In our two prior articles (The expanded role of courts in settling government investigations and Settlements with the government), we addressed issues that arise after a settlement agreement has been signed by the parties to a dispute: getting the agreement approved by a court, especially in a government enforcement action; and, after the agreement has been approved, modifying or undoing the settlement following significant changes in the facts or law. In this article we discuss an issue that arises just before a settlement agreement is executed – namely, what happens when the parties agree to settle in principle but one party changes his or her mind before the agreement is fully executed?
The primary question in such a dispute is whether an enforceable contract was created during settlement negotiations. If the dispute reaches a court the inquiry is very fact-specific. Two issues are particularly critical. First, the court seeks to determine the completeness of an agreement and whether there are any outstanding issues about what it considers to be material terms. The more gaps there are in the agreement, the less likely a court is to consider it binding and enforceable. Second, the court looks at how the parties acted after the agreement to determine their intent, for example, whether a party made a partial payment towards the agreed settlement or made representations to third parties that an agreement had been reached.
In that case, a franchisor of a real estate brokerage system sued two real estate brokerage companies for anticompetitive business practices. After the trial ended in a mistrial, the parties began settlement negotiations. Eventually, all parties admitted in a settlement conference before the judge that they had reached an agreement and stated the general terms on the record. However, the agreement did not define specific terminology that might affect the parties’ obligations. Shortly after the conference, one of the defendants tried to withdraw from the agreement, arguing that it had never been written down, signed or finalized.
In a suit brought to enforce the agreement, the trial court held that the agreement reached at the settlement conference was enforceable because, among other things, the parties had reached agreement on all the key issues in the underlying dispute, and the parties had begun to act pursuant to the agreement, for example, by sending payment and publishing press releases – all of which was consistent with statements made to the court in the underlying dispute that the parties had reached a settlement. On appeal to the Eleventh Circuit, the Court focused on the parties’ statements to the court about reaching a settlement and held that the parties had agreed on all material terms. Even though several terms were left undefined at the court conference, that fact did “not undermine the crux of the agreement.” Furthermore, although the parties had not signed a written agreement, the Court held that “[t]he existence of a valid agreement is not diminished by the fact that the parties have yet to memorialize [it].”