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or call +44 20 7542 6664. Copyright ©Thomson Reuters 2017. All Rights Reserved.
United States of America - specic information on all aspects of settling a dispute by negotiation, mediation and
other alternative dispute resolution mechanisms, including the statutory obligations to attempt settlement, form
and formalities of settlement, how to ensure condentiality of the settlement terms, the without prejudice status of
negotiations, the law on third party rights, enforcement of the settlement terms and how to set aside a settlement.
This Q&A provides country-specic commentary on Practice note, Settlement: Cross-border and forms part of
Cross-border dispute resolution.
SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
by Carolyn M. Branthoover and Eric M. Matava, K&L Gates LLP
This document is published by Practical Law and can be found at: uk.practicallaw.com/W-006-5994
To learn more about legal solutions from Thomson Reuters, go to legal-solutions.co.uk
RESOURCE INFORMATION
RESOURCE ID
W-006-5994
RESOURCE TYPE
Country Q&A
STATUS
Law stated as at 31-Mar-2017
JURISDICTION
United States
STATUTORY OBLIGATIONS
1. Do courts in your jurisdiction encourage
settlement between parties? If so, by what means?
Are there any implications for the parties that
refuse to participate in settlement negotiations?
Courts in New York and throughout the United
States of America (US), both at the federal and
the state court level, use several methods to
encourage settlement between parties. The Federal
Rules of Civil Procedure (FRCP), applicable in all
federal courts across the US, establish a process
for scheduling one or more pre-trial conferences
that typically have as one of their specific purposes
“facilitating settlement” (Fed. R. Civ. P. 16(a)(5)).
Matters that may be considered at a pre-trial
conference include “settling the case and using
special procedures to assist in resolving the dispute
when authorized by statute or local rule” (Fed. R. Civ.
P. 16(c)(I)).
Federal courts across the US have adopted Local
Rules that supplement the FRCP. These Local Rules
also typically encourage and/or require parties to
engage in settlement discussions. For example,
the Local Rules of the United States District Courts
for the Southern and Eastern Districts of New York,
which is one such set of Local Rules, provides that
“[a]ll counsel in civil cases shall seriously discuss the
possibility of settlement a reasonable time prior to
trial” (Local Civil Rule 47.1). These New York District
Courts are also empowered to impose on the parties
or their counsel the cost of one day’s attendance by
jurors at the trial of a case if the case is settled after
the jury has been seated or during trial. In this way,
the New York Federal Courts have imposed upon
parties, through their counsel, a positive obligation
to engage in settlement discussions.
Also, the Southern and Eastern US District Courts
of New York, like the majority of federal courts, have
established a mediation process (Local Civil Rule 83.11)
for cases that the court considers suitable for mediation.
If the court deems a case suitable for participation in a
mediation programme, the parties must attend at least
one mediation session (Local Civil Rule 83.11(c)(1)). Failure
to participate in a court-ordered mediation, like a breach
of any other court order, subjects a party to potential
sanctions (In re A.T. Reynolds & Sons, Inc., 452 B.R. 374,
381–85 (S.D.N.Y. 2011). No sanctions were appropriate, but
it acknowledged the court’s power to sanction parties who
fail to participate in good-faith mediation).
The procedural rules governing suits led in New
York state courts similarly encourage, if not require,
parties to engage in good faith settlement negotiations
throughout the case. For example, the Uniform Rules
for New York State Trial Courts (Uniform Rules for Trial
Courts) provide that “[t]he matters to be considered at
the preliminary conference shall include: … settlement
of the action” (Uniform Rules for Trial Courts, rule
202.12(c)(5); see also the reference to “facilitating
settlement” during the pre-trial conference in federal
court cases (Fed. R. Civ. P. 16(a)(5)).
New York law also prohibits a non-settling defendant
from seeking contribution against a defendant that has
settled (New York General Obligations Law § 15-108(b)).
This statute was specically designed to encourage
parties to settle and was a response to the decision of
the New York Court of Appeals in Dole v. Dow Chemical
Co., 282 N.E.2d 288 (N.Y. 1972), which held that, when
only one of two defendants is sued, the defendant can
take legal action against the other defendant for an
equitable apportionment of liability. The Dole decision
was interpreted by later courts to mean that a non-
settling defendant could cross-claim for contribution from
a settling defendant, which had the effect of discouraging
defendants from engaging in settlement discussions.
New York General Obligations § 15-108(b) was enacted to
restore faith in the settlement process.
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
FORM OF SETTLEMENT
2. What are the different ways in which parties
to a dispute can record a settlement between
them (for example, a settlement agreement,
deed or court order)? Are settlements agreed
verbally or through emails or letters exchanged
between the parties required to be recorded
in separate agreement or court order to be
considered valid?
Under New York law, and in other US jurisdictions,
settlement agreements are treated like any other
contract. Accordingly to establish the existence of a
settlement agreement, “a plaintiff must establish an
offer, acceptance of the offer, consideration, mutual
assent and an intent to be bound” (Kowalchuk v. Stroup,
61 A.D.3d 118, 121 (N.Y. App. Div. 2009)). However, there
is some inconsistency in the courts’ approaches to the
enforcement of oral settlement agreements. There are
many states where oral settlement agreements are
enforceable so long as they do not violate breach the
statute of frauds (see, for example, Mastroni-Mucker v.
Allstate Ins. Co., 976 A.2d 510, 518 (Pa. Super. Ct. 2009)
(applying Pennsylvania law)). New York and a number
of other states, however, take the opposite view. New
York law requires that, to be enforceable, a settlement
agreement must be in writing.
This requirement is reected in rule 2104 of the New
York Civil Practice Law and Rules (NY CPLR), which
provides that: “An agreement between parties or their
attorneys relating to any matter in an action, other
than one made between counsel in open court, is not
binding upon a party unless it is in a writing subscribed
by him or his attorney or reduced to the form of an order
and entered. With respect to stipulations of settlement
and notwithstanding the form of the stipulation of
settlement, the terms of such stipulation shall be led
by the defendant with the county clerk.” New York courts
have referred to rule 2104 as “a statute of frauds” that
governs the enforceability of a settlement agreement
(Sears, Roebuck and Co. v. Sears Realty Co., Inc. 932 F.
Supp. 392, 401¬–03 (N.D.N.Y. 1996)); and the requirement
of “a writing” has been consistently applied (see Apple
Corp. Ltd. v. Sony Music Entm’t, Inc., No. 91 Civ. 7465, 1993
WL 267362 (S.D.N.Y. July 14, 1993); In re Lady Madonna
Indus. Inc., 76 B.R. 281 (S.D.N.Y. 1987); Klein v. Mount Sinai
Hospital, 462 N.E.2d 1180 (N.Y. 1984); Greenidge v. City of
New York, 179 A.D.2d 386 (N.Y. Sup. Ct.1992)).
The second part of rule 2104 provides that stipulations
of settlement led with the court must include the terms
of the parties’ agreement. In practice, this requirement is
not strictly observed. What usually happens in New York
state courts is that the parties jointly le a stipulation of
discontinuance, which brings the legal proceedings to
an end. The stipulation of discontinuance may refer to
the settlement agreement without including the terms
of the settlement or a copy of the agreement.
Out of respect for the legitimate interest of parties to
maintain the condentiality of their settlement agreements,
there has been almost no litigation regarding the stipulation
requirements of rule 2104. Court clerks routinely accept non-
complying stipulations of settlement so long as the required
US$35 ling fee is paid (see NY CPLR 8020 for further details
on ling fees).
However, a court may in some circumstances refuse to
enforce the settlement agreement if the parties have not
complied fully with rule 2104 (see, for example, Velazquez
v. St. Barnabas Hosp., 13 N.Y.3d 894 (N.Y. 2009) –).
Although New York law insists that settlement
agreements must be in writing, the law is less strict
regarding the degree of formality of the writing.
Settlement agreements reected in the exchange of
letters or emails are enforceable provided that the
letters or e-mails contain all the essential elements
of a legally binding contract: an offer, an acceptance,
an intention to create a legal relationship, and some
form of consideration. Therefore, a further formal
written agreement is not required for a settlement to be
enforceable (see, for example, Hostcentric Techs., Inc. v.
Republic Thunderbolt, LLC, No. 04 CIV. 1621 (KMW), 2005
WL 1377853 (S.D.N.Y. June 9, 2005) The court found that
two e-mails between parties constituted a valid, binding
settlement agreement; Denburg v. Parker Chapin Flattau
& Klimpl, 624 N.E.2d 995, 1000 (N.Y. 1993) −).
FORMALITIES
3. What formal requirements exist for
executing a valid settlement? Is it possible
to use counterparts to complete the process
of executing a settlement agreement?
There are usually no formal requirements regarding the
contents of a written settlement agreement. However,
the agreement must contain all the essential elements
of a legally binding contract (see Question 2). Similarly,
there are no formal requirements regarding the manner
in which a settlement agreement is executed. The use of
counterparts signature pages is common and acceptable.
TERMS OF SETTLEMENT SUBJECT
TO COURT RATIFICATION
4. Do the terms of settlement require court
approval? Does the settlement agreement
need to be led with the court? If so, are (i)
the fact of settlement and (ii) the settlement
terms, a matter of public record?
In most cases, the terms of a settlement agreement
do not require court approval and the agreement does
not need to be led with the court. However, in certain
classes of claims where the parties are acting, in whole
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
or in part, as representatives of others, court approval is
required. Cases brought or defended in a representative
capacity, and where court approval of a settlement
agreement is required, include:
• Class actions.
• Shareholder derivative actions.
• Bankruptcy court claims.
• Cases involving minors or incompetents.
• Claims under the Fair Labor Standards Act.
Class actions
Rule 23 of the Federal Rules of Civil Procedure provides
that “[t]he claims, issues, or defenses of a certied class
may be settled, voluntarily dismissed, or compromised
only with the court’s approval.” Rule 23 also sets out the
specic procedures to be followed to secure the court’s
approval (Fed. R. Civ. P. 23(e)). These procedures include
(Fed. R. Civ. P. 23(e)(1)–(5)):
• Reasonable notice to all class members.
• An opportunity for class members to object.
• A determination by the court that the proposed
settlement is “fair, reasonable, and adequate.”
The United States Congress enacted the Class Action
Fairness Act of 2005, 28 U.S.C. §§ 1711–1715 (CAFA) in
response to abuses of the class action procedure. Some
of these abuses “harmed class members with legitimate
claims” (section 2, CAFA). To protect class members and
defendants, CAFA expanded the jurisdiction of federal
courts to preside over class actions (section 4). The Act
also provided further guidance on the circumstances
under which a court may or may not approve the
settlement of a class action, including additional
notication requirements (section 1715, CAFA).
Therefore, class action settlements are regularly
subjected to close examination by the federal courts
and approval of a jointly proposed settlement is not
automatically granted. For example, in one particularly
high prole and complex antitrust case brought by
millions of retailers against the Visa and MasterCard
payment networks, the parties have spent several
years trying to reach agreement without being able to
secure the nal approval of the court (In re: Payment
Card Interchange Fee and Merchant Discount Antitrust
Litigation, No. 12-4671-cv(L) (2d Cir. June 30, 2016);).
New York state law is similar to federal law and requires
that “[a] class action shall not be dismissed, discontinued,
or compromised without the approval of the court. Notice
of the proposed dismissal, discontinuance, or compromise
shall be given to all members of the class in such manner
as the court directs” (NY CPLR 908).
New York courts impose a level of scrutiny similar to
federal courts when reviewing a proposed settlement
for approval. For example, in Fiala, et al. v. Metropolitan
Life Ins. Co., 899 N.Y.S.2d 531 (2010) (Fiala), the court
approved a US$50 million settlement of the claims of a
class of more than 10 million life insurance policyholders
of MetLife. In doing so, the court undertook a careful
assessment of the “fairness of the settlement, its
adequacy, its reasonableness and the best interests of
the class members” (Fiala at 537). More specically, the
court took into account (Fiala at 538−39):
• The duration of the litigation.
• The experience and skill of counsel.
• The complexity of the legal issues.
• The relative strength of the parties’ positions.
• The challenges associated with the proof of
damages.
The court also assessed and found reasonable the
portion of the settlement identied for the payment of
counsels’ fees (Fiala at 540–41).
Shareholder derivative actions
Shareholder derivative actions are brought by individual
shareholders as duciaries on behalf of the corporation.
Like class actions, shareholder derivative actions receive
the close attention of the federal courts. The Federal
Rules of Civil Procedure provide that “A derivative action
may be settled, voluntarily dismissed, or compromised
only with the court’s approval. Notice of a proposed
settlement, voluntary dismissal, or compromise must
be given to shareholders or members in the manner
that the court orders” (Fed. R. Civ. P. 23.1(c)). New York
Business Corporation Law is similar and provides that a
shareholder derivative action “shall not be discontinued,
compromised or settled without the approval of the
court having jurisdiction of the action” (N.Y. Bus. Corp.
L. § 626(d)). The court’s involvement in the approval of
settlement agreements ensures that the interests of the
corporation and its shareholders are protected.
The law of Delaware, and in particular the common law
of the state, is particularly important in the context of
shareholder derivative actions. This is because Delaware
courts play a unique role in shareholder litigation. The
majority of US corporations are incorporated in Delaware,
which means that most shareholder disputes are litigated
in Delaware courts. Delaware Chancery Court rule 23.1(c)
is almost identical to the corresponding Federal rule and
provides that a derivative action “shall not be dismissed or
compromised without the approval of the Court, and notice
by mail, publication or otherwise of the proposed dismissal
or compromise shall be given to shareholders or members
in such manner as the Court directs” (Del. Ch. Ct. R. 23.1(c)).
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
The great majority of derivative actions are resolved
by settlement, and such settlements are particularly
favoured by the courts because derivative actions are
“notoriously difcult and unpredictable” (Maher v. Zapata
Corp., 714 F.2d 436, 455 (5th Cir. 1983), citing Schimmel v.
Goldman, 57 F.R.D. 481, 487 (S.D.N.Y. 1973)). The standard
of review used by a court when considering approval of
the settlement of a derivative action is similar to that used
by courts when approving class action settlements: “In
reviewing the settlement of a derivative suit, the Court
must assess, using its business judgment, whether the
settlement terms are fair, reasonable, and adequate”
(Ryan ex rel. Maxim Integrated Prods. v. Gifford, No. 2213-
CC, 2009 Del. Ch. LEXIS 1, at *16 (Del. Ch. Jan. 2, 2009)).
In making this assessment in Stepak v. Ross, 11 Del. J.
Corp. L. 1011 (Del. Ch. 1985) (Stepak), the Delaware Court
of Chancery took into account “the nature of the claim,
possible defenses and the legal and factual obstacles
facing plaintiffs in the event of trial” and concluded that
the proposed settlement of the derivative shareholder
claims in several consolidated actions was “fair to all
concerned” (Stepak at 1017–19).
Bankruptcy court claims
Matters brought before federal bankruptcy courts are
governed by the Federal Rules of Bankruptcy Procedure.
Rule 9019(a) gives federal bankruptcy courts the authority
to approve settlements. The rule provides that “[o]n
motion by the trustee and after notice and a hearing, the
court may approve a compromise or settlement” (Fed.
R. Bankr. P. 9019(a)). Although a bankruptcy court is
required to hold a hearing, it is not required to conduct
an independent investigation or a mini trial on the merits
(In re Drexel Burnham Lambert Group, Inc., 134 B.R. 493,
496 (S.D.N.Y. 1991) (Drexel)). Instead, the court must
“make an informed, independent judgment as to whether
a settlement is ‘fair and equitable’ and ‘in the best
interests of the estate’” (Drexel at 496, quoting Protective
Committee for Independent Stockholders of TMT Trailer
Ferry, Inc. v. Anderson, 390 U.S. 414 (1968), reh. denied,
Protective Committee for Independent Stockholders etc.
v. Anderson, 391 U.S. 909 (1968), on remand, TMT Trailer
Ferry, Inc. v. Kirkland, 471 F.2d 10 (5th Cir. 1972)).
Factors that bankruptcy courts take into consideration
when determining the reasonableness of a proposed
settlement include (Drexel at 497):
• The probability of success compared to the present
and future benets of the proposed settlement.
• The probability of complex and lengthy litigation if
the proposed settlement is not approved.
• The extent to which represented parties object to or
support the proposed settlement.
• The competency and experience of counsel
supporting settlement.
• The relative benets to be received by all members
and groups within the class.
• The nature and scale of releases obtained by
directors and ofcers.
• The extent to which the proposed settlement
resulted from arm’s length negotiations.
The bankruptcy courts are not required to resolve all of
the legal and factual issues presented by the dispute
but should “canvas the issues and see whether the
settlement ‘fall[s] below the lowest point in the range of
reasonableness’” (In re W.T. Grant Co., 699 F.2d 599, 608
(2d Cir. 1983), quoting Newman v. Stein, 464 F.2d 689,
693 (2d Cir. 1972)).
Cases involving minors or incompetents
Another class of plaintiffs who are protected by rules
requiring court approval of settlements are minors and
individuals who lack legal ability to stand trial, who
are considered wards of the state (Valdimer v. Mount
Vernon Hebrew Camps, Inc., 172 N.E.2d 283, 284–85
(N.Y. 1961) (Valdimer)), and whose interests in disputed
matters are usually represented by parents or court-
appointed guardians or conservators. This requirement
is codied in the New York Civil Practice Law and Rules,
which provide: “Upon motion of a guardian of the
property or guardian ad litem of an infant of, if there is
no such guardian, then of a parent having legal custody
of an infant, or if there is no such parent, by another
person having legal custody … or of the conservator
of the property of a conservatee, the court may order
settlement of any action commenced by or on behalf of
the infant, incompetent or conservatee” (NY CPLR 1207).
The court must assess the fairness and reasonableness
of the settlement when considering the best interests of
the minor or incompetent (Valdimer at 284).
Claims under the Federal Fair Labor Standards Act
Rule 41 of the Federal Rules of Civil Procedure provides
for the voluntary dismissal of an action without court
order or approval. However, voluntary dismissal under
rule 41 is only available to the parties so long as another
federal rule or “any applicable federal statute” does not
provide otherwise (Fed. R. Civ. P. 41(a)(1)(A)). An example
of a federal law claim requiring court approval of a
dismissal with prejudice is a claim brought under the
Fair Labor Standards Act (FLSA).
In Cheeks v. Freeport Pancake House, Inc., 796 F.3d
199 (2d Cir. 2015) (Cheeks), the United States Court
of Appeals for the Second Circuit concluded that “in
light of the unique policy considerations underlying
the FLSA”, the FLSA is an “applicable federal statute”
under rule 41 such that settlements involving stipulated
dismissal of FLSA claims with prejudice must be
approved by the district court or the US Department
of Labor (Cheeks at 206). Characteristics of FLSA
claim settlements unlikely to secure court approval
include (Cheeks at 206):
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
• Highly restrictive condentiality provisions.
• Excessively broad releases.
• Provisions setting attorneys’ fee awards at inordinate
amounts not supported by adequate documentation.
CONFIDENTIALITY
5. Are settlements in your jurisdiction
automatically condential? If not, what
steps can parties take to seek to keep the
settlement condential?
In New York, settlement agreements are not
automatically treated as condential. If parties wish to
keep their settlement condential, they usually include
a condentiality provision in the agreement. Also, the
parties must le a motion with the court to allow the
ling of their stipulation of settlement and dismissal
under seal. However, placing a settlement agreement
under seal is an awkward process. Another option, not
tested in the courts, is to describe the settlement terms
in the stipulation generally and not specically.
POWERS OF THE PARTIES TO
COMPROMISE
6. Are there any restrictions on parties’ power
to compromise their disputes? Are there rules
on who may sign a settlement, especially on
behalf of a company?
There are restrictions on parties’ power to compromise
their disputes if the dispute requires court approval
(see Question 4). The types of disputes requiring
court approval include class action settlements
and shareholder derivative actions (see Question 4).
The court will review the fairness of the proposed
settlement in accordance with applicable law and
either approve or reject the proposed settlement.
The individual who signs a settlement agreement
must have the authority to bind the settling party in
order for the settlement agreement to be enforceable
against that party (see Question 16). This rule also
applies to attorneys: “[W]ithout a grant of authority
from the client, an attorney cannot compromise or
settle a claim” (Hallock v. State of New York, 474 N.E.2d
1178, 1178 (N.Y. 1984) (Hallock)). Settlement authority,
however, may be either express or implied (see Hallock
at 1178 where a settlement agreement agreed to
by counsel was found binding on plaintiff because
plaintiff’s counsel had apparent authority to bind him).
TIMING OF SETTLEMENT
7. Can settlement discussions be conducted
at any time during litigation proceedings?
Are there any advantages, in terms of costs
or otherwise, to entering into settlement
negotiations sooner rather than later during
litigation proceedings?
In New York, as well as generally within the US, there are
no court-imposed limitations on the timing of settlement
discussions. Civil procedure rules applicable in federal
and state courts encourage settlement discussions
from the earliest days and throughout the duration of
an ongoing action. In New York, the Local Rules require
parties to discuss settlement before the trial begins
(Local Civil Rule 47.1; see Question 1). The Local Rules also
provide for costs to be imposed on parties if the case
is settled after the jury has been seated or during trial
(Local Civil Rule 47.1; see Question 1).
WITHOUT PREJUDICE RULE
8. Does the ‘without prejudice’ rule apply to
settlement negotiations in your jurisdiction? Are
there any exceptions to the applicability of the rule?
Can it be waived with the consent of the parties?
The “without prejudice” rule applies in New York in the
form of NY CPLR 4547. Evidence that a party either
offered, promised to offer, accepted, or promised to
accept any valuable consideration to satisfy a claim
which is disputed as to either validity or amount of
damages, is inadmissible as proof of liability for or
invalidity of the claim or the amount of damages (82
Retail LLC v. Eighty Two Condo., 117 A.D.3d 587, 589 (N.Y.
App. Div. 2014)). New York Rule 4547 provides for two
exceptions that mirror those provided in Federal Rule of
Civil Procedure 408:
• Evidence that is otherwise discoverable.
• Evidence that is offered:
– to prove the bias or prejudice of a witness;
– to reject a contention of undue delay; or
– as proof of an effort to obstruct a criminal
investigation or prosecution (Arben Corp. v. New
York State Thruway Auth., 859 N.Y.S.2d 892 (N.Y.
Ct. Cl. 2008)).
Additionally, evidence of any conduct or statement
made during settlement negotiations is also
inadmissible. The New York legislature added this
provision in 1998 to conform to Federal Rule of Civil
Procedure 408, and this addition represented a major
shift in New York law.
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
Before, it had been the rule in New York that unqualied
statements of fact made during settlement negotiations were
admissible against the party who made the statements (Miller
v. Sanchez, 789 N.Y.S.2d 850 (N.Y. Civ. Ct. 2004)). So, to avoid
the admissibility of their comments, negotiators had to enter
into stipulations or preface their discussions with technical
or protective phrases such as “This is without prejudice,” or
“Let’s assume, hypothetically.” The traditional rule prevented
open, informal communication and often created a trap
for individuals who did not understand the complex legal
principles and language. The expansion of the exclusionary
rule to include statements of fact made in the course of
negotiations was adopted in line with public policy aimed
at encouraging settlements (Vincent C Alexander, Practice
Commentaries on the New York Civil Practice Law and Rules, in
McKinney’s Consolidated Laws of New York (Thomson/West)
(McKinney’s CPLR); McKinney’s CPLR 4547).
TERMS OF SETTLEMENT
9. Are there any limitations on the scope of
release clauses that parties may agree with
respect to existing and future claims? Please cite
any relevant statutory provisions and case law.
In general, no particular form of words is required to
make a written release of claims effective. All that
is necessary is that the words show an intention to
discharge. The scope and meaning of a release will
be determined by the clearly expressed intention
of the parties using principles of general contract
interpretation (Gordon v. Vincent Youmans, Inc., 358 F.2d
261, 263 (2d Cir. 1965)).
Releases are often referred to as either general or specic
in nature. A general release covers any and all claims that
are in existence between the parties and that they have
in mind when the release is executed (Peterson v. Regina,
935 F. Supp. 2d 628, 636 (S.D.N.Y. 2013) (Peterson)). By
contrast, a specic release is one that is restricted by its
terms to claims or actions arising from specied events,
transactions or injuries (Peterson; see also 19A N.Y.Jur.2d
Compromise, Accord, and Release § 105).
Neither form of release is more enforceable than the other.
However, the restricted nature of specic releases means
that they are likely to generate fewer disputes regarding
their scope, which may make them easier to enforce.
The law is not uniform across the US regarding the
enforceability of releases of future claims. California
statutory law provides that: “A general release does
not extend to claims which the creditor does not know
or suspect to exist in his or her favor at the time of
executing the release, which if known by him or her
must have materially affected his or her settlement with
the debtor” (Cal. Civ. Code § 1542;). Specic releases,
however, are not covered by section 152 of the California
Civil Code and may therefore serve to discharge claims
that the creditor does not know or suspect to exist at the
time of executing the release (Larsen v. Johannes, 7 Cal.
App. 3d 491 (Cal. Dist. Ct. App. 1979)).
Unlike California, New York does not have a statute
prohibiting releases of future unknown claims as part
of a general release. On the contrary, New York courts
have held that a release may include unknown claims
if the parties so intend and the agreement is fairly and
knowingly entered into (Centro Empresarial Cempresa
S.A. v. Am. Movil, S.A.B. de C.V., 952 N.E.2d 995, 1000
(N.Y. 2011), which enforced the terms of a specic release
that extended to unknown future claims). On the other
hand, if a release does not extend to future claims, the
release would be effective only to bar or discharge any
claims in existence up to the date of the execution of the
release (Id.; see also 19A N.Y. Jur. 2d Compromise, Accord,
and Release § 108).
TAXES ON SETTLEMENTS
10. Are taxes (such as income tax, capital gains
tax or corporation tax) payable in relation to
settlements involving payment of money?
Whether taxes are potentially payable on a settlement
payment depends on the circumstances and requires
specialist advice.
SEVERABILITY
11. Are severability clauses commonly
incorporated within settlement agreements to
avoid the entire agreement being held void or
unenforceable due to the illegality, invalidity
or unenforceability of a part of the agreement?
Yes, severability clauses are commonly incorporated into
settlement agreements.
THIRD PARTY RIGHTS
12. Can third parties enforce their rights under
the terms of the settlement? If so, can parties
exclude the application of third party rights in
the agreement?
The ability of third parties to bring a claim as a third-
party beneciary under a contract that was made
for his or her benet is well-established in New York
(Port Chester Elec. Const. Co. v. Atlas, 357 N.E.2d 983,
985 (N.Y. 1976)). If a person wishes to bring a third-
party beneciary claim, he or she must establish that
(Mandarin Trading Ltd. v. Wildenstein, 944 N.E.2d 1104,
1110 (N.Y. 2011), citing Mendel v. Henry Phipps Plaza W.,
Inc., 844 N.E.2d 748, 748 (N.Y. 2006)):
7 Practical Law
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
• A valid and binding contract exists between other parties.
• The contract is for his or her benet.
• The contracting parties have a duty to compensate
him or her if the benet is lost.
It is very common for parties to include a clause in a
settlement agreement that positively denies any third
party rights in the agreement. These types of provisions
are almost always given effect, even when the contract
is intended to benet a third party. For example, the
US District Court for the Southern District of New York
recently noted that “courts applying New York law have
consistently found that, even where a contract expressly
sets forth obligations to specic individuals or categories
of individuals, those individuals do not have standing
to enforce those obligations by suing as third-party
beneciaries when the contract contains a negating
clause” (In re Lehman Bros. Holdings Inc., No. 11-CIV-2792
JGK, 2012 WL 3047175, at *6 (S.D.N.Y. July 26, 2012); see
also 28 N.Y. Prac., Contract Law § 8:9.10).
The parties to the settlement agreement should make
sure that the clauses denying third party rights are
precisely worded. Vague or uncertain language should be
avoided (Greeneld v. Phillies Record, Inc., 98 N.Y.2d 562,
569 (N.Y. 2002)). For example, any intended and exclusive
beneciaries should be clearly identied. The exclusion of
any other intended beneciaries should be clearly stated
(India.Com, Inc. v. Dalal, 412 F.3d 315 (2d Cir. 2005)).
Also, parties should be careful when using the word
“herein” or the phrase “except as otherwise provided
herein” when referring to third parties in negating
clauses. The parties should clearly identify whether
the word or phrase refers to the clause only or to the
agreement as a whole (see Bayerische Landesbank v.
Aladdin Capital Mgmt. LLC, 692 F.3d 42 (2d Cir. 2012)
(Bayerische); Morse/Diesel, Inc. v. Trinity Indus., Inc., 859
F.2d 242 (2d Cir. 1988) (Morse/Diesel)). If the court nds
the word or phrase to be uncertain or vague, it may
look to the document as a whole for guidance on how
to interpret the clause, and this may interfere with the
parties’ intentions (Bayerische; Morse/Diesel).
DISPOSAL OF LEGAL PROCEEDINGS
13. What are the formalities to dispose of court
or litigation proceedings once the dispute has
been settled?
The Federal Rules of Civil Procedure allow a plaintiff to
voluntarily dismiss an action without court approval or
order. Assuming that the defendant has already led an
answer and no summary judgment motion is pending,
the plaintiff may secure the voluntary dismissal of any
action (for example, following a settlement) simply by
ling a stipulation for dismissal signed by all the parties
(Fed. R. Civ. P. 41(1)(A)).
The corresponding rule in New York state courts provides
for voluntary discontinuance by ling a stipulation
of dismissal signed by counsel for all of the parties
(McKinney’s CPLR 3217). The New York Civil Practice
Law and Rules also provide for the prompt payment of
agreed settlement amounts. The defendant must pay
the settlement amount within 21 days of an executed
release and stipulation of discontinuance by the plaintiff
(NY CPLR 5003-a(a)).
BREACH OF SETTLEMENT TERMS
14. What are the remedies available for breach of the
settlement terms? Is it possible to revive the original
claim, or is it necessary to bring a fresh claim for
breach of the settlement agreement?
For the purposes of determining an appropriate remedy,
courts will treat a breach of settlement agreement claim
much like a simple breach of contract claim. So, courts
may award compensatory, liquidated, and punitive
damages when appropriate (SMD Capital Grp. LLC v.
Reichenbaum, 867 N.Y.S.2d 21 (N.Y. Sup. Ct. 2008)). The
most common remedy sought for breach of a settlement
agreement, however, is the equitable remedy of specic
performance. Given the courts’ strong preference for the
resolution of disputes by settlements, a party usually
will not be required to show that remedies at law are
inadequate in order to obtain specic performance
of a settlement agreement (Specic Performance of
Settlement Agreements, 2 N.Y. Prac., Com. Litig. in New
York State Courts § 10:11 (2015)).
In limited circumstances, courts may consider rescission
of the settlement agreement an appropriate remedy.
Rescission, however, is “’an extraordinary remedy’
rooted in equity” (Krumme v. WestPoint Stevens Inc., 238
F.3d 133, 143 (2d Cir. 2000), internal citations omitted)
In Krumme, the court refused to rescind the settlement
agreement where one of the parties acted in good faith.
Therefore, rescission is generally limited to cases where
a party’s breach is “material and willful, or, if not willful,
so substantial and fundamental as to strongly tend to
defeat the object of the parties in making the contract”
(Krumme).
Whether or not rescission of a settlement agreement is
appropriate will also depend on whether the agreement is
classified as an “executory accord” or a “substitute agreement”.
An executor accord extinguishes a claimant’s prior
claims upon performance of the accord. A substitute
agreement extinguishes a claimant’s prior claims upon
execution of the agreement. In C3 Media & Mktg. Grp.,
LLC v. Firstgate Internet, Inc., 419 F. Supp. 2d 419, 434
(S.D.N.Y. 2005) (C3 Media) the court found a substitute
agreement where a separation agreement contained
language indicating that it was intended to replace
the previous agreement. When a material breach of a
substitute agreement occurs, the non-breaching party
may sue on the underlying obligations only if the court
orders rescission (C3 Media). By contrast, when a party
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
materially breaches an executor agreement, the non-
breaching party may sue on the pre-existing obligations
without rst obtaining rescission of the agreement
(C3 Media). .The United States Supreme Court has
conclusively ruled that a motion to enforce a settlement
agreement is essentially a claim for breach of a contract,
part of the consideration for which was dismissal of an
earlier federal suit, and therefore requires an independent
basis for the court to re-exert jurisdiction (Kokkonen v.
Guardian Life Ins. Co. of Am., 511 U.S. 375, 378 (1994)
(Kokkonen)). In some cases, the basis for jurisdiction
may be found in the doctrine of ancillary jurisdiction.
This doctrine allows a district court to decide matters
that are “factually interdependent” with another matter
before the court; or to take actions necessary “to manage
its proceedings, vindicate its authority, and effectuate
its decrees” (Kokkonen at 378–79). However, to ensure
that the federal court retains ancillary jurisdiction over
enforcement of a settlement agreement, it is best practice
to provide that a district court’s order of dismissal either:
• Expressly retains jurisdiction over the settlement agreement.
• Incorporates the terms of the settlement agreement
in the order itself (Hendrickson v. United States,
791 F.3d 354, 358 (2d Cir. 2015) − holding that
unexpressed intent or merely acknowledging the
existence of a settlement agreement would not be
sufcient to retain jurisdiction; StreetEasy, Inc. v.
Chertok, 752 F.3d 298, 305 (2d Cir. 2014) − holding
that after-the-fact statements and actions of the
parties, and even of the court, are not enough to
retain jurisdiction).
ENFORCEMENT PROCEEDINGS
15. What are the procedures to enforce a
settlement contained in a:
• Settlement deed/agreement?
• Court order?
The method for enforcing a stipulation of settlement will
depend on the terms of the settlement and the procedural
status of the relevant litigation (Oppenheim v. Ultimate
Servs. for You, Inc., 958 N.Y.S.2d 647, 647 n.1 (N.Y. Sup. Ct.
2011) (Oppenheim)). Whether the agreement is recorded in
a court order or a separate agreement, the party seeking
enforcement must le a motion to enforce the settlement
agreement (Oppenheim). In most cases, the motion may
be brought in the same action that was settled, as long
as the parties have not ended the lawsuit. If the original
action was brought in federal court, the motion may
be led in federal court if the court retained jurisdiction
over the settlement agreement (see Question 14). If the
federal court did not retain jurisdiction, and starting a
new federal action is not a realistic option, then the only
option available to the party seeking enforcement would
be to commence an action in state court to enforce the
settlement agreement.
SETTING ASIDE A SETTLEMENT
16. On what grounds can a settlement be
varied or set aside? Please outline the
procedure to be followed.
If a party wishes to set aside a settlement agreement, he or
she must le a motion to set aside the settlement, setting
out the reasons for the relief sought. Similar to a standard
contract, settlement agreements will typically only be set
aside where there is sufcient evidence of fraud, collusion,
mistake, accident or duress. Courts are reluctant to set aside
settlement agreements lacking one of these circumstances
(see, for example, Saviano v. Estate of Saviano, 836 N.Y.S.2d
489 (N.Y. Sur. Ct. 2006), which expressed reluctance to vacate
settlement agreement based on insufcient consideration).
However, certain procedural defects, such as failing to
notify or obtain the consent of necessary parties, may also
invalidate an otherwise valid settlement agreement In In re
Estate of Drake, 278 A.D.2d 929, 930 (N.Y. App. Div. 2000)
the court held that the settlement agreement was properly
vacated where the parties failed to obtain necessary releases
from the other heirs.
A settlement agreement may also be set aside on the
ground that the attorney who agreed to the settlement
lacked the authority to stipulate on behalf of the client
(Hallock v. State of New York, 474 N.E.2d 1178, 1178 (N.Y.
1984) (Hallock)). In Hallock, the plaintiffs sought to vacate
a settlement agreement more than two months after
it had been agreed to in court with one of two plaintiffs
present (Hallock at 1180). The court denied the motion to
vacate, citing the fact that the attorney had represented
both plaintiffs throughout the case and participated in
prior settlement negotiations (Hallock at 1182). The court
also reasoned that the parties’ conduct gave their counsel
implied authority to enter into a binding settlement
(Hallock at 1181). By contrast, a court will probably grant a
motion to vacate provided that (see Koss Co-Graphics, Inc.
v. Cohen, 166 A.D.2d 649, 650 (N.Y. Sup. Ct. 1990)):
• No previous settlement negotiations have taken place.
• The defendant has strongly defended the proceeding
on the merits from the beginning.
• The defendant immediately les a motion to vacate
upon learning of the agreement.
LEGAL COSTS
17. Would you expect to see a clause dealing
with legal costs in the settlement agreement?
Are parties free to agree on arrangements
regarding payment of legal costs? What is
the position if the parties do not include a
separate clause dealing with legal costs?
Settlements that do not require court approval generally
have a clause dealing with legal costs.
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SETTLEMENT (CIVIL LITIGATION) Q&A: US (NEW YORK)
The clause will say something to the effect that each
party will be responsible for paying its own legal costs.
This is consistent with the ‘American rule’ regarding the
recovery of legal costs. For settlements requiring court
approval, such as class actions and shareholder derivative
actions, the payment of the legal fees of plaintiffs’ counsel
usually forms part of the settlement eventually approved
by the court. This was the case, for example, in Fiala, et
al. v. Metropolitan Life Ins. Co., 899 N.Y.S.2d 531 (N.Y. Sup.
Ct. 2010) (Fiala), where up to US$15 million of a US$50
million settlement agreement was set aside by the parties
and approved by the court for the payment of counsel fees
and reimbursements (Fiala at 611).
If parties to a written settlement agreement do not
incorporate terms related to the payment of legal costs,
it is presumed that they reached no agreement and
are bearing their own costs. Under both New York law
and federal law, a successful party cannot recover its
attorneys’ fees from the losing party unless such recovery
is authorised by statute, agreement or court rule (U.S.
Underwriters Ins. Co. v. City Club Hotel, LLC, 822 N.E.2d
777, 777 (N.Y. 2004); Gotham Partners, L.P. v. High River
Ltd. P’ship, 76 A.D.3d 203, 204 (N.Y. Sup. Ct. 2010)).
SETTLEMENT AGREEMENTS
18. Are there any other clauses that would
be usual to see in a settlement agreement
and/or that are standard practice in your
jurisdiction which do not appear in the
Standard document, Settlement agreement
(civil litigation): Cross-border?
The clauses included in the Standard document,
Settlement agreement (civil litigation): Cross-border are
commonly found in settlement agreements used in New
York and throughout the US. Additional clauses that are
commonly found in settlement agreements executed in
the US include the following:
• “Equitable Relief” clauses. These clauses provide for
court-ordered relief where no adequate remedy at
law is available to the injured party.
• “Accord and Satisfaction” clauses. These clauses
establish that the settlement agreement is a
substitute agreement as opposed to an executory
agreement (see Question 14).
• “Jointly Drafted” clauses. These clauses deal with
the consequences of ambiguous contract provisions.
The common law rule of contract construction
interprets ambiguous provisions against the party
that drafted them. However, if the parties were to
introduce a clause afrming that neither party was
the main drafter of the settlement agreement (the
jointly drafted clause) the common law rule would
not apply.
• “Representation by Counsel” clauses. These clauses
declare that:
– each party has sought legal advice regarding the
signing of the agreement and the meaning of its
provisions;
– each party is signing the agreement voluntarily
and with the intention to be legally bound; and
– each party has undertaken an independent
investigation and assessment and is not relying
on the advice, representations or information
provided by any other party.
This clause reduces the possibility of either party later
complaining that he or she was induced to enter the
agreement on the basis of fraud, coercion or duress.
CONTRIBUTOR DETAILS
Carolyn M. Branthoover, Practice area
leader - litigation and dispute resolution
K&L Gates LLP
T +1.412.355.8902
E carolyn.branthoover@klgates.com
Eric M. Matava
K&L Gates
T +1.412.355.7445
E eric.matava@klgates.com
W www.klgates.com
Area of practice: Litigation and dispute resolution.
