Reviewing a Settlement Agreement Checklist (Federal)

This checklist explains how to review a settlement agreement and covers topics such as preparatory steps, communicating with adversaries, settlement terms, ambiguity, confidentiality, relevant parties, breach provisions, releases, and final approval.

When reviewing a draft settlement, make sure the document reflects the parties’ agreements about the settlement terms and eliminates any ambiguity. The agreement should list the rights, claims, obligations, or interests that will be released in the settlement as well as any claims or obligations that are not part of the settlement. A careful examination of the agreement is imperative because settlement agreements not only resolve the current dispute, but could have business implications for years to come.

Preparatory Steps

Preparatory Steps

• ✔ Examine relevant documents. These include documents such as relevant communications between the parties, contracts relating to the dispute, and key internal material.
• ✔ Confer client’s ability to settle. Ensure the client has the ability to timely make any required payments and to provide/ perform any other consideration provided for in the agreement. You should also examine any relevant preexisting rights or obligations that may impact the agreement.
• ✔ List all covered parties. List all individuals and entities—both for the plaintiff and the defendant—that the agreement will cover.
• ✔ List all legal issues to be settled. List all claims you and your adversary may legally release via settlement. Verify the agreement covers these claims.

You should also examine the advice you are giving your client regarding the settlement to ensure that you have properly:

• ✔ Educated your client on the terms and effect of the proposed agreement
• ✔ Advised your client on whether the settlement proposal is a good deal

Your client may push for the settlement terms/payments to be structured in as tax efficient a manner as possible. Consider whether to consult with a tax expert on the consequences of the agreement.

Communicating with Other Side

Be crystal clear when communicating with other parties on the settlement, as ambiguity and silence can sometimes be viewed as acceptance of terms. For example:

• ✔ Avoid causal language in emails
• ✔ Respond to each provision in a proposed term sheet, lest a court conclude you accepted the terms you did not respond to
• ✔ Include language in all settlement communications that all correspondences are for negotiation purposes only and that a condition of an agreement on any term is the execution of a formal final settlement

Identify Relevant Parties

Make sure the agreement covers the proper parties to the dispute and identifies all parties with specificity. Parties may include:

• ✔ All parties to the lawsuit
• ✔ Affiliates
• ✔ Subsidiaries
• ✔ Parent or holding companies
• ✔ Exclusive licensees and non-exclusive licensees
• ✔ Franchisors and franchisees

Standard Terms

Standard terms should not be included in the agreement without being scrutinized. Care should be taken with terms such as:

• ✔ Confidentiality
• ✔ Governing law
• ✔ Enforceability
• ✔ Dispute resolution methods

Recitals

Make sure the recitals are accurate. Recitals appear at the start of the agreement and provide background of the settlement and underlying dispute, such as:

• ✔ The settlement’s date of execution
• ✔ The parties to the settlement
• ✔ A description of the plaintiff’s claims that are subject to the settlement
• ✔ A statement that the parties have voluntarily entered into the settlement to fully resolve the dispute

No Admission of Liability

Nearly all settlement agreements include a paragraph in which the parties represent that they agree to resolve the dispute without the defendant admitting liability in the underlying civil case. These statements generally include language stating the settlement:

• ✔ Was entered into solely for the purpose of allowing the parties to avoid further litigation
• ✔ Does not constitute an admission by either party of any wrongdoing, contractual obligation, or any duty whatsoever

Basic Settlement Terms

Make sure the settlement:

• ✔ Clearly states all the consideration being provided and any performance terms related to such consideration
• ✔ Addresses any issues relevant to the payment of any settlement proceeds, such as:
  • The amount
  • Timing
  • Potential tax consequences of settlement payments
  • Whether the recipient will be entitled to receive interest or late charges for any delinquent payments
• ✔ Clearly identifies if there is pending litigation or another proceeding that will be resolved as a result of the settlement and details the action to be taken by the parties with respect to such pending matter (such as dismissal)
• ✔ Addresses the parties’ respective obligations regarding attorney’s fees and costs incurred in entering into the settlement agreement
• ✔ Includes an integration clause stating that the agreement constitutes the parties’ entire agreement and supersedes all prior negotiations/other agreements
• ✔ States that agreement is legally binding on the parties and their successors, assignees, etc.
• ✔ States that the party representatives who sign the agreement are authorized to do so and bind the party
• ✔ Set forth where future cases must be filed, the law that must be applied, and the court that will have the authority to hear the case (consider whether the court should retain jurisdiction for purposes of enforcing the terms of the settlement agreement)
• ✔ Includes a non-disparagement provision that prohibits defamatory or disparaging comments against opposing parties and permits the disparaged party to seek redress for disparagement

Release

Settlement agreements generally contain a release to at minimum avoid a future dispute over the same claims at issue in the current dispute. When reviewing the release, make sure it:

• ✔ Unless otherwise agreed to, includes language providing for a general release that will cover all actual or potential claims, whether known and unknown, that the releasing parties may have had, may have, or may acquire in the future relating to the subject matter of the settlement
• ✔ States that the released claims will be dismissed with prejudice, if agreed upon
• ✔ Specifies that it is a mutual release, if agreed upon
• ✔ States explicitly which claims are not released if not a comprehensive release
• ✔ Makes the release binding on successors in interest and any relevant third parties

Unless the settlement agreement contains a valid choice-of-law provision, the effect of a release of state law claims is governed by the law of the forum state, while federal common law governs the effect of a release of federal claims.¹

Confidentiality Provision

One benefit to settling out of court is that the details are not part of the public record. Many settlement agreements incorporate a confidentiality clause that strictly prohibits the parties from disclosing certain details of the case. When reviewing the agreement:

• ✔ Evaluate whether public disclosure of settlement terms is likely to prompt copycat lawsuits
• ✔ Decide what terms, if any, should be confidential (for example, monetary terms)
• ✔ Be realistic about the practicality of very broad confidentiality provisions that prohibit the parties from even discussing the facts of the case and arguments advanced in the litigation
• ✔ Consider the need for providing specific language that dictates the parties’ response to public inquiries about the dispute and settlement
• ✔ Give the confidentiality provision teeth by explicitly stating the penalty for violation

Contemplate Potential Breach

If the agreement contemplates non-monetary obligations, make sure it addresses the steps the parties must take in the event of a breach:

• ✔ Includes a provision that any violation of the agreement will cause the non-breaching party irreparable harm and that the parties have the right to obtain injunctive relief to enforce the settlement
• ✔ Provides a notice and cure provision to avoid liability for an inadvertent breach
• ✔ If desired, includes an alternative dispute resolution clause to resolve future disputes about the settlement agreement
• ✔ If desired, includes a term awarding attorney’s fees and costs to the prevailing party if there is a dispute regarding performance or enforcement of the settlement agreement

Final Acceptance

Before giving final acceptance to the agreement, you will generally need sign-off from your client. If your client is a company, this may entail approval from some or all of the following:

• ✔ In-house counsel
• ✔ The company’s business unit
• ✔ The board of directors

If your client is hands-on, it will typically want to review the proposed agreement and offer feedback and edits.

In addition to your client, you generally will need sign-off from:

• ✔ Any insurance company that has been providing a defense and/or will be on the hook for settlement payments
• ✔ Any third-party indemnitor who will have obligations under the agreement

Checklist provided by James M. Wagstaffe, a renowned author, litigator, educator, and lecturer, and the premier industry authority on pretrial federal civil procedure. He is a partner and co-founder of Kerr & Wagstaffe LLP, where he heads the firm’s Federal Practice Group. See his full bio here: https://www.lexisnexis.com/en-us/practice-advisor-authors/profiles/james-wagstaffe.page.

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1. See Renwick v. Bennett (In re Bennett), 298 F.3 1059 (9th Cir. 2002).