Key Takeaways:

  • A settlement agreement breach of contract occurs when one party fails to meet the terms agreed upon.
  • Breaching a settlement agreement can lead to legal consequences, including monetary damages, enforcement actions, or even contract termination.
  • Courts may enforce settlement agreements through motions to enforce, requiring the breaching party to comply.
  • Common remedies for breach include financial compensation, specific performance, and injunctive relief.
  • Preventative measures, such as clearly outlining dispute resolution methods and penalties for breach, can reduce risks.
  • Seeking legal assistance is crucial to navigate breaches effectively and ensure compliance with contractual obligations.

Settlement agreement breach of contract is a term used when one of the parties entering into a settlement agreement violates the terms of that agreement. A settlement agreement is a contract that binds two parties together to perform obligations or refrain from actions or activities as part of a settlement of one of the party's claims.

For example, an employer may pay its employee a sum of money and benefits in exchange for the employee refraining from engaging in work with or soliciting business from the company's clients. Additionally, in exchange for the payment of the agreed-upon sum of money, the employee is waiving their rights to bring a claim against the employer for such things related to their employment termination. The salary is considered compensation for the claim the employee has the potential to file.

An example of a claim an employee could file is an employee who is terminated due to redundancy at their level in the company. The employee may have a case to dispute how the selection process was made, so instead of risking taking the case to court, the employer agrees to a settlement to avoid the costs and time associated with a potential lawsuit.

It is necessary for the employee to sign a settlement agreement in order to waive their statutory rights, otherwise, any document they sign concerning this waiver would be considered unenforceable in court.

While settlement agreements can be considered a typical part of the business for many companies, there are occurrences where one party does not abide by the terms of the settlement agreement which results in a breach. In the event that there is a breach of a settlement agreement the offended party can:

  • Initiate a civil claim for breach.
  • Seek intervention by the court that would have had jurisdiction over the original dispute.

To be able to use the latter remedy, it is essential that both parties pre-plan for the event of a breach and draft into the agreement a section that indicates the court will have jurisdiction over disputes arising from the settlement agreement.

What is a Breach of Contract?

At its core, a contract is an exchange of promises between two parties. A breach of contract can occur when one of the parties bound by the contract violates one or more of their obligations or requirements that had been laid out in the contract. When a breach of contract occurs, there is often some harm that is created for the non-breaching party by the failure to perform the actions or obligations.

Consequences of Breaching a Settlement Agreement

When a party breaches a settlement agreement, several legal consequences may follow, depending on the severity of the breach and the terms outlined in the agreement. Common repercussions include:

  • Financial Damages – The non-breaching party may seek monetary compensation for losses resulting from the breach.
  • Specific Performance – Courts may order the breaching party to fulfill their obligations as originally agreed.
  • Rescission of the Agreement – The agreement may be deemed void, restoring both parties to their original positions before the settlement.
  • Injunctive Relief – The court may issue an order preventing the breaching party from taking certain actions.
  • Legal Enforcement Actions – The non-breaching party may initiate a motion to enforce the agreement in court.

Employers and employees alike should be aware of these potential consequences before violating a settlement agreement. Courts generally uphold these contracts unless they are found to be unconscionable, obtained through fraud, or fail to meet legal requirements.

Is a Settlement Agreement Required to Terminate Employment?

The answer to this question is no, though employers may insist on the completion of a settlement agreement before they pay out any money or continue any benefits. Your employer may require this so that you cannot seek a claim against them after they have already paid out a sum to settle with you. Additionally, for your waiver of statutory rights to be legally binding, it must be drafted in a settlement agreement.

How Courts Enforce a Settlement Agreement

If a breach occurs, the non-breaching party has legal avenues to enforce the agreement. The enforcement process typically involves:

  1. Sending a Demand Letter – Before legal action, the non-breaching party often sends a formal demand requesting compliance.
  2. Filing a Motion to Enforce – If the breach remains unresolved, the non-breaching party can file a motion with the appropriate court.
  3. Court Proceedings – A judge will evaluate the case and may order compliance, award damages, or provide other legal remedies.
  4. Contempt of Court – If a party refuses to comply with a court order enforcing the agreement, they may face penalties.

In federal cases, courts have jurisdiction to enforce settlement agreements when incorporated into a court order. Parties should always include a jurisdiction clause in their agreement for streamlined enforcement.

What Are the Requirements for Entering Into a Settlement Agreement?

To make sure that the settlement agreement is legally enforceable, there are a number of legal requirements. The employee must have received legal advice on what the terms and effect of the settlement agreement are. This legal counsel must be independent and not employed by the company. This is to ensure that the employee understands everything they are agreeing to before they decide to waive their rights. The employee can receive legal advice from:

  • A qualified lawyer.
  • A certified and authorized official or employee of a trade union.
  • A certified worker at an employee advice center.

Additional requirements include:

  • Naming or the legal advisor in the agreement.
  • Formally putting the agreement in writing.
  • Specifying which claims the employee is waiving.
  • Stating that all of the requirements have been met.

Preventing Breaches of a Settlement Agreement

To minimize the risk of breaches, parties should consider the following preventive measures:

  • Clear and Detailed Terms – Every aspect of the agreement should be explicitly defined, including deadlines, payment structures, and non-compete clauses.
  • Dispute Resolution Clauses – Settlement agreements should outline procedures for handling disputes, such as mandatory mediation or arbitration.
  • Liquidated Damages Provisions – These clauses specify pre-agreed damages if a breach occurs, discouraging non-compliance.
  • Confidentiality Obligations – Parties should understand and adhere to confidentiality clauses, as violating them may constitute a breach.
  • Legal Review Before Signing – Seeking legal counsel before finalizing an agreement ensures both parties understand their rights and obligations.

By proactively addressing potential points of contention, parties can safeguard their agreements and avoid costly legal disputes.

Who Pays for the Legal Advice?

While there are no set requirements for this process, often employers will pay a portion of the legal fees for advice regarding a settlement agreement.

Remedies Available for a Breach of Settlement Agreement

When a breach occurs, the non-breaching party has several legal remedies, including:

  1. Compensatory Damages – The breaching party may be required to pay for financial losses incurred due to the breach.
  2. Specific Performance – A court may order the breaching party to fulfill their contractual obligations as originally agreed.
  3. Punitive Damages – In cases of bad faith or intentional misconduct, additional damages may be awarded.
  4. Termination of the Agreement – If the breach is severe, the non-breaching party may be allowed to cancel the agreement entirely.
  5. Negotiated Settlements – In some cases, parties may renegotiate terms to resolve the breach without litigation.

If you need legal assistance regarding a breach of a settlement agreement, UpCounsel provides access to experienced attorneys who can guide you through the enforcement and resolution process.

Frequently Asked Questions

  1. What happens if you breach a settlement agreement?
    Possible outcomes include financial penalties, enforcement actions, contract rescission, or legal proceedings.
  2. Can a settlement agreement be enforced in court?
    Yes, settlement agreements are legally binding, and courts can enforce them through motions to compel compliance or award damages.
  3. What legal remedies are available if someone breaches a settlement agreement?
    Common remedies include financial compensation, specific performance, injunctive relief, and contract termination.
  4. How can you prevent a breach of a settlement agreement?
    Clear contract terms, dispute resolution clauses, and legal review before signing can help prevent breaches.
  5. Do I need a lawyer to enforce a breached settlement agreement?
    While not mandatory, legal assistance can help navigate enforcement, protect your rights, and ensure compliance with the agreement.

If you need help with a settlement agreement breach of contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.