What is a Deed of Settlement?
A Deed of Settlement is also known as a deed of release. It is an agreement whereby two parties end their professional or legal relationship and all financial and other legal matters are formally resolved and agreed upon. These agreements are used to prevent or end a dispute and are commonly used between two companies who used to have a commercial arrangement but no longer wish to be in business together, or by employers and employees, as well as between principals (the party who hires a contractor) and contractors.
What is in a Deed of Settlement?
Deeds of Settlement usually state that an amount of money will be given to the aggrieved party/ the employee who is leaving, in exchange for agreeing that any existing legal proceedings will be terminated and no further legal proceedings will be initiated. Both parties usually agree to keep the contents of the agreement confidential. The deed may also include a non-compete clause.
Deeds versus Contracts
Now, there is an important distinction between a deed and an agreement. Even though deeds are actually referred to as an agreement. Yep, the technical legal jargon floats to the top again.
An agreement is a contract that requires consideration to be properly formed. This means that each party has to get some kind of benefit for the agreement to be binding. In a Deed of Settlement between an employee and an employer, the consideration that an employee usually gets is money. The consideration that the employer gets is a guarantee that they won’t be sued. Agreements are fine in many situations where an employee is seeking monetary compensation and the employer agrees to pay them the money.
A deed is a type of formal contract that does not require consideration. However, there are a bunch of other technical requirements that need to be met. Ever heard of the phrase “signed, sealed, delivered” and “witnessed”? That phrase is actually what needs to happen with a deed.
If the deed is between a company and an employee, then on behalf of the company it needs to be signed by two company directors or a company director and the company secretary. For the employee, they will need to sign the deed and it will need to be witnessed by an adult who is not a party (or involved with in any way) the deed. When an employee won’t be receiving any money, deeds of settlement are definitely the way to go.
Deeds are more common than Contracts
In fact, deeds are used more often than agreements. Why? Say you are a company that used to be in business with another company, if each company decides that it does not want to work with the other company then the companies may agree to part ways. Often no money will change hands on the parting of ways. In this case there could be doubts as to whether any consideration was paid (and remember if there is no consideration then there is no contract). So in these circumstances, you may not have a binding contract. A deed avoids this situation.
We have a complete section devoted to Deeds in our Ebook – Why Templated Contracts represent a massive risk to your company.
Deeds of Settlement are significant because they can prevent either party from bringing any further legal proceedings relating to whatever is covered in the deed. This means that it is really important to read the deed carefully and, even better, to have your contract lawyer (not the lawyer for the other party!) have a look over it for you.
Remember – do it once and do it right!