The case is settling: what to check in the agreement before you sign it

What to check first

Before you sign a settlement agreement, check who is released and from what, exactly how and when payment is made and what happens if it is not, whether the case is dismissed with prejudice, how attorney's fees and costs are handled, what confidentiality and non-disparagement terms bind you, how the payment is allocated for tax purposes, and what obligations continue after signing. In Texas, a signed written settlement agreement is generally enforceable like any other contract, so what it says is what you get.

I have represented businesses and individuals in disputes since 1995, on both sides. A settlement can end a dispute cleanly or plant the seed of a second one, and the difference usually lies in the drafting. This guide walks through the terms that matter most. It is general information; have a licensed Texas attorney review your specific agreement before you sign, and a tax professional review the tax treatment.

Why the paper matters as much as the number

By the time a case settles, everyone is tired, and the temptation is to sign whatever arrives and move on. That is exactly when mistakes happen. The number is only one term. A large payment spread over two years with no security can be worth less than a smaller payment made now. A release that is narrower than you thought can leave you exposed to a new claim over the same facts.

Texas law takes these agreements seriously. Under Section 154.071 of the Civil Practice and Remedies Code, a written settlement agreement reached through mediation or another dispute resolution procedure is enforceable in the same manner as any other written contract, and a court may incorporate its terms into a final judgment. Texas Rule of Civil Procedure 11 adds that agreements between parties or attorneys about a pending suit generally will not be enforced unless they are in writing, signed and filed, or made in open court and entered of record.

The release: who and what you are giving up

The release is the heart of the agreement. It describes the claims each side is giving up, and its scope should match what you actually agreed. Read it for who is released, what claims are covered and whether it runs both ways. A one-way release that frees the other side but leaves you exposed to their claims is a common and avoidable problem.

Also check what is carved out. Some obligations should survive: the settlement payment itself, warranties on products already delivered, indemnities in a separate contract, or claims that have nothing to do with the dispute. A release that is too broad can wipe those out without anyone intending it.

• Who is released: the company only, or also owners, officers, employees, affiliates and insurers
• Which claims: only those in the lawsuit, or all claims related to the relationship
• Known and unknown claims, and up to what date
• Whether the release is mutual
• What is expressly excluded and survives

Payment terms, and what happens if they are not met

If you are receiving money, the payment terms deserve the most attention. A lump sum paid at signing, or into your attorney's trust account before dismissal is filed, carries the least risk. Installment payments need protection: a clear schedule, a short cure period after a missed payment, acceleration of the remaining balance, and a fast way to enforce the deal without starting a new lawsuit from scratch.

Common protections include an agreed judgment held in escrow and filed only upon default, a personal guarantee from an owner, or security in specific assets. The right tool depends on who is paying and how much you trust them. If you are the one paying, make sure the agreement says exactly when your obligations end and that the release takes effect when you pay.

When an insurer is funding the settlement, build in realistic timing. Carriers need signed paperwork and tax forms before they issue payment, and their processes take time. The agreement should say when payment is due after signing, what documents each side must deliver first, and what happens if the deadline passes. Vague language such as payment within a reasonable time invites a fresh disagreement.

• The amount, payment date and method, written precisely
• Who receives the funds and when dismissal is filed relative to payment
• Installment schedule, cure period and acceleration on default
• Agreed judgment, guarantee or security for unpaid amounts
• Who bears each side's attorney's fees and costs

Confidentiality, non-disparagement and no admission

Many business settlements include a confidentiality clause covering the terms, and sometimes the dispute itself. Make sure it allows the disclosures you will actually need to make: to your accountant, tax advisor, lender, insurer, auditors and, where required, regulators. A clause with no exceptions can put you in breach the first time your banker asks a question.

Non-disparagement clauses restrict what each side can say about the other. If you agree to one, ask that it be mutual and that it is clear who it binds, since a company can control what it says officially but not every comment by every employee. Finally, most agreements state that no party admits liability. That language protects both sides and is usually uncontroversial, but confirm it is there.

Think through how a breach would be handled, too. Some agreements set a fixed amount payable for a confidentiality breach; others leave it to ordinary contract remedies. Either way, the clause should be specific enough that both sides know what is prohibited. A vague promise not to discuss the matter can lead to an argument over whether a remark at an industry event or a comment to a customer crossed the line.

Taxes depend on what the payment is for

Settlement money is not automatically tax-free, and the agreement can affect how it is treated. According to IRS Publication 4345, whether settlement proceeds must be included in income depends on all the facts and circumstances, and a settlement may include separate allocations, such as back pay, emotional distress and attorney's fees. The IRS generally will not disturb an allocation if it is consistent with the substance of the settled claims.

The same publication explains that a settlement for lost profits from a trade or business is taxable business income subject to self-employment tax, and that lost wages in an employment case are taxable wages. Because the allocation in the agreement matters, involve a tax professional before the agreement is final, not after the check arrives. A CPA such as Joe Hockaday can review how the payment should be characterized and reported.

Making sure the case actually ends

A settlement agreement does not end a lawsuit by itself. Whether the case is pending in a Dallas County court or anywhere else in Texas, the court needs a filing, usually an agreed motion to dismiss and an order of dismissal with prejudice, which means the same claims cannot be brought again. Check who files it, when, and what it says about costs. If the case was in arbitration, the arbitrator or administrator needs to be notified so the matter is closed.

At mediation, the parties often sign a short settlement memorandum the same day, with a fuller agreement to follow. That short document can itself be binding, so read it with the same care. If key terms are missing, such as the scope of the release or the payment protections, raise them before you sign, not after.

Last-mile mistakes I see

Most problems with settlements come from haste, not bad faith. These are the ones I watch for, whichever side I represent.

• Signing a mediation memorandum that leaves out the release terms
• Accepting installment payments with no default remedy
• A confidentiality clause with no exception for advisors or lenders
• A one-way release when both sides had claims
• No allocation discussion before the tax consequences are fixed
• Forgetting to calendar ongoing obligations such as non-solicitation or return of property
• Filing the dismissal before the money has cleared

After you sign: obligations that continue

Some settlements end with a single payment. Others create obligations that last for months or years: a former employee who agreed not to solicit certain customers, a company that agreed to stop using a name, a partner who agreed to cooperate in transferring accounts, or installment payments on a schedule. Put every deadline on a calendar, assign someone to track compliance and keep a copy of the signed agreement where you can find it.

If the other side does not comply, act promptly and in the way the agreement provides, whether that is a notice and cure period, filing an agreed judgment or a motion to enforce. Waiting can weaken your position. And take a lesson from the dispute itself: the contract terms, records and procedures that would have made it easier to resolve are worth putting in place now.

How I bring a case to a clean finish

When a case is close to settlement, I review or draft the agreement line by line against what was actually negotiated, flag terms that create risk, and explain each one in plain language so you know exactly what you are signing. I coordinate with your tax advisor on allocation, handle the dismissal filings, and make sure payment and paperwork happen in the right order. You can reach me by phone or at my office in downtown Dallas.

If you are still deciding whether to settle, my guide on five Texas lawsuit myths, including who pays attorney's fees covers the beliefs that often get in the way, and my guide on how long a Texas business lawsuit takes shows what continuing would involve.

Questions people ask me