Whether a claim is settled before a lawsuit is filed or after litigation has begun, it is important for both parties to memorialize the settlement terms. A good settlement agreement will tell everyone what they are supposed to do, and what might happen if they don’t do it. It is far easier to deal with any ambiguities at the time of drafting than to incur the cost of litigating the settlement terms. There are several legal pitfalls to keep in mind when drafting a settlement agreement.
Payment Is to Be Made over Time
One issue is how to handle a settlement where payments are to be made over a period of time. The very fact that payment is to be made over time, rather than in one lump sum at the time of the settlement, may signal that the payor does not have funds immediately available. For this reason, any party agreeing to settle a claim in installments needs to consider the consequences of non-payment. That starts with deciding exactly how much the debtor is to pay and when. Both sides need to spell out exact due dates, how payment will be made (i.e. direct deposit, check, etc.) and the amount of a grace period, so both sides know the exact consequences of a late payment. The more terms that are written out the fewer headaches there will be later if the debt goes unpaid.
Confidentiality Clause
Another issue to consider in any settlement agreement is keeping the terms confidential. For the paying side, the main reason to keep the settlement amount confidential is to keep other people from realizing how much you are willing to pay to resolve disputes, so they can make the same claim and ask for the same amount. Settling a claim may also give the impression that you are accepting blame. Even if your agreement explicitly states that you are not to blame, people don’t always read things in detail before spreading the news.
But the side being paid, whether the plaintiff in a lawsuit or the purported victim of a tort, may want to go public with the fact that they are receiving money because it vindicates their cause. Many people assume that whoever walks away with money must have been the victim, and there is a temptation to tell everyone you know that you won your case. So any confidentiality clause that requires payment if a term of the agreement goes public needs to say how much and who may see the private details. Make the penalty realistic to your business and spell out the list of those who may be told, since those closest to you may have to know and might unintentionally spill the secret. Agree that the agreement be held in confidence and cannot be told to anyone aside from lawyers, accountants and others who might need to know.
What Papers May Be Needed
You will need to consider not just how payments are made but if any documents must be completed at all or in a particular order. It is natural that opposing sides don’t trust each other to hold up their end of a deal. An agreement may call for a plaintiff to discontinue the lawsuit against the defendant at a set time after the defendant’s payment clears. Money may need to sit in escrow, such as a lawyer’s trust account, until all payments are made. Often nothing is paid until everyone signs the settlement agreement. It is best for your agreement to say what happens if either side misses a deadline to sign or pay. Court rules may also apply and carry their own penalties for signing late. Plan ahead, mark your calendar and hire a lawyer to cover both your contract and any legal issues that may arise.
Sometimes you will need more than just a settlement agreement to seal your case or deal. A confession of judgment is asking the court for advance permission to enter judgment in one side’s favor on a fixed sum. Once that number is overdue, the creditor can immediately get a judgment from the court without a lot of wrangling. Once judgment is entered it is often very hard to have it reversed or set aside. If multiple claims are being paid or the payor is dealing with more than one person, you may need to hammer out a separate release for each payer and payee. Bills of sale and transfer documents may be needed, each with its own terms. An experienced lawyer knows exactly what papers may be needed and whether you should be concerned about signing them.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
