Confidential Settlement Agreement: Everything You Need to Know
A confidential settlement agreement is a provision in a settlement that prevents either party from discussing the nature of the settlement.3 min read
A confidential settlement agreement is a provision in a settlement that prevents either party from discussing the nature of the settlement.
Necessity of Confidential Settlement Agreement
In many cases, including a confidentiality clause is a necessity in a settlement agreement. When these clauses are included, the parties, as well as their attorneys, are not allowed to disclose how the agreement was reached. While both sides in a settlement agreement can benefit from confidentiality clauses, they are especially advantageous to defendants.
Defendants can have several motivations for settling a legal case. For instance, when liability is involved, it's usually better for a defendant to settle than it would be to let the case go to court.
Several factors must be considered when trying to decide whether to settle a case. If the defendant is a company, for instance, they may wish to settle so that they don't have to take time away from their day-to-day operations to defend the lawsuit.
While liability can be a big factor in deciding whether to settle, cost can also be a big influencer. A company involved in litigation may decide to settle a case based on the cost of defense. If the company knows that defending themselves is going to cost a great deal of money, they may decide a settlement is the better option.
In terms of a confidential settlement agreement, defendants will usually insist on a confidentiality clause to protect themselves from further litigation. A case that is successfully litigated can be a signal to other parties that they should also consider filing a suit. By hiding the details of the agreement with a confidentiality clause, the chances for copycat litigation will be limited.
In most settlement agreements, there will only be a short description of the case, including an indication that there was a cash payout. Because these details are so sparse, it's impossible for the general public to understand what factors were involved with the settlement. When a settlement agreement doesn't include a confidentiality clause, it can cause the plaintiffs of future lawsuits to have an unrealistic idea of the damages they may be awarded. Lawsuits where the litigant has unrealistic expectations related to their claim can be very difficult to resolve successfully.
Non-confidential settlement agreements can also make future negotiations difficult. One party may attempt to use the basic information of the settlement agreement during negotiations, despite the fact that the information in the agreement doesn't give a full picture of the case.
With a confidential settlement agreement, the number of people who have access to the terms of the settlement are limited. In addition to the parties to the agreement and their attorneys, the families of the parties and potentially a taxing agency may have information about the case.
Drafting a Confidential Settlement Agreement
To successfully draft a confidential settlement agreement, there are a few steps that you will need to take:
- Be sure that it's clear to both parties that the terms of the agreement, and the agreement itself, must be kept confidential.
- Make it clear that this confidentiality also applies to the dispute between the two parties and the negotiation process that resulted in the agreement.
- Include language in the agreement that specifies that breaking the confidentiality clause will be treated as a material breach of contract.
- Describe liquidated damages that must be paid when a breach takes place.
As a provision of the settlement agreement, all documents related to the case should either be returned to the parties or destroyed. Also, the parties should not acknowledge that these documents exist.
Sometimes, the plaintiff in a case will resist including a confidentiality clause because they are angry at the harm they have suffered due to the actions of the defendant and want the public to know what occurred. Defendants, on the other hand, will almost always want a settlement agreement to be confidential because of the guilt associated with a settlement.
One of the biggest drawbacks of confidential settlement agreements is that it can put the public at risk. When the bad actions of the defendant are kept confidential, it can allow their wrongful actions to continue, removing the public's ability to protect themselves from bad actors.
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