How to draft a business settlement agreement: top 5 clauses to include

If carefully crafted, a business settlement contract provides a clear, legally binding resolution, preventing any future legal actions related to the settled matter. It ensures transparency and serves as a legal safeguard, allowing businesses to proceed with their operations, confident that their disputes have been effectively resolved through a formal agreement.

For more information about the benefits of settlement contracts, check out this comprehensive guide.

Key clauses to include in a settlement contract

1. Key details of the settlement

Now that you’ve negotiated the terms of the settlement, it’s time to document these negotiations in your settlement contract. The settlement contract should explicitly state the terms and conditions agreed upon by the parties. Clearly outlining specific actions, obligations and payments will prevent misunderstandings and further disputes in future.

In the event of breaches, the settlement contract serves as a record of the agreed settlement, giving the innocent party legal recourse. Furthermore, documenting the key details of the settlement proactively prevents future disputes and ensures the parties are on the same page. A well-documented settlement contract not only resolves immediate issues but also establishes a stable foundation for ongoing and future interactions if the relationship is still intact - otherwise, it provides a clean break between the parties.

2. Settlement sum

The sum payable by one party and the relevant payment terms play a vital role in a settlement contract. By specifying the exact monetary amount and outlining the payment mechanism, including deadlines and banking details, this clause ensures absolute clarity and leaves no room for misunderstandings between the parties.

If the parties have agreed that the settlement sum will be payable in instalments, each instalment should be clearly specified in the contract to ensure the paying party complies with their financial obligations on time. A clear payment mechanism should be included in the settlement contract so there can be no dispute over the total payment amount, as well as when those payments are due.

If the party responsible for the settlement sum doesn't pay on time, having clear payment terms in writing gives the innocent party a strong legal basis to take action. For this reason, having a written agreement in this instance is always better than relying on a verbal agreement where one party simply promised to pay £X to settle the dispute.

3. Waiver of claims

In a well-drafted settlement contract, the "waiver of claims" and "agreement not to take future legal action" (which we'll discuss further in point 4) clauses are fundamental to ensuring the dispute is conclusively resolved. Together, these clauses free both parties from any claims related to the settlement and prevent the need for future litigation.

The waiver of claims clause ensures the parties voluntarily relinquish their legal rights to make any further claims in relation to the "waived claims" specified in this clause. The scope of waived claims will typically be drafted broadly depending on the parties' circumstances. The types of claims that are waived include claims related to the specific dispute but also potential claims tied to related contracts, previous agreements, or any other matters related to the parties' relationship.

4. Agreement not to take future legal action

Alongside the waiver of claims, the agreement not to take future legal action clause broadens the commitment to ending the dispute once and for all. This clause will state that neither party will initiate any legal actions in the future related to the settled issues.

Together, the "waiver of claims" and "agreement not to take legal action" create a robust shield against potential legal challenges, ensuring that all settled matters remain conclusively resolved. These clauses are an important tool to include in a settlement contract as they ensure both parties agree that the settlement contract represents a full and final settlement. This approach provides both parties with confidence in the stability and finality of the resolution, paving the way for lasting peace after a dispute.

In addition to these clauses mentioned in points 3 and 4, as a "belt and braces" approach, you may also want to include certain warranties (i.e. contractual statements of fact that if proven to be untrue, give the other party the ability to make a claim for damages) that both parties have the legal right and permission to enter into the business settlement agreement, and that neither party will take any legal actions related to the waived claims in future.

5. Confidentiality

A clause that places obligations on either party to keep all information related to the settlement confidential is essential in a settlement contract for several crucial reasons, such as:

• it safeguards sensitive information disclosed in relation to the business settlement agreement, ensuring that the terms of the agreement remain private between the involved parties.

• it protects the reputations of both parties by preventing potentially damaging information from being disclosed to external parties.

• it provides a clear framework for handling confidential information, allowing disclosure only to essential advisers under strict confidentiality agreements or if legally required to do so.

Overall, the inclusion of a confidentiality clause not only upholds the privacy of the parties involved but also creates an environment of trust despite going through a difficult period of negotiating to resolve the dispute.

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All you need to do is answer a series of questions and you will create a fully customised settlement contract in no time at all, that has been adapted to suit your situation based on the answers you provided.

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