What's Your Authority? and Other Issues in Oral Settlement Agreements
| Publication year | 2000 |
| Pages | 26 |
69 J. Kan. Bar Assn. May, 26 (2000). WHAT'S YOUR AUTHORITY? AND OTHER ISSUES IN ORAL SETTLEMENT AGREEMENTS
Vol. 69, May, 2000
Copyright (c) 2000 Kansas Bar Association; Daniel E. Blegen
Introduction
In most lawsuits, the parties are happy to orally agree to the major settlement issues and leave the cleanup to the lawyers. It is during this cleanup, however, that many issues can arise to endanger the agreed-upon settlement. From the issue of enforceability of an oral settlement agreement to the authority of the attorneys to settle the case in the first place, many problems can arise and derail what appeared to be a done deal.
This article examines the issues surrounding an oral settlement agreement in two parts. Section I examines the general issues surrounding oral settlement agreements, from consideration to the statute of frauds. Section II examines the issue of the attorney's authority to settle and how it can affect settlement negotiations.
*27 I. Enforceability of Oral Settlement Agreements
The settlement of disputes without proceeding to the time-consuming and expensive process of trial is beneficial for both the parties and the courts. In general, "[t]he law favors the compromise and settlement of disputes." [FN1] For this reason, "when parties in good faith enter into an agreement based on good consideration, neither is permitted afterward to deny it." [FN2]
In determining whether a settlement agreement is valid and enforceable, the parties and the court must look to contract law. [FN3] Therefore, to be enforceable an oral settlement agreement must contain all of the essential elements of a contract. [FN4] The essential elements of a contract are "the agreement of two competent parties about a legal and competent subject matter, upon a mutual legal consideration, with a mutuality of obligation." [FN5]
Applying the general rules of contract law can be difficult when confronted with the complicating factors that arise in the course of litigation. While parties to most contracts are trying to accomplish a common goal, parties to settlement agreements are often engulfed in bitter personal animosity arising from the disagreement that brought them to the point of litigation in the first place. The attorneys involved in settlement agreements are often career litigators who do not regularly confront the myriad of issues that arise in contract law. These complicating factors lead to particular types of contract issues that arise more frequently with oral settlement agreements than they would in a more traditional contract setting. The remainder of this section will address some of the more common and troublesome issues that can arise.
A. Consideration
As stated above, one of the essential elements of a contract, and by extension an oral settlement agreement, is consideration. [FN6] Consideration generally consists of money, goods or services. In many oral settlement agreements, money or property is to be exchanged. Usually, however, the only thing one party exchanges is the abandonment of a claim that has not been adjudged to be valid.
This raises the issue of what constitutes sufficient consideration. It is the general rule that the compromise of a claim, even if the validity of the claim is disputed, is sufficient consideration. [FN7] Issues arise, however, if the amount paid is substantially different than the actual amount claimed to be due or the validity of the cause of action is questionable.
"Courts should not be concerned with the exactness of the accounting between the parties in considering the validity of the compromise." [FN8] This statement by the Supreme Court of Kansas in International Motor Rebuilding Co. v. United Motor Exchange, Inc., [FN9] summarizes the general approach of the courts when addressing consideration in settlement agreements. International Motor involved a suit over the settlement of accounts between two businesses following negotiations over the disputed accounts. [FN10] The plaintiff filed suit to enforce the settlement and a note executed pursuant to the settlement. [FN11] The defendant objected to the settlement, in part because the defendant alleged that the actual amount due was less than the amount agreed upon in negotiating the settlement amount. [FN12] The defendant argued that this disparity in amounts fatally damaged the consideration required for a valid contract. [FN13]
The Supreme Court held that a "compromise may be valid although the amount agreed to be paid is much more or much less than the amount actually due . . . . [[i]nadequacy of consideration does not invalidate a compromise if fairly made." [FN14] This holding was based upon the principle that the forbearance of suit, providing the suit is in good faith, is sufficient consideration for a settlement agreement.
While compromises and settlements, like other contracts, must be supported by a consideration, it is enough to support the agreement that there was *28 a doubtful question, and, where the parties to a compromise act in good faith and one agrees to pay and the other agrees to accept a certain sum in satisfaction of his liability upon a claim, there is sufficient consideration for the compromise. [FN15] In Wingerd v. Foley, [FN16] the Supreme Court of Kansas addressed this question in a suit for "seduction of [the] plaintiff's wife." [FN17] The plaintiff was attempting to enforce a settlement agreement in the amount of $3,000, and the defendant argued, in part, that there was not sufficient consideration for the settlement contract. The defendant's argument was that "invasion of a husband's conjugal rights [was] not actionable in Kansas," therefore the abandonment of that claim was not sufficient consideration. [FN18]
In addition to holding that the allegations in that case were actionable, the Supreme Court held that the settlement contract "contains admissions which tacitly conceded that plaintiff had a colorable cause of action, at least, against defendant which would serve as sufficient consideration for the contract." [FN19] The Supreme Court went on to hold that "[w]here one in good faith asserts a claim which is not obviously invalid, worthless or frivolous, and which might be thought to be reasonably doubtful, the forbearance to prosecute such a claim will furnish a sufficient consideration for a promise of settlement and compromise of such claim." [FN20]
Therefore, the Supreme Court established that the admission by a defendant that the claim had some merit will almost conclusively establish sufficient consideration. "It does not take a legal cinch to form a sufficient consideration for a settlement; a fairly debatable point is quite enough." [FN21]
B. Mistake
As in all contracts, one or both parties to an oral settlement agreement may discover that they were mistaken as to the facts and circumstances surrounding the settled lawsuit. Oral settlement agreements, for example, often involve estimating damages that are either in dispute or not fully known at the time of settlement. It is the uncertain nature of this value in many monetary settlements that can often lead to problems in enforcing the settlement agreement.
For example, two parties to a lawsuit over a commercial contract may agree that money is owed, but disagree as to the amount. This is the issue that arose in International Motor Rebuilding Co. v. United Motor Exchange, Inc. [FN22] This case involved a settlement of an account between the plaintiff, a motor repair company, and the defendant, an automobile repair company, that sold motors back and forth for repair and eventual installation in refurbished automobiles. [FN23] The plaintiff approached the defendant prior to litigation about settling the accounts between the companies and the defendant agreed to pay a certain amount up front and sign a note for the remainder. [FN24] When the defendant failed to pay back the note, the plaintiff filed suit on the note. [FN25] The defendant argued that the amounts the plaintiff initially provided and alleged to be due were not accurate, and that this should cause the settlement to be set aside because of a mutual mistake. [FN26]
The Supreme Court of Kansas held that the effect of a mistake depends upon whether it was a mutual mistake or a unilateral mistake. [FN27] Generally, a mutual mistake as to the facts upon which the parties based their settlement can allow a party to have a settlement set aside. [FN28] "However, the fact that one of the parties made an error in calculating the items of his claim, which is accepted by both parties, is not enough to invalidate the compromise." [FN29] Therefore, even if both parties are ultimately mistaken as to the actual value of the lawsuit to one party, if the error is the result of the unilateral mistake of the damaged party it will not invalidate the settlement. The court went on to state that the "mistake must be such that the parties are unintentionally caused to do something they did not intend to do." [FN30]
The holding of the court is best summarized in a passage from AMERICAN JURISPRUDENCE quoted by the court:
Generally speaking, if there was a mutual understanding as to the payment and acceptance of something in full settlement of the controversy, without fraud or unfair conduct on either side, the compromise cannot be avoided for mistake of fact although subsequent events may show that either party made a bad bargain, because of a wrong estimate of the damages which would accrue. If a mistake is made as to some fact which, though connected with the transaction, is merely incidental, *29 and not a part of the very subject matter or essential to any of its terms, or if the complaining party fails to show that his conduct was in...
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