10 Tips for Drafting Bullet-Proof Settlement Agreements

Few contracts bring as much satisfaction as a well-crafted settlement agreement, for its ability to fully and finally resolve a dispute and bring lasting peace. To ensure that your settlement agreements meet those objectives, here are ten tips to consider.

1. Who is being released? The party being released (Releasee) will generally seek a release of not just itself but its subsidiaries, affiliates, officers, agents and so forth. Provided the Releasor agrees to such language, it should be included in the release provision (e.g., “Releasor hereby releases, waives and forever discharges…”), not in the first paragraph of the agreement after the name of the Releasee, as that would complicate matters, making the subsidiaries and affiliates parties to the agreement.

2. What is being released? To ensure broad coverage, the Releasee will usually want to include detailed recitals of the facts, claims and allegations leading up to the settlement, then state something like this: (all claims and liabilities relating to such matters shall be known as the “Dispute”). It’s then a simple matter to release all claims concerning the Dispute. Of course, the Releasor should make sure that any unsettled disputes are expressly excluded.

3. Are unknown claims released? If the objective is to settle all claims as of the date of settlement, the release should specifically state that it covers claims of every kind, known or unknown, suspected or unsuspected, etc. If the agreement is governed by California law it should go a step further and include an express waiver of Civil Code Section 1542. Courts won’t always enforce such a waiver, but it is prudent and standard practice to include it.

4. Is it a mutual release? It is usually fair and reasonable to require a mutual release, but be sure to consider the particular facts before agreeing to such language (or requesting it).

5. How will payments be made? Will the settlement be paid by check, wire transfer or installments? On what date/s is it due? Is any particular currency required? To what account should it be paid? Such terms should be stated.

6. Conditional or Unconditional? The Releasor will want the release to be effective upon receipt of the full settlement payment. The Releasee will prefer it to be effective upon execution.

7. How will disputes be resolved? As with all agreements, it is prudent to state the governing law and jurisdiction (or arbitration) in the event of a breach. If the settlement dictates dismissal of a pending lawsuit, the Releasor should state in the agreement – and in the court’s order of dismissal – that the court where the action was pending shall retain jurisdiction to enforce the settlement. In fact, failure to do so will most likely result in such court not retaining jurisdiction.

8. Attorney fees in the event of enforcement? It is often appropriate to add language requiring the losing party to any enforcement action to pay the winning party’s attorney fees.

9. Confidentiality. Both parties will probably want a confidentiality provision, with carve-outs for disclosure to accountants, attorneys, and the like. However, due to the difficulty in proving damages, such a provision may have little value unless it provides for liquidated damages in the event of a breach. Liquidated damage provisions are not always enforceable (the dollar amount must be reasonable), but in any event such a provision may serve as a deterrent to breach.

10. Capacity and authority to Sign and Settle. The Releasee, in particular, should consider including language stating that each party signing is duly authorized and has legal capacity to do so and upon execution the agreement shall be legal binding. If one has serious concerns, one could also request evidence establishing such authorization, but usually that should not be required.

Of course, the above are just a few highlights. There may also be issues about potential taxes, interest on late payments, injunctive relief in the event of breach, and other matters, but if we addressed all of those matters this article wouldn’t match its title, so we’ll stop there for now and wish you the best of luck in settling your disputes fully, finally and irrevocably.


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4 thoughts on “10 Tips for Drafting Bullet-Proof Settlement Agreements

  1. Tip number 11 – make absolutely sure the wording is certain and the settlement is readonable, in line with UCTA.

    This should probably be rule 1.

  2. I think it is crucial to put representations that are being relied upon in the format of warranties, the breach of which is deemed “material” –thus a breach of the ENTIRE agreement. These warranties should include items such as,
    1–that the parties are duly formed and in good standing in their respective jurisdictions of origin/incorporation,
    2–that the party signing the agreement has the full legal authority of the Bd./governing body of the party which was given in a duly noticed/called meeting by a quorum of it’s Bd.,
    3–that all potential and known claims/liabilities between the parties or arising out of the “dispute” have been disclosed,
    4–that the facts, as stated in the preamble (or otherwise in the agreement) are true and accurate, and
    4–A warranty as to the truth and accuracy of any other facts upon which your client/company is relying in entering into the settlement.

    Thus, if any of the presumptions upon which you are basing the settlement turn out to be false, the agreement is voidable at your option (or so it should be drafted). Otherwise, it is simply a potential damage to be litigated and you may still be held to your part of the agreement/settlement despite the fact that you would have never entered into it if you had known the truth.
    All the best,–Konny Light (404) 373-7927

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