It often happens that a dispute is settled before formal legal proceedings are adjudicated by the court or through arbitration. There can be many reasons why the parties wish to settle, and commercial considerations such as the cost of litigation and the time and effort to be expended by the business can play a major role in determining whether a settlement makes more commercial sense than litigating.

Whatever the reason for settling, it is always advisable for the terms of the settlement to be reduced to writing and contained in a written deed of settlement, to minimise risks and avoid disputes and uncertainty later on.

Some of the most important clauses we recommend to include in the settlement agreement are the following:

  1. The Parties

The settlement agreement should include all relevant parties and the parties should be accurately identified. Where legal entities and specifically groups of companies are involved, take care to ensure that the correct entities are party to the agreement and that the signatories have the necessary authority to conclude the agreement.

  1. The Settlement

It sounds obvious, but the parties should be very clear about what is being settled.

Are you merely settling an existing dispute or claim or do you want the settlement to extend to any unknown and/or any potential future claims between the parties? Depending on what is being settled and the extent of the settlement, careful wording may need to be included in the settlement agreement to ensure there is no uncertainty about the scope of the settlement and/or its effects and to ensure that any existing claim is accurately described.

  1. Payment

Settlements are often reached on the basis that one party will pay the other a sum of money. If this is the case all aspects relating to payment must be detailed in the settlement agreement, including the settlement amount, whether it includes or excludes VAT and/or interest, the payment terms (i.e. by whom; to whom and when payment will be made), accurate bank account and payment reference details, as well as the consequences of late payment.

Where more than one party is liable for payment, it is important to clearly state the extent of each party’s liability and whether they are jointly and severally liable.

Parties should also consider whether there will be any tax implications as a result of the payment and whether it is necessary to consult a tax specialist to advise on the inclusion of provisions dealing with tax in the agreement.

  1. The Legal Proceedings

There are a number of additional considerations if the parties intend settling existing legal proceedings. First, the parties should be clear that the legal proceedings are being settled fully and finally (if that is indeed the case) and the dispute and/or claim(s) subject to the proceedings must be accurately described.

Second, the parties might want to have the agreement made an order of court. It is worth noting that a settlement agreement can only be made an order of court where the legal proceedings are already before the court. The benefit of having the settlement agreement made an order of court is that, if a party breaches the agreement, then the other party can proceed to execute against the defaulting party immediately on the basis that a court order is final and binding.

Third, the parties should consider who will be responsible for the legal costs that have been incurred to date in respect of the legal proceedings. The parties may want to include this in the settlement payment, share the costs equally or have one party pay the costs on an agreed scale.

Finally, the parties should ensure that the pending legal proceedings are properly dealt with. This may involve the withdrawal of the matter on the basis of settlement or agreeing to a stay of the proceedings.

  1. Confidentiality

Unless you include a confidentiality provision regarding either the existence of the settlement, its terms, or both, the parties to the settlement agreement will not be bound by any duty of confidentiality. If there are any potential adverse consequences that could arise if anyone else has knowledge of the settlement and its terms, then a confidentiality clause should be included in the agreement.

  1. Breach

In circumstances where it is not possible to have the agreement made an order of court, then a separate provision dealing with a breach by either party of its obligations in terms of the agreement becomes vitally important.  The breach clause should set out the process to be followed by the innocent party as well as the consequences of non-compliance and can, if appropriate, provide for the cancellation of the agreement, a liquidated damages claim and interest to apply in respect of late payments.

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