Drafting Enforceable Settlement Agreements
The writing requirements for settlement agreements can create pitfalls for unwary attorneys, especially when settlement negotiations are informal. This article explains the basic requirements for drafting settlement agreements and some of the common ways problems may arise.
Once a case is in adjudication, Wis. Stat. § 807.05 governs settlement of the case. It states in pertinent part: “No agreement, stipulation, or consent between the parties or their attorneys, in respect to the proceedings in an action … shall be binding unless made in court…and entered in the minutes or recorded by the reporter, or made in writing and subscribed by the party to be bound thereby or the party’s attorney.” The following fact scenarios demonstrate how this seemly simple writing requirement plays out in practice.
You reach a settlement agreement with plaintiff’s counsel following several conversations; each is confirmed by one of the parties via letter. Based on these negotiations, the parties sign a stipulation to dismiss the action. When plaintiff’s counsel receives your settlement check, he claims that the settlement agreement was for $1,500 more than the check you sent. After reviewing the letters, you realize that they do not clearly indicate the final settlement amount.
Is plaintiff owed an additional $1,500?
Settlements under section 807.05 are an exception to the rule that oral contracts are binding. Section 807.05 is rooted in the statute of frauds and is meant to avoid fraud or perjury in the settlement of cases. If an agreed upon term is missing from the settlement documents, any agreement on that term is only an oral contract. Therefore, under section 807.05 there is no enforceable agreement.  Wisconsin courts have rejected using extrinsic evidence, including testimony of the parties, to determine a missing term in a settlement agreement. Therefore, in the scenario above, whether the settlement is enforceable as to the settlement payment would depend on whether a court finds the content of the letters ambiguous. If the plaintiff drafted a letter restating terms the parties verbally agreed to, including to a specific settlement amount, and defendant replied by letter generally agreeing with the plaintiff’s letter, a written agreement was created. If however, plaintiff drafted such a letter and defendant never replied, there is no enforceable agreement.
After reaching a settlement agreement on the phone with plaintiff’s counsel, you send a letter to counsel confirming the terms of the agreement. The letter is signed with your name stamp, instead of a handwritten signature. You receive a faxed letter from plaintiff’s counsel several days later confirming acceptance of the settlement. It is on counsel’s letterhead, but instead of bearing a signature, plaintiff’s counsel has typewritten his initials. The following week, plaintiff’s counsel informs you that his client no longer accepts the settlement terms.
Do the signatures bind the parties?
Section 807.05 requires that the written agreement be “subscribed by the party to be bound thereby or the party’s attorney.” The term “subscribed” is not defined by statute. Subscribing is not the same as signing. Instead of focusing on the method of signature, subscribing instead asks whether the document was signed with the attorney’s or client’s authority. Both rubber stamped signatures and typed signatures or initials are sufficient to meet the subscribing requirement. In the example above, both letters were subscribed and plaintiff would be bound to the terms of the agreement.
Though the rules for subscribing are lenient, some form of written subscription is required. Settlements under section 807.05 are an exception to the rule that oral contracts are binding. Therefore, courts have not enforced settlement agreements where a party’s signature is lacking, even if the party’s actions evidenced acceptance of the settlement agreement. If settlements could be reached without written assent, the purpose of the statute would be destroyed.
You reach a mediated settlement agreement with plaintiff’s counsel. The written agreement is contingent upon the plaintiff approving the settlement within three days. After hearing nothing for a week, you send the settlement check to plaintiff’s counsel. Plaintiff’s counsel returns the check and informs you that her client is unwilling to accept the mediated settlement agreement.
Is the agreement enforceable?
Settlement agreements are contracts by nature, thus requiring offer, acceptance and consideration, reached from a meeting of the minds. If the offer is made with specific terms for acceptance, there is no acceptance until those terms are met. In the scenario above, there is no binding settlement agreement because the contingent term, plaintiff’s acceptance, was not fulfilled.
Even if the plaintiff accepted the agreement described above after the three days passed, the plaintiff would still be able to revoke that acceptance later. “When terms of a contract specify that the contract must be accepted within a particular period of time, the contract must be accepted within the time limit expressed.” If the plaintiff accepts after the prescribed time, there is only an oral contract for settlement. The prior written agreement remains unenforceable, no matter what actions the plaintiff takes which evidence acceptance. 
Contingency provisions can also arise where additional settlement documents will need to be completed. For example, requiring the plaintiff to sign and return a liability release prior to negotiating the settlement check is a contingent provision. Even if the terms of the settlement are agreed to in a written and subscribed settlement agreement, “[m]ere issuance of the checks and delivery of the release… [do] not effect a contract.” Whenever the document confirming a settlement agreement contemplates that more formal documents will be executed to finalize a settlement, there is no contract until those documents are executed.
You reach a settlement agreement with opposing counsel on the telephone. Counsel states that she needs final approval from her client, but assures you that the agreement will be accepted. Based on this discussion, you draft a letter confirming the terms of the settlement and requesting notification if her client objects to the agreement. You send a settlement check the following week. Soon after, opposing counsel notifies the court that the matter has settled and can be removed from the calendar. The court later dismisses the matter with prejudice. Three months later opposing counsel returns the check and informs you that her client rejected the settlement.
Is prior settlement agreement enforceable?
Section 807.05 is rooted in the statute of frauds. Like the statute of frauds, the strict requirements of section 807.05 can lead to unfair results. The requirements of section 807.05 and the statute of frauds are meant to avoid fraud and perjury, not to give one party a technical escape from agreements. One available defense to the statute of frauds in such situations is equitable estoppel. Since section 807.05 is rooted in the statute of frauds, equitable estoppel can also be applied to agreements under the statute.
“When the elements of equitable estoppel are met, the equities of the situation take the transaction out of the statue of frauds, and the contract is enforceable according to its terms.” The four elements of equitable estoppel are “(1) action or nonaction; (2) on the part of one against whom estoppel is asserted; (3) which induces reasonable reliance thereon by the other, either in action or nonaction; (4) which is to the relying party’s detriment.”
In the scenario above, equitable estoppel could apply. There was no written agreement signed by both parties; therefore, there is no enforceable settlement agreement under section 807.05. However, the actions and nonactions of the opposing party induced you to reasonably rely on the existence of a settlement agreement. This reliance caused a detrimental change of position when the court dismissed the action with prejudice.
The Wisconsin Supreme Court applied equitable estoppel to an agreement under section 807.05 in Affordable Erecting, Inc. v. Neosho Trompler, Inc. The parties and their insurers reached an agreement in mediation. The agreement was signed by all attorneys, but the attorney for Affordable added a provision requiring his client’s approval by noon the following day. Affordable did not accept the mediated agreement until three weeks later. In the meantime, the insurers sent settlement documents and checks to all parties. Affordable’s attorney cashed the check and held it in his trust account. Affordable then revoked it’s acceptance of the settlement several weeks later.
In Affordable, the first two requirements of equitable estoppel were conceded. The court went on to find that Affordable’s actions and nonactions led the defendants to reasonably rely on the settlement agreement. Affordable’s attorney initially indicated his client’s acceptance of the agreement.When Affordable’s attorney received settlement checks, he failed to return them and clarify his client’s changed position. Additionally, Affordable made no objection when the court warned that it would dismiss the action if the inactivity on the matter continued and made no objection when the court subsequently dismissed the suit with prejudice.
The reliance was also detrimental to the other parties. The case was dismissed by the circuit court with prejudice when no party objected to the dismissal warning. Further, the parties accepted significant reductions in their damage claims to effect the settlement agreement. These actions created a detrimental change of position based on Affordable’s actions/nonactions. Therefore, the court applied equitable estoppel and enforced the terms of the prior agreement despite its inadequacies under section 807.05.
Creation of an enforceable settlement agreement requires three steps. First, a written agreement containing all the terms of the settlement must be drafted. Second, the written agreement must be subscribed by the parties or their attorneys. Third, all contingency provisions of the agreement must be fulfilled exactly as they are described in the agreement. Adhering to these rules can be tedious in informal settlement negotiations. However, given the court’s strict enforcement of section 807.05, the extra effort can avoid many future problems.
 Wis. Stat. § 807.05 (2005-2006).
 Laska v. Laska, 2002 WI App 132, ¶ 9, 255 Wis. 2d 823, 646 N.W.2d 393.
 Affordable Erecting, Inc. v. Neosho Trompler, Inc., 2006 WI 67, ¶ 32, 291 Wis. 2d 259, 715 N.W.2d 620.
Id. ¶ 9.
 Marks v. Gohlke, 149 Wis. 2d 750, 753, 439 N.W.2d 157 (Ct. App. 1989).
 Id. at 752-53.
 Wis. Stat. § 807.05.
 Estate of Johnson v. Easton-White Creek Lions, Inc., 2006 WI App 19, ¶ 9, 289 Wis. 2d 100, 709 N.W.2d 88.
 Kocinski v. Home Ins. Co., 154 Wis. 2d 56, 64, 452 N.W.2d 360 (1990).
 Johnson, 2006 WI App 19, ¶ 13.
 See, Johnson, 2006 WI App 19, ¶ 7; Kocinski, 154 Wis. 2d at 59.
 Laska, 2002 WI App 132, ¶ 9.
 Id. ¶¶ 5, 12.
 Id. ¶ 12.
 American Nat. Property and Cas. Co. v. Nersesian, 2004 WI App 215, ¶ 16, 277 Wis. 2d 430, 689 N.W.2d 922.
 Affordable Erecting, 2006 WI 67, ¶ 28, 291 Wis. 2d 259, 715 N.W.2d 620.
 See Id.
 Id. ¶¶ 23-24.
 American Nat. Property and Cas. Co., 2004 WI App 215, ¶ 16.
 Id. ¶¶ 16, 19.
 Affordable Erecting, 2006 WI 67, ¶ 32.
 Id. ¶ 32.
 Id. ¶ 33.
 Id. ¶ 32.
 Id. ¶ 7.
 Id. ¶ 8.
 Id.¶ 11.
 Id. ¶ 10.
 Id. ¶ 11.
 Id. ¶ 34.
 Id. ¶ 40.
 Id. ¶ 39.
 Id. ¶ 48.
 Id. ¶ 47.
 Id. ¶ 46.
 Id. ¶ 48.