10 Key Considerations When Drafting a Settlement Agreement

Settling a dispute out of court is ordinarily a joyous affair – allowing parties to avoid the thorny nature of litigation and saving time and costs in the process. As much as the settlement of a case is desirable, a well-drafted settlement agreement is equally, if not even more desirable, to ensure that the rights of all parties are safeguarded. A settlement agreement should be drafted with care and not viewed as a “throwaway” document, executed simply to bring all legal disputes to an end. With this in mind, this article highlights ten key considerations in the preparation of a settlement agreement.

1. Settlement agreement or consent judgment/order

A settlement agreement and a consent judgment/order both contain contractual terms mutually agreed upon to bring legal proceedings or disputes to an end. 

A consent judgment/order is superadded with the command of a court. This means that it is usually possible to enforce the consent judgment/order as it stands until and unless the consent judgment/order is set aside by the court.

A settlement agreement, on the other hand, is purely contractual in nature. A party seeking to enforce a settlement agreement is generally confined to filing civil proceedings for breach of an agreement. In other words, a party must first obtain a valid judgment before the settlement agreement can be enforced.

So, when might parties choose to enter into a settlement agreement over a consent judgment/order, or vice versa? To answer this, here are some relevant factors to consider:

a) Stage of proceedings: A consent judgment/order is only entered into, to resolve existing legal proceedings. Naturally, a consent judgment/order is not an option if no legal proceedings have been commenced, in which case, a settlement agreement is appropriate.

b) Confidentiality: A consent judgment/order, like any court document, is a document in the public domain. Therefore, if there are any settlement terms that parties wish to keep private and confidential, it may be advisable to execute a settlement agreement that also spells out the duties of confidentiality. 

c) Ability to vary terms: Once a consent judgment/order is perfected, the court generally cannot vary/set aside a consent judgment/order. This is the case even if a party freely enters into the consent judgment/order but subsequently claims that the consent judgment/order contains terms that are unfair to him or her. While parties are also similarly bound by the terms of a settlement agreement, in comparison, there is arguably more room for parties to negotiate for a variation ofterms.
 

2. Scope of the compromise

When drafting a settlement agreement, a key question that should be addressed is: what exactly is being agreed upon here? 

In a dispute, one party may be making multiple demands against another party. For instance, there could be one demand seeking payment of RM400,000 and a separatedemand seeking the delivery of 50 vehicles. 

Thus, it is crucial for all relevant demands by a party to be properly identified. The settlement agreement should then stipulate clearly which demands are to be met and which can be withdrawn. This brings finality to matters and prevents future disputes.One may consider also if the settlement is full and final in nature, or whether it is merely a temporary compromise until certain future events occur.
 

3. Naming the correct parties 

It is important for the parties to a settlement agreement to be properly identified, as this affects whom the agreement can be enforced against. 

Should the individual director or the company be named as a party? Should a parent company or subsidiary company be named? Establishing the proper entities to be named in a settlement agreement also involves determining whether the parties named can fully perform all the terms of the settlement agreement. 

It is equally important to ensure that the entities executing the settlement agreement have the necessary authority to do so. This facilitates the smooth implementation of the settlement agreement and prevents subsequent assertions that a particular party never agreed to be bound by the agreement in the first place. 
 

4. Confidentiality concerns 

Parties may seek to incorporate confidentiality clauses in their settlement agreement for various reasons. Some key considerations when drafting confidentiality clauses include the following:

(a) Types of information deemed confidential: In general, parties seek to preserve confidentiality over documents exchanged in the course of negotiations leading up to the execution of the settlement agreement, as well as the terms of the settlement agreement itself. The definitions of “negotiations” and “documents” should be clearly spelt out.

(b) Duration of time for which confidentiality must be maintained: How long should confidentiality obligations last for? Consider also if confidentiality should extend to the existence of the negotiations and the fact that a settlement agreement has been entered into.  

(c) Instances when confidentiality can be waived, if any: Often, the applicable law or regulatory authorities of a country require certain confidential information to be disclosed. 
 

5. Time being of the essence

The timeline for parties to comply with the settlement terms ought to be expressly set out, especially when multiple payments need to be made to several parties across a fixed period. Payment terms need to be clearly defined - such as when the cut-off date for payment is, to which account should monies be paid to, and what currency payment should be made in.

Another consideration in this regard is determining when parties’ liabilities are deemed to be released. For example, the Releasor would want the release to be effective upon receipt of the full settlement payment while the Releasee would prefer it to be effective upon execution of the settlement agreement. Parties ought to negotiate closely on this front to come to a mutually agreeable solution. 
 

6. Specific monetary concerns 

When drafting a settlement agreement, all variants that would affect any payment sum have to be accounted for. For instance, would tax be levied on the payment sum and if so, which party is responsible for paying the tax? Is the payment sum subjected to interest rates? Where relevant, parties should also spell out payment obligations for items, such as the legal costs in drafting the settlement agreement and stamp duty, among others. 
 

7. Including an ‘Entire Agreement Clause’ and ‘Severability Clause’

An entire agreement clause is useful to ensure that parties are confined to the four corners of the settlement agreement. Such a clause would specify that all settlement terms must be construed within the agreement itself without taking into account earlierrepresentations, understandings, negotiations etc. 

It is also useful to insert a term on severability to the effect that, if any one term in the agreement is found to be void, illegal and/or unenforceable, the rest of the terms in the agreement can still be properly enforced.
 

8. Forum for settling disputes

A good settlement agreement should provide for any potential breaches of the agreement. The governing law and jurisdiction to adjudicate any disputes should be clearly agreed upon at the outset. The dispute resolution mechanism should also be decided beforehand - whether it is by way of litigation, arbitration, mediation, etc. It may be worth incorporating a notice and cure provision to give a party the chance to avoid liability for any inadvertent breach.
 

9. Miscellaneous provisions 

The “miscellaneous” provisions of a settlement agreement should not be neglected. These provisions include items such as the methods of service for a document, when a document is deemed to be received, and whether thirty (30) days in the agreement refers to calendar days or business days.

While these are seemingly trivial issues, miscellaneous provisions do matter, especially if the settlement agreement provides for a specific timeline and method to remedy abreach. 
 

10. Checking, checking, checking

There will often be exchanges of multiple drafts of a settlement agreement before a final one is executed. With a potentially large number of tracked changes involved, it is important to ensure that the final product is executed as agreed. This means going through the final settlement agreement word for word before sending it off for signing and execution. After all, nothing is agreed, until everything is agreed. 

Parties must be sure to sign and date the settlement agreement so that there is no ambiguity later on as to which document was finally agreed upon.

Final remarks

Of course, the ten considerations listed above are non-exhaustive. Ultimately, different types of disputes warrant different considerations. Drafting a settlement agreement involves a lengthy process to ensure all bases are covered to protect the rights of parties. Thus, it is best for parties to seek legal advice in the process of settlement.