You’re in a dispute with a contracting party, have a disagreement over services rendered, or are caught in a long-running dispute that just won’t be resolved. Eventually, there comes a point when both parties decide to settle the matter amicably. The settlement agreement (“vso”) is the most commonly used instrument for this purpose. But as practical as it may be, a vso has legal consequences that can be far-reaching. So never sign one without carefully considering what you are giving up and what you are getting in return.
A settlement agreement is an agreement by which the parties definitively resolve or prevent an existing dispute or uncertainty regarding their legal relationship. The legal basis is found in Article 7:900 of the Civil Code. The parties mutually commit to a specific outcome, even if that outcome differs from what a judge might have decided.
That is precisely the strength and the risk of a settlement agreement: you gain certainty, but you pay for it by waiving certain claims. Which claims you waive and the scope of that waiver are at the heart of every negotiation regarding a settlement agreement.
Virtually every settlement agreement concludes with a so-called final release—a provision in which the parties declare that they have no further claims against one another. This may seem obvious, but its scope is crucial.
A broadly worded release of liability may cover claims that you hadn’t even considered at the time of signing. Think of hidden defects that come to light later, or damage that only becomes apparent later on. It is therefore wise to define the scope of the release as precisely as possible: which claims, for what period, and in what capacity?
In principle, a settlement agreement cannot be challenged on the grounds of a mistake regarding the facts that were in dispute between the parties—that is precisely what they have settled. However, this does not apply without limitation. If a party has knowingly provided incorrect information, or if there is fraud or abuse of circumstances, the settlement agreement can still be challenged. This distinction is subtle but important: a settlement agreement offers more certainty than a standard agreement, but it is not inviolable.
The description of the subject matter of the dispute is too vague. A VSO that does not clearly define the underlying dispute will later lead to debate over whether a new claim is covered by the policy or not. Be specific.
Forgotten agreements regarding ancillary obligations. Consider confidentiality, the withdrawal of pending proceedings, the return of documentation, or agreements regarding communication with third parties. Anything not included in the VSO is not covered.
No attention is paid to implementation. Who pays and when? What are the consequences if a party fails to comply with the agreement? Ensure that payment terms are clear, that any necessary security is in place, and that there is a penalty clause in the event of non-compliance.
Signed by the wrong person. In the case of legal entities, it is important that the VSO be signed by an authorized representative. A VSO signed by an unauthorized representative may not be binding.
A well-drafted settlement agreement contains a clear description of the dispute or uncertainty being resolved, the mutual obligations of the parties, agreements regarding any payments and their timing, ancillary agreements such as confidentiality and the withdrawal of legal proceedings, a precisely defined release clause, and a provision regarding what happens in the event of non-compliance.
A settlement agreement is a powerful tool for definitively resolving long-standing disputes. But “definitive” works both ways: it may also preclude claims that you might wish to assert at a later date. Therefore, always have the agreement reviewed before you sign it—not after.
Do you have questions about a VSO that has been submitted, or would you like help drafting a solid agreement? Please contact us.
