The Other Side Breached the Settlement Agreement. What Now?

Start with where the case is

The first question is procedural, and it decides everything else. A settlement can leave a lawsuit in one of three states.

• The case is still pending. The parties signed, filed the agreement under Rule 11, and were waiting for payment before dismissing. The court still has the case, and a motion to enforce the settlement, with notice and a hearing, is the direct route. Because the agreement is a contract, the court decides the motion on contract principles; if the facts are disputed, it may require pleadings and a summary judgment or a trial on the contract issue.
• The case was dismissed. Once a dismissal order becomes final and the court's power over the case has run, the court generally cannot enforce the settlement by motion unless the order expressly kept jurisdiction to do so or incorporated the agreement's terms. The remedy is a new lawsuit for breach of the settlement agreement.
• An agreed judgment was entered. The settlement terms became a judgment. A judgment is enforced like any other: abstract, execution, garnishment, turnover. No new finding of breach is needed.

Texas law supports the second route expressly. Tex. Civ. Prac. & Rem. Code § 154.071 provides that a written settlement agreement reached through alternative dispute resolution is enforceable in the same manner as any other written contract, and that the court may incorporate its terms into the final decree. The same contract treatment applies to a settlement reached without a mediator; the statute simply confirms it for mediated deals.

Suing on the settlement agreement

A breach of settlement claim is a breach of contract claim. You prove a valid agreement, your own performance, the other side's failure to perform, and damages. The agreement itself is the main exhibit, which is why how it was written matters more now than anything that happened in the original dispute.

Damages are ordinarily the unpaid amount plus whatever the agreement provides on default. A well-drafted installment settlement includes an acceleration clause so that one missed payment makes the whole balance due, a notice-and-cure period so that a late wire is not a lawsuit, and a provision for interest. Without those terms, you may be able to sue only for the installments already missed, and you may have to return to court as each later one is missed. The underlying rules on contract damages are in what damages a business can recover for breach of contract.

Attorney's fees are a frequent surprise. Texas follows the American rule, so fees for enforcing a settlement are recoverable only if the agreement has a fee clause or a statute applies. Most settlement agreements between businesses have a prevailing-party clause for exactly this situation. If yours does not, the statutory route for fees on a written contract claim may still be available depending on who the defendant is; that question is covered in recovering attorney's fees in a Texas contract case.

Can I revive the original claims instead?

Usually not, and you should assume not unless the agreement says otherwise. A settlement with a release is a substituted contract: the old claims were extinguished in exchange for the promise to pay. If the promise is broken, your remedy is on the promise. Rescinding the settlement and reviving the original claims is possible only where the agreement makes the release conditional on payment, where the breach is so material that the agreement fails of its essential purpose and rescission is equitable, or where the agreement was induced by fraud.

This is the single most important drafting point for a party being paid over time. If the release takes effect on signing, a default leaves you with a contract claim for the money. If the release takes effect only on final payment, a default leaves you with your original claims as well. Which you want depends on how strong those original claims were and how collectible the other side is. The options are compared in structuring a business settlement.

Enforcing an agreed judgment

Where the settlement was entered as an agreed judgment, or where an agreed judgment was signed and held in escrow for release on default, you hold the strongest position. There is nothing left to prove. You file the escrowed judgment if that is the mechanism, or proceed directly on the entered one, and collect through the ordinary post-judgment tools. Those tools, including abstracts of judgment, writs of execution and garnishment, are described in how to collect a judgment against a business in Texas.

One caution from the Texas cases on Rule 11: a court can render an agreed judgment only while every party still consents. If the agreement called for an agreed judgment later and the other side withdraws consent before it is signed, the court cannot enter it as agreed. It can, under Padilla v. LaFrance (Tex. 1995), enforce the settlement as a contract and render judgment on that basis after notice and hearing. The result is similar; the path is a contract claim rather than a consent order.

Non-monetary breaches

Settlements between businesses carry promises beyond payment: confidentiality, non-disparagement, a non-compete or non-solicitation, return of property, a transition of customers, dismissal of a related claim. A breach of those terms is still a breach of contract, but the remedy is different. Money damages for a disparaging post or a leaked term are hard to prove, so agreements often fix a liquidated damages figure, which Texas enforces if it is a reasonable forecast of harm that would otherwise be difficult to estimate. Injunctive relief is available where the breach is continuing and damages are inadequate. The agreement should say which remedies are available and that the breaching party agrees irreparable harm would result, though the court still decides.

Example

Suppose a Dallas software vendor settles a $400,000 claim against a customer for $300,000, payable in six monthly installments, and dismisses the case with prejudice the day the agreement is signed. The agreement contains a mutual release effective on signing, a prevailing-party fee clause, and no acceleration clause. The customer pays twice and stops. The vendor cannot revive the original $400,000 claim; the release was effective when signed. It cannot move to enforce in the dismissed case, because the dismissal order did not retain jurisdiction. It files a new suit for breach of the settlement agreement, but because there is no acceleration clause, the clearly liquidated damages are the two missed installments then due, with the remaining two installments becoming claims as they fall due. The fee clause at least makes the exercise worthwhile. Had the agreement provided for an agreed judgment for the full unpaid balance held in escrow, the vendor would have filed it and started collection the week after the missed payment.

Why this is not family law

Readers who search this question find a great deal written about mediated settlement agreements in divorce and custody cases, where the Family Code makes a properly drafted agreement binding and entitles a party to judgment on it. None of that applies to a business dispute. A business settlement, mediated or not, is governed by contract law, Rule 11 where a suit is pending, and § 154.071. Do not assume a mediated business settlement has any special status beyond that.

What to gather before calling a litigator

• The signed settlement agreement and every amendment or side letter.
• The dismissal order or agreed judgment, with the date it was signed.
• Proof of your own performance: the release delivered, the property returned, the dismissal filed.
• Proof of the breach: bank records showing the missed payment, the disparaging post, the notice you sent and any response.
• Any notice-and-cure provision and the dates you complied with it.

Tina Wysk enforces and defends settlement agreements for businesses in Dallas state and federal courts. Her breach of contract practice page describes that work.