Settlement deeds: drafting for enforcement

Settlement deeds are regularly used to record the terms of settlement of a dispute and bring legal proceedings to an end. In theory, and if properly drafted, they provide the parties with certainty. However, if too much focus is placed on the settlement terms without considering what happens in the event of a breach, the parties may find themselves facing another costly dispute.

The following clauses and mechanisms can help provide clear and effective enforcement pathways if a party fails to comply with the terms of a settlement deed.

Having the paying party expressly acknowledge the existence and quantum of any underlying debt or liability within the deed is simple, but frequently overlooked. It provides a clear evidentiary foundation for enforcement, which will be difficult for that party to later challenge.

A consent to judgment clause requires the paying party to agree in advance that, upon a specified default event, the innocent party may enter judgment without commencing fresh proceedings.

To give effect to these kinds of clauses, parties typically execute a consent order in an agreed form when the settlement deed is signed. This is often attached to the deed, and may only be filed if a default occurs. Alternatively, the settlement deed may contain a clause permitting the innocent party to file an application for judgment supported by affidavit evidence of the default. Often, this sort of clause puts a restriction on the steps the paying party can take to defend any enforcement efforts.

A liquidated damages clause pre-agrees the quantum of loss payable upon breach, relieving the innocent party of the burden of proving actual loss. Care must be taken when drafting liquidation damages clauses to ensure that they do not result in unfair penalties, which might be set aside by the court.

Where payment is by instalments, an acceleration clause makes the entire outstanding balance immediately due upon default.

Where the liable party’s financial position is uncertain or the settlement sum is substantial, the deed can be supported by security. Common forms include personal guarantees from directors, mortgages over real property and security interests over personal property registered on the Personal Property Securities Register.

A costs clause might provide that, upon breach, the defaulting party will pay the innocent party’s legal costs. This shifts the financial risk of enforcement onto the defaulting party and creates an incentive to comply.

A sunset clause sets out what happens if the deed’s obligations are not fully performed within a specified timeframe, providing certainty as to when the deed will ‘fall away’ and also triggering enforcement rights if performance remains incomplete.

These clauses are not always found in boilerplate settlement deeds. Each should be considered in the context of the particular settlement to ensure enforcement rights can be exercised quickly and effectively following a breach or defined event of default. The appropriate combination will depend on the nature of the dispute, the parties’ financial positions and the terms of settlement.

Well-drafted enforcement mechanisms can significantly reduce the time, cost and uncertainty involved if a party fails to comply with its obligations. Our disputes and litigation team can assist with negotiating and drafting settlement deeds and advising on enforcement options where settlement terms have been breached.

This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.