Settlement Agreement Construed Like Any Other Contract

image

 

This one naturally resonated with me as I’ve experienced how time-consuming and expensive it is to monitor and enforce a settlement agreement that, in theory, ended the case.

In Sprint Nextel v. AU Electronics, Inc., 2014 WL 2580, the parties executed a written settlement agreement ending litigation involving defendants’ illegal sale of Sprint cell phones.  The agreement required the defendants to make several installment payments in exchange for Sprint dismissing the suit and not enforcing the agreement’s consent judgment term.

A month after the settlement agreement was signed, government agents raided defendants’ corporate offices (as part of a crackdown on cell phone trafficking), took its equipment and slapped a $1,000,000 lien on the corporate bank account.  Convinced that Sprint was behind the raid, the defendants repudiated the settlement agreement and Sprint moved to enforce it.  The Illinois Northern District granted Sprint’s motion.

The Court enforced the settlement agreement under basic contract interpretation rules.

A district court has inherent power to enforce a settlement agreement in a case before it;

–  A settlement agreement is a contract and state contract law governs the construction and enforcement of a settlement agreement;

– The terms of a settlement are based on the parties’ intent derived from the objective language of the agreement terms;

– A settlement agreement is effective when arrived at unless the parties specify that it’s subject to contingencies.

– A binding contract must contain an offer, acceptance and consideration and a meeting of the minds on all material term;

– Consideration means “bargained-for exchange” – where the promisor receives a benefit in exchange for his promise;

A “meeting of the minds” is based on the parties’ objective manifestations of intent;

–  A “material term” is one so essential to the contract that it wouldn’t have been made without itSprint, *4-5.

Here, all contract elements were present: the settlement agreement clearly delineated the parties obligations, it recited consideration and was signed by the defendants.  Consideration existed too:  Sprint agreed to dismiss the suit and forbear from executing on the judgment as long as defendants made the payments.  Sprint also established defendants’ breach (the repudiation of the settlement) and damages – defendants’ refusal to comply with the settlement meant that Sprint would now have to spend more time and money litigating the case and would not receive the installment payments.

The defendants’ tried to defeat the settlement agreement under rescission and commercial frustration theories.  The Court rejected both arguments.  Defendants’ rescission attempt was based on Sprint’s supposed breached of the agreement’s confidentiality/non-disclosure provisions.  The Court nixed this argument because the non-disclosure provision wasn’t a material term of the settlement agreement.

Under Illinois law, only a material breach will merit rescinding a contract.  Sprint, *9.  Here the material terms were simple: (a) Sprint dismisses the suit; and (b) defendants make payments.  The non-disclosure term was viewed as collateral to the agreement’s main purpose.

The Court also rejected defendants’ commercial frustration defense.  A sparingly used doctrine, a commercial frustration defense requires a showing that (1) the frustrating event was not reasonably foreseeable, and (2) the value of counter-performance has been totally or nearly totally lost or destroyed by the frustrating event.

The Court labeled the commercial frustration test as “rigorous” and “demanding.”  The Court held that the government’s raid on the corporate defendant’s office was reasonably foreseeable given that defendants were involved in a criminal enterprise and under investigation by state and Federal authorities.  Also, the defendants’ performance of the settlement terms wasn’t completely foreclosed.  The individual defendants’ bank accounts were not frozen by the government.  This made it possible for defendants to perform under the settlement agreement by paying the installments to Sprint.

Afterword: Monitoring compliance with and enforcing settlement agreements often leads to protracted, “satellite” litigation.  It can be tedious and demoralizing to realize that you are spending more energy (and money) babysitting and litigating the settlement than you did in the underlying case!  The Sprint case, in back-to-basics fashion, shows that settlement agreements are enforced like any other contract.

[email protected]