H. Principle 8: Many Problems Can Be Avoided by Carefully Reviewing the Settlement Agreement Before It Becomes Effective
1. Don't Ignore Seemingly Inconsequential Errors That Can Undermine the Effectiveness or Validity of the Settlement Agreement
Little details have special talents in creating big problems!
— Mehmet Murat Ildan
Although a settlement agreement does not need to be fancy, details do matter. A missing punctuation mark, such as a colon or semi-colon, may change the meaning of an important term entirely.240 Innocuous terms may later wreak havoc on attempts to comply with or enforce the agreement. Consequently, an agreement must be drafted with care.
There are many ways in which a settlement agreement can be written. Whatever the approach, however, the document must be written with care. Case law is replete with examples of seemingly small mistakes that invalidated agreements or caused them to take on an unintended meanings. Not all mistakes are fatal, however, and many are inconsequential. Further, most mistakes will never matter because the parties choose to fulfill the terms of the agreement as intended. Other mistakes may be cured by the parties modifying the agreement or a court reforming the agreement according to the intent of the parties at the time they signed.
It's a different story when parties decide they are better off not complying with the agreement. "If a dispute arises, the parties' lawyers will pore through the contract wording in search of loopholes."241 Under the critical reading of a party or attorney who desires to get out of an agreement, previously hidden errors may emerge and result in an invalidated or seriously wounded agreement. The challenge for drafters of settlement agreements is to understand that details matter, know what types of details tend to be most problematic if misstated, and have an approach that minimizes the chance of fatal errors.
Courts tend to be unforgiving of drafting errors even when attorneys have done their best under trying circumstances in complex cases. The Ninth Circuit displayed a typical approach to drafting error when it declared, "We see no reason to give [the defendant] the benefit of the doubt created by its own careless drafting."242 The "careless" drafting denigrated by the court involved no more than an omitted punctuation mark where the inclusion of a colon would have resulted in a $10,000 insurance deductible and a semicolon a $500,000 insurance deductible.243 By contrast, the wholesale omission of any specification of how and when a settlement check should be issued to the plaintiff has been cured by a court which simply implied a reasonable manner of payment.244 Although silence is not necessarily fatal, even small misstatements have the potential for grave, adverse consequences. Thus, writers of settlement agreements must understand that small errors carry big risks and develop a system for reducing the errors.
2. Enshrine Error-Reducing Practices in the Writing and Review Processes
A fool with a plan can outsmart a genius with no plan.
— T. Boone Pickens245
There is no such thing as a perfect first draft. No amount of effort to be more careful or try harder to avoid errors can substitute for repeated rounds of improvement, revisions, and error correction. Without the necessary effort to turn an initial draft into a good final agreement, the hostile reading of a party with buyer's remorse or a lawyer charged with the task of finding a loophole is likely to find fertile ground. The best way to reduce errors in the final settlement agreement is for attorneys to formally adopt error-reducing practices into the drafting process such as the following:
Prepare a draft before the parties reach initial agreement. The best way to arrive at an effective settlement agreement is to begin with a decent draft for which there has been adequate time to research the governing law and sketch out the expected basic terms of the agreement. It is far easier to modify a solid draft than to start from scratch amid the fray of negotiations over the terms of the agreement. Advance drafts should be marked prominently with the words "draft" or "nonbinding" and the date of their creation so that they do not create ambiguities later due to their differences with the final version of the settlement agreement.
Arrange for the document to be proofread by a real person. Regardless of how good computerized spell checkers get, there is no substitute for careful proofreading by a human being. Drafts must be read carefully not only for misspelled words, but to ensure that terms are used consistently, punctuation is correct, and the clauses accomplish what the parties have agreed upon. Drafts must also be read to ensure that there are no missing terms forming important parts of the deal. It is helpful to have someone other than the primary author give the agreement a careful proofreading. In advance of the mediation, colleagues can provide a great second read of drafts. At a mediation session, the parties themselves may be enlisted to carefully review the draft. Careful proofreading—but not a computer spell checker—could have caught the $1.7 billion dollar drafting error in which an attorney forgot to delete a sentence relating to cash payments after copying the language to another part of the agreement. Although the federal court ultimately reformed the error, the correction was expensive and entirely avoidable.246
Engage in a hostile reading of one's own documents. Before allowing a settlement agreement to be executed, attorneys should engage in a complete read-through of the draft from a hostile standpoint. This means that the attorney should imagine representing another party to the agreement who wants to find something that renders the agreement invalid or provides an escape loophole. By engaging in a hostile reading, an attorney may see the document in a new light that reveals sections to be fixed and ambiguities to be clarified.
Be wary of demands for new terms made for the first time during the drafting process. Not every term in a settlement agreement is equally important. Most potential settlement terms go unaddressed during a mediation until an agreement is nearly fully drafted. Standard terms, written in a neutral and mutually applicable manner, are usually unproblematic and can often be included without much discussion.
However, substantive terms that change the risk or value of the deal may require more in-depth discussions. In addition, proposal of a new term late in the drafting stage may result in exclusion of the term from the settlement either by the parties who refuse to execute the agreement, or by a court which strikes the term. For example, a confidentiality clause that had not been mentioned during the negotiations was excluded by a court in a settlement that the parties reached in a series of e-mail exchanges.247 Another court held that failure to fully discuss the release and enforceability provisions before the signing of a settlement agreement invalidated the entire agreement.248
3. Critically Assess the Substance of the Agreement
Education is what you get from reading the small print; experience is what you get from not reading it.249
The task of an attorney is often to review for suggestions a draft settlement agreement composed by a colleague or opposing counsel. Sometimes, an attorney may need to review a take-it-or-leave-it settlement agreement offered by an insurer or entity that inflexibly insists on using its own form. In reviewing a proposed settlement agreement, the goals are to ensure that the agreement accurately reflects terms of the deal reached, does not add unacceptable terms or omit provisions that the reviewing attorney's client deems necessary, and does not threaten unacceptable adverse consequences.
Reviewing a settlement agreement is a delicate art. Comments by an attorney on opposing counsel's drafts that are intended to be constructive and helpful may easily be taken as personal attacks by an adversary. The challenge for a reviewing attorney is to maintain a collegial and productive working relationship in...
