What is a deed of settlement?

A deed is a special type of contract. It sets out the legal obligations that the parties agree to be bound by; in short, what the parties can and cannot do to finalise a dispute (of any kind) and/or ensure a future dispute does not arise. A deed of settlement is used to bring an end to a litigious matter or current court proceedings on clearly defined terms. A deed of release is often used in an employment context to ensure the parties’ rights and obligations are recorded in a document.

One of the key differences between a normal contract or agreement and a deed is the issue of consideration. Consideration is an essential element in a contract. It means something for something, and is variously defined as “the price for which the promise of the other is bought[1] or “a price in return for the promisor’s promise or a quid pro quo. The price can be in the form of an act, forbearance of promise.[2] It can include the act of performing a term or terms of an agreement in the reliance or expectation of all other terms being satisfied. Consideration is not required for a deed. This is because a deed is intended to record the parties’ solemn intentions to be bound by its terms and that in itself is sufficient.

Some basic similarities with contracts will still be applied, especially in relation to construing its terms. A court will usually interpret the deed using the plain, everyday meaning of the words used in the document in the event there is a dispute.

Sign away?

Consider the following two situations:

  1. You have negotiated a good settlement of the long-running legal issues (whether or not court proceedings are on foot) with a business supplier. They will pay you $50,000 “at some point” to settle the accounts and “sort the details out” later. You usually operate on handshake agreements, but the specifics are hazy and you really want to get this one right. Do you contact a lawyer to instruct them to put the agreement into writing? Will it be worth getting a lawyer at the end of the matter?
  2. You have agreed to accept a voluntary redundancy from your employer. The redundancy is, however, on the condition the parties “enter into a deed of release”. Your employer then sends you a draft deed containing detailed clauses and it all appears to be in order. Should you sign the deed? Should you have even agreed that the redundancy be subject to a deed in the first place?

In order to answer these questions, we explore what a deed is and what you can expect it to contain, and some words of caution when you may be in a position to need one.

Usual formalities

Most law firms and lawyers will rely on their pro forma deeds, amended as necessary to fit the situation. However, the below are some key elements which can be found in most deeds of settlement.

Parties: Who agrees to be subject to the deed and bound by its terms. Whilst it may seem obvious in some circumstances as to who the parties should be, sometimes it is not so simple. Should the directors of a company be parties to the deed, even if the directors personally weren’t part of the court proceedings? Can the other side demand that all of your subsidiary companies be included when the dispute wasn’t specifically about them? This will depend on a case by case basis.

Recitals: A brief background to the dispute set out in dot points. This section should set out succinctly and usually chronologically any facts the parties agree are relevant for the purposes of the deed. If it is to settle a current court case, it may include expressly that the parties have agreed to enter into the deed “without any admissions” and to avoid the time and cost of further litigation.

Definitions: The key words or phrases used throughout the deed to ensure consistency and readability. A common definition is “Business Day”, which is usually a day on which trading banks are open for ordinary business in the chosen state or territory. Whilst some definitions are straightforward, care needs to be taken to define any settlement sums clearly, including whether they are inclusive of GST or any other taxes, interest, legal costs and disbursements.

Settlement/ Release/ Indemnity: The terms the parties actually agree to do (or not do) from the moment of exchange. These terms are sometimes used interchangeably, however, as their names suggest, they mean very different things. Deeds may have one or all of these components.

As stated above, a settlement will usually be used for a disputed matter. Key terms will include who will do what, and when they will do it; for example, Party A will pay Party B the “Settlement Sum” (which should be set out in your definition section) within ten business days of the date of the deed. Party B will agree to never commence court proceedings or any type of claim in respect of the circumstances which gave rise to the payment.

A release means that past, present and future claims will be limited or discharged in some way; usually they are ruled out in their entirety. In an employment context, if an employee accepts a voluntary redundancy, the employer will want to be released from any liability including, for example, unfair dismissal. By the same token, an employee could require a release from any actions arising from their employment such as negligence.

An indemnity is a type of insurance for future loss or damage. One party agrees to take on the risk of the other party for damage that may occur as a result of a certain event occurring. Be careful that you are not indemnifying a party for acts or events entirely outside your control well into the future.

Default: What happens when a party does not adhere to the terms of the deed. A good default clause will include a detailed process that needs to be followed in the event a party fails to fulfil its obligations, starting from giving notice of the default. An example for non-payment of an instalment agreement is that the balance of the amount becomes due and payable immediately. The consequences of a default will necessarily be different for each party, so any possible contingencies will need to be considered.

Confidentiality: The parties cannot disclose the terms of the deed unless required by law. Most deeds will include a standard confidentiality clause. Depending on how widely it is drafted, it may range from being unable to discuss the exact terms or even as far as being unable to disclose the existence of the deed itself. An exception to confidentiality includes when a party sues for breach of deed in the event of default.

Applicable laws: The jurisdiction to interpret and adjudicate the terms of the deed. An ACT matter where both parties reside in the Territory and the facts all arose in Canberra will usually nominate ACT laws and courts to hear any dispute relating to the deed. This can become complicated when there are national or even international issues which played a part.

Entire agreement: The terms set out in the deed comprises the full conditions by which the parties agree to be bound. This means any prior negotiations and agreements will be superseded, and this is why you want someone with serious drafting skills to capture all the necessary components without making it an overly onerous document.

Execution: The official signing of the deed, usually prefaced with a statement to the effect that it is “executed by the parties as a Deed”. A company will need to execute a deed in accordance with the Corporations Act 2001, by its directors or a director and company secretary.[3] An individual will need to “sign, seal and deliver” the deed, which nowadays means signed before a witness who is not a party to the deed.

Exchange: One party’s executed deed is given to the other party/parties, and vice versa. A deed may be executed in counterparts and this is usually provided for expressly. This means the parties will sign separate but identical copies of the same deed, which together form a single binding document. These days, lawyers often exchange deeds electronically, by sending scanned copies of the signed deed by email. You should ensure that the copies exchanged are identical documents, rather than a previous version which has since become redundant.

Some notes of caution

  • Get it right from the negotiation stages. If you intended to settle a directors’ dispute but not the shareholders’ claim, this should be made clear from the beginning. Otherwise, you may be locked into a settlement that you never wanted or anticipated, resulting in those terms being locked into a deed.
  • Ensure you read and understand all the terms of the deed prior to signing and returning it. Once it is exchanged, it is a legally binding document. For example, if the deed contains a confidentiality clause, depending on the wording, it is unlikely you will be able to talk to the media about the deed or the even the circumstances of the case.
  • A cause of action founded on a deed has a 12 year limitation period in the ACT, rather than the usual six years for a contractual claim.[4] This means if a party breaches the deed, the non-breaching party will have 12 years from the date of the breach to commence a court claim to have it rectified. Keep in mind the limitation period varies in each state and territory.
  • Make sure you keep an exchanged copy for your records. The deed sets out the rights and obligations of all parties, so it is the key document to refer to going forward. In the event a party breaches the deed, you will need to refer to it (including any default provisions) to seek redress.

To collectively answer the questions posed in the opening scenarios, as shown above, a deed is a complicated document which can have serious legal consequences. When used properly, it can be a valuable document for any party. It is always worth getting a lawyer’s opinion early on, or even to review the terms of a deed to ensure that you are not signing away your rights.