Those of us who litigate routinely seek to sharpen our pre-trial and in-trial techniques. We read about successful trial lawyers, or we attend an ICLE workshop. We want to be best positioned to push every advantage available in the courtroom for the benefit of our client or cause. However, we know that based on published statistics and personal experience, few of our cases will be decided at trial. Some will be dismissed by the court or the claimant, but most will be resolved through settlement. That being the case, it makes sense that we devote the same level of craft to drafting settlement agreements as we do to conducting depositions.
PREPARE IN ADVANCE
When building a case for trial, we develop timelines, case themes, and evidentiary checklists. We should develop a settlement checklist as well. Identify the specific takeaways your client needs for a settlement to be plausible. Likewise, identify the unique issues that will require customized handling. We can predict that certain events on the calendar will likely prompt settlement conversations, so we want to enter those conversations with our key objectives solidly in mind.
In particular, mediation sessions require advance planning. Most mediators, if successful in bringing the parties to resolution, want to secure the result with a signed memorandum of some sort, possibly with the final settlement agreement itself. You do not want to find yourself in the heat of the moment trying to identify and articulate the details you need in a final agreement. Have your checklist in hand and consider taking a pre-drafted settlement agreement to the mediation.
DISTINGUISH SETTLEMENT NEGOTIATIONS FROM SETTLEMENT AGREEMENTS
Remember, a settlement agreement is simply a contract. It must meet the requirements for a valid contract — offer, acceptance, mutual assent on essential terms, and consideration.1 An email exchange, for example, can constitute a valid offer and acceptance, even if one party assumed (but did not stipulate) that a mutually agreed, signed settlement agreement was necessary to cement the deal.2 As you explore settlement options, take pains to distinguish whether all essential terms have been identified and communicated before a potentially binding offer is made.
BE WARY OF BOILERPLATE
I will not pretend that I cut every settlement agreement I draft from whole cloth. Most of us have a stockpile of favorite forms and provisions from which we draw when creating a document. The danger in drafting a settlement agreement is assuming that a customary provision should be included without sufficiently analyzing whether it needs modification or whether it is even appropriate under the circumstances. Here are a few examples:
Typically, we include an integration clause to avoid a future argument about whether one party to a settlement retains claims against the other that derive from a different source or agreement. Sometimes, however, separate agreements do exist, and our client very much intends to rely on their continued enforceability. Consider an employment dispute in which an employer settles a former employee’s discrimination claim but still intends to enforce a free standing, non-competition agreement. Likewise, a supplier and a manufacturer may have an open, blanket purchase order for production parts while disputing a separate order for tooling. Resolving the latter should not foreclose claims under the former.
Confidentiality and non-disparagement
In many instances — especially from a defense perspective — we find it appropriate to protect against disclosure of a settlement’s terms and future badmouthing by the other party. I have had multiple cases, however, where my defendant client wanted the freedom to talk about the settlement (perhaps feeling the size of the settlement payment vindicated its position.) Similarly, an organization may not trust its personnel — or an individual may not trust him or herself — to bite their tongue, making non-disparagement commitments ill-advised under the circumstances.
A party making a settlement payment expects to buy peace. Therefore, the release is a critical component of most settlement agreements. This may explain the lengthy, laborious, and even incomprehensible language we sometimes encounter:
In consideration of the foregoing, Plaintiff does hereby waive, release, settle, discharge, terminate, exempt, and forgive for himself and his agents, heirs, successors, and assigns, any and all rights, claims, demands, suits, promises, pledges, obligations, causes of action, liability, interest, request, or commitment, arising from the beginning of time to the date of this agreement and any time thereafter, sounding in tort, contract or equity, known or unknown, absolute or contingent, owed by or arising from or asserted against Defendant, its successors, assigns, insureds, officers, directors, employees, agents, attorneys, insurance carriers, independent contractors, lenders, and lienholders.
Did we cover it all? I’m not sure. I do fear, however, that the more ways we attempt to define or list a claim, the more we implicitly suggest that our language is insufficient. If we can find 12 ways to say what is released, does that beg the question whether there is a 13th we failed to include?
Think about the actual claims your client expects to be released and identify them. If there is a white elephant lurking in the room, call it out and make sure you have specifically released it rather than depend on a vague litany of released claims.
Likewise, determine whether the party entering the settlement agreement has the legal capacity to release the claims at issue. A release from a minor requires court approval. A release from an injured party does not bar reimbursement claims from Medicaid or Medicare. Make sure you understand the scope of what can and cannot be released in your agreement.
TALK TO TAX COUNSEL
Most settlement agreements involve settlement payments, which will carry tax consequences for the payor and recipient. Will a former employee plaintiff receive a W-2 for back wages? Will a former member of a limited liability company receive a K-1 on company earnings in which he did not share? Understand those consequences in advance so you do not make commitments that your payer client cannot lawfully keep or your payee client lives to regret.
INCLUDE ENFORCEMENT PROVISIONS
If drafted well, a settlement agreement should end a dispute without creating a new one. However, whether because of poor drafting, buyer’s remorse, or bad faith, disputes arise concerning the construction and enforcement of settlement agreements. Anticipate those disputes and determine in advance how and where they will be resolved. You might agree to arbitrate such disputes — perhaps with the mediator who helped settle the case. If so, make sure you have an enforceable agreement to arbitrate consistent with the Uniform Arbitration Act.3 You may choose to return to the court where the litigation occurred. Include the appropriate agreement on jurisdiction and venue. In either event, specify whether the losing party will bear the costs and reasonable fees associated with enforcement.
Additionally, you may want to include a consent or “pocket” judgment provision allowing a settlement payee to convert the settlement agreement to an enforceable court order for damages following the payer’s default under the agreement.
REVIEW WITH CLIENT
I regularly send documents to clients with an admonition to “review carefully to make sure this draft is consistent with your understanding and expectations.” But I know from experience that many clients will not take the time to review my work product and, even if they do, they often bring a layman’s perspective insufficient to appreciate subtleties and distinctions the law provides. If I want to make sure clients understand a legal document, I need to review it with them and explain the provisions as we go.
This is especially important with settlement agreements. Typically, the client has a substantial investment in the cost of litigation. The client may have a significant emotional investment as well. As lawyers, we must ensure that the settlement agreement protects the client’s interests as fully as possible and consistent with the client’s expectations. Michigan case law makes clear that settlement agreements will be strictly enforced consistent with their unambiguous terms. This is true even where one party misunderstands or overlooks an important provision.
A case decided by the Michigan Court of Appeals in 2015 involved a dispute over the scope of the release in the settlement of a personal injury protection (PIP) claim between the insured and her insurance company. 4 The agreement did not include payment of a $28,942 charge for shoulder surgery. However, this claim was plainly included in the agreement’s release of all PIP benefits incurred as of the date of settlement. Reversing the trial court, the Court of Appeals ruled that the settlement agreement barred recovery of the additional charge. In its opinion, the Court minced no words placing blame for the client’s plight with her lawyer:
It is the obligation of plaintiff’s attorney to ensure his client knows that a settlement, like the one at issue here, encompasses all claims. If plaintiff or her lawyer had any doubt about such an agreement, it was the responsibility of plaintiff’s lawyer to demand a different kind of settlement.5
As noted above, a settlement agreement should end a dispute without causing a new one. Take the time to review a draft settlement agreement carefully — both on your own and with your client — to ensure it addresses the intended issues. While you are at it, you might ask a colleague to take a look as well.