Penalty Clause: How to give your settlement agreement some punch

In this video, partner Keith A. Davidson discusses how a penalty clause in your settlement agreement can create a strong incentive for the opposing party to either comply or pay the price.

The following is a transcript of this video:

In this video, I want to talk about a couple of provisions that you really should think about putting into your settlement agreement to help you enforce that settlement agreement in the future. Now, there’s times when you enter into a settlement agreement and maybe the other party gets cold feet, they want to back out, they don’t want to comply with the terms of the settlement agreement.

Most settlement agreements are pretty solid documents. They’re contracts. The parties are going to have to perform under that contract. Very rarely is somebody going to be able to get out of a settlement agreement. But if you have a settlement agreement and the other side’s not complying. It really makes your life a lot easier if you had thought ahead about that possibility. And one of the things you can do is you can have some sort of a penalty. So if you’re due a payment under the settlement agreement by a certain day, you can put into the agreement that if I don’t get the payment by the agreed-upon date, then maybe the other side has to pay me interest and maybe the interest is 6 or 7 or 8%. Something that’s relatively high in the current market conditions. And the reason you do that is to incentivize the other side to act and to act on time and then if you don’t, there’s a punishment. There’s a penalty.

And so anytime you’re doing a settlement agreement, you kind of want to think ahead and think to yourself what happens if this doesn’t actually play out the way we think it will. How can we help incentivize the other side to do the right thing or put in a penalty so that they’re going to want to perform on time because they’re not going to want to be subjected to whatever that penalty is.

Now you can’t always get a penalty in a settlement agreement, it’s something that you have to negotiate with the other side, but it’s definitely something that you should think about if you’re heading into a written settlement agreement.