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What is a Settlement Agreement: Guidance and Procedure

27 July 2022

What is a Settlement Agreement?

A settlement agreement records the terms of a compromise which has been agreed between the parties to a dispute. It is a useful tool to conclude a dispute, set clear obligations for everyone involved and reduce the risk of future disputes and litigation arising between the parties.

Litigation often involves a significant investment of time and money. Finding a workable commercial compromise is therefore often in everyone’s interest. A settlement agreement can be entered into at any stage of the litigation process on any terms which all parties agree to. A settlement agreement can be formed orally, but it is best practice for any resolution to be properly documented for the sake of clarity in case you need to rely on it later.

Because of the binding nature of a settlement agreement (it is a contract), it is important to carefully consider its contents to ensure that it accurately records your side of the bargain.

When to consider settlement

Parties are encouraged by the Courts to consider settlement at every stage of legal proceedings whether it be pre or post a claim being issued.

The danger of waiting too long before entering into settlement discussions is that the parties may become more entrenched in their positions and, as legal costs rise on both sides, it becomes more difficult to do a deal.

How does the negotiation impact your claim

Negotiations between parties should be marked “without prejudice” to the parties’ positions in a claim and therefore cannot be put before the court as evidence of admissions against the interest of the party that made them. Genuine attempts to settle disputes between parties have this protection to encourage the parties to attempt to resolve their differences without fear of prejudicing their position in a court claim.

Even where communications are not marked as being “without prejudice”, the communication may still have the same protection where there is a genuine attempt to settlement the matter. However, settlement communications should still be stated as being made on a “without prejudice” basis in order to avoid another dispute arising.

Settlement communications will usually be marked in one of the following ways:-

  • Without prejudice – settlement discussions/ communications will not affect the parties’ open position and the court will not see the communication.
  • Without prejudice save as to costs – settlement discussions/ communications will not affect the parties’ open position and the communication will only be seen by the Court once Judgment has been handed down, i.e. after the Court has decided who has won the case, and in the context of any award of costs that the Court may make.

Without prejudice save as to costs and subject to contract – settlement discussions/ communications will not affect the parties’ open position; the communication will only be seen by the Court once Judgment has been handed down and is subject to a settlement agreement being entered into by the parties.

How to document a settlement – what should a settlement agreement contain?

A settlement agreement is a contract and so should include all of the ingredients of a contract in order to be binding on the parties. These are:-

  1. Offer
  2. Acceptance
  3. Consideration (something of value needs to have been exchanged; this does not need to be money)
  4. Intention to create legal relations

Settlement agreements are bespoke and fact sensitive but the usual provisions which most settlement agreement should cover are as follows: -

  • Parties – consider what parties are intended to be a part of the settlement and ensure that they are properly identified. Where this is a group of companies, the definition of parties should confirm the correct entity or entities which are bound by the settlement agreement. You should consider whether a party should (and is able to) settle claims on behalf of its parent company and subsidiaries too, or whether they should be added as a party to the settlement agreement. If the matter involves a company in liquidation / administration, you should consider whether the liquidator / administrator should also be a party to the settlement agreement.
  • Obligations – consider what each party is agreeing to do e.g. pay a certain sum of money by a certain date or do a certain thing. Where a party is required to do something, consider whether this is within the power of the relevant party to fulfil.  
  • The scope of settlement – it is vital to carefully consider and set out exactly what is being settled and ensure this is clearly described in the settlement agreement. A range of possible options include settling:
  • some or all of the claims set out in the claim form (a narrow definition) or correspondence;
  • all claims arising out of the facts underlying the dispute;
  • all claims arising out of a particular contract (whether or not relating to the current dispute);
  • all claims arising out of the entire relationship between the parties (a much wider ranging definition);
  • What claims are specifically excluded from the settlement; or
  • Future unknown claims which parties may not yet be aware of.
  • Indemnities – consider whether you want comfort from the other party in respect a potential future loss which may arise (perhaps from another connected claim). If being asked to give an indemnity, consider the scope of the comfort you are giving.  
  • Confidentiality – consider whether you would want the other party to be able to disclose the terms or even the existence of the settlement agreement to others. You may also wish to consider non-disparagement clauses (where both parties agree not to make negative comments about each other).
  • Costs – consider how the parties’ costs incurred in respect of the dispute will be dealt with. You should also consider how future costs of enforcing the terms of the settlement agreement will be treated.
  • Alternative dispute resolution provisions – consider how a breach of the settlement agreement or enforcement of terms will be dealt with. The settlement agreement may specify whether parties are to engage in arbitration (see our note on Arbitration) or mediation (see our note on Mediation) prior to court action.
  • Governing law and jurisdiction – the settlement agreement should specify which country’s laws will apply to any dispute arising from the agreement and in which jurisdiction a dispute will be decided. This is particularly important where there is any cross-border issue.  
  • Entire agreement clauses and variations – consider whether it is intended that the settlement agreement records the entire agreement between the parties or if there are specific matters which need to be carved out of the agreement and how any variation of the agreement will be dealt with (e.g. by agreement in writing). This avoids ambiguity of the terms of the settlement agreement.

As the content of a settlement agreement is dependent on the surrounding circumstances, there may be further provisions which are not covered here. It is important to carefully to consider the scope and impact of any contract. If you have any questions about the terms of a settlement agreement, please contact us.

This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Dominic Holden or write to us using the contact form below.

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Farrah Khalid
Senior Associate
Dominic Holden
Partner, Head of Litigation
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