Overcoming a Bad Settlement

Courts favor settlement. It reduces their case load, provides a means for resolving multiple issues in a case when only the legal issues can be resolved at trial, allows more creativity in solving problems, and can open the door to better subsequent relationships between parties. Unfortunately, not every settlement is well done. Sometimes clients do not fully comprehend the details or the consequences of the settlement. Attorneys might have conflicting understandings of what was discussed. Memories may differ on critical details. When the problems are minor, the courts consistently enforce settlement agreements. When the problems are major, however, competent client representation may require an attorney to return to court and seek to have a settlement set aside. A truly bad settlement may be brought back to court under a number of different arguments.

1. Lack of authority. An attorney has no inherent authority to settle a case, and may not compromise a client’s case without the client’s consent.Rosenberg v. Townsend, 376 N.W.2d 434 (Minn. App. 1985). Even though Minn. Stat. § 481.08 appears to allow an attorney to bind his or her client by stating an agreement on the record, or by signing a settlement agreement, the courts have held that an attorney must have express authority to settle a case. Id.

No agreement. A settlement agreement is a contract, and as such, is subject to the same restrictions and requirements as any other contract. If the supposed settlement is merely an outline of issues to be resolved, rather than the actual resolution, it will not be sustained. “If an alleged contract is so uncertain as to any of its essential terms that it cannot be consummated without new and additional stipulations between the parties, it is not a valid agreement.” Triple B&G, Inc. v. City of Fairmont, 494 N.W.2d 49 (Minn. App. 1992). See also Druar v. Ellerbe & Co., 222 Minn. 383, 24 N.W.2d 820 (Minn. 1946). An agreement to agree is not a valid contract.

3. No meeting of the minds.Like any contract, to constitute a full and enforceable settlement agreement, there must be a definite offer and acceptance with a meeting of the minds on the essential terms of the agreement. TNT Properties, Ltd. v. Tri-Star Developers LLC, 677 N.W.2d 94, (Minn. App. 2004); In re Estate of McCarthy, unpub. No. A03-1183 (Minn. App. 4/27/2004).

4. Improvidence. If a party agrees to something by mistake or ignorance, to their severe disadvantage, a court may set aside the agreement as improvident. Jacobs v. Farmland Mutual Ins. Co., 377 N.W.2d 441 (Minn. 1985). “Equity will set aside a release and settlement if improvident or unconscionable and will prevent one party from taking an unconscionable advantage of another's mistake.” This is particularly true for real estate, where the court requires not only that an agreement be provident, but that the grantor must understand the nature and effect of what he or she is doing. Fenrick v. Olson, 131 N.W.2d 235, 269 Minn. 412 (1964). A settlement agreement conveying real estate will be set aside if a party who is inexperienced or ignorant, failed to understand the nature or consequences of the settlement.

5. Mistaken assumptions. If an erroneous assumption is integral to a settlement, or a settlement turns out to be based on a mutual mistake of fact, a court may set the settlement aside. For example, the attorneys may assume that a party’s entire injuries are known, or that insurance will cover part of future costs. Laidlaw v. Commercial Ins., 255 N.W.2d 807 (Minn. 1977); Simons v. Schiek’s, Inc., 145 N.W.2d 548, 275 Minn. 132 (1966).

6. Failure of consideration. Even if there is a binding contract, if the consideration fails, a court may undo the contract. This applies to settlement agreement, just as to other contracts. With failure of consideration, "a contract valid when formed becomes unenforceable because the performance bargained for has not been rendered." Franklin v. Carpenter, 309 Minn. 419, 422, 244 N.W.2d 492, 495 (1976). The consideration can take the form of either a benefit to the promisee or detriment to the promisor. Park-Lake Car Wash v. Springer, 394 N.W.2d 505 (Minn. App. 1986). As an equitable remedy, a court may cancel or rescind a settlement agreement if one party fails to perform or performance becomes impossible.

7. Breach of contract. A settlement may seem like a good idea at the time, but become problematical if one party refuses to comply with the terms of the settlement agreement. In this situation, a court may rescind the settlement agreement. “Where the injury caused by the breach of contract is irreparable, or where the damages would be inadequate or difficult or impossible to determine, rescission is appropriate.” Johnny’s, Inc. d/b/a/Pilgrim Cleaners v. Njaka, 450 N.W.2d 166 (Minn. App. 1990)

8. Judicial economy. Sometimes a settlement covers some of the issues, but addresses others so vaguely as to make those portions unenforceable. If those portions are minor or trivial, a court may choose to ignore them. However, if the failure to adequately resolve some issues will result in further litigation, in the interest of judicial economy a court may do well to set aside the entire settlement agreement. Wiping the slate clean will force the parties to face all issues and either resolve them properly, or go to trial and have them judicially determined.

When a settlement agreement turns sour, or fails to actually settle matters, parties may need to seek judicial relief. Counsel should select the best arguments for their case in requesting the court to rescind or set aside a settlement.

By Karen E. Marty Copyright July 2008.

Categories: Legal Blog

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