So then, it’s Settled: Or is it?

by Jerry Meek

It has happened to many lawyers.  After countless hours of negotiations, the parties believe they’ve reached a settlement agreement.  But instead of rejoicing in the resolution, they find themselves locked in renewed conflict after the “deal” falls through.

Usually this happens for one of three reasons.  Sometimes the parties fail to recognize the importance of details that could doom the agreement.  Some agreements, for example, have significant zero-sum tax consequences for the parties, which must be addressed in the final agreement but may not be apparent to the clients at the time the agreement is being negotiated.  Other times, the lawyers fail to appreciate how their clients will react to the inclusion or exclusion of some particular provision.  Many lawyers, for example, incorrectly assume that their clients will have no objection to the insertion of a confidentiality clause.  When the lawyers make incorrect assumptions about what their clients will agree to, the result is often not only a “deal” that falls through but also a strained lawyer-client relationship.

Sometimes, after an agreement is reached, a dispute arises as to whether one or more parties to the agreement are fulfilling their end of the deal.  Believing that one party is not in compliance, another party may refuse to comply.  Obviously, this is more likely to happen when the parties’ obligations under the agreement are complex or when those obligations are to be performed over a long period of time.  It is particularly likely to happen if any party’s performance under the agreement is to be measured by what would be “reasonable” or by what is “in good faith.”

Finally, sometimes a client simply has a change of mind.  It is the unusual case when, as in Estate of Gilbert Barber v. Guilford County Sheriff’s Dept., 161 N.C. App. 658, 589 S.E.2d 433 (2003), a party to a settlement agreement brazenly repudiates the agreement, proclaiming,  “Psyche!  I lied.  I will not honor it.”  More commonly, the client has post-settlement remorse – often because of newly acquired information – which prompts him to find an excuse for either not executing the written document or for not complying with the agreement as executed.

When the opposing party refuses to comply with a settlement agreement, two tools are available.  The aggrieved party can either file a Motion to Enforce Settlement Agreement or file a separate action for breach of contract, seeking specific performance of the agreement.  Currituck Assocs. v. Hollowell, 166 N.C. App. 17, 24, 601 S.E.2d 256, 261 (2004).  Generally, when the underlying action is still pending, a Motion to Enforce is the easiest and quickest method of obtaining relief.  But if the underlying action has already been dismissed, this option won’t be available.  There may then be no choice but to file a separate action for breach of contract.

Regardless of which tool you employ, two sets of issues can emerge.  First, did the parties agree on all of the material terms of the settlement, so as to give rise to an enforceable agreement?  Or were essential terms left open, such that there was no “meeting of the minds”?  Second, even if an enforceable settlement agreement was reached, are there grounds for rescission of that agreement?

It is an often repeated mantra that Courts favor compromises and settlements of controversies.  Despite this, the Courts’ approach to enforcing settlement agreements is no different than its approach to enforcing any agreement.  Since a Motion to Enforce is nothing more than a motion for specific performance of a contract, a Court will apply general principles of contract law to decide whether the settlement agreement should be enforced.  It will treat a Motion to Enforce as a motion for summary judgment, granting it only when there is no genuine issue of material fact.  Hardin v. KCS International, Inc., 199 N.C. App. 687, 682 S.E.2d 726 (2009).

As with any contract, there must be a “meeting of the minds as to all essential terms of the agreement.”  Northington v. Michelotti, 121 N.C. App. 180, 184, 464 S.E.2d 711, 714 (1995).  To be enforceable, the agreement cannot leave “material portions open for future agreement.”  Boyce v. McMahan, 285 N.C. 730, 734, 208 S.E.2d 692, 695 (1974).  But what terms are essential?  And what portions are material?

Unfortunately, there is no magic formula to help us answer this question.  Nor is it a question that can be answered in the abstract.  In Chappell v. Roth, 353 N.C. 690, 548 S.E.2d 499 (2001), the parties reached an agreement at mediation, pursuant to which the defendant would pay the $20,000 in exchange for a voluntary dismissal of the action and a “full and complete release, mutually agreeable to both parties.”  When the parties were unable to agree on the language of the release, the plaintiff moved to enforce the settlement agreement.  Reversing the Court of Appeals, our Supreme Court held that the “mutually agreeable” release provision was “part of the consideration, and hence, material to the settlement agreement.”  As a result, “no meeting of the minds occurred between the parties as to a material term; and the settlement agreement did not constitute a valid, enforceable contract.”  Id.  Deciding whether any particular term is material or essential is therefore a fact-specific inquiry that defies generalizations.

Two things, however, are clearly not required for a settlement agreement to be enforceable.

First, there’s no requirement that your client personally agree to the settlement.  That’s because there is a strong presumption under the law that an attorney has authority to bind her client.  In Harris v. Ray Johnson Construction Co., Inc., 139 N.C. App. 827, 534 S.E.2d 653 (2000), the client authorized her attorney to settle her case for $2000, net of attorney’s fees and other costs.  Her attorney thought that he was authorized to settle for a gross amount of $2000.  Noting that the attorney-client relationship is based upon principles of agency, the Court of Appeals affirmed the trial court’s decision to enforce the settlement.  “Actual authority is that authority which the agent reasonably thinks he possesses, conferred either intentionally or by want of ordinary care by the principal.”  Id.  Since the attorney reasonably thoughtthat he had authority to settle the case for $2000, he in fact had that authority.  In practice, the presumption that an attorney has authority to act for her client (in settlement negotiations and elsewhere) is so strong that it will seldom be rebutted.  See Harmon v. Frangis, 2009 N.C. App. LEXIS 778 (2009) (client bound by settlement even though her attorney negotiated the settlement after filing a motion to withdraw from the case).

Second, there’s generally no requirement that the settlement agreement be in writing.  Except where the Statute of Frauds requires otherwise, an oral settlement agreement is binding, even when it is understood that the agreement would later be memorialized.  In fact, even when the Statute of Frauds applies, Courts have eagerly found that a written agreement existed.  In Bass v. Siloam Baptist Church, 204 N.C. App. LEXIS 207 (2004), for example, the Court of Appeals concluded that a letter signed by an attorney conveying the terms of an agreed settlement was sufficient to satisfy the Statute of Frauds.  Similarly, in Currituck Assocs. v. Hollowell, supra., a string of emails between opposing counsel was held sufficient to satisfy the Statute’s requirements that the agreement be in writing and signed by the person to be charged.

Even when there has been a “meeting of the minds” sufficient to give rise to an enforceable contract, a settlement agreement can be rescinded for all the same reasons that any contract can be rescinded.  Of the many possible grounds for rescission, a party to a settlement agreement is most likely to seek rescission on the grounds that another party has materially breached the agreement.

But, as in any contract dispute, whether a breach is material (therefore justifying nonperformance and rescission) or an independent promise (entitling the non-breaching party merely to damages) is critical.  In Hardin v. KCS International, Inc., supra., the settlement agreement at issue required the plaintiff to release the defendants, but further provided that this release was not intended to bar any future action to enforce the agreement.  The Court of Appeals held that, where the settlement agreement authorizes further litigation arising out of disputes regarding compliance with the agreement, a party cannot show that failure to fully comply with the agreement is a material breach.  Ironically, by including language obviously intended to protect his rights, the plaintiff lost his right to rescind the agreement and sue on the underlying claim.

Ultimately, in determining whether a provision is material, a Court is forced to divine the intent of the parties.  In the end, its conclusion on this issue is likely to determine whether the plaintiff can pursue its original claim or is limited to recovering under the settlement agreement.  Under the election of remedies doctrine, in the event of breach, the non-breaching party must choose between enforcing the settlement agreement or recovering on the original claim.  Keyzer v. AmerlinkLtd., 2008 N.C. App. LEXIS 11 (2008) (“To allow plaintiff to pursue both actions is repugnant to the whole purpose behind the settlement and release.”)  Obviously, unless the agreement is rescinded, an action on the underlying claim will be barred.

As a lawyer, there’s no fun in either pursuing a Motion to Enforce or defending against one.  While most Motions to Enforce are without controversy, many can be as thorny as the underlying claim that was just settled.  The best way to avoid them is by fully understanding your client and your client’s expectations, by anticipating and negotiating critical issues, and by clarifying which provisions of the agreement your client considers essential or material.

[This article originally appeared in the Campbell Law Observer, March 28, 2012.]