After two or more parties reach a mutual agreement to resolve a legal dispute, they may sign a settlement agreement. Parties sign this legally binding contract after negotiations but before final judgment.
A settlement agreement can help:
- Resolve the end of marriages through divorce
- Settle personal injury claims
- Settle employment disputes
- Settle contract disputes
- Settle contract violations
To make a settlement agreement valid and approved by a judge, here are 9 things to include in your settlement agreement.
1. A Legal Purpose
The legal purpose of a settlement agreement expresses the intent and reason for the agreement between all involved parties.
A settlement agreement aims to resolve a dispute and reach a mutually agreed outcome. However, the exact purpose and resolution will vary by the type of settlement.
A marriage settlement contract, for example, will seek to legally reach an agreement on the terms and conditions surrounding a divorce. On the other hand, a business settlement between a company and consumer will seek to minimize harm and rectify any damages.
Here is an article that explains how to prepare for a settlement agreement.
2. An Offer
To be legally binding, the settlement agreement must propose a possible resolution to the dispute. This can ultimately lead to the release of future liability, expressed through a settlement and release agreement.
Both parties agree to resolve and end their dispute on mutual terms through a settlement agreement and mutual release.
Before this can happen, however, one party must propose a resolution to the dispute and extend it to the other party. Be open to negotiation as this is a key part of reaching a fair outcome.
Here is an article about how to write a settlement proposal.
3. Acceptance of the Terms
Once one party makes a settlement proposal, the other parties must review the offer and, if they desire, counter with their own. Settlement negotiation takes time and often involves lengthy discussions and eventual compromise.
All parties must express their purpose and desired outcome to reach a mutual settlement. This allows them to align their objectives and ultimately reach a mutual agreement.
Only after all parties accept the terms can they reach a final settlement. This also applies in cases of trade, when the buyer must deliver payment to the seller before they provide any assets. But, again, this will be determined by the final settlement date.
Here is an article that defines the role of a settlement date in business.
4. Valid Consideration on Both Sides
In legal contracts, “consideration” is something of equal value each party offers in exchange for resolution.
To be approved by a judge, the settlement agreement must prove that there was valid consideration for all parties free of coercion, duress, or intimidation.
Consideration can vary case by case and individual. It could be monetary compensation, physical objects, or even the promise not to pursue certain legal action.
Consideration is the price one party is willing to pay in exchange for another’s action. However, it is important to note that consideration cannot be used to threaten or coerce the other parties into a settlement.
Here is an article that gives more information on American contract law considerations.
5. Mutual Assent
Mutual assent means mutual agreement. A negotiated settlement agreement must include mutual assets from all parties. There can be no outstanding disputes or counters to the settlement proposal.
In contract law, a mutual asset is the agreement to perform or not perform certain actions in return for something valuable. All parties must agree to the final offer, and the final consideration must provide something of equal value in exchange for the agreed-upon actions.
Here is an article that explains mutual assent.
6. Waiver of Unknown Claims
A settlement and release agreement is a waiver for any claims that are unknown at the time. This releases parties from any future liability and subsequent litigation.
A settlement agreement and mutual release waiver relieves all parties of any future accountability for legal disputes and affirms their assent to the resolution laid out in the settlement agreement.
Here is an article that gives an example of a settlement release agreement.
If someone decides to leave their company, a resignation clause will be a part of an employee settlement and release agreement. Under this agreement, the company will agree to file all necessary paperwork to terminate its employment.
The employee agrees to relinquish all rights to employment and other benefits with the company after their resignation date. Most importantly, the agreement should state that the employee and company agree that the resignation agreement replaces the original employee agreement.
Here is an article with a guide on how to write a voluntary resignation letter.
8. Confidentiality Clause
A confidentiality clause can prevent all parties and their lawyers from releasing details about the settlement process and details of the final resolution. This provision helps:
- Protect intellectual property
- Protect personal identities
- Prevent damages from the resulting contract
Failing to uphold a confidentiality agreement is a breach of contract. Therefore, the agreement should express potential consequences any party might take in case of a violation.
9. Signatures of Parties Involved
The settlement agreement must include signatures from all involved parties. They should have their title, such as:
- Chief Executive Officer
The signatures must also be dated.
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