Defining a Settlement Agreement
A settlement agreement is a contract, most commonly entered into by the parties to a Court action, which sets out the terms of their agreement to dispose of the proceedings. The purpose of entering into a settlement agreement is primarily to dispose of any further disputes arising between the parties in relation to the subject matter of the Court proceedings.
It is usual that the terms of the settlement agreement comprise a sum of money that is to be paid by one party to the other to compensate them as far as possible for their financial losses because of the dispute. If the dispute has arisen out of a commercial transaction it is normal that the payee under the agreement has sustained financial losses arising out of the underlying transaction and it will be that which causes them to accept the terms of the agreement even if they are not strictly "fair" or "reasonable" in all circumstances.
It is usual that a settlement agreement contains an acknowledgement by the parties of the truth of the matters set out therein but no more than that. Sometimes there is scope for the parties agreeing to a concession in respect of a factual issue, particularly where the parties find themselves in a situation where the point is going to be determined by a Judge on a balance of probabilities and the Defendant is willing to concede the issue in order to achieve an early resolution to the underlying claim, thereby avoiding the expense of further litigation. As set out above, it is preferable for the parties not to go into the details of the facts and in those circumstances an acknowledgment or concession is made only if a party is willing to concede on a "without prejudice" basis that their case is weaker than previously thought. This is a difficult and strategic decision to make. In a situation where a particular fact was the subject of dispute in proceedings, it is not uncommon for one of the parties to agree not to call their witnesses in respect of that fact however it would be difficult for a party to compromise on the factual dispute in a situation where such an agreement would leave them open to a further claim for damages which fell well beyond the subject matter of the proceedings.
The settlement agreement will then contain an undertaking by the payor under the agreement to pay the compensation to the recipient and also commonly an undertaking by the recipient of that compensation not to pursue the Defendant any further in respect of the matters contained in the proceedings .
In many commercial cases it is common for there to be a confidentiality clause in the settlement agreement obliging the parties not to disclose the terms of the agreement, the settlement sum or the fact of the settlement.
The settlement agreement might sometimes be referred to as a "Tomlin Order" which derives from the case of Tomlin -v- Standard Telephones & Cables Ltd (1978). In practice, the parties might agree that the underlying Court proceedings be stayed on the basis that the terms of the parties’ agreement are contained in the schedule so that the provisions of the agreement are not on the public Court record. It should also be noted that in some circumstances the Court might approve the terms of the settlement agreement and make it an order of the Court.
Whilst the primary purpose of the settlement agreement is to resolve the underlying dispute, the parties in some circumstance might require there to be provisions in the agreement dealing with the process for resolving any future disputes prior to issuing a claim in Court. For example, it may be that items of equipment or stock are required to be sold through the Court and the parties might agree how the proceeds of sale of that equipment would be allocated should they fail to agree whether certain items have both been included in the items for sale. It may also be that where the terms of the settlement include the concept of retention of documents by one of the parties, the parties might see fit to include a mechanism in the agreement for the resolution of any dispute as to whether the relevant documents are available for inspection and so forth.
A defendant might think at the time of signing the agreement that its terms are unfair, for example where it has agreed to provide significant compensation in favour of the Claimant which far outweighed the latter’s actual losses. However, the alternative is for the Defendant to continue with the proceedings and risk not being able to recover the compensation that the Claimant claims they are entitled to. The alternative i.e. not settling and leaving the whole matter to the Court may often represent increased costs and uncertainty. The agreement therefore facilitates a practical outcome to the commercial dispute between the parties. The agreement therefore increases certainty for both parties that the matter is concluded, this benefit should not be overlooked.
Why You Might Refuse to Sign
There are any number of reasons why individuals or organizations may refuse to sign a settlement agreement. The terms may heavily favor the other party. There may be no trust, even in writing. There may still be ongoing legal issues. Or, perhaps the money ("adequate compensation") is just not enough for the person to consider signing the agreement.
For example, a financial settlement will be less than what the recipient perceives is adequate and fair in the eyes of the law, and he or she refuses to sign. Or perhaps the contract does not allow for the type of expansion that the client seeks, and he or she refuses to sign until the terms are expanded. Conversely, a client may feel that the arrangement has favorable terms and may simply want to be out of one case and more focused on another. Or he or she may be willing to give ground to avoid the cost of litigation, since there may still be an ongoing legal issue.
In short, there are any number of reasonable and legitimate reasons for refusing to sign a particular agreement. But, it may be best to carefully evaluate the agreement prior to refusing to sign – especially when it comes to the cost of litigation. A client may find that it is more cost effective to sign the agreement and move on, rather than litigate in order to readjust the terms of a deal.
The Legal Fallout of Refusal
These additional costs may include attorney’s fees, which could potentially be recouped by either party in a second round of legal proceedings. These fees often add up quickly. The original litigation may have cost tens of thousands of dollars and as a result of refusing to sign a settlement agreement, you could spend hundreds of hours working on a new round of documents, discovery, and depositions. No business wants to pay its attorney more money than is required, especially after a settlement agreement is in the works. The party who refused to sign the settlement agreement can end up paying the other party’s additional costs. Another legal consequence that could happen is, at least on the surface, a continuation of the dispute. Parties could end up in court attempting to reach the same end goal they tried to accomplish with the settlement agreement. Then again, a court may decide to make its own settlement agreement after holding a hearing or two; sometimes, the judge has enough information to cite without needing a hearing. Whether parties actually spend the time and money to hold hearings and litigate is really up to them. After going through the effort the first time, many would be unlikely to extend themselves like that a second later. Yet, adversaries do occasionally go in for the kill. Even if a judge makes their own ruling, the party that’s inclined to battle until the end could still spend extra time going back and forth with the attorney, costing thousands of dollars.
Practical Negotiation Approaches
Refusing to sign a settlement agreement immediately does not mean that a dissolution case may not ultimately settle. Far from it! Most of the time, a case will not get to trial if all issues are properly raised, litigated and negotiated. As with any contract, the terms of a marital settlement agreement can be negotiated. Many times, each party has strong points in their favor, while others not so much. Ideally, the lawyer for each side will have the requisite experience to know where each party’s "red lines" are on issues of alimony, child support, college tuition, equitable distribution, alimony and parenting time. Issues that require further development can be addressed by way of motions to compel discovery or through depositions. Maybe the outside valuation of a closely held business should be obtained? Perhaps, a vocational expert should be hired to determine the extent to which the wife’s marketability has been diminished, if at all, by being a stay-at-home-mother? More information could also help resolve custody issues in a more amicable way. In the end, several factors determine how far one party can move the other from their position, so that the deal can be closed. This might be based upon a traditional strengths and weaknesses analysis; or it might simply be based upon perceived need, or in the context of a divorce, greed. Perhaps spouse A must obtain $10,000 per month in alimony in order to pay legal bills, expenses and her mortgage while spouse B must see his children every other weekend and on Wednesdays. Depending on the party, the willingness to budge enough from their position to satisfy the other, or to settle at all, may vary considerably. This is why mediation or arbitration is so essential and useful in the matrimonial context.
Consulting an Attorney
While inclusion of an arbitration clause in a settlement agreement is not unusual, it is equally not uncommon for attorneys to add additional stipulations that require each party to hire their own attorney. For those parties who represent themselves and enter into a settlement agreement that stipulates the hiring of no attorneys, they may in fact refuse to sign unless the other party secures counsel. While this certainly can be more expensive, it is often in the best interest of your case to speak with an attorney. An attorney can explain the most probable outcome if the case went to trial or was arbitrated. He/she can also discuss his/her hourly rates , the probability of a resolution of an issue through motion practice. The motion practice can address valuation issues, establish contingencies into the settlement agreement that relate to third parties that may later seek to set aside the settlement agreement. Your attorney can also prepare a counteroffer to the settlement agreement you have been presented. He/She can also advise you whether a settlement agreement does not include enough protections for your rights. If you feel that you will benefit from an experienced attorney going over your settlement agreement before you sign, you should consult with one. An experienced attorney can help you clarify issues that may otherwise just be aggravating at the moment, and help you understand the legal implications.
Case Studies
Case 1: John and Sally reach a mediated agreement to pay for their son’s college expenses, but when it comes time to put the terms into a binding court order, John refuses to sign. After lengthy negotiations, John and Sally decide that John will pay 60% and Sally will pay 40% of the cost. Sally demands that John pay 50% or he has to sign the agreement under the terms she originally proposed. John finally ends up signing the agreement as proposed by Sally to keep the case moving forward in the court system.
Lesson learned: Don’t be a bully. You get much further in a negotiation if you give and take and also make an effort to see the other person’s point of view.
Case 2: Jennifer and Paul reach an agreement that Paul is going to sell his house, and use part of the proceeds after selling it to buy out Jennifer. They agree that Paul does not have to buy Jennifer out of the home until he knows if he can afford to do so.
When it is time to put that into a legal court order, Jennifer refuses to sign the agreement. The case goes to trial, and the judge rules that because they did not have an agreement as to what to do if Paul cannot sell the house, the original purchase agreement between Paul and Jennifer is controlling, which requires Paul to buy out Jennifer right away.
Lesson learned: Be careful when you make agreements on the fly. Failure to document those agreements can come back to haunt you.
Analyzing Your Choices
While there is a time and place for strong stances, it pays to react carefully to unwanted contract proposals. When negotiating, clients – whether individuals or businessowners – should first consider whether it makes sense to sign the settlement agreement or certificate of finality as proposed (or be sued for breach of contract), or refuse to sign it and walk away from the deal. In weighing the options, the following thoughts should be considered:
- How much money do you expect to earn from the deal? The more you expect to earn from the deal, the more likely it makes sense to sign.
- What are the odds of success in court? Sometimes you have no choice but to sue. Most times , however, you can afford to negotiate your way to a good outcome.
- How much money will it cost to pursue the case? A preliminary injunction will almost certainly be nice enough to convince the other side that resisting the injunction is unlikely to succeed. But preparing for trial will cost you thousands of dollars.
- Is the contract proposal something you can live with? Often, clients are unhappy with aspects of a proposal but unsure whether you can live with it. Some contracts are worth doing even if they are not perfect. Others are not worth doing even if they seem like a good deal because the risk of future conflict is too high.
