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Drafting A Settlement Agreement: A Quick Guide to The Art of Effective Compromise


When the parties to a dispute reach a form of compromise without the intervention of court or arbitration proceedings, it is important for the parties to have all the terms of agreement recorded in writing in the form of a settlement agreement.  Entering into a settlement agreement is usually the best way of reaching a swift resolution.

Negotiating the terms for a settlement agreement can be a tedious, daunting and stressful process.  In this article, I have listed out some practical guidelines for the drafting of a settlement agreement and also, to help you/ your company to negotiate the best possible outcome.


A) Understand What is at Stake

Before you negotiate the terms for settlement, it is prudent to a have a clear understanding of exactly what is at stake.

Some of the key questions for consideration would be:

What is being settled and on what basis? Whether the settlement proposal is reasonable? what will happen if you give in or hold your ground?  What would be the impact of compromising? What would be the possible outcome?

Asking yourself these questions with gathered answers/ information would assist you to make better decision for yourself/ your company.


B) The Key Provisions to include in a Settlement Agreement

  1. 1. The Parties – The Parties to the settlement agreement should be clearly named and specified. This is usually stated by reference to the name of the person/business and their respective addresses. It is also important for the parties to ensure that the person executing the settlement agreement has the necessary authority to execute the settlement agreement, especially when the party entering into the agreement is a company.
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  1. 2. Scope of Settlement – It is also important for the scope of settlement in the settlement agreement to be set out as clear and well defined as possible. This is to avoid the possibility of any ambiguity or conflict in the future.
  2. As a general rule, you would want to cover, amongst others, the following items:-
    1. a) the subject matter of the dispute;
    2. b) what are the conditions to the settlement (i.e., the settlement sum and due date for payment);
    3. c) obligations of the parties;
    4. d) timeline to comply with the terms;
    5. e) consequences for non-compliance to the settlement terms;
    6. f) tax implication;
    7. g) interest;
    8. h) how the scope of release is defined; and
    9. i) any other details.
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  3. 3. “Governing Law” and “Dispute Resolution” clauses – As with any other agreements, the “Governing Law” and “Dispute Resolution’ clauses should also be clearly drafted and unambiguous.
  4. Typically, a “governing law” provision is a provision used in an agreement that specifies which country’s law will apply in the event of a dispute, whereas the “Dispute Resolution” clause will set out which avenue/forum the parties want their disputes to be resolved (i.e. by court or arbitration proceedings). Essentially, the parties involved would need to understand what are the advantages and disadvantages of these forums.
  5. The Malaysian courts will usually endeavour to give effect to the parties’ agreement on how the parties wish to resolve their disputes. Hence, if this is poorly drafted, the parties would end up wasting their time and money arguing on which would be the appropriate forum for the disputes to be resolved, instead of actually resolving their disputes. 
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  1. 4. Confidentiality ClauseMany times, the parties to a settlement agreement would want the information contained in the settlement agreement be kept strictly private and confidential by the parties involved. Essentially, having a confidentiality clause would prevent the parties to the settlement agreement from divulging sensitive information and trade secrets to a third party. In this regard, the parties can negotiate the terms of the confidentiality in accordance to the sensitivity of the confidential information, obligation and/or the scope as they deem fit.
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  1. 5. Notice It is also important for the parties to state clearly on the method of notice to be given or received by the parties under the Settlement Agreement. A notice clause usually specifies how contractual notice should be given, where it should be served and when these notices are deemed to have been properly served.
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  3. 6. Expense/Cost for Preparation of the Agreement A clause relating to cost/expense arising from the negotiation and preparation of the Settlement Agreement is also fairly important as the parties would probably incur costs such as stamp duty, legal fees, expert fees or fees arising from court, arbitration or adjudication proceedings. It is important for the expenses required by each party to be spelled out clearly in the settlement agreement relating to the preparation, negotiation and execution of the settlement agreement.
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  1. “7. Entire Agreement” clauseThis clause allows the parties to provide certainty on the entirety of the agreement in writing. Having this clause included in the settlement agreement would ensure that no other pre-contractual discussion, agreement (either written or oral) or documents will form part of the settlement agreement, unless otherwise stated. A separate article on the importance of adopting the “Entire Agreement” clause can be found here  or in our September 2021 Empower.
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This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the Author

Lynn Foo
Partner, Construction & Energy Unit
Harold & Lam Partnership

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