3 Ways That Plaintiffs Can Protect Against Defaults in Settlement Agreements

At its core, when a plaintiff settles with a defendant, the plaintiff agrees to release the defendant from any and all claims he or she may have against that defendant in exchange for money. While settling a case is generally a positive thing, there can be unintended consequences for a plaintiff who fails to adequately protect himself or herself should the defendant not live up to its obligations under the settlement agreement.

For example, let’s say a plaintiff has a claim for $300,000 and agrees to settle the case for $150,000. As part of the settlement, the plaintiff agrees to discontinue his or her lawsuit against the defendant with prejudice, meaning that the plaintiff agrees that he or she cannot bring the same claims against the same defendant ever again.

In many cases, the defendant satisfies its obligations under the settlement agreement and no issues arise. However, in the event that a defendant fails to make all payments due under the agreement, the plaintiff should include one or more of the following contingencies into the settlement agreement to ensure that his/her claims are not compromised:

Contingency #1

Insert an attorneys’ fees clause. If the defendant defaults, this provision will allow the plaintiff to recover all attorneys’ fees incurred as a result of the defendant’s breach, in addition to any amounts that are still owed under the settlement agreement.

Contingency #2

Insert a liquidated damages provision. Liquidated damages is a fixed penalty agreed upon by the parties that a breaching party is required to pay to the non-breaching party. There is no “typical” liquidated damages amount, but the plaintiff should make sure that the penalty is large enough that it will deter the defendant from defaulting.

Contingency #3

Require the defendant to sign a Confession of Judgment. A Confession of Judgment is an affidavit signed by the defendant acknowledging that the defendant owes a debt to the plaintiff, typically in an amount equal to or greater than the total amount of the plaintiff’s claims. If the defendant defaults under the settlement agreement, then the plaintiff has the right to file that affidavit with the Court, which will result in a judgment being entered in favor of the plaintiff for the amount listed in the Confession of Judgment.

Essentially, the Confession of Judgment allows the plaintiff to skip the entire litigation process and obtain a judgment almost immediately, which the plaintiff may then attempt to enforce. This saves the plaintiff a significant amount of time and attorneys’ fees should the defendant default under the settlement agreement.

These are just a few examples of ways that plaintiffs can protect themselves from defaulting defendants under settlement agreements.