Thomas E. L. Dewey
Thomas E. L. Dewey ()

One might think that in order to be bound by a settlement agreement, at the very least, your client must sign it.

Not so.

New York courts often enforce unsigned settlement agreements when a party merely swears in open court that it agrees to settle the dispute. Following this practice, the U.S. Court of Appeals for the Second Circuit recently affirmed the enforcement of a settlement agreement that was “agreed to in open court,” despite plaintiff subsequently having “a change of heart between the time the oral agreement was made and when it was reduced to writing.”1 This makes sense: It is uncontroversial that statements sworn to on the record are enforceable.

But there are other, less common situations in which a party may be bound by an unexecuted settlement, and some examples of these situations have arisen in two recent decisions in New York federal court, Balaban-Krauss v. Executive Risk Indemnity2 and Mapel v. Regis Corporation.3 Both cases apply the four-factor test set forth long ago in the Second Circuit’s decision in Winston v. Mediafare Entertainment Corporation, which governs whether an unexecuted settlement agreement will be enforced.4

Taken together, these cases show how, in theory, an unexecuted settlement agreement may be enforceable so long as there has been “preliminary agreement” that addresses all negotiated terms (even if the agreement is simply oral). In practice, however, as demonstrated by these recent decisions, absent some form of acceptance of the settlement agreement in open court, New York federal courts most often require some form of execution evincing an intent to be bound by a settlement agreement—even if the execution is not part of the settlement agreement itself.

The Winston Factors

It has long been the rule in the Second Circuit that preliminary settlement agreements may be enforceable, even where a party fails to sign a final written instrument, if the parties satisfy a four-factor Winston test. Under Winston, when scrutinizing an unexecuted but potentially enforceable settlement agreement, courts will evaluate:

(1) whether there has been an express or implied reservation of the right not to be bound in the absence of a writing;

(2) whether there has been partial performance of the contract;

(3) whether all terms of the alleged contract have been agreed upon; and

(4) whether the agreement at issue is the type of contract that is usually committed to writing.5

Of the above, “[n]o single factor is decisive,”6 but if there is a writing between the parties showing that a party did not intend to be bound, then courts will not enforce the unsigned agreement.7

This test attempts to reconcile two competing policies: the presumption in favor of enforcement of negotiated settlement agreements,8 with the “essential” requirement that the parties mutually assented to the agreement.9 Since these policies may be in tension, litigants must be wary that by preliminarily agreeing to a settlement, they may create a binding obligation to perform under the settlement agreement.

‘Balaban-Krauss’

The court in Balaban-Krauss v. Executive Risk Indemnity, one of the most recent decisions applying Winston, refused to enforce an unsigned settlement agreement, despite the parties agreeing in writing to a settlement amount and all of its terms.

In July 2013, plaintiffs and defendant agreed via an email exchange to the amount of settlement. (Plaintiffs’ counsel: plaintiffs “will settle this case today for $17,621.26″; defendant’s counsel: “I got the $17,621.26. Done.”).10 Then, in August, after haggling about the terms of the settlement agreement over the next month, the parties came to an agreement as to all terms.11 After reaching such agreement, however, plaintiffs chose not to execute the settlement agreement, and defendant, contending that the settlement agreement was binding and enforceable, moved to enforce.

On June 27, 2014, Judge Gary Sharpe adopted the Report-Recommendation and Order of Magistrate Judge Christian F. Hummel, which had denied defendant’s motion to enforce the settlement agreement.

Judge Sharpe determined that only one Winston factor favored enforcement: the parties had agreed to all material terms. The first factor weighed against enforcement, since the terms of the settlement agreement indicated that “the parties did not consider the agreement complete until the agreement was signed by the plaintiffs.” In coming to this conclusion, the court, in part, relied on the presence of a merger clause as persuasive evidence that the parties did not intend to be bound without a writing.12

The remaining two factors also did not favor enforcement, since there had been no partial performance, and the agreement was of the type that is usually committed to writing—which the court determined required that the agreement be “formally executed.”13

Thus, while defendant had contended that the parties had plainly agreed to a settlement agreement—which included agreement as to all terms and the amount—this agreement was not enforceable.

‘Mapel v. Regis Corp.’

Mapel v. Regis Corp. arose out of similar circumstances as Executive Risk, but it yielded the opposite result.14 There, after mediation, the parties agreed to a settlement amount, mutual release and other material terms. Unlike in Executive Risk, however, the parties actually signed an agreement that they “had reached a settlement agreement and would file appropriate papers,” rather than just agreeing on the terms.15 Then, a week later, plaintiff reneged and refused to execute the formerly agreed-to settlement agreement.

Unlike in Executive Risk, Judge Ronnie Abrams of the Southern District enforced the settlement agreement. As in Executive Risk, Abrams determined that there had been no partial performance, and that there had been agreement on all terms, so these two factors were a wash.

Here, though, Abrams ruled that the remaining factors favored enforcement of the settlement agreement. Plaintiff had not impliedly or expressly reserved her rights not to be bound—in fact, the existence of the signed agreement to submit a settlement agreement showed that the parties “intended to be bound prior to the drafting and executing of a formal settlement agreement.”16 Lastly, Abrams deemed this type of settlement agreement to be “straightforward” and “therefore not the type of agreement that would always require a writing,” which also favored enforcement of the agreement.17

Practice Tips

There are a few important takeaways from these decisions. First, don’t presume that just because you and your adversary have agreed to settle on a settlement amount and to all material terms that the agreement is enforceable—especially when the unexecuted agreement contains a merger clause. Unless this agreement is sworn to in open court, it is unlikely that the settlement will be enforceable.

Second, if the parties have agreed via a signed writing to settle the dispute—i.e., an agreement to agree, but not the settlement agreement itself—that will likely end the matter, and, absent compelling reasons under Winston not to, courts likely will enforce the agreement, even if it is unsigned. The lesson is clear: To make sure a dispute is truly settled, always make sure to sign on a dotted line—even if that dotted line merely commits you to execute the settlement in the future.

Thomas E.L. Dewey is a partner of Dewey Pegno & Kramarsky. David C. Gartenberg, an associate of the firm, assisted in the preparation of the article.

Endnotes:

1. Pierre v. Chase Inv. Servs. Corp., No. 13-1398-CV, 2014 WL 1316774, at *1 (2d Cir. April 3, 2014).

2. No. 1:13-cv-282, 2014 WL 2927289, at *1 (N.D.N.Y. June 27, 2014).

3. No. 12 Civ. 6863(RA), 2014 WL 2095158 (S.D.N.Y. May 19, 2014).

4. 777 F.2d 78 (2d Cir. 1986).

5. Winston v. Mediafare Entertainment Corp., 777 F.2d 78, 80 (2d Cir. 1985).

6. Ciaramella v. Reader’s Digest Ass’n, 131 F.3d 320, 323 (2d Cir. 1997).

7. RKG Holdings v. Simon, 182 F.3d 901 (2d Cir. 1999).

8. Majority Peoples’ Fund for 21st Century v. Hohri, 159 F.3d 1347 (2d Cir. 1998) (“Settlement agreements are strongly favored in New York and may not be lightly cast aside.”).

9. Register.com, Inc. v. Verio, 356 F.3d 393, 427 (2d Cir. 2004) (“Mutual assent is essential to the formation of a contract and a party cannot be held to have contracted if there was no assent or acceptance.”).

10. Balaban-Krauss v. Exec. Risk Indem., No. 1:13-cv-282, 2014 WL 2927289, at *1 (N.D.N.Y. June 27, 2014).

11. Id.

12. Balaban-Krauss v. Exec. Risk Indem., No. 1:13-cv-282, 2014 WL 2927289, at *3 (N.D.N.Y. June 27, 2014).

13. Id. at *4-*5.

14. No. 12 Civ. 6863(RA), 2014 WL 2095158 (S.D.N.Y. May 19, 2014).

15. Id. at *2.

16. Id. at *3.

17. Id. at *3.