What is a Settlement Agreement?
A settlement agreement is a legal document that is commonly used in civil disputes to amicably resolve the issues between the parties while avoiding the need for lengthy and costly litigation. The agreement is executed by the parties and often signed before a Notary Public and/or a witnessing party. If properly drafted, a settlement agreement may be reduced to a Consent Order and entered with the Court, it may remain a private (and thus confidential) agreement between the parties or the parties may incorporate the settlement agreement into the business records of the parties and operate under its terms . Settlement agreements frequently contain mutual releases between the parties meaning that the parties are mutually releasing each other from any possibility of litigation or claim regarding the issues set forth in the agreement. Further, a settlement agreement generally contains a general waiver of future claims.
Mutual Release Basics
The mutual release is an important part of most settlement agreements. At its most basic, a release means that a party gives some right up in exchange for something else. Within the confines of a settlement agreement, a mutual release means that both parties are giving something up in exchange for the release. So, if you are settling with a company, they are giving you money, and you have to give up some of your rights in the company. Or conversely, if you are paying money to settle a claim, you are getting the other party to give up some of his or her rights in exchange for your payment.
Typically, the first step in analyzing a mutual release is to identify what rights are being given up by each party. The second step is to determine whether the release will be general or specific, global or limited to specific claims. Prior to making your decision as to the type of release, you must identify all potential claims that you or the other party could assert against the other. In the case of a corporation, this means that the corporation must identify and understand what rights it possesses, and what claims exist that might be made in the future. Of course, the corporation cannot release something that it doesn’t yet know about, even if it were to assume, for the sake of argument, that the release would cover it. However, if the release of claims is mutual, ensuring that both parties submit to a release of claims basically encourages them to ensure that all releases are mutual.
Unfortunately, this is not always the case. Often, one side submits a draft release to the other as part of the settlement negotiations. If you perceive that your client is being asked to release more claims than the other party, you should pursue the issue before agreeing to the settlement. Although a mutual release means that both parties are giving something up, often the company is the larger party with more chips to trade. This holds true even when the company believes it may have a better hand than the other party. No party should sign something that releases a claim or right that it thinks might be better than any future claim. Although a release of claims absolves the other party from suit, it does not help the corporation to release claims on behalf of others who might want to bring suit against the other party. One should never sign a release of claims without being absolutely certain that all of the potential claims that might arise are addressed in the settlement agreement and the release of claims.
Key Components of a Settlement Agreement
The basic terms of the fundamental obligations in a settlement agreement must be clearly spelled out. For example, the payment obligation must include the amount to be paid, timing, method, form of payment, and what happens in the event of default. Where more than one payment is made, there should be language that makes it clear which portion of the settlement sum is allocated to which obligation. A release should not result in multiple payments by the settling party if the result of the settlement agreement reopens other claims. The time frames for performance should be stated clearly.
In addition to including the above-referenced elements, a settlement agreement should provide for such boilerplate provisions as an integration clause, a choice of law provision and a provision relating to the effect of a failure to proceed in accordance with the settlement agreement (it should not be mandatory to comply with any or all of its provisions in that particular event). Essential terms include confidentiality provisions, which define the scope of the information that may not be disclosed, and exceptions. No settlement agreement is final until after approvals are obtained, so proposed language should make it clear that the agreement is contingent on receiving client approval and being approved by the applicable court, and in accordance with any reporting requirements arising from such approval. In addition, methods to resolve disputes may be provided for in advance (i.e., selecting arbitration as a forum for potential future disputes relating to the agreement, or stating that the parties’ last bargaining position will be the resolution mechanism). To the extent the attorneys who negotiated the agreement are entitled to fees for subsequent work performed in connection with the settlement agreement, this should also be addressed.
Why Settlement Agreements and Mutual Releases are Beneficial
There are many reasons a company or individual would want to pursue a settlement agreement and mutual release. First, they are generally efficient. Assuming good faith between the parties, the process can be modest in time. Generally, within a few weeks, the parties can come to an agreement and quickly finalize the same.
Second, a settlement and mutual release will save the parties a substantial amount of money. As we all know, litigation is an expensive endeavor. Courts, even small claims courts, can have strict rules regarding discovery, disclosure, interrogatories, and other discovery issues. Having an attorney or attorneys represent the parties in their discovery efforts can drastically reduce the length of the process and also increase the amount paid by or awarded to the respective party. Whether a party is a defendant or a plaintiff, the stakes of the lawsuit should be evaluated. What are the damages and costs associated with continuing in the litigation? In the vast majority of lawsuits, it is always more expensive to litigate a case than to settle it. The longer a suit goes, whether as a plaintiff or a defendant, becomes exponentially more expensive due to the attorneys’ hourly fees, time spent by the parties and lawyers, and cost associations with those activities. Plaintiffs in particular should evaluate whether the amount recovered from a lawsuit would even be able to pay the attorneys’ fees associated with pursuing the claim to its end.
Third, a settlement and mutual release can allow the parties to preserve their relationship. Many businesses that pursue litigation are in some form of continuous relationship or do business on some level with their adversary. Embarking on litigation could make it difficult for the parties to move past litigation if they have to continue to work together.
Common Mistakes to Avoid
A couple of common mistakes that parties should avoid with respect to their settlement agreement and mutual release are:
- Too few or no recitals. There are a number of reasons for including recitals in an agreement, including to identify the parties and their background, to create a chronological history of the events leading to the agreement, to state the intent of the parties, and to state any other information relevant to the agreement. Make sure you include the necessary recitals. Do not assume that everyone will remember the details of the discussions leading to the agreement, or that everyone reading the agreement will have access to all the requisite information.
- Immediately releasing a promissory note or settlement. It is common to include a provision in the mutual release whereby the obligor under a promissory note (the debtor) agrees to pay the outstanding balance in exchange for a release. However, if the debtor is paying the debt immediately, there may be no need for a release as the debt is being immediately extinguished by payment. While it may seem harmless to have an obligation to deliver a release to an immediate debtor, the debtor may wish to wait to tender the payment until he has fully performed the agreement , or he may desire to delay payment until absolutely necessary for his own sound business reasons. Further, if the debtor is in a credit crunch, a new and more expensive criminal interest rate structure may go into effect that could affect the cost of delay. If that is the case, the creditor should seek to delay the mutual release until the obligor has made payment. To avoid this problem, the mutual release should be drafted to be effective only upon payment in full or it should be executed and held in escrow until payment is received.
- No optional forms. Be sure to attach any optional forms specifically referenced in the agreement or mutual release to the agreement and mutually release, and refer to the payment of the debt in the relevant optional form.
- Missing signatures or dates. Be sure that signatures are dated by the parties on all documents including the mutual release. It is also best practice to have an independent witness on each signature and to have all signatories initial all exhibits and all pages of the agreement and mutual release. Finally, make sure that all parties have signed all copies of the agreement and mutual release. Do not assume that all parties will sign every copy of the agreement and mutual release at the same time.
Legal Considerations and Advice
Parties who enter into settlement agreements should recognize the potential risks associated with their agreed-upon terms. Although some issues can be resolved outside of litigation or mediation, the parties are still bound by the terms of any underlying contract or agreement. It is important to remember that certain provisions in a settlement agreement may not be enforced.
- Breach of Contract: Although most settlement agreements are fairly non-confrontational in nature, litigants should be aware that they are still bound by the terms of their agreement. In other words, a litigant cannot later allege that the underlying dispute was partially resolved based upon the basis of a settlement agreement if the terms in that agreement are different from those in the initial disagreement.
- Scope of the Release: The language contained in the settlement agreement releases a party from claims that were raised (or could have been raised) arising out of the facts which gave rise to the initial dispute. Therefore, if either party believes that they may have claims in the future against the other party, it is important to include those claims in the release. Additionally, the release language must be drafted in such a way that the other party fully understands what claims they are releasing. If there is a dispute regarding the enforcement of language, Courts will look at how the parties intended to interpret the release language and engage in further analyses.
- Unconscionability: Simply stated, this means that the terms in a settlement agreement cannot be so harsh and oppressive against one party as to be considered unfair. A typical example of this would be the use of standard form contracts that are one-sided in favor of the drafting party. Generally, unconscionability is a heavily fact dependent inquiry which is determined based upon both procedural and substantive factors.
- Mutual Releases: Settlement agreements generally include mutual releases, where both parties agree to waive any and all claims against the other. This is true even when one party to the settlement pays monetary damages to the other. However, it is important to draft the releases in the settlement agreement carefully, so there is no ambiguity as to the scope of the release. The release language should indicate whether the parties are waiving only known claims or unknown claims as well.
- Waiver: The language contained in the waiver provision is also very important to preserve the settlement agreement. When parties agree to enter into a settlement agreement, they each waive their rights to seek damages or other remedies prior to entering into the settlement agreement. Parties enter into these agreements pursuant to a contract, therefore liability is governed by the contract law. As it relates to the waiver language, Courts will determine whether the waiver language is clear and whether a party has waived those rights and remedies.
When to Consult with an Attorney
When it is important to seek legal advice
It is always recommended that parties seek legal advice before signing documents, whether they be settlement agreements or otherwise. However, there are instances when this is doubly important. For example, a mutual release in a settlement agreement extinguishes all existing and future claims, demands, liabilities or causes of action between the parties related to the subject matter outlined in the agreement. Therefore, if a party signs a settlement agreement, only to later discover that they have a claim against the other party that is not expressly excluded in the agreement, the result for that party could be disastrous. If no exclusions apply, the claim that was not known will be extinguished because it was not contemplated by the parties when the mutual release was signed. Remember, to be truly valid, a mutual release must be signed by both parties. It is also important to seek legal advice if your interests may be jeopardized by signing a release. For example, if you are being asked to sign a mutual release on behalf of a minor, you will need to have your agreement approved by the court. This is a formality that is generally met as a matter of course but it does mean that the release should not be signed until the court hearing occurs. Simply put, if you sign the release before the court hearing, you will not be able to receive the funds in trust for your minor until the hearing occurs. In the meantime, critical medical and educational needs may not be met for your child. Also , consider a case in which one party to a separation agreement was coerced into signing it by his or her abusive spouse. Even if you agree to have the marriage certificate registered with the court, if you do this after a coercive separation agreement has been entered into or registered, the results could be severe. If you separate from your spouse and shortly thereafter, at your home, you sign the separation agreement under coercion or duress, you are at risk of never being able to extricate yourself from a harmful relationship unless you seek annulment of the separation agreement within 90 days from signing it. If you wish to annul the agreement, you must file an application in the court within 90 days from when it was signed. If you sign a separation agreement not at your home, the agreement cannot be annulled after 90 days from signing the agreement but instead, must be filed in the Ottawa High Court of Justice within 180 days of signing. After 180 days, you may be required to show "sufficient cause" to the court as to why you did not file the agreement within the required time limit. Suffice it to say, if you are a victim of violence and you have been bullied into signing a separation agreement, the result could be devastating if you later choose to "wave the white flag" and then negotiate a more equitable agreement. If you stand to benefit from a waiver or a release, you should also seek legal advice before signing the document. It is the responsible thing to do as it ensures that your interests are protected and that the other party is fulfilling their obligation.