What Is a Corporate Settlement Agreement?
Updated: Nov 2, 2021
In corporate litigation cases that are likely to devolve into long, drawn-out ordeals for both sides, parties may instead agree to a corporate settlement agreement. This covenant sets in place legal controls and terms that are deemed mutually agreeable to both sides, saving the involved parties significant time and capital that would otherwise be tied up in corporate legal matters.
What Is a Corporate Settlement Agreement?
A corporate settlement agreement is a document that allows two or more parties involved in a civil dispute to resolve matters out of court. Admittedly, the last part is a bit of a misnomer: The court still must make a judgment regarding the actual legal contract and its contents or terms.
That said, the court only has jurisdiction but not the power to define or modify terms. This requires the assistance of a mediator, with a judge only approving or denying the final settlement agreement.
Purpose of a Corporate Settlement Agreement
Civil lawsuits that involve corporates are not just costly for both parties financially; they can also be devastating from a brand perspective. A corporate settlement agreement drastically reduces the risk of brand damage for both the plaintiff and the defendant. A mediator is enlisted to negotiate for both sides, terms set forth are private, and time is saved on all sides.
Additional terms may also be agreed upon, such as the inclusion of a “no admission of guilt” clause or similar terms. For example, in a previous Fortinet settlement case, the defendant Sophos agreed to settle over alleged stolen IP and staff, without having to admit liability.
The terms of the corporate settlement agreement serve the underlying essence of its purpose: to settle the legal dispute without having to wage a corporate legal battle in court. It's therefore critical that the terms laid out between the two parties sufficiently address their bilateral wishes and obligations. Anything less could mean more legal disputes down the line—an outcome that both parties should seek to avoid.
How To Prepare a Successful Corporate Settlement Agreement
At the end of the day, the opposing parties are ultimately responsible for coming up with the terms to be set forth in the corporate settlement agreement. They should also be guided by counseling from appropriate mediating parties regarding available terms and options, topics for negotiation, required documents and resources, and other critical matters.
Most corporate settlement agreements involve a financial payout by the defendant to the plaintiff. In the case of a Barracuda Networks settlement, the IT security vendor was ordered to pay financial restitution to the plaintiff—the Department of Commerce—as the result of the agreement.
A significant effort must be put into defining the terms of these agreements. Will the settlement be paid in one lump sum or a series of periodic payments? What are the penalties for missing a payment? This level of detail helps to alleviate the potential for conflict or misunderstanding down the line and is where most corporate settlement agreements fail to live up to the test of time.
How Corporate Settlement Agreements Are Enforced
If all parties are in compliance, enforcement can be rendered as an afterthought—but only if the appropriate measures are taken in advance to draft a comprehensive agreement. In reality, corporate agreements are breached all the time, and settlement contracts are no different. In these cases, the parties will ultimately end up back in court, where a decision will be made by a judge whether or not to grant a motion to enforce the settlement agreement.
A number of criteria dictate whether or not a corporate settlement agreement is considered a legally enforceable contract. The following are just a few qualifying criteria that require specific attention:
The contract was drafted by a qualified attorney.
A legal advisor was enlisted for proper counseling on the matter.
The settlement agreement was drafted in writing.
The settlement agreement clearly indicates any claim waivers.
Courts tend to uphold corporate settlement agreements in their original form, as it's assumed that both parties were in sound mind and judgment when the contract was signed. The court may carry out an evidentiary hearing—if there's a claim or an issue with substantial facts upon which the agreement was founded (e.g., untruths that in some part impaired the understanding of the other party). During the hearing, both sides have the opportunity to present evidence or have witnesses heard in support of their claim or counterclaim.
Ultimately, the court has a right to exercise the appropriate discretion in the legal proceedings. The court may refuse an enforcement hearing request that it deems superfluous. That said, cases where one party is severely incapacitated in their ability to properly negotiate (e.g., due to intimidation or the purposeful withholding of information by the opposing party) will result in court intervention. Cases where the agreement is grossly imbalanced or unfair will also be questioned by the court.
Do You Need a Corporate Settlement Agreement Lawyer?
In a word, yes. In some cases, parties involved in a corporate civil dispute may choose to informally negotiate the terms directly. But arbitration, mediation or facilitation, and preparation of contracts should be left to the legal professionals trained in handling corporate settlement agreements.
The latter is especially crucial. The contract itself is the essence of the agreement and should be drafted by a legal professional trained to operate at that level of detail. This includes defining the parties and roles involved, rights and responsibilities per role, what is being exchanged for the release of legal liability (i.e., consideration), type of consideration (e.g., financial remediation or reparation, the promise of service), the scope of the agreement, whether fault will be publicly admitted, and confidentiality clauses, among others.
In short, taking the proper measures to detail appropriate terms that are mutually acceptable by both parties goes a long way in preventing future litigation. An effective corporate settlement agreement, drafted through the collective efforts of the opposing parties, appropriate mediators, and legal counsel, can provide faster resolution to an otherwise lengthy legal dispute.