What is a Deed of Settlement?

A Deed of Settlement (‘Deed’) is a document which formalises an agreement that is entered into between parties who are in a commercial dispute with an intention to resolve it. The Deed of Settlement sets out what each party has to do to settle the dispute.

How does a Deed of Settlement work?

A Deed of Settlement ensures that the parties to the Deed carry out the terms of the Agreement by fulfilling the respective obligations which may be in the form of (i) delivering a product, (ii) making a payment, or (iii) discontinuing a court proceeding.

In case one party does not perform its obligations, the aggrieved party can rely on the Deed to enforce the obligations, such as taking the other party to court to demand payment.  A Deed of Settlement ensures that a dispute does not emerge again at a later date. Generally, the Deed will also include a release where parties agree to release the other from all future claims, demands and actions.

What are the key terms of a Deed of Settlement?

The following are the key terms should be present in a Deed of Settlement:

Date: The date on which the Deed has been entered and the execution dates must be mentioned in the Deed;

Parties: The name of the parties must be entered accurately;

Definitions: All the required terms must be defined in the Deed of Settlement;

Background: The background of the parties and the outline of the dispute must be provided briefly;

Key Obligations: The Deed should state who will pay or do what, and what will happen after the payment is made or the actions completed.  It should include details like a payment deadline;

Release: Parties must agree to release each other from all future claims, demands and actions;

Default: The default clause sets out the penalties which are applicable if one party doesn’t do what they’re required under the Deed;

Confidentiality: The dispute and the agreement are to remain confidential as far as the law permits.

What happens if a Deed of Settlement is entered into while the matter is already in Court?

If a Deed of settlement is entered into when court proceedings have already commenced, the Deed should include terms which finalise the proceedings. The terms must ensure that one party cannot initiate future legal action against the other party. A Notice of Discontinuance or Consent Order needs to be attached to the Deed, which has to be signed by the parties in addition to the Deed. The Deed must ensure that Court proceedings will resume if either party fails to perform its respective obligation.

What are the benefits of entering into a Deed of Settlement?

A Deed of Settlement has benefits for both the creditor and the debtor.

The benefits which a creditor has after executing a Deed of Settlement are:

  • There is a security over its debt;
  • A personal guarantee from the Director of the company;
  • A charge over the debtor’s assets;
  • Acceptance of the debt on the debtor’s part. This ensures the debt cannot be disputed at a later date.
  • Interest on overdue payments.

The benefits which a debtor has after executing a Deed of Settlement are:

  • Flexibility in repayment, such as specific dates for each repayment;
  • Allowance to forecast payment dates so that one can work towards those dates;
  • By entering into a Deed of Settlement, the creditor is prevented from initiating court proceedings, ensuring the debtor enjoys peace of mind;
  • No credit default will be placed while there is an active Deed of Settlement;
  • Since there is a confidentiality clause in the Deed of Settlement, it allows the debtor to settle the dispute without attracting publicity, and to keep their legal issue and agreement private.

The main purpose behind executing a Deed of Settlement, is to ensure that a commercial dispute can be resolved amicably out of court.

What are the Limitations of a Deed of Settlement?

A Deed of Settlement cannot bind any other party except those who are parties to the Deed. Further, the Deed cannot impede the work of statutory agencies, as it is a private arrangement between the parties. Also, a Deed has no effect if it is against public policy, contrary to law or if its purpose is to conceal unlawful activity.

Key Reflections

The main purpose behind executing a Deed of Settlement, is to ensure that a commercial dispute can be resolved amicably out of court. Further, since it is a formal legal document, it can be enforced against the party which does not follow the terms or things go wrong.