Because the court system simply doesn’t have the staff to hear every case, and because the law recognizes that people often have to deal with each other after a case is over, the law encourages people to settle their disputes. Unfortunately, sometimes the settlement isn’t performed as agreed. A recent case from the Oregon Court of Appeals discusses what to do when that happens.
Clarence Rucker loaned money to a group of borrowers (who, judging by their names, probably included relatives). The borrowers gave him a promissory note, stating that they would pay on a schedule. The borrowers eventually were unable to pay the entire note. When Clarence asked them to pay, they asked for a credit for services caring for Clarence.
At that point, Clarence and the borrowers agreed to meet with a judge to mediate the dispute. At the mediation, they reached a settlement for less money, which they then placed on the court’s official record to make it enforceable. Everyone was asked by the judge whether the settlement was what they had agreed to, and everyone said yes. After that, a written settlement agreement was prepared, which everyone signed.
Clarence died shortly after the settlement agreement was signed. His estate distributed interests in the note to several beneficiaries, and then sued the borrowers for payment on the note. The borrowers argued that the settlement was a new contract and that the note was no longer in effect.
The court had to decide whether the note or the settlement controlled. The law allows people to settle disputes either by creating new contracts, which replace the entire original contract, or by substituting new obligations under old contracts, in which case the original contract (the note) remains in effect. When there’s a dispute about what the settlement means, the court has to decide what the parties intended.
Intent, when trying to interpret a contract, isn’t decided by what the parties think. It’s decided by what they say and how they act. In this case, the court read the settlement agreement and reviewed the court record from the mediation. The settlement said that it was a resolution of “all claims between the parties” and that the parties released each other from claims arising from both the loan and the services provided by the borrowers. Based on that, the court decided that the settlement was intended to be an entirely new contract, and that the estate could not sue on the note.
Most settlement agreements are written similarly to the form in this case. This means that usually, the settlement cancels any prior claims, and that if there’s a problem, it’s the settlement that controls. If you want to keep an earlier contract in effect when settling a dispute, you probably need to make absolutely clear that that’s what you intend, both in the negotiations and in the final documents. Make sure your lawyer knows as soon as you decide that you want to keep the old contract going so that he or she knows not to bargain it away for you.