C. Principle 3: Parties Must Agree on All Material Terms for the Agreement to Become Valid

LibraryCrafting Effective Settlement Agreements: A Guidebook for Attorneys and Mediators (ABA) (2018 Ed.)

C. Principle 3: Parties Must Agree on All Material Terms for the Agreement to Become Valid

[R]esolution by agreement, as distinct from trial, is appropriate only when the parties have actually reached agreement.

—Judge Niemeyer150

Quite often mediation participants equate initial agreement on payment amount with a settlement agreement. This view makes sense because negotiations tend to focus on the amount of money to be paid or property to be transferred as a single term in isolation. A typical situation might involve a plaintiff's initial demand for $1,450,000, which is met by defendant's initial counteroffer of $450,000, and results in an agreement to settle for $750,000 after twelve rounds of competing offers.151 During the rounds of back-and-forth offers, the legal merits subside into the background, and other critically important terms of a settlement agreement—such as choice of law, enforcement mechanism, and scope of release—probably go unaddressed.152

Attorneys and mediators should remember that a settlement agreement requires all parties to actually agree on all material terms. Although deceptively simple and uncontroversial, the failure to heed this principle explains a vast body of case law that grapples with issues of when parties have or do not have a binding settlement agreement. Parties seeking to escape from a settlement agreement use this argument as a frequent ground for suing to avoid complying with the terms of the agreement.153 "The question of whether the facts support mutual consent to all material terms as necessary to form an enforceable contract is the area of potential attack that has been most successful in defeating efforts to enforce mediation agreements"154 These new lawsuits arise when parties hastily conclude with just a term sheet that may or may not be adequate to be binding. Parties leave a mediation elated that the case has settled and wrongly assume that the lawyers will easily take care of a few remaining trivialities. Instances when parties simply assume that a preliminary agreement, memorandum of understanding, or term sheet seems "good enough" to work can lead to tremendous headaches. You can save everyone from unnecessary grief by sticking to the rule that there is no agreement until there is agreement on all material terms.

1. What Feels Like Agreement Is Usually Only the Midpoint of the Process of Finalizing a Settlement

[T]here is no one "bottom line." — Roger Fisher & Wayne Davis155

During a tough distributive negotiation, many people just want to get to the bottom line, which is usually seen as the number of dollars a defendant will pay the plaintiff to settle the claim. So viewed, an agreement on a number is all the agreement that is necessary, and anything else is a mere formality. This narrow view gets parties, attorneys, and mediators into trouble because even in the simplest of agreements there is no single bottom line.

For example, agreement to pay $10,000 to settle a straightforward slip-and-fall case does not yet answer any of the following issues, disagreement on any of which may prevent an agreement from ever being reached:

Payment. Will the money be paid at once or in installments? If in installments, how many will be made, and will interest accrue on the outstanding balance? When will payment be made? To whom will payment be made? To the attorney in trust for the client, or to the attorney and the client, or to the attorney in trust and some of the lienholders?
Release. Will the plaintiff release all known claims? Only some of the claims? Known and unknown claims? Reserve the right to pursue claims against other defendants? Will the release suffice to allow the settling defendant to pursue contribution or indemnity from someone else?
Dismissal. Will plaintiff dismiss the case immediately upon signing, after receiving payment, or only after all conditions are fulfilled? Will the court be asked to reserve jurisdiction to enforce the agreement? Will any part of the case, perhaps a cross-claim or claim against nonsettling parties or insurers, remain pending?
Authority. Will the attorneys sign on behalf of the parties or will the parties themselves sign? Is there a subrogation or assignment that requires the signature of a non-named party in the lawsuit? Does the insurer have sole authority to enter into or reject the agreement?

These are but a few of the issues that arise in even the simplest of agreements to pay money to settle a legal claim.

Because there are many issues that must be answered for even the most uncomplicated settlement agreement, attorneys and mediators should understand that the moment of initial agreement represents only the midpoint in the process of settling a case. The work of agreeing on the remaining issues and memorializing the set of terms acceptable to everyone may be substantial. Advance preparation for this phase of work can decrease impatience with the process of crafting an agreement. Having a clear perspective on the importance of reaching agreement as to all material terms makes clear the importance of continuing to work directly toward a complete agreement in order to avoid slogging through the remaining issues in piecemeal fashion via e-mail or telephone over the weeks to come.

There is an additional benefit to moving away from the idea that an agreement has a single bottom line. Viewing an agreement as a constellation of negotiable terms creates space for finding additional sources of value to the parties. Constraining a party's position to a dollar amount forecloses an expanded focus on differing risk preferences, time horizons, and capabilities. In the event of a continuing business relationship, "knowing that a workable deal must address not only price, but also delivery and payment terms, and that it must set out a process for controlling quality and managing the inevitable disagreements that will arise, will make it more likely that when you are ready to reach a final agreement that you will have adequately discussed all the terms that will determine whether or not your negotiation really is a success."156

2. The Essential Elements of Settlement Agreements

There are only a few necessary ingredients for a valid settlement agreement; however, the lack of any of these ingredients precludes the formation of a binding agreement. Generally, all of the...

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