A compromise or settlement agreement is an agreement made by the parties for the settlement of a dispute or a claim by mutual agreement in order to avoid a lawsuit. Basically, it is an amicable settlement of bonafide differences or uncertainties. A compromise and settlement can be used for many types of disagreements including contract disputes, civil disputes, labor management negotiations, criminal cases, and divorce and custody problems.
Generally, a valid compromise and settlement is considered as final, conclusive, and binding upon the parties and upon those who knowingly accept its benefit. However, a compromise and settlement can be put aside if there is evidence of bad faith, genuine mutual mistake undue advantage or fraud[i].
Generally, construction and enforceability of a valid compromise or settlement agreement is governed by the legal principles applicable to contracts[ii]. A valid compromise and settlement must have the same elements as a contract. There must be an offer of compromise and an acceptance of that offer. An offer and acceptance of compromise and settlement must be made within a reasonable time.
Likewise, a valid compromise and settlement must be based on some consideration. Anything of value exchanged by the parties is sufficient to support a valid compromise and settlement. A valid compromise and settlement can be written or verbal. Writing is not mandatory if it is not specified by statute, court rule, or the terms by the parties. An oral agreement is enforceable as long as it is knowingly and voluntarily entered into by a person or that person authorizes an attorney to settle the dispute[iii].
However, if the agreement is written, then it must clearly state the intentions of the parties[iv]. Therefore, in order to determine the effects of a valid compromise and settlement, the primary object of a court is to effectuate the intention of the parties[v]. Anyhow, if there is no ambiguity in the language of a settlement, the intention of parties in executing a compromise is discerned only from the settlement language.
It is to be noted that both parties to the litigation bears equal risk if they make free and bilateral decisions for settlement. Moreover, if the parties fail to properly estimate the loss or gain from entering a settlement agreement, it will not provide relief under the statute[vi]. Further, if the final judgment stems from a settlement agreement between the parties, a supervening change in the law will not alone suffice as a ground for invalidating a settlement agreement[vii].
When a co defendant secretly agrees with the plaintiff that, if s/he will defend himself/herself in court, then his/her own maximum liability will be proportionately lessened by increasing the other co defendants’ liability. This agreement is known as Mary Carter agreement. Mary Carter agreements are generally considered as valid agreements. However, Mary Carter agreements promote litigation rather than settling it as they grant settling defendant veto power over any proposed settlement between the plaintiff and any remaining defendant. Therefore, Mary Carter agreements are viewed as void if they violate public policy[viii].
A valid compromise and settlement operates as a merger of the antecedent claim or right of action. In other words, a compromise agreement operates as a merger and bars all preexisting claims and causes of action and is as binding and effective as a final judgment itself[ix]. Generally, a compromise of a civil claim based upon a certain act will not bar a criminal prosecution for the same act. Disputes involving family matters are frequently the subject of compromise and settlement. It is to be noted that family matters resolved through compromise and settlement tend to be more amicable than those resolved through litigation.
[i] Holland v. Virginia Lee Co., 188 F.R.D. 241 (W.D. Va. 1999)
[ii] United States v. Fairway Capital Corp., 433 F. Supp. 2d 226 (D.R.I. 2006), see also Novamedix, Ltd. v. NDM Acquisition Corp., 166 F.3d 1177 (Fed. Cir. 1999)
[iii] Brown v. City of Aurora, 955 F. Supp. 1023 (N.D. Ill. 1997)
[iv] Lang v. Meske, 2004 PA Super 166 (Pa. Super. Ct. 2004)
[v] Constitution Bank v. Kalinowski, 38 F. Supp. 2d 384 (E.D. Pa. 1999)
[vi] Holland v. Virginia Lee Co., 188 F.R.D. 241 (W.D. Va. 1999)
[vii] Conway v. Takoma Park Volunteer Fire Dep’t, Inc., 2001 U.S. Dist. LEXIS 2490 (D. Md. Feb. 26, 2001)
[viii] Darden v. Kitz Corp., 997 S.W.2d 388 (Tex. App. Beaumont 1999)
[ix] Robinson v. First Sec. Bank, 224 Mont. 138 (Mont. 1986)