In the construction industry, many projects end with unresolved claims. The outstanding matters may be a result of an accumulation of changes encountered during the job for which a final price, or even acknowledgment that there is an extra, remains to be negotiated.
There may also be disputes over delays, liquidated damages, the quality of work performed or overruns in labor caused by the general contractor’s lack of coordination or by an acceleration of performance. In many cases, a global agreement between the parties concludes these matters. Your intent may be to have all issues concluded so that neither party will have to revisit them.
Too often, however, an electrical contractor will be driven by a desire to bring an end to the contract and settle all claims. In this situation, the “agreement” to settle may be rendered verbally with a handshake or by a written change order that may not address all of the agreements achieved. There are instances, for example, where the parties have finalized their agreement with trade-offs, yet the change order only shows a payment (or credit) for one major item.
Whenever there is uncertainty or lack of clarity in a settlement, the potential for future disputes exists. Consider a circumstance where the owner sues its general contractor, who then brings you into the lawsuit on a question of contract installation that you thought was a dead issue because of your prior settlement with the general contractor.
10 essential elements of a settlement agreement
1 The compromise
A “settlement,” as that word is used here, is a compromise with the intended purpose of closing out the contract. As such, it ends the original contract and essentially substitutes the new agreement.
2 Whereas clauses
If the settlement involves clearly defined issues, it may be worthwhile to list those issues in the introduction to the agreement (the so-called “whereas” clauses). Make certain you list all disputes that are being settled, so the other party cannot later assert that a claim was not resolved and remains open.
3 Statement of intent
The agreement should include an introductory statement of intent, such as: “It is the intention of the parties to resolve all issues between them.” This kind of language is an aid to interpretation if a question arises about the scope of the agreement.
4 Deny liability
Where there are disputes for which neither party wants to accept liability, it is common to recite the nature of the disputes and then add that the other party contests that dispute. Typically, “settlements” are not admissible as evidence, but there are exceptions. The agreement should not be worded in such a way that it can ever be used against you.
5 “All and every”
For global settlements, you will want to add language that “all claims, disputes, matters in controversy, whether known or unknown, etc.,” are included and settled. Language is imperfect. You may think you have covered all of your agreements in the stipulation of the controversy, but having redundancy in this regard is not a bad thing, especially in the event that a claim later arises that was not contemplated at the time of the settlement.
6 Contract of tort
There are instances where a claim against you can arise out of contract and/or negligence. You want to make certain that, regardless of what legal theory is involved—contract or tort or equity—the disputes have been fully resolved and the contract is closed out. Language normally added is simply “whether in contract or in tort.”
7 The release
The exact wording used for a release can vary. You may see words such as “release,” “discharge” or “quitclaim,” which all have the same import. The variations are historical; although, some states have additional terms of art, which should be used.
B. Mutuality and inclusion
If both parties want the dispute to be fully concluded, the agreement should state that the parties release each other—a mutual release. Whether your company is organized as an Inc., an LLC, a partnership or another entity, you should include in the umbrella of the release all of your associated companies and individuals. A common list within the release language will include officers, directors, employees, affiliated companies, agents and even heirs and successors in interest. Inclusion of these others should take care of the potential that someone in your company made a promise of which you are not aware.
8 Payment terms
If payment is not exchanged at signing, it is standard practice to state in the settlement agreement that it does not become final (take effect) until payment is made.
For settlement payments to be received over time, you should consider attaching a signed promissory note from the other party. With a promissory note, you can have the settlement and release take effect immediately.
There may be instances where something is intentionally excluded from the global settlement. For example, an owner may want to retain warranty rights. If you cannot avoid including some exceptions, make it clear what they are and how long they will remain viable.
10 Exceptions for completion work
There will be times when it seems appealing to offer to perform some completion work, or even added work, as part of the settlement. Think hard about such an approach. Relations between the parties may already be strained, and prolonging interaction may not be advisable.
Every settlement is unique, and every one is the same. Use these 10 steps as an outline—a starting point—and consult with your attorney before signing.