Few lawsuits end with a trial. Trials require significant expense and preparation, come with varying degrees of uncertainty regarding the outcome, and generally exist in a public forum. Instead, litigants and courts tend to favor settlements to resolve litigation.
Ideally, a settlement puts an end to the disputes between the parties, but often that is not the case. Because settlement agreements generally require both parties to take certain actions (e.g. payments by installment, transfers of property, and engage in or to refrain from certain acts, etc.), they present the possibility of future disputes.
Too often parties—without the assistance of a lawyer—attempt to resolve their issues before a complaint has been filed by haphazardly entering into a settlement agreement. They assume they can save costs without the advice of counsel, but the terms of a settlement agreement can carry significant and ongoing consequences. Below are some considerations you might want to discuss with your lawyer when resolving a dispute.
Parties often have options when it comes to where they institute litigation – depending on the case, they may be entitled to file in state or federal court, and possibly in different locations in either of those court systems. A business may (often correctly) view one or another of those venues as more favorable. That may make parties “race to the courthouse” of their choosing if a dispute is imminent. Your lawyer can ensure that the settlement agreement, a binding contract, is drafted in a way to select the jurisdiction you prefer to resolve any disputes arising out of the settlement agreement.
After settlement, parties need to procedurally wrap up their dispute for the court. Litigants often submit short, perfunctory notices to dismiss the case in light of settlement without giving the terms much thought. The terms of dismissal, however, will have important ramifications for the court’s ability to enforce the settlement’s terms.
If the settlement agreement is not carefully drafted, either of the parties may be forced to file a new lawsuit (resulting in added time and expense) before a new judge (resulting in ambiguity since the new judge will be unfamiliar with the case and may view the dispute differently from the prior judge) should a dispute related to the settlement agreement arise. In Ohio, parties may craft a dismissal entry or their settlement agreement to ensure that the same judge presiding over the original dispute also presides over any settlement-agreement disputes.
Which claims (and when)?
Parties generally expect that, once a settlement agreement has been reached, the original claims may no longer be pursued. That general expectation may—or may not—be true. If you have pending claims against the other party, you may want to leave them open until your adversary has fully performed certain obligations (e.g. full payment if payment is made over time in installments). Make sure you and your lawyer are discussing whether your obligations under the settlement agreement are contingent upon certain actions.
What tax treatment?
Monies paid or received in settlement can have very different tax consequences for either or both sides depending on how the payments are structured. Parties may have more flexibility to manage the tax consequences if a lawsuit settles rather than goes to judgment. The basis of the claim(s) in the litigation controls each party’s tax obligation, but most lawsuits involve multiple issues and multiple claims. While settlement agreements are not binding on the Internal Revenue Service, experienced counsel can help you identify and maximize the likelihood of the most favorable lawful tax treatment.
Unfortunately, at some point your business will likely face a dispute, which will more than likely be resolved through a settlement agreement. By taking the time to consider the terms of that settlement agreement and discussing those considerations with your lawyer, you will minimize the likelihood of potential future headaches after you thought the dispute was resolved.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
Barnes & Thornburg LLP is a large, full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business.