What Is a Settlement Agreement?
A settlement agreement is an agreement between parties in dispute, reached usually by some form of compromise in the interest of avoiding or ending litigation in the California courts. The usual information included in a settlement agreement is a description of the dispute, persons and entities involved, and the extent of obligations under the agreement. Typically, settlement agreements are often used in routine litigation between individuals and businesses, but they are also used regularly (and sometimes exclusively) in family law cases . Because it is important that family law settlement agreements be clear and comprehensive in order to avoid future disputes regarding interpretation, they can vary somewhat in form and terminology from other legal agreements. Often, however, they will include and be divided into the same general categories of information including, dispute synopsis, parties to the agreement, distribution and conveyance of property, visitation and child support, spousal support, attorney’s fees and costs, conservatorship and guardianship arrangements and modifications, Non-Molestation Orders, Non-Harassment Orders, Non-Disclosure Agreements, and other miscellaneous provisions.
The Law in California
The governing law for settlement agreements entered into in California is set forth in the California Civil Code. California Civil Code Sections 1521 – 1654 address the general requirements for an enforceable contract and the requirements for a release. The portions of the settlement agreement that must be in writing are those that require a transfer of interest in land, goods or an estate and to grant a power and some promises made in consideration of marriage. A release need not be in writing, but if it is, it must contain or be part of the written contract. Under California law, a release is a type of contract that requires the relinquishment of some claim or potential claim one may have against another.
Because the then-current versions of the California Uniform Commercial Code were not enacted at the time of the hospital’s settlement agreements with the cardiologists, the prior California Uniform Commercial Code is applicable and will be discussed herein. Thus, the settlement agreements are not legally compliant under the California Uniform Commercial Code. Generally speaking, under California Uniform Commercial Code Section 3101 et seq., statutes of frauds pertaining to the sale of goods, some sales of securities, intangibles and negotiable instruments contain requirements for statements of accounts and releases.
A claim against a hospital arising from a medical malpractice suit falls within the definition of "professional negligence" as defined in California Civil Code Section 2796. Section 2796 states the statutory requirements applicable to release agreements entered into with a healthcare provider by a patient who has filed an action alleging professional negligence. It applies only to the release by a patient of a medical malpractice action and is not a "general" release. Although standard agreement releases entered into by hospitals with physicians may resemble those entered into by patients with physicians, they are not identical. The Section 2796 requirements are not satisfied through the use of an attorney general-approved general release form. The requirement that the release be in the "simplest and most direct language possible" means that any legalese typically found at the top or bottom of the standard legal release form, such as "In consideration of the sum of X Dollars, receipt of which is hereby acknowledged," must be omitted from the release when executed by a patient.
What Does a Settlement Agreement Include?
The primary components of a settlement agreement are to identify the parties, state the terms and conditions of the settlement (including an allocation of payments among the parties), and have the parties agree to a release of claims against themselves for the allegations in the pleadings. Generally, the settlement will provide that the defendants deny any wrongdoing and in fact the claims may be meritless. The settling parties all agree, that in order to avoid the cost of litigation, it is in their best interests to resolve the matter and proceed with the terms of the settlement.
The settlement will typically include confidentiality provisions and provide that the matter will be dismissed with prejudice with the court retaining jurisdiction. The parties should agree to prejudgment interest and the method and timing for the payment of the settlement funds. If the claim involves minors or individuals who are incompetent to bring action, the settlement agreement should include the legal procedure in which the minor or incompetent individual that can be reviewed by the court.
Types of Settlement Agreements
California law provides greater flexibility in the types of settlement agreements that may be entered into by parties than most other kinds of contracts. The California Civil Code provides for the following specific types of settlement agreements:
Although these statutory provisions provide more express guidance on the enforceability and form of settlement agreements than the common law rule, California law also recognizes the common law rule that any dispute may be settled if the parties reach agreement on its terms.
The California Rules of Court, Rule 3.2100 lists certain standards of quality and requirements for enforceability for all contracts, including settlement agreements. Despite this standardized approach for establishing form and enforceability, rules governing settlement agreements vary by jurisdiction and practice area. An attorney experienced in the relevant field and familiar with the state, federal, and agency rules governing most settlement agreements will best advise his or her client about the appropriate form for their particular settlement agreement.
Other categories of settlement agreements for which there are no statutory provisions include comprehensive settlement agreements, cost-share settlement agreements, release settlement agreements, and tax settlement agreements. Aid agencies and private disputes also give rise to many unique types of settlement agreements, or may require a settlement agreement in settlement of claims or disputes.
It is important to understand the procedural and substantive requirements of a settlement agreement. Otherwise, a party may find a dispute unduly prolonged by the necessity of re-settling its matter with increased transaction costs and a sale of awkward precedent.
Creating a Settlement Agreement
As with any contract, the parties and their counsel should ensure that the settlement agreement integrates all of their understandings in one document. It is not uncommon that after negotiating a settlement agreement that the parties will also enter into a separate release agreement, a payment schedule, a payment plan or a mutual waiver agreement. Although these documents may be appropriate in some instances, they can also lead to misunderstandings. The best practice is to integrate all of the agreements into one document. Otherwise, the drafting attorney runs the risk that the opposing side may later claim that an ancillary document modifies or supersedes provisions of the settlement agreement.
The parties and their counsel must also ensure that the settlement agreement contains contingency plans for contingencies. For example, the settlement agreement must address what happens if the payor is late on a payment, fails to make a payment or if there is a dispute about the interpretation of the settlement agreement. Payment plans are nothing without remedies for enforcement . A prudent drafter often anticipates most foreseeable contingencies.
The drafter of a settlement agreement must also be mindful of the antideficiency laws as well as bankruptcy laws. California Code of Civil Procedure section 704.210 provides various exemptions from application of judgments, and certain types of payments and assets are protected from judgment creditors. The drafter must also analyze the parties’ financial conditions and consider whether the payor has the ability to pay in light of bankruptcy considerations.
One of the common pitfalls with settlement agreements is that they inadvertently incorporate provisions and remedies that were meant to be temporary. When one party is forced to sign a settlement agreement, usually that party’s counsel will insert provisions only detrimental to that party. And, the other side’s counsel will promise the language will be changed later. The best practice is to make sure that the settlement agreement does not impose conditions or terms that both parties did not agree to.
Breach of Agreement and Remedies
If a settlement agreement is breached, then the nonbreaching party may be able to pursue various forms of enforcement. The party who seeks to enforce an agreement may seek to: (1) enforce the settlement agreement by way of a motion, specifically a motion for severance or rescission, or for contempt, or for equitable relief in some instances; or (2) file a breach of contract claim to recover damages for the breach in a separate action.
There may be a limit on whether a settlement agreement entered into in the family law context can be enforced under the law of contracts. When the agreement is made in the context of a marital dissolution proceeding, there is a more limited judicial power over the terms of the agreement. The Family Code provides that any terms in a divorce judgment that are not in compliance with Family Code section 2550, i.e., not "in the nature of spousal support," and not authorized by the Family Code, including the Division of property, "are not enforceable by Ms. Keeping, under the law of contracts." However, a family law agreement that has been incorporated into an order may be enforced by a motion.
Advantages and Disadvantages of Settlement Agreements
As with any legal tool, there are benefits and drawbacks to entering into a settlement. A very common benefit tends to be the ability to avoid a long and expensive litigation process. Going to court can turn very hostile, and the more contentious, the more expensive and time-consuming the reparation. Additionally, you can be assured that the judge or jury does not know you or understand the nuances of your case like you do. Another advantage is that, under most circumstances, the terms of the settlement agreement will be confidential, meaning a third party will not have access to your private matters.
On the other hand, settlement in California must bring both parties to an agreement on all issues. When there are many unresolved issues between spouses, the chances that a settlement will be reached are low, and the process can take additional time to reach an ultimatum. Sometimes, one spouse will be much more eager to litigate than the other. If the divorce appears to be very acrimonious, the chance of resolving the case through mediation is unlikely. Lastly, if an agreement is not reached, it can be difficult to recommence negotiation between the parties after litigation has begun, especially if everyone gets a taste of such a judicial process.
When to Get a Lawyer
When you are contemplating entering into a settlement agreement or have received a severance agreement from your employer in California you should consult an attorney that concentrates in this area of the law . This will allow you to get a full understanding of the binding legal effect of the agreement, the tax consequences of the agreement, and how the agreement affects your legal rights. There are many subtleties in the law surrounding settlement agreements and these subtleties can have a far reaching and negative affect on your legal rights if you do not have advance legal advice.