Careers Business Ownership When Should I Settle Out of Court? Why and When to Take a Settlement Agreement Share PINTEREST Email Print FatCamera / Getty Images Business Ownership Operations & Success Business Law & Taxes Sustainable Businesses Supply Chain Management Operations & Technology Marketing Market Research Business Insurance Business Finance Accounting Industries Becoming an Owner Table of Contents Expand What is a Settlement? Why Many Court Cases Settle Pros Explained Cons of a Settlement Agreement Using Mediation for Settlements Settlement Agreement Sections Settlement Agreements and Taxes Frequently Asked Questions (FAQs) By Jean Murray Jean Murray Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. She has taught at business and professional schools for over 35 years. Learn about our Editorial Process Updated on 05/21/21 Going to trial can be lengthy, difficult, and costly, so many lawsuits end up being settled out of court. In fact, of major case categories, tort cases (including personal injury and negligence) tend to have the highest settlement rates, followed by contract cases, employment discrimination cases, and then constitutional tort cases. One study from the Eastern District of Pennsylvania reported that the highest settlement rate for tort cases was 87.2%. If you’re considering whether to settle out of court, here’s a breakdown of how it works, including a sample settlement agreement template. What Is an Out-of-Court Settlement? A settlement is an agreement between the parties in a lawsuit that effectively halts the dispute process and any other future litigation (lawsuit). It’s basically a compromise, which is why it’s sometimes called a compromise agreement. The compromise agreement is substituted for the claim by the injured party, and the rights and liabilities of the two parties are then set by the agreement. Why Do So Many Court Cases Settle Out of Court? Going to trial in a civil case against another party—whether you are the plaintiff or the defendant—can be stressful, and settling before the trial may be the best option to save time and money. Pros Lower court costs and attorney fees Quicker resolution and certain outcome Less stress and time away from work and family Cons Claim amount may be less than in a court case May be difficult to get the claim paid If no agreement, it's back to court Pros Explained Costs of Litigation. Many court cases are settled just before trial and, of course, a significant amount of money has probably already been spent getting ready for it. This money may go toward: Billed time for attorneys Costs for investigations Depositions Court filings To put these costs into perspective, a study from the University of Denver cited this example: “...while a simple automobile case may resolve quickly after case initiation and incur less than $10,000 in fees, the total costs of such a case can also exceed $100,000 per side if the case goes to trial." Stress and time. The “stress factor” is different for everyone, but if the case is taking you away from your work and it’s costing you money, or the stress is eating away at you, it might be wise to settle. Uncertain outcome of a trial. Jury verdicts are more uncertain than having a judge. For instance, studies have found that juries tend to be more empathetic to defendants in certain situations than a judge might be. Why spend all that time, money, and effort if there’s a possibility you won’t win the case? You or the other party can appeal a trial verdict, but a settlement ends the dispute and is binding on both parties. Cons Explained Claim amounts. Offsetting the uncertainty of the results of a trial is the prospect of a high return in damages to the injured party, especially punitive damages. Since a settlement is a compromise, the damage amounts you receive in a settlement may be lower than you expect. Getting the claim paid. Even if the two parties can agree on the settlement, it may be more difficult to get the claim paid in full. The plaintiff may have to go back to court to get a judgment (court order) from the court. Back to court. If the settlement process breaks down, you may end up in court, with all of those costs and time, in addition to the time spent in the failed agreement. Each lawsuit is different, with different parties, and it’s impossible to know whether a settlement is a good idea until the parties reach a specific point in the process when an agreement might be possible. You and your attorney will ultimately decide what’s best for you. Using Mediation for a Settlement Agreement As a way to get to a settlement agreement, the parties in a lawsuit can agree to mediation. In mediation, the two parties meet with a trained mediator who works to reach an agreement. At any point in a lawsuit before trial, the two parties can agree to mediate. If they reach agreement, they can put it in writing. What Is Included in a Settlement Agreement? A settlement agreement is a contract, so it must meet the terms necessary for a contract, including mutual agreement and consideration (something given by both sides). The various sections in a typical settlement agreement may include: Names of the parties to the agreementAn introduction that explains the reasons for the contract, also known as the “whereas” sectionThe “no admission of liability” clause that says the settlement doesn’t include an admission of wrongdoing by either partyA “promise to pay” section that states the settlement amount that one party agrees to pay to the other partyThe invoicing and payment schedule with details on the money transferThe "mutual release" clause, which states that both parties agree not to make any claims against the other party Download a Sample Settlement Agreement Template Settlement Agreements and Income Taxes The IRS counts any income from any source as taxable gross income, and that specifically includes amounts received in settlements. But gross income for tax purposes doesn't include certain types of damages received through the result of a lawsuit or through a settlement agreement. Specifically excluded from income taxes are: Damages for certain discrimination claims and amount paid on account of physical injuriesDamages received on account of personal physical injuries and physical injuriesDamages (not including punitive damages) received by lawsuit or agreement, in a lump sum or in payments, on account of personal injuries or physical sickness Frequently Asked Questions (FAQs) What's the difference between a settlement and a judgment? A settlement is an agreement between the two parties in a lawsuit. A judgment is a verdict or ruling by a judge. If I take a settlement as the defendant, does that mean I'm admitting guilt? A settlement doesn't usually include an admission of guilt; it doesn't say anyone was right or wrong in the case. A settlement agreement may include a "no admission of liability" clause. In some cases, part of a dispute can be settled, leaving a judge or jury to decide other issues. Can I use a settlement agreement in small claims court? If you have a claim in process in small claims court, you and the other party can come to an agreement before the trial date. Be sure to put in writing. If you make the agreement and the claim has been paid in full, notify the small claims clerk in writing to clear the case. If the claim hasn't been paid, you can go to court and ask for more time. Key Takeaways A settlement agreement is a contract between the two parties in a lawsuit.The settlement takes the place of the trial and is a compromise to save time and money and stress.If the parties can't agree, the case returns to court.