Settlement Letter

Settlement is a process that takes place when an employee decides to leave the organization or for any reason he/she is terminated by the organization. It is a formal process of settling unpaid salary and other benefits of the employee. It generally happens on an employee’s last working day. The objective of this process is to make the employee’s exit process as smooth as possible and to ensure that there are no issues even after an employee leaves the organization. It is an important process for both the HR and finance department. The settlement can be done through the service of a settlement letter.

A settlement letter records the terms of a compromise that has been agreed between the parties to a dispute. It is a useful tool to conclude a dispute, set clear obligations for everyone involved and reduce the risk of future disputes and litigation arising between the parties.

Litigation often involves a significant investment of time and money. Finding a workable commercial compromise is therefore often in everyone’s interest. A settlement letter can’t can be entered into at any stage of the litigation process on any terms which all parties agree to. A settlement agreement can be formed orally, but it is best practice for any resolution to be properly documented for the sake of clarity in case you need to rely on it later.

Because of the binding nature of a settlement agreement or settlement letter (it is a contract), it is important to carefully consider its contents to ensure that it accurately records your side of the bargain.

When to consider a settlement letter

Parties are encouraged by the Courts to consider settlement and a settlement letter at every stage of legal proceedings whether it be pre or post a claim being issued. The danger of waiting too long before entering into settlement discussions is that the parties may become more entrenched in their positions and, as legal costs rise on both sides, it becomes more difficult to do a deal.

How does the negotiation impact your claim

Negotiations between parties should be marked “without prejudice” to the parties’ positions in a claim and therefore cannot be put before the court as evidence of admissions against the interest of the party that made them. Genuine attempts to settle disputes between parties have this protection to encourage the parties to attempt to resolve their differences without fear of prejudicing their position in a court claim.

Even where communications are not marked as being “without prejudice”, the communication may still have the same protection where there is a genuine attempt to settlement the matter. However, settlement communications should still be stated as being made on a “without prejudice” basis in order to avoid another dispute arising.

Settlement communications will usually be marked in one of the following ways:-

  • Without prejudice – settlement discussions/ communications will not affect the parties’ open position and the court will not see the communication.
  • Without prejudice save as to costs – settlement discussions/ communications will not affect the parties’ open position and the communication will only be seen by the Court once Judgment has been handed down, i.e., after the Court has decided who has won the case, and in the context of any award of costs that the Court may make.

Without prejudice save as to costs and subject to contract – settlement discussions/ communications will not affect the parties’ open position; the communication will only be seen by the Court once Judgment has been handed down and is subject to a settlement agreement being entered into by the parties.

All the preceding aspects will be considered before a perusal and review of the settlement letter.

What should a settlement letter contain?

A settlement letter is a contract and so should include all of the ingredients of a contract in order to be binding on the parties. These are: –

  1. Offer
  2. Acceptance
  3. Consideration (something of value needs to have been exchanged; this does not need to be money)
  4. Intention to create legal relations

Provisions of a settlement letter

Settlement agreements in form of a settlement letter are bespoke and fact sensitive but the usual provisions which most settlement letters should cover are as follows: –

  • Parties – consider what parties are intended to be a part of the settlement and ensure that they are properly identified. Where this is a group of companies, the definition of parties should confirm the correct entity or entities which are bound by the settlement letter. You should consider whether a party should (and is able to) settle claims on behalf of its parent company and subsidiaries too, or whether they should be added as a party to the settlement agreement. If the matter involves a company in liquidation / administration, you should consider whether the liquidator / administrator should also be a party to the settlement agreement or settlement letter.
  • Obligations – consider what each party is agreeing to do e.g., pay a certain sum of money by a certain date or do a certain thing. Where a party is required to do something, consider whether this is within the power of the relevant party to fulfil.  
  • The scope of the settlement – it is vital to carefully consider and set out exactly what is being settled and ensure this is clearly described in the settlement agreement. A range of possible options include settling:
  • some or all of the claims set out in the claim form (a narrow definition) or correspondence;
  • all claims arising out of the facts underlying the dispute;
  • all claims arising out of a particular contract (whether or not relating to the current dispute);
  • all claims arising out of the entire relationship between the parties (a much wider ranging definition);
  • What claims are specifically excluded from the settlement; or
  • Future unknown claims which parties may not yet be aware of.
  • Indemnities – consider whether you want comfort from the other party in respect a potential future loss which may arise (perhaps from another connected claim). If being asked to give an indemnity, consider the scope of the comfort you are giving.  
  • Confidentiality – consider whether you would want the other party to be able to disclose the terms or even the existence of the settlement letter to others. You may also wish to consider non-disparagement clauses (where both parties agree not to make negative comments about each other).
  • Costs – consider how the parties’ costs incurred in respect of the dispute will be dealt with. You should also consider how future costs of enforcing the terms of the settlement letter will be treated.
  • Alternative dispute resolution provisions – consider how a breach of the settlement letter or enforcement of terms will be dealt with. The settlement agreement may specify whether parties are to engage in arbitration or mediation prior to court action.
  • Governing law and jurisdiction – the settlement letter should specify which country’s laws will apply to any dispute arising from the agreement and in which jurisdiction a dispute will be decided. This is particularly important where there is any cross-border issue.  
  • Entire agreement clauses and variations – consider whether it is intended that the settlement agreement records the entire agreement between the parties or if there are specific matters which need to be carved out of the agreement and how any variation of the agreement will be dealt with (e.g. by agreement in writing). This avoids ambiguity of the terms of the settlement letter.

The purpose of a settlement letter

If you are contemplating a way to settle your dispute without having to go to court, drafting a settlement letter may be one of your legal options. With this type of settlement letter, one party must complete an action or pay a certain amount in exchange for the other party’s promise to stop legal proceedings. Here are some situations in which a settlement letter can apply: 

  • Any property damage claim; 
  • Employment disputes; 
  • Marital issues and; 
  • Medical malpractice. 

With any settlement letter, there first needs to be negotiations in order to agree on certain provisions. A mediator is useful to agree on a factual account of the situation if necessary. In some corporate settlements, one party may only agree to settle if no wrongdoing or liability must be admitted. Some settlement agreements may also have conditions, such as how long a party has to fulfill his or her contractual obligations. Therefore, you must agree on whether all current and future claims are resolved by this agreement or whether it fulfills only a single claim or lawsuit.

Preparing for a successful settlement letter

Understanding the potential terms and researching them will get you ahead in the settlement letter process. You can start by looking at any terms that would assist the case in the mediation process. For example, an insured claim being resolved by settlement agreement usually involves payment in exchange for release of legal liability. For these cases, a minimum of preparation requires consideration of whether payment will be made as a lump sum or in a series of payments. In addition, the scope of the claims being asserted and any releases must be considered. 

Moreover, drafting a successful settlement letter can be challenging, and seeking consultation from a settlement attorney may be useful. Generally, you need to identify the parties that will be signing the agreement and determine if they have the necessary legal authority to do so. It is important to include a factual description of the dispute that has been agreed on by both parties. This should include all relevant details to ensure there are no disputes regarding the facts. The agreement should also describe the scope of claims it covers. This could include all future claims and current claims or it can be limited only to specific claims.

Having clear language about the conditions of the settlement, particularly in a conditional agreement in which the action in question requires effort and time. Furthermore, including whether the settlement agreement is confidential can be useful. If litigation is ongoing, the agreement must admit a clause dismissing the specific pending lawsuit. The settlement letter should have a space for each party’s signature and the date. Once both parties have come to an agreement on a draft settlement, you can opt to submit it to the court for approval.

How are settlement letters enforced? 

The courts have the authority to enforce settlement letters  between the parties in the case. A settlement agreement once signed by the relevant parties it is a legally binding contract if all the terms are deemed valid. But it is important to note that courts do not have inherent power to enforce settlement letters after a case has been dismissed. 

The court may adopt the agreement and incorporate it into a judgment or decree; however, the court cannot add substantive terms to the agreement. The court must accept the terms on which the parties have settled their dispute. The court’s obligation is to construe and enforce contracts as made, not to make them for the parties. 

The enforceability is always a question for the court and it depends what is favored under the law in the state. The agreement is interpreted under the rules of contract construction. The parties may request an evidentiary hearing if there is a dispute issue of fact. 

A court order or judgement is easier to enforce than a contract. There are different types of releases for different situations. If you need a general release or a specialized release that can be used for auto accidents, property damage, and personal injuries. In general it is helpful to include a statement of what the party is giving up a claim receiving in return, meaning there must be adequate consideration.