Six Key Questions When Settling and Releasing Legal Claims

Louise C. Stoupe and Keiko Rose | Morrison & Foerster

Most disputes settle, so it is important for legal teams to be aware of the key issues involved in drafting a settlement agreement. This is particularly true now, as companies around the world grapple with the COVID-19 pandemic and the resulting strain on supply chains and business relationships.

When businesses decide to resolve issues amicably, the settlement agreement should accurately reflect the compromise that the parties have reached. Too often, the focus is only on the amount to be paid in exchange for the release of claims, but there are other, equally important considerations that need to be addressed.

Below are six questions that business and in-house legal teams should ask themselves when pursuing settlement negotiations and finalizing settlement and release agreements.

1. Do you want a broad or narrow release of claims?

Parties should carefully consider which claims they want to release as part of a settlement agreement and whether the language in the settlement agreement captures those precise claims. Releases may cover different categories of claims, including:

  • Claims asserted in pending litigation or arbitration;
  • Claims arising out of or related to a particular agreement;
  • Claims arising out of or related to a particular subject matter or event; or
  • Claims arising out of or related to the relationship between the parties.

In deciding which option is best for you, consider whether you want to foreclose all potential litigation (which is attractive if you would be the defendant in any future litigation) or whether you may want to retain certain claims to assert in the future.

It is also important to clarify in the settlement agreement whether the release of claims is mutual. For example, if only one party has asserted claims in pending litigation, you may want the settlement agreement to release not only claims asserted in the litigation but also any claims that the defendant may have related to the same underlying events.

2. Do you want to release unknown claims?

Put differently, do you intend to release claims that are not yet known to exist but may later be discovered? If so, then the settlement agreement should explicitly release all known and unknown claims. A general release of claims is not always sufficient to release claims that were unknown at the time of settlement.

For example, California Civil Code Section 1542 provides that a general release of claims does not extend to claims that the releasing party “does not know or suspect to exist” at the time of the release and that, if known, “would have materially affected” the settlement. If your settlement agreement is governed by California law or has another nexus to California, a provision stating that the parties agree to waive Section 1542 must be included in order to release unknown claims.

3. Who should be covered by the settlement agreement?

Normally, the parties to a settlement agreement would be the parties to the contracts at issue or the parties to the pending litigation or arbitration. But should the agreement cover anyone else? Consider whether you would benefit from adding a provision stating that entities with a legal relationship to the parties also agree to release claims. For example, you may want to ensure that the release covers a party’s “parent, subsidiaries, assignees, transferees, representatives, principals, agents, shareholders officers or directors, and all persons acting by, through, under, or in concert with them.” You may also want to include a release covering downstream customers in certain circumstances.

If you are the defendant, then you will want to ensure that all of the opposing party’s related entities are covered by the release of claims to broaden the reach of the agreement. However, even if you are in the position to assert claims, you may be willing to include such a provision if none of your related entities would have a viable claim in any event.

4. Who should bear fees and costs?

Parties to a settlement agreement often agree to bear their own legal fees, but are there any particular costs the parties should share?

5. How and when will the settlement payment occur?

The settlement agreement should be clear as to the date of any settlement payment, any conditions precedent to payment, and the means of transferring such payment. Additional considerations include whether you want the ability to assign the right to receive the payment to affiliates and, if so, whether that assignment can occur with or without the consent of the other party.

6. Who is allowed to know about the settlement agreement?

The settlement agreement will include a provision explaining confidentiality obligations, and parties typically agree that the terms of the settlement agreement must remain confidential. But consider whether you want to be able to share the existence of the settlement agreement with anyone besides the parties to the agreement. For example, you may want your customers or certain business partners to be aware of the settlement. Confidentiality provisions also normally allow disclosures to the extent required by law, regulation, or court order.

It’s Not Over … Until The Panel Sings

Jonathan Bank and Matthew Murphy | Locke Lord | November 1, 2019

A federal court in New York recently held that an arbitration panel retained the right to resolve any dispute arising out of an arbitration award.  In Chicago Insurance Company v. General Reinsurance Corporation et al., no. 18-cv-10450, 2019 WL 5387819 (S.D.N.Y. Oct. 22, 2019), Chicago Insurance Company and its reinsurers disputed the reinsurers’ share of a settlement agreement that Chicago entered into with its insured with respect to the insured’s liability arising out of asbestos claims.

The panel rejected Chicago’s billing scheme and in 2017 it issued a final award for the reinsurers.  In the final award, the panel retained the right to resolve disputes arising out of the award.  In 2018, Chicago submitted a new bill to the reinsurers that it claimed was prepared in accordance with the 2017 final award.  The reinsurers rejected the allocation and submitted the issue to the panel to resolve the issue.  A majority of the panel agreed that the dispute arose out of the 2017 final award (Chicago’s party-appointed arbitrator wrote separately that the panel did not have a jurisdictional basis to address the dispute).

Chicago commenced a new, separate arbitration and filed a motion to compel the reinsurers to participate in the new arbitration.  In response, the reinsurers filed a cross-motion to stay the new arbitration seeking a declaration that the 2017 panel had the requisite jurisdiction to resolve the dispute.  The court observed that the issue of whether the 2017 panel’s retention of jurisdiction over disputes arising out of the 2017 final award was an issue for the court to decide.  The court, noting that Chicago claimed that the new bill was prepared in accordance with the protocols set forth in the 2017 final award, agreed with the reinsurers that the 2017 panel expressly retained jurisdiction to resolve dispute arising out of the final award.

The decision is a reminder that if a panel retains jurisdiction to resolve subsequent issues arising out of a final award, courts will not join the chorus, and will instead permit the panel to finish the song.

If You Settle Your Construction Dispute, Have You Really Settled It?

Matthew DeVries | Best Practices Construction Law | March 14, 2016

Just this weekend, after breaking up a Minecraft dispute among four of my young children, I sent them back to the world of digital building. Within minutes, they were fighting again. Makes you wonder about whether you have really settled the dispute after you have settled the dispute?

The Court of Appeals of Tennessee recently addressed this issue in McNeese v. Williams, No. 2014-CV-30, which involved two adjoining landowners who had a dispute over an easement.  Right before trial, the parties reached an agreement and notified the court that the trial was unnecessary. The attorney for the Williams drafted a short letter agreement and sent it to opposing counsel.  An agreed order of dismissal was also submitted to the attorney for McNeese. When Williams was “unable to obtain” a signature on the agreed order from opposing counsel, they filed a motion to enforce the settlement agreement.

construction hand

Following the hearing, the trial court found that the parties, through their attorneys, had entered into an agreement to resolve all matters of controversy between the parties. The trial court found that the agreement was fair and equitable, and that it would be enforced, despite the fact that Mr. McNeese no longer consented to the agreement.

On appeal, the Court of Appeals found that the trial judge lacked the power to enter the agreed order when he knew that Mr. McNeese had withdrawn his consent to the oral settlement agreement reached by the parties’ attorneys.   In other words, Mr. McNeese may have “had” a settlement agreement with the other party, but he repudiated that agreement prior to the hearing on the motion to enforce the settlement agreement.  Accordingly, the appellate court ruled that the trial judge should have granted the motion to set aside the agreed order.

So what?  While the issue in this case generally is one for attorneys, it also provides guidance to businesses about how to treat their settlement discussions via email.  Whether you are talking about a change order, outstanding payment application, or claim for delay damages, your agreement on a dispute may be binding depending on the circumstances. First, your written contract may have a provision that requires all changes and modifications to be in writing. Therefore, an oral agreement to resolve the dispute may not be sufficient. Second, even if you agree to resolve the dispute in writing, the outcome may be dependent on whether you have timely repudiated the agreement.

In the McNeese case, it was a matter of…

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