5 Tips For Crafting An Airtight Settlement


David McMahon was quoted in an Aug. 8, 2013, in a Law360 article, 5 Tips For Crafting An Airtight Settlement, (subscription required) about the petroleum company BP's court fight over settlement payments connected to the Deepwater Horizon disaster. BP has taken its fight to the Fifth Circuit, alleging that the claims administrator is misinterpreting the terms of a $7.8 million settlement agreement.

The article notes that settlements are often the result of marathon negotiations where the potential for mistakes is high.

It's 2 or 3 in the morning and people have been there for 18 hours and are dying to leave,” said McMahon, who worked on the early phases of the BP litigation. “But that's when you have to pay attention and make sure the [settlement] language is clear and adequately expresses the intent of both sides.”

The article also offered five tips for crafting a rock solid settlement agreement.

One of the most important is spelling out the terms of the settlement in plain and easy-to-understand terms, McMahon said.

“You want to have the essential terms in as few words as possible that are as clear as possible, so it's unmistakable as to what was reached,” he said.

Ambiguity in settlement language leads to disputes and the possibility the that court will have to weigh in, which is not always a good thing. According to McMahon, BP is experiencing that now.

“The judge really pointed it out in his rulings — that language they negotiated allowed the claimants to pick the time period for business losses that was most favorable to them,” he said.

Also important is getting the parties – not just the lawyers – to sign the settlement agreement.

“You can avoid those types of battles where the actual party signs the agreement,” McMahon said. “If you have to go to court to enforce it, with a party's signature on it, it makes it far more likely a judge will enforce the agreement.”

To prevent communications during settlement negotiations from being used against you in a later dispute over the deal, it is also a good idea to put Rule 408 of the Federal Rules of Evidence on your correspondence. The rule prevents communications that are part of the negotiations from being used against either party in a dispute.

“When you put Rule 408 on [correspondence], you can rest assured the judge will say, 'The correspondence was in the context of settlement negotiations, and I'm not admitting it,'” McMahon said.

Even so, McMahon cautions that Rule 408 has its limits. Courts have held that the rule doesn't prevent settlement communications from being disclosed during discovery and it must only be used for documents clearly related to the settlement negotiations.

“I could see a judge getting angry at an attorney who puts settlement privilege on documents that clearly don't have any relevance,” McMahon said.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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