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What happens if a company breaches a settlement agreement?

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A settlement agreement is legally binding, which means there are serious implications if a company breaches it.

An employee has a legal obligation to abide by the terms in a settlement agreement. Therefore, if there is a breach, there is the potential for the employee who has signed the agreement to then bring a damages claim against the employer.

How Should a Settlement Agreement Work?

A settlement agreement is usually between an employer and their employee, and the most common use of this type of agreement is to bring a period of employment to an end.

The settlement agreement enables both parties to make a clean break, without there being any kind of legal action or dispute.

This is a way can provide a swift, clean resolution where a relationship between employer and employee is no longer viable or working.

Typically, the employee will receive an agreed financial sum and references, in return for agreeing to leave their job and not making any subsequent claim.

To set the process in motion, the employer needs to make an offer. They can put this in writing, or make it verbally to the employee.

The employer’s proposal of a settlement will need to explain what kind of financial compensation is on offer, and why the employer is making the offer.

There may then need to be discussions between parties before they move on to the final, written settlement agreement.

A settlement agreement can include details of:

• Settlement payments
• Non-financial terms.

These non-financial terms can include references the employer will provide and confidentiality clauses that apply to the employee.

Once both parties sign the settlement agreement, it becomes legally binding.

Why Are Settlement Agreement Terms Important?

The chief benefit of a settlement agreement should be that both sides come out satisfied: the employer no longer needs to employ the other party, and the other party receives financial compensation for agreeing to leave this employment.

It is a form of mutual resolution, and it always involves the employee receiving some sort of payment in exchange for agreeing not to pursue any sort of formal, legal claim.

This agreement not to pursue a claim can include cases they might otherwise bring against the employer via an employment tribunal.

For all this to work, the terms and conditions of the settlement agreement must be clear.

These terms will include the amount of compensation being paid, and whatever clauses there are that prevent the employee seeking a claim, or making any kind of disclosure to third parties.

Once the settlement agreement becomes legally binding, if one party breaches its terms and conditions, then the other party can take legal action through the courts.

What are Common Breaches of Settlement Agreements?

There can be breaches to settlement agreements from either the employer or the employee.

These are, essentially, violations of the agreed terms, where one of the parties fails to honour the agreement.

One of these common breaches is where the employer fails to make the agreed payments to the employee, or delays making them.

For the original agreement to work, it will have needed to include the specifics of these payments, including how much the compensation should be, and the timescales for paying it.

Where payments are late or inadequate, the employer is breaching the agreement.

Another breach can be from the employee side, where the party involved breaks the confidentiality conditions of the agreement.

Confidentiality is central to settlement agreements, especially at the negotiation stage. Settlement agreements always include some sort of confidentiality clause.

These types of clauses can relate to the nature of the business, or events leading up to the agreement. They may cover the terms of the settlement itself. There can also be clauses that prevent the employee making derogatory remarks or statements about the employer and staff.

The chief point of a settlement agreement is to avoid any dispute involving employer and employee going to court.

For example, if the employee attempts to continue a pursue a claim in court, even though they have signed an agreement, then the agreement will prevent this action proceeding.

In this situation, the employer could then seek reimbursement for any costs in defending the claim, through the employee’s breach of contract.

What Happens if a Company Breaches the Agreement?

The legal consequences of breaching a settlement agreement will vary according to specific circumstances.

It may be that the parties continue to seek to prevent litigation from happening, even though this was the purpose of the settlement in the first place.

What is important is to have sound legal advice and support in these situations.

Where the parties involved cannot reach a resolution, then, if the employer has breached the agreement, the employee can decide to bring a breach of contract claim against the employer.

The aim of such a claim would be to compensate the employee for any losses they have suffered as a result of the employer’s violation of the agreement

Breach of Contract Claims

If a party to a settlement agreement sues the other party in the agreement, they are making a breach of contract claim against them.

This claim is against material non-compliance with the terms of a legally-binding contract.

A legally-binding contract is an agreement that the law recognises as legally-binding. Because of this, if one of the parties breaches it, legal rights arise, and the terms of the contract are enforceable against the party in breach.

The enforcement of contracts is a crucial and necessary part of any legally binding contract, and a settlement agreement is no exception.

The principle is that if one party does not receive the benefit of the contract by reason of the other party’s breach, then the innocent party can, by right, claim compensation legally for their loss. This claim is for damages.

Therefore, if a company fails to honour its payments in a settlement agreement, it can find itself in breach of contract.

What Makes a Settlement Agreement Legally-binding?

For a settlement agreement to be legally binding, it must first be a formal, written agreement.

It must also meet certain legal requirements:

• An independent legal adviser must provide advice to the employee, and
• The agreement must name this independent adviser.

This is important because in the agreement, the employee will be waiving their legal rights to make any kind of future claim.

Usually, this independent adviser will be a solicitor.

There are statutory requirements for the settlement agreement to make it legally valid and binding:

• The agreement must be in writing

• It must relate to specific proceedings or a specific complaint

• An independent lawyer must draw up the agreement, and include their name in it

• The agreement must set out what it intends to do, and

• It must state that it meets the statutory regulations covering settlement agreements.

If the settlement agreement doesn’t meet these statutory requirements, then it won’t be a legally valid document. Without this validity, the employee could still bring a claim against the employer.

However, once a settlement agreement becomes legally binding, signed by both parties, then failing to meet its terms will result in breach of contract.

How Does an Employee Claim for Breach of Contract?

The first stage would normally be to discuss the breach with the employer, and a solicitor can do this on the employee’s behalf. If these negotiations are not successful, then the employee should then bring a breach of contract claim against the employer.

To sue for breach of contract, the employee must:

• Prove that a contract was in existence, which was legally binding,

• Prove that the other party (the employer) did not fulfil their part of the contract, and

• Prove that they suffered loss as a result.

All three of these aspects should be provable with a legally valid settlement agreement.

For more information about our business law services, including settlement agreements, please call or complete our online contact form, and we will be in touch as soon as possible.

Jennie Jahina


Jennie Jahina


Jennie is a Partner and Head of the Employment team.  A member of the Employment Lawyers Association, Jennie has 21 years’ experience and is an accredited CEDR Mediator. She acts for private sector organisations ranging from SMEs to multi-national companies and public sector organisations.