The proper way to handle this matter is to consult with an attorney regarding this matter. It is impossible to tell from the limited information that you provided as to your rights and remedies. You should consult with an attorney as soon as possible to avoid missing any deadlines or loss of your available rights.
If you have been sued, you have a limited time to serve and file an Answer to the Complaint and to file any counter-claim. Missing necessary procedural deadlines can be fatal to your case and your defense. You should immediately consult with experienced legal counsel.
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"Stipulation" is a term signifying that the opposing parties to a law suit have come to an agreement about something (such as, a settlement of the case), and "dismissal with prejudice" means the case will be dismissed and cannot be re-filed ever again. From your very limited facts, it would appear unlikely that you have settled this case, unless the contractor has offered you money. If Minnesota procedural rules requires that you file a counter-claim if you have one in the event someone sues you (as in, for example, your claim for incomplete work and possible over payment), then a dismissal with prejudice could foreclose your right to ever sue the contractor for what you claim he owes you. It is for this reason that you need to consult with a construction lawyer in your area. You might also check your state's regulatory laws regarding home improvement contractors, as you likely have a consumer claim which the state attorney general's office will pursue on your behalf. Agreeing to a stipulation and dismissal could seriously compromise any claims you may have.