Compromise and Settlement

Resolution of a dispute by mutual agreement to avoid a lawsuit.

Public policy favors the settlement of disputes to avoid lawsuits. Parties to conflicts that might otherwise end up in court are encouraged to resolve those conflicts by mutual agreement through their attorneys, through mediators, or even on their own. A compromise and settlement can be used for many types of disagreements including contract disputes, civil disputes, labor-management negotiations, criminal cases, and DIVORCE and custody problems.

The terms of a settlement agreement do not necessarily need to be equal. One party may give up more than originally intended. However, as long as the parties agree to the terms and the court views the compromise as fair, the settlement will be upheld by the court. A settlement is considered binding, and the court views it as final and conclusive. A compromise and settlement will be put aside only if there is evidence of bad faith or FRAUD.

A valid compromise and settlement can be in any form, written or verbal. A writing is not required unless specified by statute, court rule, or the terms set by the parties. When the agreement is written, it must clearly state the intentions of the parties.

A compromise and settlement must have the same elements as a contract: parties who have the capacity and authority to agree, an offer and acceptance, and valuable consideration (consideration is something of value received or promised by one party to induce the other party to enter into an agreement).

Any party competent to enter into a contract can use compromise and settlement to resolve a conflict. There must be a meeting of minds in order to form a valid compromise; in other words, the parties must have the same understanding of the settlement. There must also be an offer of compromise and an acceptance of that offer. The offer can be made by either party. The terms of the offer must be clear and must show that the party making the offer intends to assume some obligation.

The offer can be made subject to certain conditions that must be satisfied for a valid compromise. For example, a creditor creates a conditional offer when he or she sends a promissory note for less than the full amount of a debt. If the debtor signs the note, he or she is agreeing to forgive part of the debt. If the debtor refuses to sign the note, the creditor's offer is rejected. The offer is conditioned on the debtor's signing the note.

An offer of compromise and settlement must be made within a reasonable time. Acceptance of an offer of compromise must likewise be made within a reasonable time, and on the terms offered. However, delay in acceptance is immaterial when the person making the offer is not prejudiced by it. Acceptance can be implied or expressed. If it is based on a condition that proves impossible to perform, no settlement is possible.

An offer of compromise can be withdrawn before acceptance, but not after. When an agreement is put in writing, either party may withdraw before signing. If court approval is necessary, one party can repudiate the agreement prior to the approval of the court.

Like any other contract, a valid compromise and settlement must be based on consideration. Anything of value exchanged by the parties, including money or property, is sufficient to support a compromise and settlement. If a debtor agrees to pay more than she or he thinks is owed, the additional amount is consideration in exchange for settlement of the debt. Resolution of family conflicts can also be considered valuable consideration. The adequacy of the consideration, however small or slight it might be, is usually not a matter for judicial scrutiny. Unless the consideration is so unfair as to shock the conscience, inadequacy of consideration does not justify setting aside a compromise and settlement.

Disputes involving family matters are frequently the subject of compromise and settlement. Increasingly, courts are encouraging, and sometimes mandating, that parties in divorce and custody matters seek settlement before pursuing an issue through trial. In a family setting, where issues are very personal and emotional, compromise and settlement provides a means of preserving some sense of the close relationship between the parties. Because the parties reach the final agreement together, family matters resolved through compromise and settlement tend to be more amicable than those resolved through litigation.

Compromise and settlement can also be used to settle disputes with the INTERNAL REVENUE SERVICE (IRS). A taxpayer who owes the IRS money may propose a compromise for the method or amount of its payment. When the government accepts this compromise offer, it becomes a binding contract (47B C.J.S. Internal Revenue § 1064 [1995]).