A compromise and settlement is defined as an amicable settlement of bonafide differences or uncertainties. Construction and enforceability of a valid compromise or settlement agreement is governed by the legal principles applicable to contracts[i]. A settlement agreement is a contract and is governed by the traditional requirements for contracts[ii]. In other words, a valid compromise and settlement must have the same elements as a contract. Generally, a valid compromise and settlement is considered as final, conclusive, and binding upon the parties. However, a compromise and settlement can be put aside if there is evidence of bad faith, genuine mutual mistake undue advantage or fraud[iii].
A compromise agreement operates as a merger and bars all preexisting claims and causes of action. Merger is defined as the substitution of rights and duties under judgment or decree for those under property settlement agreement[iv]. A compromise agreement which results in a dismissal with prejudice of the claims asserted constitutes a final judgment on the merits which bars any new actions[v]. In other words, a judgment entered by the court on consent of the parties after settlement or by stipulation of the parties is as valid and binding as a judgment between the parties and bars a later action on the same claim or cause of action as the initial suit[vi].
The compromise agreement is substituted for the antecedent claim or right, and the rights and liabilities of the parties are measured and limited by the terms of the agreement. It was observed in Pacheco v. Delgardo, 46 Ariz. 401 (Ariz. 1935) that a minor can repudiate any compromise or settlement of any right of action s/he has before his/her majority, unless it is made by a authorized guardian. Similarly, if a former guardian voluntarily comes into court for the purpose of obtaining a settlement of his/her late guardianship, this is fully authorized by law even without a summons or other process of the court[vii].
All preliminary discussions are merged into the settlement agreement. If a court finds that an agreement is enforceable and valid, it cannot look behind it or beyond it in order to determine damages. If the language of the agreement shows any intent to make it part of the divorce decree and the agreement is incorporated in the decree, then the provisions of the agreement can be enforced as an order of the court[viii]. However, a property settlement agreement incorporated into a divorce decree cannot be enforced as a court order, unless the agreement is merged with the divorce decree[ix]. If a settlement agreement or any of its provisions are incorporated in the decree and the decree orders the performance of such agreement, then the agreement or provisions so incorporated are merged in the decree and can be enforced only as the order of the court[x].
However, a merger clause in a settlement agreement will not bar the assertion of claims of common law fraud allegedly inducing a party to enter into the agreement. Likewise, when a party enters an agreement settling a prior action, such party will not waive any current claims that such settlement agreement is breached. If more than one remedy or theory of liability initially is available for the antecedent claim, and if one remedy or theory is pursued and results in a compromise and settlement, a subsequent action to obtain relief for the same claim is barred even if it is based upon a different theory. However, bar of an election of remedies will not apply to the assertion of distinct causes of action against different persons arising out of independent transactions with such parties[xi].
[i] United States v. Fairway Capital Corp., 433 F. Supp. 2d 226 (D.R.I. 2006)
[ii] Am. Nat’l Prop. & Cas. Co. v. Nersesian, 2004 WI App 215 (Wis. Ct. App. 2004)
[iii] Holland v. Virginia Lee Co., 188 F.R.D. 241 (W.D. Va. 1999)
[iv] Johnston v. Johnston, 297 Md. 48 (Md. 1983)
[v] Webb v. First Nat’l Bank, 219 Mont. 160 (Mont. 1985)
[vi] Willerton v. Bassham by Welfare Div., 111 Nev. 10 (Nev. 1995)
[vii] M’Leod v. Mason, 5 Port. 223 (Ala. 1837)
[viii] Sonder v. Sonder, 378 Pa. Super. 474 (Pa. Super. Ct. 1988)
[ix] Garcia v. Garcia, 19 Phila. 502 (Pa. C.P. 1989)
[x] Shogren v. Superior Court of San Francisco, 93 Cal. App. 2d 356 (Cal. App. 1949)
[xi] Lomas & Nettleton Co. v. Huckabee, 558 S.W.2d 863 (Tex. 1977)