Tips on Avoiding the Unsettling Results of a Poorly-Drafted Settlement Agreement

June 26, 2015

By Paul W. Mengel III

Well done! Through your reasoned approach and powers of persuasion, you have managed to resolve the pending contract dispute on your own, and thus have avoided that costly telephone call to the litigator in your attorneys’ office and the uncertainty that comes with putting your dispute before a judge or arbitrator for resolution.

As you reflect on the expense that your efforts have saved the company and contemplate a possible second career as a diplomat, a draft settlement agreement arrives in an email from your erstwhile adversary. After giving it a look, you conclude that it contains all the big-ticket points you had discussed and grab a pen, but something tells you to give it a bit more thought. Good call, because, after all, a settlement agreement is a contract, and a contract designed to resolve a dispute merits the same amount of scrutiny as was given to the contract from which the dispute arose. And, unless care is taken, much of the money you saved by avoiding litigating the underlying dispute could be devoted to litigation over the enforcement of the terms of the settlement agreement.

So what are some of the essentials of a solid settlement agreement? Of course, each settlement agreement needs to be tailored to the facts of the particular disagreement from which it sprung, and there in no “one-size-fits-all” form that can be employed. But there are some typical provisions that, at a minimum, should be contemplated for inclusion, if you want your agreement to stand up to a challenge:

  • Introduction: Written settlement agreements typically commence with an introductory section that identifies the parties, describes the purpose for which the agreement is drafted, lays out the background facts of the dispute, and states that the parties have reached an agreement, the terms of which follow. An introductory section can also contain an acknowledgement of the sufficiency of the consideration for the settlement, a statement of the effective date and a disclaimer of liability. 
     
  • Payment terms: Assuming a payment is involved in the resolution, usually one of the first provisions sets out the amount of the payment, to whom the payment will be made, the form which the payment will take (wire transfer, check, etc.) and the commencement date and timing of future  payment(s). You should consider including a section that provides for the accrual of interest (at a rate that would be enforceable in your jurisdiction) in the event of late payments.
     
  • Release: Presumably the parties want to put this dispute behind them forever, and in order to do so, a release (usually mutual) should be included. Considerable attention should be paid to the articulation of who is doing the releasing, the claims which are being released and who are the recipients of the release. It is critical that the release be as comprehensive as possible and that it address not only the claims that have arisen, but those that could have arisen from the dispute. Many a settlement has sunk as a result of a leaky release provision.
     
  • Confidentiality: Usually at least one party to a dispute does not want word of the terms of the settlement to be the subject of discussion among others. The inclusion of a confidentiality provision is designed to keep the settlement terms among the parties and restricts the information to only those to whom disclosure must be made for business or other reasons, such as auditors, accountants, attorneys, a court pursuant to a subpoena, etc.
     
  • Non-disparagement: It’s a small world out there, particularly in the area of government contracting, and there is often a degree of animosity that has arisen as a result of the underlying dispute that might tempt a party to bad-mouth the party with whom the settlement was reached. A non-disparagement provision is designed to nip that temptation in the bud, and the inclusion of a strong financial disincentive from doing so in the form of a liquidated damages provision should be considered.
     
  • Attorneys’ fees and costs: In order not only to ensure compliance with the terms of the settlement, but to discourage frivolous litigation related to the agreement, a “prevailing party” attorneys’ fees provision should be included. In the absence of one, if the enforcement of the agreement leads to litigation, under the “American Rule” each party will pay its own fees and costs, irrespective of the outcome.
     
  • Governing law/jurisdiction: The parties can agree as to the law to be applied to the interpretation and enforcement of the agreement as well as to where an action to enforce its terms may be brought. The decision on both points can substantially affect not only the cost involved in enforcement, but the results that are likely to be obtained, depending on the applicable case law. As a result, careful deliberation should be given to these provisions.
     
  • Severability: Despite the best efforts at drafting, a court might find a provision of the agreement to be unenforceable. In that event, you want to have assured, to the extent possible, that the remainder of the agreement remain intact and enforceable. A severability provision is designed to not only preserve the integrity of the remainder of the agreement, but to address the replacement of the provision that has been stricken with one that will be enforceable, if the applicable law allows.
     
  • Miscellaneous: There are other typical inclusions in settlement agreements, such as a provision stating that counterparts are deemed originals, a statement that the signer has the authority to do so, a non-waiver provision indicating that a failure to enforce one term is not a waiver to enforce others, and an agreement that ambiguities will not be resolved in favor or against any particular party.

It is hoped that the foregoing outline of critical settlement agreement provisions drives home the point that you should give to your settlement agreement the attention you would give to any other contract that serves to bind your company to a legally enforceable financial obligation. Otherwise, you may find yourself in the unenviable position of devoting the resources you saved, by ostensibly resolving the dispute, to funding the effort to enforce it.

About the Author: Paul Mengel is counsel with PilieroMazza and leads the Litigation Group. He can be reached at pmengel@pilieromazza.com.

 

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