Settlement agreements may be the nail that saves you

Settlement agreements come in all forms, some of which are called by different names. A number of related concepts have been the subject of prior articles, including “accord and satisfaction” and “final lien waivers.” Hand-shake agreements are not wise in construction contracting. Whenever a dispute or potential dispute is resolved, there should be a writing that confirms the agreement as a settlement.

Consideration

An ancient legal concept is that a contract (agreement) must be supported by consideration, meaning something of value. With a new contract, the terms will state the contract value or its equivalent, such as cost-plus or time and materials. The contract will also contain mutual promises, such as the contractor will build and the owner will pay.

Settlement agreements are different. The anticipation is not to start a relationship, but to end it. Typically, the goal is to have one party pay money and the other party go away.

Such a simple agreement should be enough to satisfy the “consideration.”

The release

The settlement agreement should be designed so that it truly ends the dispute. This can be tricky.

Serious care must be given to describing what is being settled. If you miss something, it is possible that the agreement will be found to be defective or that it failed to cover all disputes.

If the matter is already in court, the agreement should be followed by dismissal of the lawsuit “with prejudice.” That means that the lawsuit has been totally and completely settled by the parties and it cannot be refiled in the future.

Notice that I said the “lawsuit” has been settled. There still may be areas of dispute that were not part of the lawsuit that could be filed in a separate action in court at a future time. To know whether that is possible, you would have to understand the court’s rules of civil procedure, a subject that is beyond this article.

Mutuality

“The Contractor, and its officers and directors, heirs and assigns, forever release and discharge the Owner against all claims, disputes, accounts and all other matters concerning the project.”

This clause is standard fare and appears often. Look also for another concept: Mutuality.

For example, you have a claim against a general contractor and you reach a settlement. The general wants to be certain that his payment to you resolves the matter. What about you? The general should release you, too.

A simple addition to this common release clause can take care of a potential future problem. Add the words “each other” to the “forever release and discharge” language. For a bonded job, consider having the bonding company also agree to your settlement. That way, the bond obligation will be released as well.

Making the settlement agreement a mutual release can be overlooked with change orders where there is no litigation. Most owners have a standard form that says, essentially, that by the payment of the change, you waive any further rights regarding the subject of the change. But where is the mutuality? Is the owner bound to anything by this language?

For work already completed, you may want to insert an additional sentence into the change order to the effect that the owner accepts the work as performed. Now you have mutuality.

Payment issues

Where the settlement agreement provides that the other side will make payments to you in installments, you need to pay particular care to how that is phrased.

For example, if the matter is in court, do not allow the case to be dismissed until the last payment is made. Also, be sure to insert a clause entitling you to attorney fees and costs if you have to go to court to enforce the settlement agreement.

Maybe you have heard of a “confession of judgment.” A “confession” clause provides that any late or insufficient payment on the settlement entitles you to go to court and request that a judgment be entered immediately as the other side has admitted that it has no defense. He has, so to speak, “confessed” that your demand in court is valid. You should consider adopting such a clause. Check first to make sure that a confession of judgment is enforceable in your state.

This article focused on some important considerations in resolving a dispute. There can be other concerns, depending on how complicated the dispute and the manner in which the settlement will be carried out.

Cover the basics by remembering the following points and reviewing them every time you settle a dispute:

a. Put your agreement to settle in writing.

b. Describe the dispute in the agreement.

c. Insure mutuality.

d. Consider whether other parties need to be tied into the settlement.

e. Make certain that any payment terms are enforceable.

f. Have a lawyer who knows about these things review the agreement before you sign. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.