Grounds For Invalidating a Settlement Agreement

There are certain grounds under which a compromise and settlement agreement can be invalidated. If a settlement agreement fails to establish certain elements like offer, acceptance and consideration, it can be invalidated.  Similarly, a settlement agreement can be invalidated due to:

  • Fraud;
  • Nondisclosure as fraud;
  • Duress;
  • Illegality;
  • Mistake;
  • Undue influence.

A compromise induced by fraud can be invalidated.  In approving a proposed settlement agreement, a court must determine that the agreement is not the outcome of fraud[i]. Fraud exists if all of the following elements are present:

  • An untrue representation of fact knowingly by a party;
  • Making such representation recklessly;
  • Making untrue representation to deceive the other party and to induce him/her to act upon the same.

Similarly, an unintentional nondisclosure without an intention to deceive will not constitute fraud.  However, a compromise can be invalidated for fraud if one party deliberately conceals facts with the intent to induce the action of other party.  The duty of disclosure is more comprehensive when there is a fiduciary relationship between the parties to the compromise.  At the same time, it cannot be presumed that the elements of fraud exist only because of the existence of a fiduciary relationship.

Likewise, a person who makes a compromise as a result of duress invalidates the same.  Duress is defined as the imposition, oppression, undue influence or the taking advantage of the stress of another whereby one is deprived of the exercise of his/her free will. The party asserting duress must prove the allegation by clear and convincing evidence.  However, a compromise agreement will not be set aside on the ground of duress if the person alleging it can get relief from the courts[ii].  Coercion, fraud or duress must be proved by clear and convincing evidence[iii]. Moreover, the burden of proving duress, by clear and convincing evidence, is on the person asserting it[iv].

A compromise and settlement can be defective or invalid on the ground of illegality. It was observed in Union Collection Co. v. Buckman, 150 Cal. 159 (Cal. 1907) that a contract executed in consideration of a previous illegal one or in compromise of differences growing out of it is an illegal one.  A compromise can be considered as invalid on the ground of illegality if such compromise is based upon an antecedent claim that is illegal.  Compromise of a criminal offense can be illegal.  However, the compromise of a civil claim for injuries that arise out of a criminal act is not illegal.  Moreover, a person having a civil remedy for injuries arising from a criminal act can compromise his/her civil claim[v].

A compromise and settlement is not defective if the parties were ignorant or mistaken as to the full extent of their rights.  However, a mistake invalidates a compromise settlement if it is based upon the unconscious ignorance of the party.  A mistake must be material in order to invalidating a compromise and settlement.  In addition to this, it is also considered whether a mistake was mutual or unilateral and whether it was a mistake of fact or of law.

Another factor that invalidates a settlement agreement is undue influence.  Undue influence consists of the following elements:

  • A person subject to influence;
  • An opportunity to exert undue influence;
  • A disposition to exert undue influence;
  • A result indicating undue influence.

[i] 7-Eleven Owners for Fair Franchising v. Southland Corp., 85 Cal. App. 4th 1135 (Cal. App. 1st Dist. 2000), see also Ficalora v. Lockheed California Co., 751 F.2d 995 (9th Cir. Cal. 1985)

[ii] Moore v. Cooper, 1996 U.S. Dist. LEXIS 5387 (N.D. Ill. Apr. 18, 1996)

[iii] In re Marriage of Smith, 164 Ill. App. 3d 1011 (Ill. App. Ct. 1st Dist. 1987)

[iv] Flynn v. Flynn, 232 Ill. App. 3d 394 (Ill. App. Ct. 1st Dist. 1992)

[v] Schirm v. Wieman, 103 Md. 541 (Md. 1906)

Inside Grounds For Invalidating a Settlement Agreement