The moment when an agreement is reached to resolve a disputed matter often brings great relief to the litigants and their attorneys. However, that same sense of relief can cause the unwary lawyer to let his guard down when it comes to memorializing the settlement in a written agreement. The same care and diligence that a lawyer must display in reaching a settlement for his client must continue through the consummation of the settlement via a written agreement. The purpose of this article is to familiarize new lawyers with common issues that arise in drafting settlement agreements.
I. Settlement negotiations dictate the terms of the settlement agreement. When drafting a settlement agreement, the threshold question is what has been agreed to. The first question that you should ask yourself is this: What are the essential terms that were bargained for? If you are drafting the agreement, the essential terms must find their way into your document. If you are reviewing a document drafted by someone else, you cannot let the final agreement include material terms unfavorable to your client that were not bargained for. (Practice Note: It is extremely important that you include all arguably material terms in your offer or they may risk falling out in the drafting of the final agreement.) Do not assume that you can insert substantive terms after a settlement has been reached. Having specifically discussed all the terms during negotiations will avoid many an argument in drafting the settlement documents and will allow you to enforce a settlement if necessary.
Examples of issues to consider:
Who are the Releasees and Releasors? Who is being released and who is releasing claims? Be on guard for parties that find their way into the settlement agreement whose release was not negotiated for during negotiations.
What is being released? Is the release a general release of all claims or are specific claims being released (e.g., property damage claims v/s bodily injury claims in a lawsuit)? Are there specific claims that need to be excluded from the release?
Indemnification. Indemnification is a substantive component of a settlement and should be bargained for. The precise terms of the indemnification language are highly important. Lawyers tend to gloss over this.
Medical Bills, Liens and Insurance Reimbursement. Is the Releasor
being asked to indemnify the Releasee from paying medical bills incurred by Releasor? O.C.G.A.§33-24-56.1 requires that the Releasor notify all benefits providers at least ten (10) days before consummating settlement. (See Exhibit A hereto). Be on the lookout for trust agreements. Some insurers may try to get you to agree to act as a trustee for them.
Taxes. In settlement agreements where the monies paid are taxable, one party may ask the other party to indemnify the other party for taxes owed or penalties for failure to appropriately pay taxes. I typically see this when employment claims are settled. For example, in Fair Labor Standards Act cases, remedies include lost wages, liquidated damages and attorneys’ fees. In Title VII discrimination cases, remedies include lost wages, mental anguish damages and attorneys’ fees. Payment for lost wages is subject to withholding and FICA. Payment for mental anguish damages or liquidated damages is income that must be reported to the IRS, but is not earned income subject to withholding and FICA. Thus, the employee and the employer pay less in taxes on the mental anguish and liquidated damages payments. It is therefore important to specify in settlement negotiations not only the lump sum of the offer, but also the amount of the lump sum that will be attributed to lost wages, liquidated damages and attorneys’ fees. The employer will often ask that the employee indemnify the employer in the event the IRS determines that the allocation of the payments is incorrect. If the employee is willing to indemnify the employer in order to persuade the employer to agree to the allocation demanded by the employee, tailor the indemnification agreement so that it does not cover situations where the employer simply fails to make the payments that the agreement necessitates.
Confidentiality. This is frequently something that a party will try to interject after the fact. Confidentiality is a substantive limitation on the free speech rights of the parties.Again, it must be bargained for. And, if confidentiality is sought in a case in which the settlement monies paid are not taxable, it is important to specify the amount of money being paid for the confidentiality clause. For example, damages received for “personal physical injuries or physical sickness" are not included in a person’s gross income. 26 U.S.C. §104(a)(2), i.e., income tax is generally not paid on personal injury settlements. However, in 2003, the U.S. Tax Court held that monies paid for confidentiality clauses in personal injury settlements are not excluded from gross income and are subject to taxation. See Amos v. Commissioner, T.C. Memo. 2003-329. While the parties may specify the amount of the settlement attributed to confidentiality, the IRS may challenge that amount.
Some settlement agreements provide for liquidated damages in the event a confidentiality agreement is breached. If the amount is low, such a provision may actually provide some certainty for the parties. I have received a number of first draft settlement agreements that provided for repayment of all settlement funds in the event of a breach of confidentiality. I do not recall ever agreeing to such a clause.
Defense attorneys often draft confidentiality clauses that only bind the plaintiff. I negotiate for bilateral provisions when possible. Corporate defendants often argue that they cannot be bound by confidentiality because they cannot control everyone in their organization. In those cases, it is often worthwhile to identify the persons/positions in the corporation who will have access to the information and who will be bound by confidentiality. If all else fails, consider a clause that releases the plaintiff from the confidentiality provision if someone from the corporation negatively comments on the plaintiff or his or her claims.
II. Timing of release. Some releases purport to release claims that do not even exist and have not accrued at the time the release is executed. For example, I have seen releases in employment severance packages that would purport to release a claim if one of the employer's agents ran a red light in a car and hit the employee two weeks after the release was signed. While there is support for the proposition that one cannot release claims that have not yet occurred, why risk it? Specifically note that the release pertains to all claims arising up until the date the release is signed.
III. Non-disparagement Clauses. As with confidentiality clauses, it may be beneficial for the plaintiff to negotiate for bilateral non-disparagement clauses. Also, in cases involving resolution of employment disputes, such a clause is an appropriate place to detail the type of information the corporate entity will provide concerning the plaintiff. Specifying what the former employer will say if contacted by potential employers can provide both parties with security.
IV. Court Approval of Settlement Required. Some types of claims require court approval of any settlement agreement. A non-exclusive list is as follows:
Fair Labor Standards Act Claims
Minors Claims in Excess of $15,000 –O.C.G.A. §29-3-3 (See Exhibit D hereto).
V. Enforcing the settlement. To prevail on a motion to enforce a settlement agreement “a party must show the court that the documents, affidavits, depositions and other evidence in the record reveal that there is no evidence sufficient to create a jury issue." Superglass Windshield Repair, Inc. v. Mitchell, 233 Ga. App. 200, 504 S.E.2d 38, 39 (1998). The analysis turns on “basic principles of contract formation and enforcement." Thompson v. Pulte Home Corp., 209 Ga. App. 558, 434 S.E.2d 89, 90 (1993). A “contract exists [when] all essential terms have been agreed to."Id. (emphasis added).
‘Under OCGA § 13-3-1, the plaintiff in a breach of contract action has the burden of proving three elements: subject matter of the contract, consideration, and mutual assent by all parties to all contract terms.’2 Because a settlement agreement is a contract, it must meet the same requirements of formation and enforceability as other contracts.3 ‘Only when a meeting of the minds exists will an agreement be formed. But the law also favors compromise, and when parties have entered into a definite, certain, and unambiguous agreement to settle, it should be enforced.’4 If an alleged settlement agreement is disputed by the parties, it must be in writing to be enforceable.5 ‘Ideally, a writing satisfying this requirement consists of a formal written agreement signed by both parties. But letters prepared by the parties' attorneys may suffice if they memorialize the terms of the agreement.’
Oldham v. Self, 279 Ga. App. 703, 707, 632 S.E.2d 446, 449 (2006) (footnotes omitted)
“The requirement of certainty extends not only to the subject matter and purpose of the contract, but also to the parties, consideration, and even the time and place of performance where time and place are essential." Zurich Am. Ins. Co. v. Gen. Car & Truck Leasing Sys., Inc., 258 Ga. App. 733, 734, 574 S.E.2d 914, 916 (2002).If a settlement is reached prior to litigation, a lawsuit alleging breach of settlement agreement is appropriate.