31 August 2021

Settlement Agreements: Top 10 Tips

When parties settle a dispute, it is important to record any terms of the agreement in writing so that rights and obligations are clear and enforceable. Whether parties have reached a legally binding and enforceable agreement can sometimes be unclear depending on how the negotiations have ensued, and this could be the subject of a separate bulletin in itself. In this bulletin, we set out our top ten tips to consider before signing off on a settlement.

#1. Settlement Agreement v Deed

Depending on the nature of the dispute and the intention of the parties, you should consider the differences between a settlement agreement and a deed before deciding the form that the agreement should take.

 

Settlement Agreement

Deed

Form

Generally one document, but can be comprised of multiple documents.

Typically one document.

Consideration (the price in exchange for a promise)

Consideration is required.

Consideration is not required. 

Execution & Exchange

Good practice to be in writing and signed before a witness.

Enforceable as soon as both parties sign.

Must be in writing.

Must be signed before a third-party witness.

Enforceable after delivery or exchange.

Limitation Period

A claim for breach must be brought within 6 years.

A claim for breach must be brought within 12 years.


#2. Identify the Parties

The document must clearly identify the parties to the agreement. It is good practice to provide current contact details (postal or email address) for the provision of notices if that becomes necessary.

#3. Background/Recitals

At the start of the document, it is common for parties to include a brief summary of the facts and key issues in dispute between the parties. The purpose of this section is to provide context to the document, give the parties an opportunity to briefly summarise the issues in dispute and record the parties’ intentions.

However, parties must ensure that any stated facts are accurate because they can be held to these factual admissions in the future.

#4. Operative Terms

This is the key section of the document which should set out all operative terms as agreed between the parties, and which is typically the payment of money and the provision of documents. You should include any consequences of non-payment and refer to any events which will occur once payment of the settlement amount is received. For example, if any active legal proceedings between the parties are to be discontinued or documents need to be completed.

#5. Releases and Indemnities

A release clause prevents each party from bringing or commencing future legal action against each other. This kind of clause can broadly release a party from all available claims or can be limited to only release specific matters. Care should be taken to ensure only intended matters are released if a release clause is to be used.

An indemnity clause requires one party to the agreement to compensate the other for loss incurred as a result of defined events. As with a release, an indemnity can be broad or narrow, and care should be taken to ensure that the indemnity is as narrow as possible if one is to be given at all. It is also important to ensure that any insurance arrangements are considered when agreeing to an indemnity, as insurance policies will not cover contractual liability that extends beyond loss that would have arisen but for the indemnity.

#6. Confidentiality

The terms of a settlement agreement are usually kept confidential. A confidentiality clause is typically broad and often requires the parties to keep the terms of the document, and any confidential information of another, confidential whilst allowing the parties to refer to the fact of the settlement itself.

There may be exceptions to the confidentially requirement which should be set out in this clause. For example, if the information is already in the public domain, disclosure is required to a professional adviser or if the disclosure is required by law.

Sometimes, a regime is built into such clauses to allow for disclosure in certain terms after the counter-party has had an opportunity to approve the wording of the disclosure to be made.

#7. Non-disparagement

When parties to a dispute manage to settle their differences, they are often keen to prevent any negative comments from being made about the other.

A non-disparagement clause typically provides that the parties agree not to disparage, defame or make any statement which does or is likely to bring the other party into disrepute or ridicule or adversely affect their reputation.

This clause should be as specific as possible, for example, by stipulating that each party cannot disparage the other but also cannot disparage the other party’s business, representatives, or products and services to any third party.

If agreeing to a non-disparagement clause on behalf of a company, it should be understood that all employees, contractors and associated persons will need to comply with the obligation.

#8. General Clauses

General clauses are included towards the end of the document and cover general topics that are relevant to the practical operation and effect of the document. These clauses are sometime referred to as ‘boilerplate’ clauses because they are often not specifically tailored to the agreement itself. Best practice is to tailor these clauses to the specific situation if at all possible because these clauses often become very important when issues of breach and enforcement are considered.

Some key general clauses often included in settlement agreements include:

  • No Assignment: the parties may wish to restrict the other’s ability to assign the agreement or any of their rights or obligations without prior consent.

  • Costs: generally, although not always, each party’s own costs associated with the preparation of the document are paid by themselves.

  • Counterparts: this type of clause permits that the agreement to be executed and take effect in two or more counterparties – such a clause addresses the practicalities of signing a settlement agreement or Deed, especially in a digital world where most documents are signed at separate locations and then emailed to the other party. The counterparts taken together then constitute the entire agreement or deed.

  • Dispute resolution: if there is a future dispute, this clause can require the parties to first engage in alternative dispute steps in an attempt to resolve the matter before commencing court proceedings, and can be useful in forcing parties to informally resolve any disputes without incurring the costs of litigation. The court can be asked to stay proceedings to allow the contractual dispute resolution process to take place.

  • Entire agreement: this clause confirms that the document records the entire agreement between the parties and provides certainty that any prior agreement between the parties is now void. These clauses often also attempt to prevent parties from relying on pre-contractual representations, which becomes very important in some types of claims.

  • Applicable law and jurisdiction: if the parties have a preference as to the law to govern the agreement and where any future proceedings are commenced, the parties should specify the applicable law and jurisdiction. These clauses can be exclusive or non-exclusive.

  • Severability: this clause stipulates that if a certain provision or clause in a document is illegal, invalid or unenforceable, then the problematic provision or clause is “severed” or separated from the document, allowing the balance of the agreement to be enforced as drafted.

  • Variation: this clause seeks to preserve the agreement by stipulating that the document can only be amended by agreement (usually in writing and signed).

#9. Who should sign?

Once the settlement agreement has been drafted, you must ensure that the person executing the document is authorised to sign on behalf of the party, particularly if the party is an attorney or a corporation. Section 127 of the Corporations Act 2001 (Cth) should be utilised to ensure a company can be held to the agreement, and if necessary, documents should be sought and reviewed to ensure power to bind to the agreement (such as a Power of Attorney).

It is preferable that a party signs the agreement before a witness to avoid any future arguments about whether the agreement was properly and validly executed.

#10. Electronic Execution

As more and more people are working from home in the digital age, parties have greater flexibility in how they can execute their documents.

Parties should keep in mind that they have the ability to sign some documents electronically and before a witness over audio visual link.

In New South Wales, if a party executes a document before a witness electronically, they must ensure that the process complies with the requirements under section 14G of the Electronic Transactions Act 2000 (NSW), which include that the witness must observe the person signing the document in real time, be reasonably satisfied that they are signing the same document and endorse the document with a statement that specifies the method used to witness the signature.

Corporations should note that temporary relief measures are in place at a Federal level to assist with electronic execution, including the execution of Deeds, during the current COVID-19 pandemic (see our earlier insight here).

If you need legal advice or assistance in drafting a settlement agreement, the commercial disputes team at Bartier Perry is available to assist.

Authors: Gavin Stuart & Rebecca Renshaw