G. Problematic, Unnecessary, and Incomprehensible Terms

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

G. Problematic, Unnecessary, and Incomprehensible Terms

Grafting old language into a new settlement agreement may be like putting an old engine into a brand new car — the fit is awkward at best and dangerous at worst.

Too many settlement agreements are littered with boilerplate.³¹⁹ Boilerplate terms in contracts, like cliches, often have just enough value to keep and often seem sufficiently innocuous to prevent critical examination. However, critical thinking is necessary even regarding standard boilerplate terms. Listed below are a few examples of common settlement terms that may be more problematic than their ubiquity suggests.

1. Representations and Warranties

Matters are sufficiently confused that if you were to ask any group of practitioners the significance of the phrase represents and warrants, the odds are many would be at a loss to provide an explanation, even an unconvincing one.³²⁰

Settlement agreements commonly contain sections titled "Representations and Warranties," which may be lengthy and elaborate.³²¹ Upon close examination, however, a representations and warranties section is unnecessary. As one leading treatise notes, "Perhaps the only representation required will be an assurance of authority to enter into the settlement."³²² Moreover, representations and warranties sections are unlikely to serve their intended purpose.

Much like recitals sections, representation and warranties sections contain statements of fact external to the settlement agreement; however, these two sections serve fundamentally different purposes. Statements of fact in recitals are not intended to give rise to any legal claims, but to provide context for a court that might be called upon to interpret the agreement. By contrast, statements of fact in representation and warranties sections are intended to give rise to or defeat causes of action—especially tort causes of action based on fraud and misrepresentation. In the category of giving rise to causes of action, drafters might include representations and warranties that a defendant has sufficient financial condition to make the required payments and to have authority to assume the obligations in the settlement agreement.

In the category of attempts defeat legal claims are representations by parties that they have read and understand the settlement agreement, are not induced to agree under duress or coercion, and have received all statutorily required notices. In essence, drafters who include representations and warranties sections often gather disparate topics in one place to express them as statements of fact that they hope will defeat tort causes of action to escape from the settlement agreement.

The better practice is to address each of the various risks in its own separate section.³²³ Rather than indirectly attempting to defeat challenges to the settlement agreement by incorporating guarantees of particular facts, the settlement agreement can directly address risks of further litigation with provisions for indemnification, prevailing party attorney's fees and costs, and clear statements of obligations under the settlement agreement.

Drafters of settlement agreements should remember that tort-based attempts to undermine terms of a settlement agreement are rarely successful. As one court noted, "When fraud induces the execution of a release, the release is voidable even though it contains a statement that no representations induced its making and that no promises not expressed therein were made, and the parties signing the release read it and knew its contents."³²⁴ What makes these types of challenges difficult to establish is the confidentiality provisions that attach to mediations and negotiations. For example, the California Supreme Court has interpreted its mediation confidentiality statute so broadly that claims of malpractice cannot be proven against mediators and attorneys in connection with mediated settlements³²⁵ Thus, the invocation of mediation confidentiality may be the best way to defeat fraud in the inducement and tort claims.

Moreover, courts take a dim view of duress and coercion claims surrounding mediated and negotiated agreements, and some provisions under representations and warranties make as much sense as the idea of being able to pick one's self up by the boot straps. Take for example, the representation that each party has "read and understood" the entire agreement. As a matter of logic and experience, parties can and do sign papers without reading or understanding any of them. The author has never come across a published case in which any kind of contract was saved from invalidity based on a statement in the written agreement that the parties had read and understood the contract.

In short, representations and warranties sections tend to be a hodgepodge of topics thrown together in hopes of preventing a party with buyer's remorse from trying to assert tort claims to defeat the contract. In the interest of clarity, attorneys should omit representations and warranties sections in favor of express risk allocations as to particular risks in separate, single-subject sections.

2. Severability

The severability clause and the appendix—things you don't think about until you need surgery.

Then you regret having them.

The ubiquity of severability clauses suggests that they serve some vital function for a contract. However, they provide more potential for disaster than relief. In a well-drafted settlement agreement...