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What Terms Should Be Included in a Settlement Agreement?

Many business contract disputes are resolved via settlement. Settling a dispute avoids the costs and inherent uncertainty of litigation, and it allows both parties to get back to business as usual.

While most settlements involve one party paying the other, the amount of the settlement is just one of several key terms. All of the terms in a settlement agreement require careful consideration and negotiation—and it is imperative that both parties work with a Miami breach of contract lawyer to ensure that they have a clear understanding of its implications and limitations.

10 Key Terms in a Settlement Agreement Resolving a Business Dispute

What are the key terms of a settlement agreement? Here are 10 terms that should generally be included in a settlement agreement resolving a business dispute:

1. Amount of Payment

A settlement agreement should clearly state the amount that the defendant is paying to resolve the plaintiff’s claims. The agreement should also stipulate the method of payment and the date on which payment is due. If the defendant will pay the settlement amount over time, the agreement should also include payment terms and the applicable interest rate (if any).  

2. Additional Terms of Settlement

If the parties have agreed to any additional terms of settlement (i.e., the defendant will return certain property or refrain from engaging in certain conduct), these should be clearly stated in the settlement agreement as well. Clarity is key, and the settlement agreement should include as many details as necessary to ensure that the parties have a consistent understanding of their respective rights and responsibilities.  

3. Characterization of Payment for Tax Purposes

Depending on the nature of the dispute, it may be in both parties’ best interests to specify how they will characterize the defendant’s payment for tax purposes. Strategic tax planning during the settlement process can reduce both parties’ costs—and thus will typically be in both parties’ best interests. By avoiding unnecessary tax liability, the parties can devote would-be tax payments to other commercial or settlement-related purposes.

4. Claims Resolved

A settlement agreement should also clearly state the claim (or claims) that it resolves. Parties to a business dispute will commonly agree to resolve all claims, known and unknown, arising or accruing prior to the date of settlement. But, this isn’t always the best approach, and parties that have concerns about unknown potential liabilities must be extremely careful to avoid giving up necessary rights to sue.

5. Release and Waiver of Rights

Along with clearly stating the claim (or claims) resolved, a settlement agreement should also include a carefully crafted release and waiver of rights. It should be abundantly clear what rights each party is (and isn’t) waiving so that there are no ambiguities regarding the parties’ rights in the future. When a settlement agreement leaves questions unanswered—as is too often the case—this can lead to (rather than prevent) additional disputes down the line. Conversely, when a settlement agreement provides certainty, both parties can move forward with confidence.

6. Confidentiality and Nondisclosure

Typically, the parties to a settlement agreement will share a common interest in keeping the terms of their agreement confidential. It is fairly standard for settlement agreements to include confidentiality provisions, though these should not be viewed as simply “standard” terms. As with all terms of the agreement, confidentiality and nondisclosure clauses require careful drafting and consideration, keeping the specific circumstances surrounding the parties’ dispute and settlement in mind. Both parties should consult with their counsel to ensure that they have a clear understanding of what these clauses allow (and don’t allow) so that they can comply after signing.

7. Default and Enforcement

As with any other type of commercial contract, a settlement agreement resolving a business dispute should include provisions addressing default and enforcement. These provisions should specify what constitutes a default under the agreement (i.e., failure to make a settlement payment when due), and they should specify how the non-defaulting party is entitled to enforce performance (i.e., through a confession of judgment). A settlement agreement may include provisions regarding jurisdiction, venue and attorneys’ fees to help facilitate enforcement as well.

8. Remedies  

In addition to including provisions for enforcement, it may also be in both parties’ best interests to specify the remedies that are available in the event of default. This can help facilitate collection by the plaintiff while also limiting the defendant’s potential exposure. For example, many settlement agreements will include a provision for liquidated damages. This type of provision states the specific amount that the plaintiff is entitled to recover when enforcing the defendant’s settlement liability.

9. Force Majeure

The importance of having a well-drafted force majeure clause came into sharp focus at the height of the COVID-19 pandemic. In many cases, commercial parties used vague and poorly-worded force majeure clauses to escape liability for contractual non-performance. Many parties also found themselves unable to avoid contractual liability despite their inability to perform because their agreements’ force majeure clauses didn’t address the economic impacts of a global pandemic.

Settlement agreements should include force majeure clauses that are appropriately tailored to the circumstances at hand. These clauses should reflect the nature of the parties’ respective obligations, and they should give due consideration to all possible contingencies for as long as the settlement agreement remains in effect.

10. Binding Effect

Finally, a settlement agreement should clearly identify the parties upon which it is binding. In many cases, this will include not only the specific parties to the dispute at issue but also their respective subsidiaries, affiliates, owners and other related parties.

Speak with a Miami Breach of Contract Lawyer at Edelboim Lieberman Revah

The lawyers at Edelboim Lieberman Revah represent businesses, business owners and other clients in all types of commercial disputes. Our lawyers have significant experience negotiating settlement agreements on behalf of our clients, in addition to forcefully asserting our clients’ rights in mediation, arbitration and litigation. To discuss your dispute with an experienced Miami breach of contract lawyer in confidence, please call 305-768-9909 or tell us how we can reach you online today.

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