Settlement agreements explained (UK): what to include and how to settle without court

Have you been presented with a settlement agreement to resolve a dispute, or are you the one who wants to propose one? A settlement agreement is the contract that records how two parties have agreed to settle their differences without going to court. This page covers what it is, what it should include, and why it is usually a better route than litigation.

What is a settlement agreement?

A settlement agreement is a legally binding contract that details the terms for resolving a dispute. Say someone owes you a large sum of money and you have come to a settlement, meaning you have reached an understanding about how to resolve the issue. That understanding might involve a payment plan. The settlement agreement will set out the payment plan, alongside the fact that you, as the person owed the money, will not bring a claim against them.

The alternative is the courts, and bringing a claim can easily cost between £10,000 and £30,000 even for small issues. A settlement agreement instead lets you record the understanding between you and the other party for resolving the issue without needing to go to court at all. Both sides get certainty, and neither side pays the cost of litigating. For a small business, that cost difference alone is often decisive: a claim that is worth pursuing in principle may not be worth pursuing through the courts once the fees and the management time are taken into account.

What to include in a settlement agreement

Three things should be in every settlement agreement.

• Confidentiality. Whether the dispute, and the issue it arose from, is to remain confidential or not. Many parties want the fact of the dispute and the terms of settlement kept private.
• The action to be taken. What a party needs to do to resolve the dispute, such as paying the other side a sum of money, on a timetable if there is a payment plan.
• Waived claims. The list of issues or claims that will not be brought to court. These are the claims each party is giving up in return for the settlement.

The waived claims clause deserves particular attention. If my client is the claiming party, I want to make sure that the list of waived claims is narrow in scope and exhaustive. Narrow, so that my client only gives up the specific claims they intend to and not everything they might ever have against the other side. Exhaustive, so that there is a definite list and no argument later about what was or was not included. The other side will typically push for the widest possible waiver, because they want to draw a line under everything, and this is often where the real negotiation happens. If you are the paying party, the position is reversed: you want the waiver as wide as the other side will accept.

Benefits of a settlement agreement vs court

The first benefit is the obvious one: you do not need to go to court. Settling is quicker and cheaper than litigation, and it resolves the dispute nonetheless. You get an outcome without the delay, expense and uncertainty of a trial.

The second benefit is less well known. A settlement agreement should not only be looked at as the final contract that outlines the terms of the settlement. It can actually be used to negotiate the settlement. The draft becomes the vehicle for communication between the two disputing parties: one side proposes terms in the form of a draft agreement, the other marks it up, and the document goes back and forth until an amicable solution is found. Negotiating on the face of the document focuses both parties on concrete terms rather than on positions, and when agreement is reached the contract is already written.

In my practice I have helped many clients negotiate and understand settlement agreements. The ones that work best are those where the client was clear from the outset about what they wanted to achieve, what they were prepared to give up, and what they were not.

Next steps

If you are in a dispute, think about whether a settlement agreement could resolve it before costs escalate. Decide what action you want from the other side, whether you need confidentiality, and exactly which claims you are prepared to waive. If you have been sent a draft, read the waived claims clause carefully before you sign. A commercial solicitor can draft, review or negotiate the agreement on your behalf.