How to Understand a Settlement Agreement

A Settlement Agreement is a legal contract effectuating a compromise between two parties, who agree to settle their disputes between them rather than resort to litigation. A Settlement Agreement usually contains a General and Mutual Release of All Claims, meaning that both parties release the other from any past, present, or future liability arising out of the events that led to the Settlement Agreement. For instance, typical language for a personal injury “slip and fall” Settlement Agreement would be: “In exchange for release of all past, present, or future liability, The Tigers Baseball team agrees to pay season ticket holder Stephens $35,000.00.”

Most parties to a Settlement Agreement will want the agreement to recite that by signing the agreement they are not admitting fault, wrongdoing, or liability. More specifically, this paragraph could say that this Settlement Agreement does not constitute an “admission, concession, or evidence of any alleged fault, misrepresentation, act or omission or any other alleged violation of law, and it does not represent a formal finding of wrongdoing by any court or administrative agency.” To further strengthen the point, the agreement might explain that the settlement has been entered into in the interest of resolving the issues raised by the complaints, investigations and examinations and to avoid the risks, loss of time and the costs associated with protracted litigation.

Because a settlement usually involves a payment of money from one side to the other in exchange for mutual and general releases, the agreement should clearly define how much money is going to be paid, in what form, when, and to whom. For instance, is the money being paid all at once or in payments over time? If it is being paid all at once, will it be paid directly to the client or to the client’s law firm? Must it be paid before the agreement can be executed, or can it be paid shortly thereafter? The agreement should clearly answer these questions.

Sometimes a party will be agreeing to do or to refrain from doing something as part of a settlement. This section of the agreement, sometimes titled “injunctive relief”, must describe what actions the settling party is agreeing to take or not to take. This section may also include language describing the consequences for breach. In addition, the agreement should contain a warranties paragraph, whereby each party covenants that no other person or entity has or has had any interest in the claims, demands, obligations, or causes of action referred to in the Settlement Agreement, and that it has not sold, assigned, transferred, conveyed or otherwise disposed of any of the claims, demands, obligations, or causes of action referred to in the Settlement Agreement.

Lastly, the Agreement should be written to express the entire agreement between the parties and should bind the successors of both parties. Each party should promise that it has obtained appropriate legal advice of its own choosing and that all terms of the agreement are fully understood and voluntarily accepted. The agreement should also state the governing jurisdiction, and finally, should refer to any supplemental documents necessary to give full force and effect to the terms of the Settlement Agreement.