Can You Unsettle a Settlement Agreement?

Consider this: You have been sued by one of your customers. In order to resolve the dispute quickly and efficiently, you agree in principle to settle the dispute, and decide to work out the terms later. You document your “agreement to agree” in an e-mail, and the customer responds that it too “agrees to agree.” However, you later decide that you do not want to be bound by this settlement agreement. Can you get out of it? Generally speaking, yes.

What Makes a Contract Enforceable?

All contracts, including settlement agreements, require an offer, acceptance of that offer and consideration (i.e., something of value—generally monetary—that causes a party to enter into an agreement). But most importantly, parties to a contract must also have a “meeting of the minds” on all material elements or terms for a contract to be enforceable. (For example, in a real estate contract, material terms would constitute the parties, the subject real estate, the price and the time frame for closing). If the parties agree to leave the “big ticket” items for later negotiation, the contract is likely to be unenforceable. Moreover, the mere fact that the communications between the parties included the terms “offer” and “accept[ance]” is insufficient to bind the parties. If the parties have not reached agreement on all essential terms, there is no enforceable contract.

Furthermore, if an agreement refers to a subsequent formal agreement to be executed by the parties, the initial agreement is generally not binding. This is true even when the parties agree to the general terms of an initial settlement agreement if they understand that the execution of a formal agreement is a prerequisite for being bound. In such a case, there is no enforceable settlement agreement until the final agreement is signed by all parties.

It is important to note that a preliminary agreement can be enforceable in some cases, but it must address each and every material term that is to be incorporated into the final agreement. The final agreement would then be considered a mere recitation of the agreement previously reached between the parties.

Confused? If you are uncertain about whether to enter into a settlement agreement in the first place, or if you have concerns about an existing agreement, your best option is to seek counsel from an attorney who is well-versed in contract law. By doing so, you will gain a knowledgeable advocate who can discuss your particular situation and the steps you might be able to take to minimize risk and protect your business.