allows parties to come together and agree in writing to the terms upon which they would like to resolve their differences. For example , an employee may want to resign on good terms, or a business owner may wish to divest themselves from a company or disperse of assets or profits. Whatever the underlying situation, a settlement agreement is intended to spell out the terms upon which the underlying dispute should be resolved.
Thus, from a practical standpoint, it is a stapler that assembles the pieces of a conflict for a smooth resolution. At a minimum, they tend to deal with financial issues but can also touch on obligations, restrictions, and other issues that are relevant to the parties involved.
Integral Components of a Settlement Agreement
A standard agreement that settles disputes amongst parties usually includes some of the following terms and conditions:
Parties: The parties to an agreement are of utmost import. It is important to list all of the parties to the litigation as the parties executing the agreement. These parties would be a "releasing party" and a "releasee". The agreement may specify that this is a mutual release or describe specifically the releasing party and the releasee.
Merger Clause: This clause states that the agreement constitutes the entire understandings of the parties with respect to the matters subject of the agreement in that there are no collateral representations. A merger clause sets out that there are no agreements other than those expressed within the four corners of the written agreement and protects the agreement from claims that representations were made outside of the agreement. This provision may be modified when there are other documents that should be also reviewed.
Agreement to Dismiss / Cooperate: The agreement may require individual parties to dismiss individual lawsuits and/or a class action lawsuit and/or a derivative action, and to cooperate with respect to any other provision of the agreement, including the execution of documents that are required.
Confidentiality Provision: These clauses would include that the parties shall keep confidential all discussions and/or results of any negotiations, including the terms of the agreement. The exceptions would be for tax advice, accounting advice, and counsel.
Return of Documents Provision: This clause would usually include that a party may disclose in confidence, to its accountants and others on a need to know basis, such a mutual agreement cannot be enforced unless it is in writing and signed by the parties
Release Provisions: In a reciprocal type of release, parties agree to release one another of all claims. There may be exclusions to the release depending upon the scope of the settlement. The mutual release may have a general release and a known claim release. The release may be combined with a covenant not to sue.
Non-Suit Provision: The consent of a party may be necessary but not essential if the parties do not pursue a non-suit.
Non-Disparagement Clause: At times there would be a provision on non-disparagement and would be included if there is a material impact on the goodwill of one or both of the parties.
Settlement Agreement Drafting: A Step-by-Step Guide
The process of drafting a settlement agreement calls for precision of language and attention to legal requirements for the release to be enforceable. The following provides a step-by-step process for ensuring appropriate wording and breadth of coverage for a settlement release.
- The Release Provision – Inclusion in Settlement Agreement: Include the release within the four corners of the agreement. This means that you want the release language to be part of the settlement agreement itself. You do not want the release language to be in a side letter or in another document outside of the body of the settlement agreement.
- The Release Provision – Identify the Releasing Party and the Released Parties: The release provision should identify the releasing party which is generally the employee. Also identify all of the "released parties" who are intended to be covered by the release. Note: if the employer is a corporate entity, include the parent company, subsidiaries, affiliated companies and any of the entities in the employer’s corporate family (including any joint ventures in which the employer is a partner).
- The Release Provision – Scope of Release: The scope of the release should cover all issues and claims – whether known or unknown; all claims from the beginning of the employment through the date of signing the settlement agreement; and all claims, demands, actions, suits, debts, costs, expenses, and liabilities. The language should also include broad descriptors of the types of claims being released. While comprehensive general releases are standard, under certain circumstances, employers may want to consider limiting the scope of the release. However, in some jurisdictions, limiting releases is not permitted.
- The Release Provision – Mandatory Provisions: The release must be valid, meaning there are specific provisions which the release must include, and refrain from including particular terms in the release. The mandatory provisions include the requirement that the release:
- be entered into in exchange for consideration, the value of which is specific in the settlement agreement;
- be knowingly, voluntarily, and intelligently signed;
- provide for a specific unenforceable clause such as a waiver or disclaimer; and
- include certain language acknowledging notice of the right to counsel.
- The Release Provision – Older Americans Act Provision: If the employee is 40 years of age or older, there is a requirement for additional language under the Age Discrimination in Employment Act to give the employee 21 days to consider the proposed release and a recission period of 7 days after the signing.
- The Release Provision – Severance Payment Provision: The release provision will state that in exchange for "x" dollars, the employee releases all claims/applicable claims. Generally, the severance payment is to be paid in accordance with the company’s policy or plan. The severance check should be accompanied by a cover letter advising the employee that: – They have been released from all claims of any kind and are urged to consult with an attorney before cashing their severance check; and
- The amount of the severance payment is ____ (include the value) plus applicable deductions and emergency withholding for any amounts in excess of $100,000 under Internal Revenue Code Section 3402; and – After cashing the check the employee releases all claims.
- The Release Provision – Further Requirements: In addition to these mandatory provisions, ensure that the settlement agreement requires the employee to represent and warrant that (s)he has not filed any claims, charges or lawsuits pertaining to or arising out of his or her employment; and that the employee has not made any statements or performed any acts that constitute defamation of the employer or any of the employer’s employees or agents. You also want to include language requiring and agreeing to maintain the confidentiality of the settlement agreement.
Common Provisions in Settlement Agreements
Indemnity Clauses. These provide that one party to a settlement agreement will indemnify the other in the event of a prior claim. For example, ABC Corporation grants a license to XYZ Corporation for certain intellectual property. Later, it is discovered that ABC does not own the necessary intellectual property rights. XYZ then sues ABC for its damages. ABC agrees to indemnify XYZ for its damages. Most indemnity clauses will have time limitations on when the indemnification actions must be made. It is important for a party to timely bring any indemnification claim that arises out of the settlement agreement.
Payment Terms. The agreement should clearly state the effect of the settlement payment. Are there obligations that must be performed to receive the payment? Generally, the party making a payment under the agreement must have a covenant that states that the payment will be returned if the obligations in the agreement are not met. There also should be a term that the payment is in full satisfaction of the claims. A payment signed over to a third party may or may not be in full satisfaction of the claims.
Conditions Precedent. Many settlement agreements include conditions precedent that must be satisfied before the settlement agreement becomes effective. For example, the parties may require approval by a bankruptcy court for the agreement to take effect. The agreement should set out how the ordinary course of business is conducted during the pendency of a condition precedent and also the effect of the non-fulfillment of the condition precedent. A party should be careful when agreeing to condition precedent language that requires the consent of a third-party. The condition precedent may allow the other party to withhold consent for whatever reason it sees fit (e.g., merely wanting additional money, reneging on a promise, setting a newly high standard). A party should make sure that the condition precedent confirms that the consent cannot be unreasonably withheld.
Pros and Cons of Settlement Agreements
Settlement agreements offer numerous benefits. They can be an effective, efficient, and cost-effective way to resolve a dispute. They can also provide parties the ability to "do what they want," rather than concern themselves with what the law allows.
While often beneficial, settlement agreements can also pose risks. First, if a party is not fully informed of his or her legal rights and remedies prior to signing a settlement agreement, then he or she may be foregoing rights without knowing it. Second, even if a settlement agreement is signed with informed consent, it may be unenforceable if, for example, it is not signed by all necessary parties. Third, while settlement agreements can provide flexibility, oftentimes what is provided by law cannot be waived without violating public policy. For example, although parties are free to privately settle a claim in exchange for services rendered, they cannot settle a work-related injury in exchange for future medical treatment, even if such treatment is never provided . Fourth, an employer may have to provide a severance to an employee as part of a settlement, and many severance agreements are governed by the Age Discrimination in Employment Act (ADEA). Fifth, many state laws restrict the amount that may be paid in settlement of workers’ compensation claims (allowing employers to settle workers’ compensation claims only for wages lost during the 30-day pen period after the injury, for instance); violation of such laws can lead to penalties. Sixth and finally, a settlement agreement may expose a party to liability in the future even if expectations to the contrary were created up-front. For instance, similar to a statute of limitations, an agreement may require that a claim be brought within a certain timeframe or else the claim is barred. But if a party waits longer than the set timeframe and is barred from bringing a claim for breach of that agreement, his or her remedial options are limited.
Example Settlement Agreements with Varied Applications
The applicability of settlement agreements spans a vast number of fields, from employment to personal injury, to businesses and beyond. Some examples are as follows:
The Employment Agreement
In employment disputes, an example of a settlement agreement would be a "Separation Agreement and General Release." This is typically a simple document that lays out each party’s position in the pending litigation together with a negotiated "separation" or "severance" package.
The Personal Injury Tort Claim
A settlement agreement for claims related to personal injury may contain more detail regarding medical expenses, lost wages, future wage loss, and even diminished earning capacity. A standard provision in personal injury cases is to disclose all medical expenses and to obtain a release of claims vis-à-vis a doctor or health care provider, in order not only to protect the defendant, but also the plaintiff from any claim by the provider for payment of a bill that has already been paid or waived.
The Business Dispute
In an example of a settlement agreement in the context of a business dispute, the parties would typically prepare a "Mutual Release," which essentially means that each party, upon fulfilling their part of the agreement, agrees to release the other party. In a business dispute, the terms could include return of any company property, references to related employment contracts, reassigned benefits, non-compete clauses, and/or confidentiality requirements. Not infrequently, counsel will draft an agreement for settlement of a business dispute that provides not only for a lump sum cash payment, but will also condition that payment on the return of certain property. The return of property may include customer/client lists, trade secrets, conquest customers/clients, work-in-progress and work product.
As we have seen, settlement agreements come in many forms. They can be brief and simple or may involve intricate provisions that apply to the particular circumstances of each dispute.
How to Handle a Settlement Agreement Breach
Typically, the parties insert a clincher provision at the end of the settlement agreement that states as follows: "If any party hereto shall institute any proceeding to enforce any provision of this Agreement, the non-prevailing party to such proceeding or action shall pay to the prevailing party all costs, attorneys’ fees, and other expenses incurred or paid by such prevailing party in connection herewith."
But what happens if the other side breaches the settlement agreement? Do you have to wait until the process server shows up with the summons and complaint?
Most breach of settlement agreements involve monetary damages, and thus it is usually a state court action. However, the Federal Rules of Civil Procedure provides that parties may enforce an agreed upon settlement agreement by utilizing Rule 70 for actions where some type of specific performance is needed (for example, turning over a title to a car). The same principal applies for a breach of settlement agreement regarding the provisions of an Order of Prejudgment or Post-judgment Attachments under N.Y. CPLR § 62, "the Judicial enforcement of the asset freeze is a monetary sanction . . ." (U.S. v. S.E.C., 818 F. Supp. 2d 1128, 1137 (D. Utah 2011). New York also has a post-judgment remedy for enforcement of the Order of Prejudgment or Post-judgment Attachment under N.Y. CPLR § 5225. Additionally, parties can ask the Court for an order to show cause why the breach has occurred and if the party has acted in good faith to purge itself of contempt and/or damages.
In light of the above, it may be best to first pursue an Order and request for money damages before asking the Court to send an errant party to jail . Perhaps one of the first questions to ask is whether one side has breached the settlement agreement. If so, "Having failed to honor his part of the agreement, the other side was under no obligation to perform either." (Rhoades v. Casey, 414 F.3d 875, 880 (8th Cir. 2005). Therefore, in doing so, the real issue becomes whether the disobedient party acted in good faith rather than "affecting" the breach itself. However, it would appear that one may be able to hold the non-compliant party in contempt of a Federal Court Order prohibiting counsel from contacting the counterpart party (the Federal Court had previously issued an Order of Protection under N.Y. C.P.L.R. § 5240). (Quintero v. Bachmann, 340 F. Supp. 2d 1305 (S.D. Fla. 2004). Evidently, an agreement that is incorporated into a Federal Court Order becomes part of the Federal law, and thus is enforceable in the Federal Court. (Id, at 1314) (It appears that punishment would be rendered pursuant to the Rules of Civil Procedure, i.e., the available remedies would be similar to that of a State Court proceeding.)
However, the Court may have discretion as to the types of sanctions that may issue for violation or threats of violation of a settlement agreement. (BWX Technologies, Inc. v. Pastore, 187 F.3d 87, 97 (3d Cir. 1999). For instance, the court may impose sanctions for vexations or harassing discovery demands, or compel compliance with the settlement agreement itself and require an explanation as to the breach. (Id. at 94). Ultimately, it is a case-by-case analysis of what is just and equitable under the circumstances. A party could even be bound by an amendment to a settlement agreement, specifically calling for attorneys’ fees. (Id. at 95).