Structuring a Business Settlement: Payments, Releases, Non-Disparagement, Confidentiality

Payment terms and what secures them

A lump sum paid at signing needs little structure: the release becomes effective on receipt of funds, and the dismissal is filed the same day. Most business settlements are not that simple. Payment over time, a mix of cash and returned goods, or a payment tied to a future event all require terms for default.

• Dates and method. Fixed calendar dates, wire instructions in the agreement, and a statement of when payment is deemed made.
• Notice and cure. A short written notice and a few days to cure, so that a bank delay does not trigger default remedies, but a real default does.
• Acceleration. On uncured default, the entire unpaid balance becomes due. Without this clause the paying party can miss installments one at a time and force separate collection efforts.
• An agreed judgment in escrow. The paying party signs an agreed judgment for the full settlement amount, or for a higher figure reflecting the original claim, which is held by the receiving party's counsel and filed only on uncured default. This is the strongest security a Texas settlement can carry, because it converts a breach into a judgment without proving the case again. The receiving party still needs the court to render it, so the agreement should say the parties consent to its entry on default and the paying party waives notice; even so, the Texas rule that an agreed judgment requires consent at rendition means the agreement should also provide for enforcement as a contract if consent is withdrawn.
• Guaranties and liens. A personal guaranty from the owner of a thinly capitalized company, or a security interest in specific assets, gives the receiving party something to collect from. Whether a guaranty is worth having depends on the guarantor's assets, which is a question to ask before agreeing to installments at all.
• Conditional release. If the release takes effect on signing, a default leaves a contract claim for the balance. If the release takes effect only on final payment, a default revives the original claims. The second is stronger for the receiving party and is often resisted by the paying party, which wants finality on signing. Decide it deliberately. The consequences of each choice are in the other side breached the settlement agreement.

Releases: who, whom, and from what

The release is the thing the paying party is buying. Its scope deserves more attention than it usually gets.

Who is released. The parties, and usually their owners, officers, employees, affiliates, insurers, attorneys, successors and assigns. Each addition expands the release; a party releasing a company should think about whether it also means to release the individual who caused the problem.

What is released. A general release covers all claims, known or unknown, arising from the beginning of time to the date of signing, whether or not related to the dispute. A limited release covers only claims arising from the dispute described in the agreement. Businesses that still deal with each other often want a limited release so that unrelated open invoices and warranty obligations survive. Whichever is chosen, say expressly whether unknown claims are included, and carve out the obligations created by the settlement agreement itself, which otherwise could be read as released the moment they are made.

Mutuality. A release that runs one way leaves the releasing party exposed to a later counterclaim. Most business settlements release both ways, with the paying party's release of the receiving party as broad as the one it receives.

Covenant not to sue and indemnity. A promise not to bring the released claims, with an obligation to pay the other side's fees if the promise is broken, adds a remedy that a bare release lacks.

Ending the lawsuit

If a case is pending, the agreement must say how it ends. The usual choice is an agreed motion to dismiss with prejudice, filed after payment or after signing, with each side bearing its own costs. Dismissal with prejudice bars refiling the dismissed claims. Dismissal without prejudice, sometimes used until final payment is made, does not. Tex. Civ. Prac. & Rem. Code § 154.071(b) lets the court incorporate a mediated settlement's terms into its decree; parties who want confidentiality should not ask for that, because a judgment is a public court record. Parties who want the court to retain power to enforce the agreement by motion should ask for an order that says so, since once the dismissal is final and the court's power over the case has run, the remedy is a new suit on the contract. Whatever is agreed must also satisfy Rule 11: in writing, signed and filed, or stated in open court. The requirements are set out in Rule 11 agreements in Texas.

Confidentiality and its exceptions

Confidentiality is a contract term, and absent one either party may disclose the deal. A workable clause covers the amount and terms, states whether the existence of the settlement may be disclosed, and lists exceptions: accountants, lawyers, lenders, insurers, auditors, regulators, spouses, and disclosure required by law, subpoena or court order, with notice to the other side where possible. A clause with no exceptions is breached the first time the CFO shows the auditor the agreement. The clause should also say what the parties may say if asked, often a single agreed sentence such as "the matter has been resolved," and it should give a remedy. Actual damages from a leaked number are nearly impossible to prove, so a liquidated damages amount, set at a reasonable estimate of the harm, is common. The limits on sealing filed documents under Rule 76a are the reason the agreement itself should not be filed. The interplay with mediation confidentiality is covered in whether mediation and settlement discussions are confidential.

Non-disparagement

A non-disparagement clause prohibits statements that disparage the other party, its products, services, owners or employees. It should define disparagement, state whether it covers truthful statements, cover the channels that matter (reviews, social media, industry contacts, customers), bind the entities' officers and require each party to instruct its people, and carve out truthful testimony compelled by law and statements to regulators. Like confidentiality, it needs a remedy, usually liquidated damages and injunctive relief, with an acknowledgment that breach would cause harm that money alone does not repair. A one-way clause binding only the smaller party is common in employment settlements and uncommon between businesses, which generally insist on mutuality.

Attorney's fees and costs

Texas follows the American rule, so each side bears its own fees unless a contract or statute shifts them. The settlement should say so expressly for the dispute being resolved, and should separately provide that a party who has to enforce the agreement recovers its reasonable fees and costs from the breaching party. Without the second clause, enforcing an installment settlement can cost more than the installment.

Tax characterization

How a payment is described in the agreement can affect how it is taxed for both sides: a payment for lost profits is treated differently from a payment for the return of capital, a payment for damage to property or a payment for interest. The agreement can allocate the payment among claims and can state whether a Form 1099 will be issued. Those choices have consequences, and the parties should have their accountants review the allocation before signing. This article does not give tax advice; the point is that the allocation is a term to be negotiated, not an afterthought.

Authority to sign

An agreement signed by someone without authority invites a later argument that the entity is not bound. Each entity should sign through an officer or manager whose authority is clear, and the agreement should include a representation that the signer is authorized and that any required approvals, such as a board resolution, a lender consent or a vote of members under an operating agreement, have been obtained. Where a lawyer signs for a client, the lawyer's authority should be confirmed in writing beforehand. Where a guaranty is given, the guarantor signs individually, not only as an officer.

Example

Suppose a Dallas commercial printer settles a dispute with a marketing agency over $240,000 in unpaid work and the agency's $150,000 counterclaim for late deliveries. The deal is $185,000 to the printer, paid $60,000 at signing and $125,000 over ten months. The agreement provides: wire dates and instructions; five business days to cure after written notice; acceleration on uncured default; an agreed judgment for $230,000 held in escrow by the printer's counsel; a personal guaranty from the agency's owner; mutual releases limited to the claims in the lawsuit, with unknown related claims included and the settlement obligations carved out; dismissal with prejudice filed on receipt of the first payment, with an order retaining jurisdiction to enforce; confidentiality of the amount with exceptions for advisers, lenders and legal compulsion and an agreed public statement; mutual non-disparagement with $10,000 liquidated damages per breach; each side to bear its own fees for the lawsuit and the breaching party to pay fees for enforcement; an allocation of the payment to the unpaid invoices; and authority representations. The agency pays for seven months and stops. The printer gives notice, waits five days, and files the agreed judgment.

Before you sign

Read the agreement for the default scenario, not the happy one. For each clause ask what happens if the other side does not do what it says. Make sure the material terms agreed at mediation appear in the document exactly, so that no one can later argue the written agreement departed from the deal, a problem described in backing out of a mediated settlement agreement. And have the people who will perform the agreement, the controller who will wire the money and the manager who will instruct employees about non-disparagement, read the clauses that apply to them.

Tina Wysk negotiates and drafts settlement agreements for businesses in Dallas state and federal court cases and arbitrations. See her arbitration and mediation practice page.