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April 28, 2016 Articles

Five Terms to Consider When Negotiating Settlement Agreements

By Mark M. Haddad

Even trial lawyers will concede that these days, nearly all civil cases will settle. A handful of them will nonetheless rise from the ashes for secondary litigation because of poorly drafted settlement agreements. And while litigators are litigators for a reason—we love to litigate!—this is one circumstance in which we really must do all we can to avoid litigation.

You’re much more likely to draft a settlement agreement in a case than jury instructions, so best practices for settlement agreements should be a part of any litigator’s toolbox. Before you even start drafting, confirm the “deal points” that must be included and ensure all of the parties agree on them. Then consider “what if” scenarios that could arise, and incorporate terms that cover those hypotheticals into your agreement. And then consider settlement agreement terms that can be particularly important when you’re on the plaintiff’s side. This article discusses some of those more overlooked or underestimated aspects to settlement agreement drafting and negotiation. Once you realize that collateral issues to the settlement can be easily resolved in the agreement itself and start to include terms to that effect, the entire process becomes much more streamlined.

Failure to include appropriate deadlines is common, particularly among lawyers who are just learning to draft an agreement. This mistake can result in minor inconveniences, such as opposing counsel who fail to have their client sign in a timely manner, or much larger issues, such as eventual litigation over the settlement agreement itself. Parties displeased with settlement terms may hesitate to sign without a hard deadline for execution. Such difficulty can be avoided entirely by including within the terms of the settlement agreement itself the date by which the agreement must be executed by all parties.

Perhaps the most important deadline that is commonly overlooked is the deadline for settlement payments. Always specify whether the settlement will be paid by check, wire transfer, or installments, but go on to specify when the payment is to be made and to whom it should be made. Sometimes settlements are paid to the attorney and sometimes to the client directly. Be sure that all parties are in agreement regarding such terms when the agreement is signed, and that the terms are clearly included.

Stipulate when dismissal documents will be filed. From a plaintiff’s perspective, the filing of dismissal documents should always be explicitly conditioned upon first receiving the settlement payment, including any consequences should the paying party fail to make the settlement payment by the specified deadline. Then, set out a timeline for the dismissal filing.

Deadlines keep the post-settlement course running smoothly. When they are omitted, you’ll inevitably find bumps in the road that were otherwise easily avoidable.

Tax and Credit Consequences
Depending on the client’s sophistication, he or she may or may not realize that some settlement payments will have tax consequences. If you are not a tax attorney and have not counseled your client sufficiently on possible tax consequences, it is important either to include a disclaimer regarding tax consequences within the settlement agreement or to have your client sign a separate document stating that he or she has not received tax advice from you. When the opposing party is a large entity and your client is an individual, opposing counsel might insist that a disclaimer of assurances regarding tax consequences be included in the agreement. Even when that is the case, consider having your client sign a separate document stating he or she has not received tax advice from you. And encourage your client to talk to his or her CPA or tax preparer ahead of time about the consequences of any settlement amounts received.

Terms explicitly related to credit consequences should also be considered in appropriate circumstances. Our office handles many foreclosure defense suits and other consumer lawsuits. In instances where the opposing party is a lender, creditor, or debt collector, do not overlook that credit remediation can be included as a settlement term. Opposing counsel will likely stipulate that her client cannot make any promises or assurances as to outcome on your client’s credit report, as it is technically not in the lender’s power to change the reports. However, a settlement term can be drafted (and enforced) whereby a party agrees to contact the credit bureaus and to make a good faith request to have negative credit reporting deleted, or the entire tradeline removed.

Consequences for Breach
More lengthy articles can and have been written on how to handle breach of a settlement agreement. The most common scenario upon breach is for the nonbreaching party to sue the breaching party to enforce the agreement and/or to obtain money damages resulting from the breach. You can avoid litigating the settlement agreement by incorporating an agreed judgment (or consent judgment) into your settlement documents. Most counsel representing defendants will not want to agree to file an agreed judgment unless a settlement agreement is breached, but our office routinely adds this into negotiations and is sometimes successful. Agreed judgments are especially useful when the settlement agreement contemplates installment payments or one payment shortly after execution of the agreement followed by a secondary payment after dismissal of the underlying lawsuit. Under the terms of an agreed judgment, if the opposing party defaults on a payment, you will only need to move forward under the judgment rather than file a lawsuit for breach of the settlement agreement. When the other side will agree, you can attach your agreed judgment as “Exhibit 1” to the settlement agreement so that everything is signed and agreed to at once.

Recovery of Attorney Fees upon Suit to Enforce
Provisions covering attorney fees incurred in a suit to enforce a settlement agreement are so important that they deserve to be discussed separately. The only thing worse for your client than having to bring a second lawsuit against the defendant in order to enforce the settlement from the first lawsuit is having to shoulder the cost of doing so without reimbursement. We also reject arbitration provisions in settlement agreements.

Releasing Unknown Claims
Consider whether you want to resolve future disputes regarding unknown claims in your settlement agreement. We frequently learn new facts forming the basis of new claims or bolstering existing ones after the filing of a lawsuit. When this happens during the course of a lawsuit, you can in most instances file a motion to amend your pleading. But because such an option isn’t available post-settlement, it is important to fully understand and address unknown claims with your client and then determine how to address them in the terms of the agreement itself.

Generally speaking, the release options are either a general release or a limited release, sometimes referred to as a special or specific release. The appropriate type of release to include turns on whether the parties want to settle and preclude any and all claims that exist now or in the future between the parties, or only certain claims related to the lawsuit or underlying transaction. Make sure your client understands that a general release will preclude him or her from all claims, even those not contemplated at the moment. 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. A broad, general release of this type is usually most appropriate when there has been limited interaction between the parties, such as a personal injury lawsuit or a lawsuit involving a single transaction. Specific releases—i.e., those that enumerate the claims released and leave any others unreleased—may be more appropriate when the parties regularly engage in business with each other or contemplate an ongoing relationship. However, some defendants will make a general release by the plaintiff a sticking point in negotiations.

Bonus Advice
Lastly, a few closing tips for during and after drafting. First, save each draft as a separate file on your computer, so that changes can be compared and tracked. You don’t need to strain your eyes or use fancy software for this if you’ve been saving each draft as a separate file. Basic word processing software nearly always includes a feature to compare two documents and highlight any changes between them—use this feature often! Don’t depend on opposing counsel’s cover email to identify all the changes. Second, when you have a proposed final version that has been agreed to by all parties, read it multiple times and make sure your client reads it too. Finally, remember the thread that ties all settlement drafting advice together: a little foresight today saves a lot of headache tomorrow.

Keywords: litigation, woman advocate, settlement, negotiations, settlement agreements, deadlines, tax consequences, credit consequences, consent judgment, agreed judgment, attorney fees, releases, unknown claims

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