Settlement agreements are a type of contract and are therefore governed by contract law[i]. Since, settlement agreements are in the nature of contracts, they are generally governed by principles of contract law[ii].
A settlement agreement is a contract provided that it meets minimal contractual requirements[iii]. The basic elements of a contract are offer, acceptance, and consideration. When these elements have been established, courts conclude that there has been a meeting of the minds and an enforceable contract exists[iv]. Also, whether a contract has been formed depends upon the parties’ intent.
Therefore, a settlement agreement is valid and binding when there is a definite offer and acceptance thereof, thereby resulting in a meeting of the minds on the contract of settlement[v].
An offer of compromise consists of either an act or a promise, but it must be made known to the purported offeree, in clear and unmistakable terms, that the act or promise is being offered as an offer of compromise[vi].
Before an enforceable contract can arise, there must be a mutual meeting of the minds[vii]. That is, the parties must have agreed to the same terms. There is no meeting of the minds where the acceptance of an offer is conditional.
Where the contractual language is clear, courts may not indulge in construction or modification and the express terms of the settlement agreement control[viii]. If there is no ambiguity in the language of a settlement, the determination of the intent of the parties is governed by the contract language alone[ix].
Further, in some instances, the authority of certain parties to make a binding compromise may depend upon judicial approval. For example, the parties to a class action in a federal district court are not permitted to compromise the action without the approval of the court.
A Mary Carter agreement is any settlement arrangement between the plaintiff and some of the defendants in a case by which the settling defendants agree to pay the plaintiff a certain amount of money and to participate in the trial against the nonsettling defendants, and the plaintiff agrees to release the settling defendants from liability; if the judgment against the nonsettling defendant is large enough, the settlement amount is repaid out of the judgment[x].
A compromise, like any other contractual agreement, must be supported by consideration[xi]. When a compromise and settlement is entered into and accepted, it constitutes a contract and, in the absence of fraud, it is binding on both parties. The release of a good faith claim is sufficient consideration when offered in a compromise and settlement agreement[xii].
Further, the requirements as to whether an agreement of compromise or settlement must be in writing vary according to jurisdiction. However, if the subject matter of a compromise is within the statute of frauds, the compromise must be in writing[xiii].
[i] Swift-Eckrich, Inc. v. Advantage Sys., 55 F. Supp. 2d 1280
[ii] Clark v. Mitchell, 937 F. Supp. 110 (D.N.H. 1996)
[iii] Dickerson v. Williams, 956 P.2d 458 (Alaska 1998)
[iv] McCormick v. McCormick (In re Estate of McMormick), 926 P.2d 360
[v] Shell v. Amalgamated Cotton Garment, 871 F. Supp. 1173 (D. Minn. 1994)
[vi] Curran v. Bray Wood Heel Co., 116 Vt. 21 (Vt. 1949)
[vii] Clark v. Mitchell, 937 F. Supp. 110 (D.N.H. 1996)
[viii] Security Ins. Co. v. Puig, 728 So. 2d 292 (Fla. Dist. Ct. App. 3d Dist. 1999)
[ix] M.H. Detrick Co. v. Century Indem. Co., 299 Ill. App. 3d 620 (Ill. App. Ct. 1st Dist. 1998)
[x] First Gen. Realty Corp. v. Maryland Cas. Co., 981 S.W.2d 495, 499 (Tex. App. Austin 1998)
[xi] Sadighi v. Daghighfekr, 66 F. Supp. 2d 752 (D.S.C. 1999)
[xii] LBM, Inc. v. Rushmore State Bank, 1996 SD 12 (S.D. 1996)
[xiii] Suitts v. First Sec. Bank, N.A., 125 Idaho 27 (Idaho Ct. App. 1993)