A. Context

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

A. Context

Without context, how do you know whether that frying pan is a family heirloom, ordinary cooking tool, or murder weapon?

1. Title and Introductory Paragraph

Courts begin with the presumption that a contract's meaning "must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it."⁴ For this reason, written settlement agreements should begin by providing the context within which the agreement is made. Without proper context, the reader comes to a settlement agreement much like a moviegoer who arrives ten minutes late. Most likely, the late moviegoer will eventually figure out what's going on, but why take the chance when a good beginning provides the proper perspective for all that follows?

Introductions can be traps for the unwary. Unfortunately, the brevity of introductions can lull drafters into a false sense that the start of a settlement agreement may be casually written. At a minimum, the settlement agreement should identify who is bound by the agreement and the legal claims to be resolved. A better approach includes recitals to provide the background of the legal conflict and the grounds for the parties' agreement.

Begin with the title.

Even though "War and Peace" might be appropriate, the title "Settlement Agreement" will raise fewer eyebrows.

Every settlement must begin somewhere, and a title is a natural start. The simple title, "Settlement Agreement," works splendidly and needs no improvement. When appropriate, adding the descriptor "confidential" doesn't hurt and may impress the constraint upon the parties from the outset. Although many drafters add "and release" to the title, a release is an integral part of the value exchanged in the agreement and is best not singled out or separated from the rest of the agreement.

Correctly name the parties to the settlement agreement. After years of litigation, the attorneys who drafted the operative complaint and answer may be different from the attorneys who attend the mediation. This means that the mediation participants may not know (or remember) the actual named parties to the litigation. Defense counsel, in particular, bear special responsibility for ensuring that a release does not unintentionally omit a client's named officers, directors, or related named defendant. Defense counsel must also ensure that no named plaintiffs are unintentionally omitted from the settlement agreement. It can be easy to forget spouses who assert loss of consortium claims or family members who might have wrongful death causes of action.⁵ Family members regularly have their own claims due to their relationship to the events underlying the case, such as when family members were passengers in the same car involved in an accident.

Plaintiff's counsel must research whether the applicable jurisdiction still adheres to the common-law rule that release of one person releases any other nonsettling tortfeasors who might be jointly liable. The modern trend is that the release of one tortfeasor does not discharge the liability of other tortfeasors.⁶ The difference between the common law and the modern rule can determine against whom the plaintiff may continue to assert claims after a partial settlement. Consequently, attorneys for defendant and plaintiffs must carefully read the operative complaint before writing any settlement agreement.

By identifying exactly who will be bound by the agreement, attorneys can determine whether any part of the contemplated terms must be performed by a person or entity not a party to the agreement. The only persons who have legal obligations under a settlement agreement are the parties who sign the agreement. As one court noted, it is "a general principle so fundamental that it rarely receives mention in case law or commentary, namely, that only parties to contracts are liable for their breach. '[T]he obligation of contracts is limited to the parties making them, and, ordinarily, only those who are parties to contracts are liable for their breach. Parties to a contract cannot thereby impose any liability on one who, under its terms, is a stranger to the contract.'"⁷ Any settlement dependent on the performance or forbearance of any person who is not a party to the agreement is likely to encounter enforceability problems.

Attorneys should also determine whether there are any third parties whose consent is necessary for the validity of the agreement. For example, insurers usually have sole prerogative to settle or dispute claims on behalf of defendants in auto accident cases. In other insurance contexts, insurers may need the consent of the insured person or party to settle claims. As to plaintiffs, defense counsel must ensure that the plaintiffs to the agreement retain their authority to settle and have not assigned their claims to anyone else.

Attorneys should also consider the practical consequences that may flow from plaintiffs' continued assertion of claims against nonsettling defendants, insurers, or others. Depending on the terms, the settlement may be deemed a void, Mary-Carter type of agreement that some courts invalidate as impermissible secret collusion against nonsettling defendants. Alternatively, a court might uphold the validity of the agreement but order that the terms of the agreement be disclosed to the trier of fact hearing the claims against nonsettling defendants. Defense counsel should determine whether their clients intend to seek contribution, indemnity, or subrogation from any other defendant, insurer, or person. If so, defense counsel must ensure that the settlement agreement is structured in a way that does not extinguish their clients' claims against nonsettling defendants or any other person.

In drafting the settlement agreement, attorneys should be sure to state the full legal name of every party to the agreement. "Obvious as this is, failing to do so is one of the most common problems with contracts."⁸One attorney reports, "Well over half of the contracts I review have the name of one of the parties wrong. I don't mean spelled wrong, although that is a basic starting point, but legally wrong."⁹ This basic error can have significant adverse consequences. Perhaps most notoriously, an attorney for Andy Warhol's estate sold Warhol's Interview Magazine in a promissory note made payable to "Andy Warhol Enterprises Inc." rather than to Warhol's estate. However, the attorney had dissolved the company one week before the buyer gave the promissory note with the consequence that the $7 million payment due was uncollectable because it was owed to a nonexistent company. Legal action inevitably followed, but the courts were unsympathetic to the claim that the name of the payee was a mere typo.¹⁰ Consequently, particular care should be given to naming business entities.

Mistaken naming of parties is a frequent mistake because the task is not as easy as it may first appear. A settlement agreement with a subsidiary may or may not include the parent company, depending on the jurisdiction in which the settlement is reached. The Seventh Circuit has held that a parent company was subject to suit for pension benefits by a plaintiff who had settled with the subsidiaries when the settlement agreement had not mentioned the parent company.¹¹ Conversely, William and Teresa Grover found themselves personally liable under a settlement agreement that listed them "as individuals" even though the action involved only their business.¹² Defense attorneys in particular should heed the apocryphal story about a case in which a corporation's liability to make payments was assumed by officers and directors, even though they were sued only in their representative capacities, because "the young defense attorney drafting the settlement late at night wrote, 'Defendants shall pay . . .' which included the individuals."¹³

The best practice is to check with the Secretary of State where the business entity is founded to obtain the exact name of the entity and ensure that it remains legally able to execute an agreement. If the entity has undergone a reorganization, be sure to include all prior names, and identify the limitation for any parties who might have a limited role under the settlement agreement by adding such language as "with respect only to the duties described in paragraph 5."¹⁴

Identify the legal claims to be resolved. A settlement agreement might constitute a complete resolution of a case, only partial settlement of a case, or a global resolution that includes other cases and unfiled claims. Attorneys should think through carefully and specify exactly the scope of the settlement agreement. The introduction in PrizeCo v. Cathatrin provides the reader with the information that the settlement agreement resolves completely one case:

CONFIDENTIAL SETTLEMENT AGREEMENT

This confidential settlement agreement is made between PrizeCo, LLC (PrizeCo), a New York limited liability corporation, and Cathatrin, Inc. (Cathatrin), a New York corporation, to resolve claims related to PrizeCo, LLC v. Cathatrin, Inc., Supreme Court of the State of New York, County of New York, Index Number 734068/2016 (the action).

When to announce the date of the agreement. The date the agreement becomes effective is generally when the last party signs it, or the court approves the settlement. When the date is supplied along with signatures of the parties at the end of the agreement, drafters need not redundantly state the date in the introduction. Some drafters nonetheless like to add the date to the outset of the document to allow for quick reference, e.g., "the June 23, 2016 settlement agreement."¹⁵ If the agreement is signed at the end of a successful mediation, and all dates of the signatures match the date in the introduction, this is not problematic. However, if any of the signatures follows on a later date, the initial announcement of the date causes a mismatch of the date at the beginning of the agreement.

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