After almost a year of discovery with numerous depositions of corporate officers, document requests, and ESI in a complex commercial dispute, mediation is now officially on the calendar four months out. You have been considering how this case may resolve on a monetary level, but have not yet given specific thought as to what provisions should be included in a settlement agreement if mediation is successful.
Each dispute between sophisticated business entities will have its own intricacies that counsel will need to account for when drafting a settlement agreement. Although by no means an exhaustive treatise on settlement provisions in a commercial case, the following provisions should be considered and discussed at mediation.
Confidentiality clause
For many commercial litigants that settle a dispute, a key concern is keeping confidential the specific terms of the agreement, including any amount paid in settlement. Many businesses fear that announcing a settlement amount will encourage future litigants to bring suit. You should also consider whether all public disclosures will be precluded under this clause. In certain cases, a short statement explaining the status may be sufficient, such as: “In response to any inquiries or in any communication regarding the conclusion or resolution of this matter, Acme Corp. shall state or indicate only that the matter was resolved amicably.”
Confidentiality provisions should include exceptions that allow a party to provide truthful testimony in legal proceedings, to communicate truthfully with any government agency (like the IRS), or to enforce the agreement. Carve-outs to confidentiality, with limitations on further disclosure, may also include notice to tax and accounting advisors, legal counsel, and boards of directors or shareholders of the corporation if necessary to effectuate the terms of the settlement.
Beyond the confidentiality of the settlement itself, you may also consider additional provisions that keep certain other information confidential that does not pertain to the settlement, such as trade secrets, intellectual property, or other issues that may be or could have been the subject of a protective order during the litigation.
Non-disparagement clause
A non-disparagement clause will help ensure that any party that might have anything negative to say about the business—including but not limited to any allegations or counterclaims that a party has made against the other business—is stopped from doing so after signing the agreement. A non-disparagement clause may be mutual and binding on both parties depending on how counsel crafts it. Exceptions to the non-disparagement clause may include ones similar to the confidentiality clause described above. Companies should also consider whether the non-disparagement obligation applies to specific individuals involved in the litigation or others in the corporation.
If the dispute involves a current or former employee, limited non-disparagement provisions are permissible, i.e., provisions that are limited to statements that meet the definition of defamation. Limitations may similarly be in place for confidentiality clauses should the dispute involve a current or former employee. See McLaren Macomb, 372 NLRB No. 58 (2023).
Representation clause
A representation clause expressly provides that neither party has relied on any representations made by the other party (including legal counsel) before agreeing to the settlement besides the representations made in the settlement agreement. This clause may help defend against subsequent allegations that a party entered into the settlement agreement because the party was fraudulently induced to do so, or fell victim to some misrepresentation, whether that misrepresentation was express or by omission. Similarly, a provision stating that the agreement is the entire agreement between the parties helps ensure that there are no subsequent claims that the party only agreed to the settlement if some other act not described in the settlement agreement was performed. However, if there is a separate nondisclosure or covenant agreement already in place, care needs to be taken to incorporate those obligations should the parties wish to keep them in place after the settlement agreement is signed.
Authorization clause
Through an authorization clause, individuals signing the settlement agreement represent that they have the authority to sign on behalf of the company-party and bind that company to the terms of settlement. If an individual signs an agreement without the appropriate authority to do so, the agreement may be null and void. This clause is vital to ensure that whoever signs the agreement for your client—and whoever agrees to the settlement terms for your client at mediation—has the clear authority to do so.
Enforcement provisions
Depending on the circumstances, one party may have reason to worry that they will not receive payment in full from the other party, and might therefore require some type of security to guaranty the payment obligations of the other side. This might require drafting an additional guaranty agreement, as well as other documents depending on the nature of the security (i.e., a mortgage deed, or even a pledge agreement that pledges membership interest in an LLC).
You should consider a provision spelling out that, if the agreement is violated, a party is not required to prove the allegations of the underlying lawsuit or original dispute. Instead, the party only has to provide sufficient proof that the settlement agreement itself was breached. This also should be considered for any injunctive relief.
Depending on the substantive nature of the dispute, certain tax or jurisdictional issues may arise that involve different states or countries, and you should consider what regulation, oversight, or approvals may be invoked by the settlement, and whether certain payments should be allocated in some manner to categories or locations with this type of issue in mind. By way of example, if a country in the European Union is implicated by the settlement, its regulations governing IT matters are fairly strict and should be accounted for in the agreement.
Settlement of commercial disputes vary depending on the parties and circumstances. Taking the items identified in this short list into consideration ahead of mediation and including them on any term sheet reached at mediation may help guide negotiations and resolution of your client’s business disputes.