What is a Settlement Agreement?
A settlement agreement is a contract resolution document between two or more parties. In the realm of employment law, a settlement agreement is a contract between an employer and a current or departing employee that aims to settle all claims or disputes between the two parties by agreeing to grant a particular thing of value, in exchange for the employee relinquishing any claims that he/she may have against the employer. It is most typically used to resolve disputes before litigation arising against an employer, and can be effective in forestalling threatened litigation. If properly drafted, a well-crafted settlement agreement can serve to resolve many unknown disputes that the parties did not necessarily know existed when the settlement agreement was negotiated. Further, the proper use of a settlement agreement can also help avoid costly litigation associated with an employer’s decision to terminate an employee.
An employer may agree to pay severance benefits to a terminated employee in exchange for the employee’s signature to a settlement agreement. The severance benefits serve as some type of consideration to provide the employee something in exchange for the waiver and release of the employee’s legal claims or employment-related contract claims.
Sometimes an employee’s performance may be sub-par, or there may be other issues relating to his/her employment that may come to light later upon reevaluation during a reduction in force or other circumstances , and the focus is on the practical benefits of avoiding tens of thousands of dollars in potential litigation expenses.
The law generally requires that such settlement agreements specifically identify the types of claims that the employee will be waiving, and that the general release provisions be in proper form to ensure that the release and waiver are as broad as necessary to cast a wide net to cover virtually all possible claims an employee could make against the employer arising out of their employment or termination of their employment. Such specific references in a settlement agreement even help protect the employer against new or unforeseen laws passed after the date of the settlement agreement. State and federal laws and regulations are continuously changing, and members of a class action or collective action may be able to come forward with claims that would pose an additional threat to the employer. If issues such as these arise, the employer may be surprised to realize that the settlement agreement executed by the protected class failed to expressly encompass such claims.
There are various legal frameworks that apply for settlement agreements to be considered valid, enforceable and not illegal "general releases." Dealings pursuant to such settlement agreement provisions will commonly fall under the release provisions of a general release contained in an employment agreement, general release, mutual release, change-in-control agreement or another contract.
Common Reasons for Breaching an Agreement
Common causes of breach after a settlement agreement is reached can fall into at least two categories:
a. Failure to abide by the payment terms. In cases where the settlement agreement calls for a one time payment, there is no problem and all that is left is for the other party to pay. However, many cases can involve a payment over time for example, most cases involving payment of attorney’s fees will be paid at certain installment payments and in employment cases, installment payments over time are common.
b. Failure to adhere to the terms of the settlement. If this is a confidentiality agreement, then there may be a tendency to leak the terms of the agreement especially since today, so much information is handled electronically and it is easier than ever to copy, send and keep information. Or, failure to adhere to the prohibition against disparaging comments. In either of these examples, contempt is not likely going to be an issue although an injunction or other form of equitable relief might be considered. As discussed above, contempt is usually not an available avenue of relief.
Legal Consequences of Breach
Depending on the terms of the settlement agreement and what is involved in the breach, a breach may give rise to a lawsuit in which the aggrieved party sues the breaching party to enforce the terms of the agreement. A lawsuit may also be brought against the party who caused the settlement agreement to be breached, if that party induced the breach of the agreement in the first place. A breach of a settlement agreement gives rise to an individual cause of action, as well as implicating the causes of action for the underlying claims that were or could have been settled by the agreement.
If a lawsuit is filed for breach of a settlement agreement, there are two main sources of damages that can be recovered if the party suing for breach of the settlement agreement is successful. The first is expectancy damages, or "compensatory damages," defined by Civil Jury Instructions as the "value of the lost performance or what the promisee expected to receive from the breach". Essentially, the goal is to put the party suing for breach of the settlement agreement, the promisee who was expecting a benefit, in the same position they would have been in had there been no breach. With regard to settlement agreements, this can be a tricky issue because there is no way to know definitively whether the terms of the settlement would have been accepted and resulted in a dismissal of the litigation that was settled. Further, if the lawsuit is brought against the party who induced the breach, expectancy damages may not be recoverable at all. It is a big risk for a party to induce another to breach a settlement agreement, because this party would likely be liable for the damages that resulted. These damages might include attorney’s fees that the aggrieved party has to incur as a result of the breach of the settlement agreement, which would be recoverable even if fees were not recoverable in the litigation that led to the settlement.
In addition to "expectancy damages", there are also consequential damages. These damages are measured by the "non-breach losses suffered by the promisee". This might include expenses spent on litigation or other costs that are unrelated to the litigation that was a subject to the settlement agreement. Consequential damages are available if they are "reasonably foreseeable" and if it is established that "the plaintiff suffered a harm which was caused by the defendant’s breach". Damages would not be allowed for losses that were not foreseeable by the breaching party. Both expectancy and consequential damages can be recovered if both are attributable to the breach of the settlement agreement. Another possible remedy is specific performance, which in essence means making the breaching party do what they originally promised in the settlement agreement. Specific performance is rarely a remedy because it "is proper only when money damages do not adequately compensate plaintiffs". There is limited case law regarding specific performance in the context of settlement agreements, but the case law does present an interesting question in settlement agreement context: whether to allow specific performance of an agreement that has already been litigation up to the point of settlement. Many courts may disallow specific performance when a case has reached litigation and either party has incurred litigation expenses, because "it is too late to be truly ‘settled’ until all litigation is completed." Further and importantly, contractual rights generally cannot be specifically enforced against a non-signatory unless there are equitable reasons to do so. In other words, if a settlement agreement is signed and subsequently breached by one party, a lawsuit brought against that party’s insurer would not be able to proceed unless the insured person (who is not a party to the settlement agreement) is also liable for the breach of the agreement.
Remedies After Breach of a Settlement Agreement
The Court will take the breach of a settlement agreement very seriously. Judge James Peterson wrote in an intriguing 2017 decision, "It should go without saying that [settlement agreements] are entitled to at least as much, if not more, deference than ordinary contracts." The Court will very likely enforce the settlement agreement to the fullest extent of the law given the serious consequences for breach of a settlement agreement.
There are three primary remedies available to a non-breaching party: (1) enforcement of the agreement against the breaching party, (2) specific performance requiring the breaching party to live up to their obligations under the settlement agreement, or (3) damages resulting from the breach of the settlement. Most cases resolving the issue of whether a party breached a settlement agreement involve simple requests for enforcement or for specific performance. Importantly, the damages damages available to the non-breaching party are limited to those that were contemplated by the parties at the time that the settlement agreement was entered into and that are equitable in nature. As the Court stated in the recent 2019 case, Madison Hardscapes v. Skyrun Towns, "In general, damages are available for breach of settlement agreements to remedy [the non-breaching party’s] economic loss."
Potential Defenses to Alleged Breach
In some instances, the settlement is void. Almost any agreement would be void if its consideration is illegal or against public policy. See Zrake v. Univ. of Mich. Hospitals, nos. 328274356, 322146, 328258, 2008 WL 2447300, at *4 (Mich. Ct. Ct. App. June 19, 2008). But even in the absence of illegal consideration, there is nothing stopping a party from defending a breach of settlement agreement claim based upon such a void agreement. Indeed, in the context of repudiation of contracts (which definitionally is at the "very core" of the doctrine of anticipatory breach), repudiation of a void contract is an actual, complete, and constructive defense to a breach of contract claim. Williams v. Nw. Airlines, Inc., 53 F.3d 1063, 1071 n. 15 (6th Cir. 1995). In certain cases, the agreement is voidable. Such is the case when a party is adjudged legally incompetent to enter a valid contract, otherwise known as incapacity. To demonstrate incapacity, a party must show: (1) the individual was unable to appreciate the nature and consequences of the transaction; and (2) the other party knew that the individual was incompetent. Smith v. Henderson, no. 217100, 2001 WL 434133, at *5 (Mich. Ct. Ct. App. Apr. 26, 2001); see also Automation & Specialty Equip. Corp. v. Safety Sys. Int’l., Inc., 533 F.Supp. 1003, 1006 (E.D. Mich. 1981) (A person is incapacitated for contractual purposes if that person is insane or mentally incompetent.) And even if a party is not legally incompetent to enter into a valid agreement , the agreement may be voidable due to misrepresentation. See Green v. Smith, no. 239037, 2003 WL 21781238, at *2 (Mich. Ct. Ct. App. July 31, 2003). Further, a fraud claim will not be barred by the release as long as the fraud claim is not inconsistent with the release. See id. Thus, if a plaintiff has a fraud claim that is not inconsistent with the release, the plaintiff must show (1) a material representation, (2) knowledge that it was false when made, (3) intent that it should be acted upon by the plaintiff, (4) reliance upon its truth, and (5) damage. Id. (citing Rossberg v. Schubert, 299 S.W.2d 704, 707 (Mo. 1941)). If a settlement agreement is valid, the next possible defense is to show lack of intent. Generally, intent is determined based on the actions of the parties and the surrounding circumstances existing when the contract is made. Mohawk Steel Co. v. Smith Int’l (U.S.), Inc., 900 F.2d 1044, 1047 (6th Cir. 1990) (citing Caterpillar, Inc. v. Great N. Res., Ltd., 834 F.2d 902, 905 (6th Cir.1987)). The intent of the parties to be bound to a settlement agreement is an objective test based on the parties’ manifest behavior rather than on the subjective, unexpressed wish of one or both parties. Id. That is, an objective approach focuses on the reasonable meaning of a party’s words and acts as manifesting motive and intention rather than on the secret unexpressed purpose of the parties. Id.
Post-Breach Considerations
If you have the misfortune of suffering from a breach of a settlement agreement, please see the below advice. To be clear, the below advice is general in nature and may not provide any specific help in your situation. However, it should allow you to understand what you need to consider and thinking about as you move forward.
- Review the agreement closely. Many times, I’m surprised by how little time people take to understand what they are signing. Do not make that same mistake with your settlement agreements. Really read them and talk to your legal counsel about your concerns. Even if you do not want to "rock the boat" with the other party, remember that these agreements are about your future securities. That future is important – don’t spend the rest of your life wishing you had asked the right question(s).
- As always, try to talk it out with the other person involved. This is true with any breach of contract action. While many times people want to simply run to court and file a lawsuit, that is very rarely the best way to solve a problem. Again, this isn’t easy, but getting on the phone with the other person as soon as possible and trying to hash something out can save you legal fees and trouble down the road.
- After notifying the other side of the contract breach, you should meet with your legal counsel to go over your options moving forward. While the law does not require you to do anything after a breach of contract, it is important to note that there are many paths forward depending on the severity of the breach, the type of damages you suffered, and what you want out of the agreement. A good attorney should be able to present at least three options, with all the pros and cons considered.
Avoiding Future Breaches
Moving forward, parties to settlement agreements should consider what can be done to avoid possible breaches in the future. By anticipating enforcement issues, and taking steps in advance to address them, parties can minimize the impact of a future breach on their financial or business interests.
When drafting settlement agreements, or revising existing ones, parties should insist on clear language detailing the parameters of the settlement. For instance, where performance is conditioned on something outside of a party’s control—e.g., a contingent action by a third party, or a real estate closing—parties may want to provide for a stipulated minimum delay after that contingent event has occurred. In other words, parties could agree that an event of non-performance would not occur unless a notice was given at least 30 days after the triggering event took place (with an exception for a notice of non-performance that is given with respect to some settled matter, for example). Such a provision might protect a party from being cited for non-breach if a deadline did not occur as scheduled, but 30 or more days passed nonetheless, and the non-breaching party took action to note damages. A contested event of non-performance is very different from a "no fault" situation where a party simply never had a chance to fulfill its obligations.
In addition to thinking about the particular language in the settlement agreement , parties are usually able to negotiate an enforcement mechanism that will serve their interests. For example, if the parties want to avoid future litigation altogether, a party might suggest including language requiring the parties to mediate before a motion—either for specific performance or for a finding of contempt—can be brought in court. Such a provision would still address the issue of a non-breaching party being short-changed by a breach, but it would also provide a way to resolve the problem outside of court.
Finally, parties need to communicate with each other to mutually enforce any incentives built into the settlement agreement. Even if a party could bring a contempt action, or could launch months of discovery into a breach, those proceedings are likely to be time-consuming for all parties involved. Parties should attempt to settle any potential breach quickly, perhaps with the same level of respect and goodwill they would employ in the negotiation of the settlement itself. This could mean giving a party extra time to perform, or working with other parties to mitigate the damages that may result from non-performance. Parties should ask themselves: could the issue be resolved by discussion alone, or would litigation really be necessary?