What is a Compromise Agreement?
Compromising agreements are commonly used management tools in order to achieve a resolution of a bona fide dispute with the obligation being to achieve an outcome which both parties are happy with so as to avoid further costs or litigation. The legal definition of a compromising agreement is an agreement which contains a promise that one party will relinquish his right to litigate over the object of a dispute in consideration of a promise to forgo something claimed by a defendant. A compromise may be defined to be the settlement of a dispute by means of some concession by or on behalf of each of the parties. However, be careful not to confuse a compromising agreement with a settlement agreement. Compromising agreements are more commonly used in civil proceedings whereas settlement agreements are more commonly used to finalise disputes that have arisen in the workplace and for that reason can often be referred to as COT3 agreements. COT3 is named after the form used to conclude the agreement with Acas.
A compromising agreement will often contain reference to certain general components such as the following: An important feature is that the agreement is usually without either party admitting anything. In our experience , many cases settle without either party wishing to admit that the other party is right. Settlements can often be difficult to negotiate even with a neutral third party or lawyer attending a mediation so compromise agreements can often be useful to those negotiations.
Compromise agreements or COT3 successful settlements will usually contain a waiver of future claims which prevent the employee having any further claims against the employer in return or in consideration for some payment or gain. Consequently, the purpose of compromising agreements is to settle disputed future claims which the employee has against the former employer in return for some kind of payment which may be a money payment but is not necessarily one. For example, the former employer may agree to undertake or complete certain work for the employee in order to bring a matter to finality.
Compromising agreements will often be concluded in circumstances where the parties to the dispute will want a quick final resolution with the least amount of legal expense possible and will also do so without admission of fault or liability by either party.
Legal Advantages of Compromise Agreements
Compromising agreements can also confer the following legal benefits: They are more cost effective than litigation – The average cost of a claim that is defended to trial is estimated to be between £5,000 to £10,000. The cost of a Tribunal appeal could be even higher and can take years to complete, often with the outcome being very difficult to predict at the outset. Compromising agreements provide the opportunity for parties to settle their differences, without incurring the expense involved in an actual claim, let alone a subsequent appeal. They are faster than litigation – Compromising agreements are generally quicker than tribunal claims. The Employment Tribunal will list a claim for a hearing within 14 weeks of the first list hearing. If a case is postponed, then that period could be as long as 20 weeks. In the Commercial Court, it is now much harder for a party to obtain a fast trial date, and it is not unusual for cases to last many weeks. In contrast, a mediation can last a few hours or be held over days or weeks or longer, and a compromise can be agreed without any delay. They are confidential – The contents of a compromising agreement (except in limited circumstances) cannot be disclosed in any subsequent tribunal or court proceedings. Further, the fact that a compromise has been reached with the aim of settling a dispute is generally confidential or can be agreed as confidential on the terms of the compromise itself. In contrast, litigation is public and court claims will be reported register including in a judgment which will be publicly available to those who refer themselves to the court record.
Common Circumstances for Compromise Agreements
In the realm of law, compromising agreements find use in a variety of scenarios. They are particularly prevalent in the context of personal injury settlements. For instance, an injured party, who is usually a plaintiff, may reach a settlement with an insurer in return for a lump-sum payment. Both parties would sign off on the terms, allowing the payment to occur.
Compromises are often implemented for the settlement of business disputes as well. When parties such as partners are unable to resolve their issues, they may use a compromise for the settlement of the matter. A contract dispute or other orderly action could use this type of agreement for settlement terms.
Family law tends to be a heavy area where compromises are used for the purpose of finalizing divorce terms. Property division, alimony and child custody and support could all use a terms set up under a compromise for settlement.
Employment disputes such as termination and severance pay could use a settlement via compromise. An employee may be able to avoid litigation under employment laws by using a compromise for the receipt of a payment as a part of his or her settlement.
Essential Aspects of a Valid Compromise Agreement
Mutual consent is a fundamental requirement for the formation of a valid compromising agreement. Without the mutual consent of both parties, there can be no legally binding agreement. If one party has not agreed to the terms of a proposed agreement, it cannot be said that the agreement came about from the mutual consent of the parties. For mutual consent to exist, the parties must either expressly or impliedly agree on the terms of the proposed compromise. Express agreement between the parties is achieved through the execution of a document by the parties, whereas implied agreement can be inferred where there is conduct on the part of the parties which gives rise to an inference of agreement. In either case, to have a valid agreement, the parties must objectively have agreed to the terms of the compromise. Such objective agreement between the parties is achieved on the basis of consensus ad idem (meeting of the minds) in the sense that the parties unanimously and unreservedly accept the terms of the compromise. For a compromising agreement to constitute a legal compromise, it is a requirement that it be based on consideration moving from the party seeking performance to the other party. The consideration need not be equal and need only be of any value that is determined by the parties. However, it cannot be so far removed from unreasonable that it renders the contract unconscionable or against public policy. In addition to mutual consent and consideration, fairness is the third essential ingredient for the validity of a compromise. For a compromise to be legally valid, it must not be unfair or unduly harsh on either party. An example is used in Feltham v The MEC for Transport in the Free State and Others 2007 JDR 0462 (O). The parties in this matter had entered into an agreement that had been negotiated after the institution of litigation. The agreement concluded was not in the best interests of the minor children and the Court set it aside as being contrary to public policy because the children were inadequately provided for by the agreement.
How to Create a Compromise Agreement
The process of drafting a compromising agreement is essential in order to comply with relevant legal formalities and to create a document which will be enforceable in the future.
This guide sets out steps that parties should follow when drafting a compromising agreement.
1. Parties to a Compromising Agreement
Compromising agreements can be completed unilaterally (i.e. voluntarily by one party) or bilaterally (i.e. by both parties). In order to be binding a compromising agreement must be between:
For a compromise to be effective, there should be at least a dispute between the parties as to the legal rights asserted by one party against the other.
2. Language of a Compromising Agreement
Ideally, the language used in the agreement should be clear and unambiguous . This will help reduce the potential for claims that the agreement is unenforceable because one of the parties did not understand its provisions.
The agreement should contain a standard definition clause; this simplifies the use of technical legal terms by highlighting what they are likely to mean in the context of the agreement.
3. Structure of a Compromising Agreement
The main points to consider are as follows:
4. Compliance with Legal Requirements
While the content of a law of contract applies to compromising agreement contracts to the same extent as with any others, there are some other requirements. Unilateral agreements, for example, will not be enforceable unless they contain a period in which they can be revoked.
Common Issues with Compromise Agreements
Parties should use extreme care when choosing the terms and conditions of a compromising agreement. Although these terms may reflect the compromise and settlement of a comprehensive claim or defence, in most instances they will not exclude all claims which may potentially arise in the future between the parties. In practical terms, it is impossible to say with absolute certainty that an event or claim which has not yet arisen between the parties will not arise in the future.
Issues do however arise with vague provisions of a compromising agreement which place the onus on the party receiving the benefit of the agreement to determine whether and to what extent the agreement applies. Such provisions have the potential to dilute the benefit obtained by the party obtaining the advantage in terms of the agreement. When parties are entering into a comprehensive compromise and settlement of claims, there is no realistic basis upon which the parties should permit anyone other than themselves to have the exclusive say in determining the scope and extent of the compromise. This should be the case, even in circumstances where a potentially competing or rival claim exists and arises from the same jurisdiction, contract or cause of action.
If there is any doubt in this regard it is advisable for parties to specifically state in their compromise and settlement agreement that the terms and conditions of the agreement will apply exclusively between the parties and in respect of specified or agreed circumstances, occurrences, claims or events. Both parties may then take comfort in the knowledge that the exclusive jurisdiction of the circumstances of the past is not, in law, the sole basis upon which the agreement between the parties is based.
Case Law: Effective Use of Compromise Agreements
Compromising agreements have been used successfully to resolve a variety of disputes in the past. Here are a few real-world examples of compromises that have worked well:
1. Walker v. North Lanarkshire Council
In 2012, an intra-family employment dispute was resolved through a compromising agreement in the Scottish Court of Session. In this case, the parties were the executor of an estate and a small business that claimed to be owed payments from his late mother’s estate. The complaint was grounded on contractual obligations and local council policies regarding employment and vacation pay. Fortunately, following signing of the CA the family was able to purchase the business from the executor and continue it as a family enterprise.
2. General Electric v. Halperin
In March 2013, the Delaware Supreme Court approved a compromising agreement that settled a shareholder derivative lawsuit. The case was initiated by a shareholder who argued that a corporate board of directors failed its fiduciary duties by approving what he deemed excessive board compensation . The settlement involved modifications establishing "new compensation committees with the power to oversee specific compensation plans in the future."
3. The National Labour Relations Board Paralegal Case
In a July 2013 decision, the National Labor Relations Board approved a settlement or "consent order" reached between a paralegal and the Agriculture Department based on her wrongful termination in 2006. The woman was fired after she attempted to unionize her colleagues and voiced opposition to certain of the Department’s policies.
4. Flournoy vs. Emerging Leaders
In a jurisdiction beyond the common law, in the country of Georgia, an employee of a non-governmental organization was terminated for filing a complaint with a governmental agency. When the employee sought redress through formal channels, the organization provided a good example of successful engagement; they appointed a competent negotiator who was able to illustrate the potential harm to the agency if the matter proceeded. After several rounds of negotiation, the employer agreed to pay the claimant damages equivalent to two year’s salary and cover employment expenses "until her employment is found."