Settlement agreements – important points to consider

The vast majority of disputes between individuals and businesses alike do not proceed all the way to trial, even where court proceedings have been issued. Instead, they are usually settled out of court.

The most common form of recording the terms of any deal made between the parties is a written settlement agreement, which should be drafted clearly and carefully to ensure that each detail agreed is included, and to set out what should happen after the agreement is entered into.

What do you need to include in a settlement agreement?

• The names of the parties: this may include more than just the parties directly involved in the dispute – or the names of the claimant and defendant if proceedings have already been issued. Consider whether there are third parties affected by the terms of settlement or any other potential claimants who may need to be tied in, for example a guarantor who may have signed the original contract in dispute.
• What claims are being settled? The present dispute between the parties should of course be resolved by the settlement agreement, but also consider whether there are any existing unknown claims or potential future claims which should also be settled. Try to describe the scope of the claim or claims and exactly what is being settled when drafting.
• The terms of settlement: you should aim to carefully record exactly what has been agreed between the parties. This could involve a step-by-step plan of what actions need to take place, or simply document that the dispute settles on the occurrence of a particular event, for example payment of a settlement sum. If you fail to do so, further disputes may result.
• Payment arrangements: you should ensure that the practicalities of any payment or payments to be made are set out clearly. Who will be paying who and when? Are sequential or instalment payments to be made, or will there be a single lump sum payment? Will interest be payable in the event of late payment?
• Confidentiality: it is usual to include an express term dealing with the confidentiality of the terms of settlement reached. There may, however, be some exceptions to this depending on what the parties agree. For example, it is sometimes in the interests of the parties to agree a joint public statement that will be published once the settlement has concluded.
• Who can sign the agreement? Each party entering into the agreement should make sure that they either sign the agreement personally or, if signing on behalf of another person or corporate entity, they have authority to bind them. The settlement agreement itself should include wording dealing with this.
• Completion of the agreement: try to set out precisely how and when completion will occur and what needs to happen beforehand. Settlements are usually concluded by payment of money, but it may also require the circulation of documents or entering into other agreements. The settlement agreement should try to tie up as many matters as possible and not leave anything undecided or to be actioned after completion takes place.

Other practical considerations

• All communications passing between the parties negotiating and agreeing a settlement should be marked as “without prejudice save as to costs”. This is to ensure protection against disclosure of that correspondence in the future if negotiations do break down.
• Make sure that the settlement agreement is tailored to the dispute it is settling. Not all agreed settlements are the same – they may involve more than the simple payment of money from one party to the other, and there may be other agreed actions to be completed by one or both parties for the agreement to be correctly performed.
• If court proceedings have already been issued, the settlement agreement should deal with disposing of those proceedings in whichever way has been agreed – for example, staying the case on agreed terms or agreeing to dismiss or discontinue the claim. You should also make provision for notifying the court that the case has settled.
• Will the settlement be conditional on anything happening, such as a payment being made? If so, make this clear in the wording of the settlement agreement.
• When drafting the agreement, consider if either party wishes to admit any fault or whether they just want to settle the claim without admitting liability.
• The question of costs incurred by the parties should be considered and dealt with. It is common for the parties to bear their own costs of preparing and entering into the settlement agreement, but the agreement should reflect what will happen with the legal costs of each party in the dispute to date.

Finally, try to be flexible when attempting to agree the terms of the settlement agreement. Quite often your opponent will not agree to the exact same wording or mechanics in the agreement that you would prefer, which can bring negotiations to a grinding halt. It is important to take a commercial view, informed by legal advice if possible, on what you should and should not agree to include in the agreement.