Dallas Bar Association

Making it Stick: Six Tips for a Better Settlement Agreement

by Angela Zambrano and Erin Eckols

After the jubilation of reaching a settlement has subsided, the parties face the reality of drafting an effective and enforceable settlement agreement. There are many traps for the unwary when drafting a settlement agreement. Here are six issues to consider when drafting your next settlement agreement.

1.         Disclaim Reliance Like You Really Mean It.

After a settlement agreement is signed, the possibility always exists that one party will have buyer’s remorse and seek to rescind the agreement claiming fraudulent inducement. In an effort to foreclose such claims, settlement agreements should include an express disclaimer of reliance on extra-contractual representations.

In the Schlumberger line of cases, the Texas Supreme Court has repeatedly held that disclaimers of reliance must use “clear and unequivocal language.” See,e.g.,Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997). In the Court’s most recent decision in this line of cases—Italian Cowboy Partners, Ltd. v. Prudential Ins. Co., 341 S.W.3d 323 (Tex. 2011)—it found that a merger clause disclaiming the existence of extra-contractual representations and promises was not a clear and unequivocal disclaimer of reliance, in contrast to the language in Schlumberger, because the term “rely” was absent.

Accordingly, a settlement agreement should not only include a disclaimer of reliance but also specifically contain the term “rely” in some form or the settling parties could risk exposure to later fraud claims. Including representations and warranties that the parties were, or had the opportunity to be, represented by counsel, and that the negotiations leading to the settlement agreement were arm’s length, can also bolster the effectiveness of a reliance disclaimer.

2.         Releases: Broader is Not Necessarily Better.

A release of liability is the heart of a settlement agreement. Although the impulse when settling a dispute may be to obtain the broadest general release conceivable, the relationship of the parties may require another approach. If the parties have a business relationship beyond the resolved disputes, then the release must be tailored in consideration of that relationship. If it is not, the settling parties may unwittingly release more claims than they intend.

3.         A Releasing Party Can Still Cause Trouble.

Even a broad release does not guarantee peace. Although a party may have released all of his claims, including a “covenant not to sue” in a settlement agreement provides an additional protection should the party seek to initiate litigation that is contrary to the terms of the release. The covenant can be drafted broadly to prevent a party from assisting others—directly or indirectly—in bringing litigation, arbitrations, or other proceedings. If drafted properly, a covenant not to sue can be an effective tool to prevent a party from inciting others to target your client.

4.         Make Sure You Know What You’re Buying and What You Aren’t.

The decision regarding what a settlement agreement will not address should be as strategic as the decision regarding what it will address. It is important for a settling party to clearly understand what issues are being resolved and what, if any, disputes are being left for another day. Taking a “wait and see” approach with a settlement agreement that is silent on a particular issue is risky.

5.         Would You Want to Arbitrate Under That Provision?

While including an arbitration provision in a settlement agreement is relatively standard, many “standard” clauses are incomplete or unclear. An arbitration provision can be drafted broadly to include all disputes related to or arising from the settlement agreement, with carve-outs for injunctive relief as needed. It should be tailored to the needs of the settling parties, including terms addressing the selection of the administrating entity, the selection and composition of the panel, the location of the proceeding, and the allocation of fees/expenses.

6.         Mum’s the Word.

A confidentiality provision covering both the negotiations and terms of a settlement agreement can be an effective tool in preventing other parties from learning of, and being encouraged to assert, similar claims against your client. Consider including limited carve-outs for the parties’ lawyers, financial/tax advisors, and spouses. As an extra protection, parties can agree that confidentiality was a material inducement for the settlement agreement, the breach of which will result in irreparable harm, such that one or both parties may seek injunctive relief without the necessity of posting a bond.

Drafting a settlement agreement that is “just right” can be a task for Goldilocks. Remember to release the right amount in precisely the right way with all the bells and whistles. And to the extent disputes may arise, be sure that procedures are in place for a streamlined arbitration process. Happy drafting.

Angela Zambrano is a partner and Erin Eckols is an associate in Weil, Gotshal & Manges LLP’s complex commercial litigation practice. They can be reached at angela.zambrano@weil.com and erin.eckols@weil.com, respectively.

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