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How to Draft a Settlement Agreement

This article shows how a legally valid Settlement Agreement can be drafted by laymen. Settlement Agreements are a good way of resolving disputes as it avoids lengthy and expensive litigations. This article discusses the steps to take to make a foolproof Settlement Agreement. 

By: Arnav Sharma, 2nd Year, B.B.A. LL. B (Hons.), Jindal Global Law School.


In today’s world, a lot of issues, be it personal, societal, professional or commercial, prop up before courts, and drain both the judicial services as well as individuals and groups. At times, even after years and fortunes are spent on litigations, either the dispute continues to drag on, or the outcome is not as expected by one or both the parties, and what they gain from such victory is reduced sizably on the account of time and money they had invested to sludge through the courts. This has made Arbitration, Mediation and Settlement an enticing option for parties seeking to iron out any issues or disputes. The most important aspect of this is the Settlement Agreements. 

What is a Settlement agreement?

Settlement Agreements are legally binding contracts that are intended to resolve a dispute between two parties such that both the parties do not have to go through the extremely costly and time-consuming judicial process or extend the process if the parties are already fighting in the court. 

Why Settlement Agreements?

When parties to a dispute reach a mutually agreeable compromise, it becomes prudent that the terms and conditions of the agreements are recorded in writing to obtain certainty, clarity and finality.

It also provides for future arbitrations, and since it is a legally enforceable contract, any parties that act in contravention to the settlement agreement can be rightfully dragged to the courts and made to pay penalties for their transgressions. 

Steps to draft a Settlement Agreement

  • Agreement on the nature of the dispute: Parties tend to have different views of the dispute, who and what caused it etc. Before moving further, the parties must agree on the factual terms of the dispute. 
  • Settlement Sum: Usually, one of the parties which have given up possible legal remedies demands a settlement sum instead of it. The amount, mode of payment, date and time of the payment and other such logistics are hammered out beforehand. 

Negotiation Stage: This is the first and one of the most important stages when drafting a settlement agreement. The parties who are entering the agreement discuss all aspects such as the scope of the agreement, duration, mode of payment etc. 

  • Writing the agreement: This is the stage at which the agreement is typed out, with the following mentioned in great detail – 
  • The Title of the Agreement. 
  • The name of the parties. 
  • A detailed description of the issue/ dispute, where, how, when it happened etc. 
  • The Settlement Costs. These are different from Settlement Sum; the former are the payments that arise because of the dispute, while the latter is just a sum that one party must pay to the other if it has begun exploring possible legal options i.e., a sum to dissuade the party from going to the courts. This should include the amount, mode, date, time and what happens on non-payment amongst other logistics in great detail. 

A clause of Non-Confidentiality. Most of the times, parties add a clause non-confidentially to prevent both the parties from disclosing the nature or details of the settlement. This should also include the penalty a party will have to face if they disclose any such confidential information. 

  • Dispute Resolution: Disputes or disagreements over the settlement agreement would likely arise in the future. Therefore, a settlement agreement must include clauses that bind the parties to behave in a particular manner or to contest the agreement in a specific jurisdiction, if any issues arise in the future. 
  • The duration of the agreement should also be mentioned. 

Terms of Termination. A settlement agreement must lay out how the agreement can be terminated by any of the parties. Also, what damages a party who wishes to terminate the agreement must pay should be mentioned. 

  • Signature of both the parties. The signatures and name of both the agreeing parties should be at the end of the document. 

That is how a legally enforceable Settlement Agreement can be drafted. While it is becoming increasingly common that individuals themselves draft and sign settlement agreements, in big, complex and or commercial disputes, a mediator or a lawyer can play an important role.

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