Insights

When is a Settlement Agreement a Final Settlement Agreement?

Commercial Litigation

The North Carolina Business Court lists on its website Orders of Significance—unpublished Business Court opinions “regarding a matter of significance.” Although Judge Gale’s order on the enforcement of a settlement agreement last month in Howard, et al. v. Iomaxis, LLC, 20 NCBC 36 did not make the list, it nevertheless serves as a good reminder for practitioners: a mediated settlement agreement leaving additional terms to be memorialized later may result in an unenforceable agreement.

To me, the most interesting part of Judge Gale’s order in Howard was not the conclusion— because as discussed below, the parties did not agree on all material terms, and thus he refused to enforce the settlement agreement—but a citation to N.C. Nat’l Bank v. Wallens26 N.C. App. 580, 583 217 S.E.2d 12, 15 (1975). This case was decided well before mediation became mandatory in North Carolina and states that a “reference to a more ‘complete’ document does not necessarily indicate that material portions of the agreement have been left open for future negotiation. It could mean only that immaterial matters, which are of no consequence, will be added to complete the agreement.”

As someone who routinely signs off on short form settlement agreements at mediation that contemplate a “more formal” settlement agreement, or words to that effect, I was comforted by the portion of the N.C. Nat’l Bank decision referencing that a more complete document to be executed later on didn’t mean that a final agreement had not been reached. The sentence that gave me pause was the reference to a more formal agreement, which “could mean only that immaterial matters, which are of no consequence, will be added to complete the agreement.”  Does the multiple page settlement agreement with standard terms add only “immaterial matters, which are of no consequence?” If so, why am I bothering to include them? Is the desire to have a more formal or complete settlement agreement undermining the enforceability of the settlement agreement I just reached?

The Parties and the Memorandum of Settlement

Howard involved a request for declaratory judgment by the Estate and Trustees of a Trust of the deceased 51% owner in the Defendant Iomaxis, in which they asked the court to decide whether Plaintiffs were entitled to receive distributions from Iomaxis after the decedent’s death.

During a week of depositions, and well after a mediation was at an impasse, the parties engaged in settlement discussions lasting over seven hours, and the majority of these took place without their lawyers. These negotiations resulted in a memorandum of settlement (the “MOS”) signed by each of the parties and their respective counsel. A handwritten document became involved and was attached as an Exhibit to the MOS; this document reflected a payment structure that the parties had signed before counsel. The parties then filed a joint motion seeking a 30-day stay in contemplation of executing a formal settlement agreement, which the court granted.

Judge Gale noted that the MOS had an agreed-upon settlement amount, and a payment schedule and interest calculation, including a provision of an initial payment in partial satisfaction of the settlement amount, which would “be nonrefundable in any event but [which] shall be credited towards any future settlement amount or judgment rendered in Plaintiffs’ favor.” The MOS also stated that the parties “shall use good faith best efforts to execute and finalize a formal Settlement Agreement, which will confirm the payment schedule to be adhered to by Defendants, mutual releases, and other terms to be agreed upon by and between the Parties.” The MOS also contained a statement that “[n]otwithstanding the foregoing, in the event the Parties are unable to agree to the terms of a final settlement such that it is necessary to continue with the litigation of the Action, Defendants agree and acknowledge that Plaintiff(s) remain entitled to take the depositions of” certain specified individuals.

Negotiations of the “Final Agreement” Break Down

The parties, through counsel, tried to negotiate the contemplated formal settlement agreement, but, ultimately, those negotiations broke down. Because the parties never reached or signed the Formal Settlement agreement contemplated in the MOS, the Defendants’ moved to lift the stay, and the Plaintiffs moved to have the Court enforce the MOS.

In ruling on the motion to enforce the settlement, the Court cited to case law allowing a party to attempt to enforce a settlement agreement by filing a motion in the action purportedly settled, and noted that the summary judgment standard applied. 20 NCBC 36 *11; McCarthy v. Hampton, 2015 NCBC LEXIS 70, at *9 (N.C. Super. Ct. July 1, 2015); Hardin v. KCS Int’l, Inc., 199 N.C. App. 687, 694, 682 S.E.2d 726, 732 (2009).

Judge Gale succinctly summarized the parties’ positions, noting that Plaintiffs contended that the MOS was a binding settlement agreement including all material terms, while Defendants argued it was an agreement in principle to settle Plaintiffs’ claims for a fixed sum, with other material terms left to be agreed upon. The opinion included a detailed discussion on contract construction, which finished with the following:

“An offer to enter into a contract in the future must, to be binding, specify all of the essential and material terms and leave nothing to be agreed upon as a result of future negotiations.” Young v. Sweet, 266 N.C. 623, 625, 146 S.E.2d 669, 671 (1966). “[R]eference to a more ‘complete’ document does not necessarily indicate that material portions of the agreement have been left open for future negotiation. It could mean only that immaterial matters, which are of no consequence, will be added to complete the agreement.” N.C. Nat’l Bank, 26 N.C. App. at 584, 217 S.E.2d at 15. But where parties manifest “an intent not to become bound until the execution of a more formal agreement or document, then such an intent w[ill] be given effect.” Id. at 583, 217 S.E.2d at 15.

20 NCBC 36 *14-15.

Applying these principles and relying on specific provisions of the MOS, Judge Gale determined the parties did not reach an enforceable final agreement. Specifically, Judge Gale relied on the provisions referring to a future settlement amount or judgment rendered in Plaintiffs’ favor, and indicating the parties would use “good faith best efforts to execute and finalize a formal Settlement Agreement, which will confirm the payment schedule to be adhered to by Defendants, mutual releases, and other terms to be agreed upon by and between the Parties.”  With regard to the former, he noted that if the MOU was a final agreement, there would be no reason to determine future settlement amounts or for the court to enter a judgment.

Lessons From Howard and Other Cases Involving the Enforcement of a Settlement Agreement

After reading the Howard decision, I reflected on whether the court would enforce one or more of the settlement agreements my clients and I signed off on at mediation had opposing counsel and I been unable to agree on the more formal settlement agreement. The mediated settlement agreement is a contract, and with most contract interpretation, the specific words of the settlement agreement matter as to whether an enforceable contract exists.

In Chappel v. Roth, 353 N.C. 690, 692-693, 548 S.E. 2d 499, 500 (2001), the North Carolina Supreme Court, after noting that settlements were favored under the law and that a mediated settlement is encouraged and should be afforded great deference, nevertheless held that the agreement reached by the parties in that case was not binding. They held the agreement could not be judicially enforced where the agreement signed at mediation provided the parties would sign a “full and complete release, mutually agreeable to both parties.” The Court refused to enforce the settlement agreement even where the mediator had filed a report after mediation noting that the parties had reached agreement on all issues.

The Supreme Court’s decision in Chappel clearly hung on the fact that a material term of the agreement—the full and complete release—was to be agreed upon at a later date. In a 2015 decision, however, Judge Gale relied on N.C. Nat’l Bank v. Wallens and distinguished the Chappel decision, in his order granting a motion to approve settlement in DeCristoforo v. Givens, 2015 NCBC 53, 2015 WL 3472999 *10 (2015) (unpublished). There, the settlement agreement and mediator’s report indicated that a full and final settlement had been reached, even though a further statement of the parties’ agreement was contemplated. Judge Gale held that the release in the mediated settlement agreement was effective to release the then-pending claims (assuming the other settlement terms were complied with) even though the parties never executed the more comprehensive statement of the settlement.

The lesson here is that an enforceable settlement agreement can be reached at mediation even where a more comprehensive agreement is contemplated by the parties, but the parties, practitioners and mediator should make clear that the mediated settlement agreement is a full and final settlement agreement of the issues in dispute. As evidenced by the decision in Chappel, even the mediator’s report indicating that a full and final decision had been reached may not be sufficient.

I know one of my colleagues often has his form release agreement at the ready to be incorporated in a broader settlement agreement rather than the typical one-pager signed at mediation, but after a long day of mediation, arguing about the details of possibly “immaterial” provisions may not be what anyone has in mind. If you’re not going to finalize a more detailed settlement agreement at the mediation, make sure you and your client are comfortable that the short form agreement signed at mediation is enforceable, has all the terms you want, and protects your client’s interests. If you leave too much to be decided in a more formal agreement later on, you might find that the settlement agreement you thought resolved your case did not really do so.

This post originally appeared on the North Carolina Bar Association’s Litigation Section blog: https://ncbarblog.com/when-is-a-settlement-agreement-a-final-settlement-agreement/