You know how it is. A construction project, a major disagreement, a claim. Court proceedings may have been started. But you've been commercial and continued to talk over the fence with the company you're in dispute with, and then, "success" … you reach an agreement to settle the dispute.

What happens next? You need to get it down in writing and sign it, in the form of a "settlement agreement".

What's a settlement agreement and what does it say?

In a nutshell, a settlement agreement is a written contract setting out the terms on which you've resolved or reached agreement to settle a dispute.

The terms of the settlement agreement will depend on the commercial agreement that you have reached with the other party; it will be tailored to what you've agreed to settle the dispute.

Your settlement agreement, should be clear and careful about what you are settling and the terms of settlement. Failure to do so may result in you not ending up with the resolution you hoped for, and you could end up in further disputes.

Points to bear in mind for your settlement agreement

While the terms of the settlement agreement will differ depending on the commercial deal reached, there are some common but essential points to remember when drafting and negotiating:

  • The parties – make sure the right organisations are party to the agreement to settle the dispute, otherwise you may end up finding that a line is not properly or completely drawn under the matter. Bear in mind that the parties to the agreement are not necessarily the same as the parties under (or involved with) the original contract – for example a company may have changed name or been taken over. If there was a guarantor who signed the original contract or a parent company guarantee, consider whether they should be a party to the settlement agreement, depending on what their obligations were and what the position now is.
  • The dispute and what is settled – explain the scope of the claim and what exactly is being settled. Generally, you'll find the party bringing the claim will want the description of what is settled to be very narrow in case other issues arise out of the same original construction works, whereas the party defending the claim will want to draft it as widely as possible to close off potential avenues for further claims. Regardless, the description of the dispute settled should reflect the terms of the offer that the parties agreed, so it is vital that when you make the offer to settle you are clear about what you are proposing, what is included and what is not.
  • Payment – a settlement will usually include a sum of money being paid from one party to the other. Consider the terms of payment, for example, when it is payable, how it is paid, and whether interest is paid if the payment is late (and if so at what rate).
  • Court proceedings – if court proceedings have already been issued, state if those proceedings are stayed or dismissed. If they are stayed, this means that the court proceedings are essentially paused - if the other party breaches the settlement agreement, the proceedings can then resume, so you won't need to start a new claim or pay another court fee. On the other hand, if the proceedings are dismissed, then if the other party breaches the settlement agreement, you will have to start a new claim in respect of that breach. Generally speaking, the party bringing the claim will want a stay, whereas the party defending it will want a dismissal. Finally, if relevant, make sure to be clear which party is responsible for notifying the Court and paying the Court fee.
  • At fault or not? – consider also if fault is being admitted or not. Usually, the party defending the claim will want to make it clear that there is no admission of liability simply because a settlement has been agreed.

Above all, continue to be commercial – you reached an agreement, you don't now want to fall out again over dotting the Is and crossing the Ts, or spend an inordinate amount of time (and potentially money) negotiating the wording of your agreement when commercially you've already both agreed you want to resolve the dispute.

Be savvy and plan ahead

Of course, in order to get to the position of negotiating and signing a settlement agreement, you first have to reach agreement with the other party on how to resolve the dispute. What you agree will often be commercially-focused to the main points of the deal - but you should address as many points as need to be covered in the settlement agreement when agreeing the basis of your deal, if possible. This should help things go smoothly when it comes to reflecting that agreement in writing.

Finally, make sure that all communications in agreeing your deal are made on a "without prejudice and subject to contract" basis. You should try to mark all communications in this way to avoid a dispute about what was and was not agreed. The devil is often in the detail so speak to your lawyer before making an offer of settlement, so that you can stress test that it really achieves the outcome that you want.