Settlement of claims

     One party with a claim against another will frequently settle that claim by contract, sometimes as the result of negotiation without litigation, sometimes as a result of negotiation during litigation or even after judgment or appeal, sometimes as the result of mediation.  The claims come in all varieties: breach of contract, tort, restitution, property, violation of a statute.  Some claims are disputed, others undisputed.  For example, a tort claim for personal injury as a result of an automobile accident is disputed if the alleged tortfeasor denies that she was negligent.  A claim for breach of contract is disputed if the alleged breaching party denies the formation of a contract or asserts discharge of contractual liability for any of a variety of reasons.  A statutory claim for damages for an antitrust violation is disputed if the alleged culprit denies that its conduct falls within the scope of the statute.  But, of course, many claims are undisputed.  A contract claim for repayment of a loan is typically undisputed, for example, as is a judgment for the payment of money (e.g. Foakes v. Beer).  Some claims, even if undisputed, are unliquidated (i.e. presently one does not know and cannot calculate with mathematical certainty the precise amount owing) and others are liquidated (i.e. presently one knows or can calculate with mathematical certainty the precise amount owing). 

     Parties with claims, whether disputed or undisputed, liquidated or unliquidated, typically settle those claims to avoid the expense, inconvenience, time, friction, stress, and uncertainty of litigation or enforcement of judgment or simply to get on with life.  Courts favor settlements, because settlements reduce judicial workload and free judges for work on other matters before the court.  Settlement of claims also restrains the cost of maintaining a judicial system.  Accordingly, judges are favorably disposed to enforce a contract that has settled a claim when one of the parties to the settlement contract later seeks to avoid the settlement.    

     Like any contract, the contract that settles a claim requires mutual assent and a consideration (or consideration substitute).  In addition, one must pay attention to the form of the settlement agreement to determine the nature of remedies in the event one of the parties breaches the settlement agreement.   We look at each of those three sets of issues in turn. 

     Mutual assent (checks tendered in satisfaction)  

     One may encounter the same types of issues of mutual assent in the context of settlement agreements that one may encounter with contracts generally.  See Commentary.Mutual assent.   In these materials, however, we focus on an issue of mutual assent that has been particularly nettlesome: the tender by a debtor to a creditor of a check in full satisfaction of an obligation in cases where the check is for an amount less than the creditor claims is owing.  That issue is presented in Problem.Dispute.Check tendered in satisfaction. 

     Consideration

     A settlement in which one party promises to forego an undisputed, liquidated claim in exchange for a promise to perform, or the performance of, a pre-existing duty is not enforceable, because of the absence of consideration, absent a statute to the contrary.   However, the promise to perform, or the performance of, anything slightly different from the pre-existing duty is sufficient consideration to support a promise to forego the claim.   See Commentary.Pre-existing duty.

     When a claim is disputed in good faith, one cannot determine in advance of a final judgment if there is a pre-existing duty, and when an undisputed claim is unliquidated one cannot quantify in advance of a final judgment the amount of the pre-existing duty.  Accordingly, a settlement in which one party promises to forego either a disputed claim or an undisputed claim that is unliquidated is enforceable notwithstanding the pre-existing duty rule.  See R.2d Contracts 74. 

     Form of settlement    

     Settlement contracts typically will take one of two forms:   the settlement contract may substitute for and hence discharge the original claim, or the settlement contract may suspend the original claim pending the performance of promises in the settlement.  A settlement contract that substitutes for the original claim is sometimes referred to as a "substitute contract" and sometimes referred to as a "novation" (although in some jurisdictions the word novation is reserved for a contract that substitutes a new debtor in place of an old one with intent to release the old debtor).  See, e.g., Cal. Civ. Code 1530-33 and R.2d Contracts 279 and 280.  Note that a substitute contract may substitute for any type of claim, not just contract claims. 

     A settlement contract that suspends the original claim pending the performance of promises in the settlement is known as an "executory accord."   The performance of the promises in the settlement is known as "satisfaction."  The entire process, settlement agreement and subsequent performance, is known as "accord and satisfaction."  Satisfaction discharges both the suspended claim and the accord.  Absent timely satisfaction of the accord, the party holding the suspended claim may pursue either the suspended claim or the accord.  See R.2d Contracts 281.   Where one party accepts or is deemed to accept tender of a check in satisfaction of a claim, the acceptance of the check forms the executory accord and the payment of the check by the bank on which it is drawn will constitute satisfaction.

     The distinction between a substitute contract and an executory accord only becomes relevant if the party making new promises in exchange for the surrender of a claim fails to perform those promises.  Consider the following example:  Party A must repay Party B in one month for a $1,000 loan made by Party B.  In settlement of the obligation, Party B agrees with Party A to take $950 in one week.  (There is mutual assent.  There is also consideration for B's promise to forego collecting the balance because Party A is promising to perform something slightly different, paying early, than her pre-existing duty.)  If this agreement is characterized as a substitute contract, its formation discharges the $1,000 obligation.   If A fails to pay $950, B has a claim for $950 but not for $1,000.  In contrast, if this agreement is characterized as an executory accord, timely payment by Party A discharges both the $1,000 and the $950 payment obligations.  Failure of A to timely pay $950 leaves B with the option to pursue either the $1,000 or the $950 claim. 

     Characterization of a settlement contract as a substitute contract or an executory accord depends upon the intention of the parties.  That intention may be expressed in the settlement document, if there is one.  If not expressed, the presumption, subject to proof to the contrary, is that the parties intended an executory accord if the claim was undisputed and liquidated (as in the example immediately above) and that the parties intended a substitute contract if the claim was disputed or unliquidated.  See Comment c to R.2d Contracts 279. 

     Supplementary reading:  Farnsworth, 4.24.