In high stakes commercial litigation, it is important to understand when a settlement becomes enforceable. Due to the fluidity of the settlement process, more often than not the terms of a settlement are agreed to orally before they are reduced in writing or the material terms are set forth in an email with the details to follow in a formal agreement. What happens if a party attempts to back out of a settlement before all the terms have been reduced to writing? Is the agreement nonetheless enforceable? In certain cases, litigants can enforce oral settlements and agreements where only certain terms have been reduced to writing.
Settlement agreements are governed by principles of contract law. See Brundage v. Estate of Carambio, 195 N.J. 575, 600-01 (2008); Nolan v. Lee Ho, 120 N.J. 465, 472 (1990). Contrary to other contract cases, our “courts strain to give effect to the terms of a settlement wherever possible” due to New Jersey’s strong public policy of favoring of settlements. See Dep’t of Pub. Advocate v. N.J. Bd. of Pub. Util., 206 N.J. Super. 523, 528 (App. Div. 1985). Accordingly, “any action which would have the effect of vitiating the provisions of a particular settlement agreement and the concomitant effect of undermining public confidence in the settlement process in general, should not be countenanced.” Id. at 528. “Where the parties agree upon the essential terms of a settlement, so that the mechanics can be ‘fleshed out’ in a writing to be thereafter executed, the settlement will be enforced notwithstanding the fact the writing does not materialize because a party later reneges.” Lahue v. Pio Costa, 263 N.J. Super. 575, 596 (App. Div.) (quoting Bistricer v. Bistricer, 231 N.J. Super. 143, 145 (Ch. Div. 1987)), certif. denied, 134 N.J. 477 (1993). The inclusion of additional terms to implement a settlement that do not alter the core agreement will not prevent the enforcement the agreement. Bistricer, supra, 231 N.J. Super. at 148, 151.
The New Jersey Appellate Division’s recent decision in Mid-Monmouth Realty Assocs. v. Metallurgical Indus., No. A-0503-14T2, 2016 N.J. Super. Unpub. LEXIS 2475 (Super. Ct. App. Div. Nov. 16, 2016) re-affirmed that the mechanics of a settlement do not need to be fleshed out in writing for a settlement to be considered enforceable as a matter of law. In Mid-Monmouth Realty Assocs., the plaintiff argued on appeal that the trial court erred in enforcing the parties’ settlement because the parties never agreed to the scope of a release, which was a material term of the settlement. Specifically, plaintiff contended that the revision defense counsel proposed was a counteroffer, which plaintiff did not accept, thus eviscerating the existence of an enforceable settlement. The Court held that the “failure to execute release documents does not void the original agreement, or render it deficient from the outset. Execution of a release is a mere formality, not essential to formation of the contract of settlement.” Id. (citing Jennings v. Reed, 381 N.J. Super. 217, 229 (App. Div. 2005). Plaintiff could not renege on the settlement simply because it no longer felt that the money it was receiving was sufficient. Id.; see also Jennings v. Reed, 381 N.J. Super. 217, 232 (App. Div. 2005) (enforcing settlement notwithstanding party’s second thoughts).
As a practice point, the material terms of a settlement should always be reduced to writing in a term sheet that includes language to the effect that the term sheet is an enforceable settlement notwithstanding the fact that additional terms will be fleshed out in a more formal agreement.