In California, a settlement agreement is a binding contract that resolves a legal claim. The agreement is the deal that the parties to the dispute have reached in order to settle their disagreements short of trial or arbitration. It is the culmination of what is often a contentious negotiation process. State courts can enforce the final terms of the agreement.
How settlement agreements work
Settlement agreements are contracts. They are legally enforceable arrangements by the parties involved to resolve their legal dispute. In them:
- the party that is claiming that they were wronged agrees to waive their legal claims, and
- the party that allegedly did the wrong agrees to give up valuable consideration for that waiver.
That arrangement is detailed in the settlement agreement. Once the settlement agreement is signed and approved by a California court, the prospective plaintiff loses his or her right to pursue the legal action. The party that they would have sued would have a contractual obligation to provide the compensation that they promised in the agreement.
A settlement agreement can be made at nearly any point during the legal dispute, including:
- before a demand letter is sent,
- after the complaint has been served on the defendant,
- during the discovery process,
- through mediation or arbitration, or
- during the civil trial.
The agreement is nearly always the result of intense negotiations between the parties and their lawyers.
Disputes they can resolve
Settlement agreements can resolve nearly any type of civil cause of action. They are especially common in:
- personal injury claims,
- breach of contract cases,
- workers’ compensation claims, and
- wrongful death claims.
Settlement agreements can be simple or extremely complicated. Simple settlements generally only involve:
- an individual who was hurt, and
- the person or company who allegedly hurt them.
However, settlement agreements in California can also be used to resolve complex pending litigation outside of the courtroom, including:
- class actions, and
- multidistrict litigation (MDL).
What they should include
Because the settlement agreement is a legally binding resolution to a legal dispute, the terms that it includes are extremely important. The personal injury lawyers at our law firm have found that vaguely worded agreements that rely on templates and a general release of claims fail more often than those that are tailor-made for your needs.
Just a few of the terms that an effective settlement agreement needs are:
- a recital of the parties that are to be bound by the agreement,
- an accurate characterization of the subject matter of the dispute and the legal claims that are being alleged by the claimant,
- a waiver of claims that identifies exactly which legal claims the plaintiff agrees to drop, and which party it is releasing from its claims,
- exactly what the defendant is giving up in order to secure that release of claims, as well as how it will be paid and who is going to receive it,
- who pays attorneys’ fees,
- a clause that states that the document consists of the entire agreement, also known as a merger clause,
- a severability clause that states what would happen if the settlement is deemed unenforceable,
- if the agreement includes the defendant’s specific performance, a detailed description of what will or will not be done, and when it must be done by, and
- signatories of the required parties.
Additionally, many settlement terms also include:
- a statement that the defendant is not making an admission of liability for the claims being dropped,
- how taxes are to be applied to the settlement amount, if it is a financial settlement,
- a non-disparagement agreement,
- the interest rate that will apply to payments that are not made on time, and
- legal claims that are explicitly not being released.
What they cannot include
Settlement agreements cannot include arrangements that would violate public policy. This includes terms that are illegal or unjust.[1] A settlement agreement that would violate public policy will not be enforced by California courts, even if the superior court judge approved it.[2]
How settlement money can be paid
Settlement agreements generally involve a financial payment in exchange for the release of claims. That financial payment can be paid in one of two ways:
- a lump sum, or
- a structured settlement.
If paid in a lump sum, the party getting the money would receive all of it at once.
If paid as a structured settlement, the party waiving its legal claims would receive numerous payments that are spread out over time. If the agreement calls for a structured settlement, the precise details of when the payments are to be made are every important.
Oral agreements
Settlement agreements should be in writing to ensure the terms are concrete, understood, and easy to recall. However, California law allows for oral settlement agreements.[3] To be enforceable, though, an oral settlement agreement must be made on the record during a hearing that is supervised by a judge.[4]
Because it is a contract, in order to be enforceable an oral settlement agreement must comply with the statute of frauds.
How an agreement can fall apart
A settlement agreement should end the legal dispute. However, poorly drafted agreements can allow the disagreement to resume even after the agreement was made. A few ways that a settlement agreement can fall apart are:
- a party to the agreement did not sign it,
- someone signed the agreement without the authority to do so,
- a material term is missing, or
- the agreement violates public policy.
This can result in the civil action recommencing.
Recent changes to California law
In the state of California, the law about settlement agreements has undergone several recent changes.
In 2020, California Assembly Bill 2723 passed. It gave legal counsel or authorized agents more power to sign settlement agreements on behalf of their clients.
In 2023, California Assembly Bill 1756 passed. It expedites the process of rescheduling cases where a settlement agreement was being breached. It goes into effect in 2025.
Legal Citations:
[1] Nicholson v. Barab, 233 Cal.App.3d 1671 (1991).
[2] Timney v. Lin, 106 Cal.App.4th 1121 (2003).
[3] California Code of Civil Procedure 664.6 CCP.
[4] California Evidence Code 1118 EC.
