Understanding Settlement Agreement and Release: A Comprehensive Guide

What is a Settlement Agreement?

Settlement agreement, sometimes referred to as a "settlement agreement and release", is commonly used to describe a legal document, or form of written contract, whose principal purpose is to resolve a dispute between two or more parties. Its primary function is to bring closure to a matter under contention which has been addressed through some form of dispute resolution process. That process may involve litigation or arbitration proceedings, mediation, or, where the parties are of equal bargaining power, negotiations. The dispute may be of any variety and, for example, may arise in the context of a shareholder dispute, a contractual dispute, a dismissal grievance, an insurance coverage dispute, or a simple accident.
The settlement agreement will set out the key points of agreement between the parties. A typical use would be to ensure that the claimant, for example, agrees to release its claims against the respondent in exchange for payment of a sum of money by the respondent to the claimant. The agreement might also include representations, warranties and indemnities, following similar logic as applying to a similar contract of sale, if for example, a party is selling an asset to another. In such circumstances , the seller of an asset would want its buyer to be liable to it should it subsequently turn out that the asset is in fact subject to a claim and buyer would similarly expect that claimant to indemnify it were it to have known about the claim before it bought the asset.
As a general rule, parties must have capacity to agree to a legally binding agreement and without capacity, the agreement will not be enforceable. For this reason, minors, those suffering mental illness and intoxicated persons for example, will lack capacity to the extent that they do not fully understand the implications of their actions. Those parties who are of sound mind and who are sufficiently aware of both their own interests and the consequences of the settlement agreement are free to enter into an enforceable settlement agreement. Here are some examples of such circumstances:
Example 1 – A person is involved in a motor vehicle accident and wants to make a claim against the driver’s insurer. The insurer will likely put up a defense to the claim.
Example 2 – A party buys a used automobile. It turns out that the seller of the vehicle failed to disclose that the vehicle was purchased on a ‘total loss’ basis. The buyer then learns that s/he has no recourse against the seller.

Essential Elements of a Settlement Agreement

So what, specifically, does a Settlement Agreement and Release look like? A settlement agreement will typically identify all parties involved in the agreement. It is very important that the parties to the agreement be clearly identified. A general population or group identification of parties will not suffice if the parties to the agreement have not been clearly identified. In this manner, the risk of releasing the wrong parties is avoided. In some cases it may be necessary to have the parties before the court sign the agreement. That way, the agreement will become a court order and the court will have personal jurisdiction over them.
Next, the settlement agreement will state specifically the terms of the settlement. It is critical to be specific about the terms of the agreement. This prevents claims from being raised contrary to the agreement. If there is an issue, there is no ambiguity in the terms as agreed and no question of the parties’ intent as to the terms. There can only be a legal dispute over the terms, and that is between the parties to the contract as to its enforceability.
Next, the agreement will identify parties that are to be released. It may incorporate other parties that have not signed the agreement. This could include parties who are not signatories, but who may be affected by the release.
It is also important that the agreement set out the specific obligations of the parties to the agreement. Again the terms must be specific, rather than general. The best practice is to state precisely the nature of the obligation or promise the parties are agreeing to.
The agreement will also set forth the obligations that it will not release. This is very important to have in order to limit any possible risk of future liability, as well as to indicate to the Court precisely what obligations will not be released.
Another important component is a confidentiality clause. The agreement generally will provide that the parties will keep the terms of the agreement confidential. It is important for the defense that the settlement is confidential to prevent public knowledge of the agreement. In this way, the confidentiality clause will prevent a future claimant from filing suit on comity with the plaintiff who has settled. It is also important that a confidentiality clause state the precise ramifications of breach of confidentiality. For example, will there be a reduction in payment for breach of confidentiality? Will it result in an admission of liability? Does the party entitled to confidentiality have a duty to pay damages to the other if confidentiality is breached? Make sure that the confidentiality clause clearly sets forth the ramifications of breach.
Another important component is that there is a stipulation that each party has authority to enter into the agreement. This is important for all parties to agree as to their authority to enter into the agreement. This is especially critical in those cases where the settlement agreement will dispose of an action before the Court.
Finally, make sure that the agreement sets forth the consideration for entering the agreement. In other words, what is each party’s benefit for entering the agreement? What are the parties getting out of the agreement? This should be clearly stated in the agreement. If a waiver of right to trial or waiver of statutory remedies is part of the consideration for the settlement agreement, make sure to state this as well in the agreement.

The Implications of a Release in a Settlement Agreement

At the beginning of the end of the litigation process, the parties frequently agree to a settlement agreement which is a contract resolving all or a number of the claims amongst them. Some claims may remain pending in court, but the parties have a mutual understanding about how they will resolve the case.
A fundamental component of a settlement agreement is a release, which is a broad or narrow waiver of the rights to pursue claims against the other(s) in the future with respect to the matters or transactions at issue in the litigation. A waiver or relinquishment of a right in the context of an overarching settlement agreement is usually referred to as a release. A release may operate in two ways: (1) it may release the other side of all claims whether known or unknown; (2) it may only release those known claims existing at the time of execution of the release (or the settlement agreement).
When negotiating a release, parties must be careful about its breadth. The release may be general (meaning that it encompasses all claims, even those unknown at the time of the execution) or specific (encompassing only those claims, known or unknown, under the circumstances). A general waiver releases not only those claims that are actually known by the plaintiff, but also those that could conceivably be perceived in the mind of a reasonable person based on the facts known at the time. On the other hand, a specific waiver is a waiver only as to specified issues or claims. The general release is applicable where some legal right of action is being abandoned in favor of payment or performance of an obligation which the parties to the transaction regard as a substitute therefor.
The scope of a release in a settlement, however, is normally illusory in a bankruptcy context, where the order approving the settlement is approved by the Court, regardless of the effect on any parties who may wish to later sue a released party.

Drafting a Settlement Agreement and Release

The settlement agreement is one of the most critical documents in the employment law arena, and must be drafted with care to ensure its validity and effectiveness in releasing claims. A poorly drafted settlement agreement can leave gaps, exclusions, exclusions, and ambiguities that create risks for the releasing employer. Once the terms of the release are otherwise determined – that is, whether a general release of claims is required or not, and whether the release is to be mutual or employer-favorable – the next step is to begin drafting the agreement itself. It will be necessary to consider the applicable state laws and any other requirements that may attach to a settlement agreement or waiver of claims, including whether there is an applicable Older Workers Benefit Protection Act (or OWBPA) requirement (for employees over age 40), and whether there are any state statute of limitations requirements (as is the case every state except Montana). If the release is mutual, consideration should be given to including a waiver of claims language in the event that the other party commences suit in violation of the agreement. Finally, the settlement agreement should contain an enforceability provision, in the event that a court is unable to enforce a term or condition of the agreement. If one side has additional leverage over the other (because it is a former employee or a case is about to be tried), then additional terms may be added, such as a requirement that the named parties submit to Confidential Non-Binding Neutral Evaluation under the auspices of Error! Bookmark not defined.Court or any other form of alternative dispute resolution. It is advisable to have counsel draft settlement agreements and releases in order to avoid unintended consequences or other formalities.

Typical Pitfalls to Avoid

A common mistake we see in settlement agreements and releases is ambiguous language, which can lead to misinterpretation of the parties’ intent. Ambiguous language is language that is subject to more than one reasonable interpretation. A best practice is to define all material terms that are susceptible to various interpretations. Some examples include: release of claims, date of release, governing law etc.
Another mistake we frequently see is that the parties do not expressly carve out certain rights of either or both of them. For example, a release of all claims may include claims that were incurred or made prior to the execution of the settlement agreement and release. If the claim is a violation of federal law , certain parties such as the U.S. Environmental Protection Agency ("EPA") may have a right to intervene in the matter, notwithstanding a release. Moreover, other governmental agencies (e.g., OSHA, SEC, etc.) may have a right of intervention under their respective statute or regulation, notwithstanding a release.
Another issue we sometimes see is where there are insufficient terms for conflict resolution. Sometimes, the parties will agree to arbitrate their disputes in a particular forum but without sufficient detail as to the specific forum for arbitration. In that case, it may not be clear what jurisdiction the parties should recognize to resolve a contractual dispute. A best practice is to include language that specifies the forum or the individual(s) who will resolve the dispute.

Enforcing a Settlement Agreement

Enforcement of a Settlement Agreement: Once a Settlement Agreement and Release is Entered Into, How is it Enforced?
As long as all the terms of the parties’ settlement are adhered to, there should be no problem with enforcement of the settlement agreement. Unfortunately, people sometimes do not keep their end of the bargain. If a party fails to comply with the terms of the settlement agreement the other party can file for breach of contract. If the settlement agreement was properly drafted and executed, the non-compliant party only has a small window in which to remedy the default. If the settlement agreement was executed by a court, the court can hold the non-compliant party in contempt. While contempt and breach of contract are both available to enforce a settlement agreement, they have very different consequences. The most obvious difference is that the contempt is punishable by jail time (in the form of coercive contempt). The other difference is the procedural "speediness" of the two claims. A motion for contempt seeks an order from the judge requiring the non-compliant party to comply with the order. Contempt actions are considered an injunctive relief. If the non-compliant party does not comply with the judge’s order, the judge often has the ability to impose jail time (commonly called "coercive contempt"). Coercive contempt forces the non-compliant party to comply in order to be released from jail. A contempt action requires that the party bring the motion before the judge that ordered the non-compliant party to comply with the underlying settlement agreement. The motion is an expedited summary proceeding usually set within 30 days from the date of filing. Depending on the scope of the contempt, the judge will either hold the motion for an evidentiary hearing or decide the motion on papers. It is important to note that if the contempt is based on a court order entered following a judicial settlement conference then the judge conducting the hearing on the motion for contempt must be the same judge who entered the order being violated. Breach of contract actions require filing a complaint with the Court alleging the terms of the settlement agreement and the breach. This civil action is assigned a discovery phase and motion practice so the case can take a year or more to get to trial. For that reason, a motion for contempt is the preferred method of enforcement, and courts look favorably on parties complying with their agreements; provided that the party who gets paid has not themselves violated the settlement agreement by refusing to fulfill their part of the agreement.

Conclusion: Why It Matters and How You Benefit

The certainty provided by a well-drafted settlement agreement and release saves litigants time and effort by avoiding the potential for extended negotiations and many months of litigation leading to a trial. The certainty also avoids the considerable costs associated with those potential expenses . Parties today also recognize the benefits to their reputations and business relations by an amicable resolution of their disputes. Having an enforceable settlement agreement and release memorializes that resolution and prevents the significant costs of litigation from dragging on.