NYLJ “Second Circuit Rejects Challenge to Settlement Agreement Announced on Record”

By Thomas E.L. Dewey

Parties often reach oral settlement agreements following settlement conferences before the court. Such settlements can mean final resolution of the case, but in certain instances, one party may later challenge the validity of a settlement that others believed to be binding.

The Second Circuit considered this scenario in Smith v. Home Depot U.S.A., Inc. To determine whether the oral agreement reached after the settlement conference was enforceable, the court considered the parties’ conduct preceding and immediately following the settlement.

The court then rejected the plaintiff’s argument that his counsel had lacked authority to enter into the settlement agreement after concluding that the plaintiff’s actions indicated the grant of actual authority. The court also held that the oral settlement agreement was enforceable because the parties intended to be bound even in the absence of a signed writing.

Background

Duane Smith brought state law contract and tort claims against Home Depot U.S.A., Inc. (Home Depot) arising out of a construction project. Home Depot then sued Roof Diagnostics Solar & Electric LLC and NRG Home Services, LLC (collectively, NRG) for indemnification.

All parties attended a settlement conference before Magistrate Judge Lee Dunst of the Eastern District of New York, where the Magistrate Judge stated on the record that an oral settlement agreement had been reached. Counsel for all parties confirmed the agreement.

Smith then emailed his counsel, Paul Youkilis, stating that he had been looking to settle the matter for a higher amount. Youkilis withdrew as Smith’s counsel as he could not in good faith represent that the parties had not settled, and Smith, proceeding pro se, disputed that the parties had ever reached a settlement agreement.

Defendants Home Depot and NRG moved to enforce the settlement agreement, and the District Court (Azrack, J.) held a fact-finding hearing. The District Court found that Smith had entered into an oral agreement to release all claims in exchange for $65,000, and granted the defendants’ motion.

The Court’s Decision

The Second Circuit considered the two arguments advanced by Smith to challenge enforcement of the settlement agreement: (1) that his attorney had lacked authority to enter into the agreement on his behalf; and (2) the oral settlement agreement was not enforceable.

Authority

The court noted the presumption that an attorney-of-record entering into a settlement agreement had the authority to do so, and Smith’s burden, as the party challenging his attorney’s authority to settle, of proving by affirmative evidence that the attorney lacked authority. The court further stated that a settlement remains binding even if a party has a change of heart between the time of the agreement and when its terms are reduced to writing.

As there was a dispute between a client and his former attorney about the attorney’s authority, the District Court was required to hold an evidentiary hearing on the matter, which it did. Considering the record developed through the hearing, the Second Circuit held that there was no clear error in the District Court’s finding that Youkilis had actual authority to settle for $65,000, and that Smith had simply had a change of heart.

First, Smith was present throughout the settlement conference, including when the parties agreed to the settlement amount, though he left before the final on-the-record discussion.

Second, Smith had made an initial, lower settlement offer of $60,000 to the defendants, and both the Magistrate Judge and Youkilis told him the defendants were willing to settle for the higher amount of $65,000.

After the settlement conference, the parties went back on the record and Youkilis stated that his client had agreed to a confidential settlement amount. During the evidentiary hearing before the District Court, Youkilis testified that Smith had agreed to accept a $65,000 settlement.

Though Youkilis had not explicitly stated on the record at the close of the settlement conference that he had authority to settle the action on Smith’s behalf, Youkilis’s announcement of a settlement on the record amounted to a statement in open court that his client had given him the authority to agree to the settlement.

Third, Smith waited several months after the evidentiary hearing to argue, for the first time, that the settlement agreement was invalid due to Youkilis’s lack of authority.

Fourth, Smith agreed to have Youkilis state on the record in open court that the parties had agreed on a settlement. Though Smith argued that he did not understand the significance of this formality, the Second Circuit concluded that he could not be relieved of his deliberate decision to settle merely because his assessment of the consequences was incorrect.

Based on this record evidence, the Second Circuit held that the District Court did not clearly err in finding Youkilis had actual authority to settle the action on Smith’s behalf. As the court affirmed on the basis of actual authority, it did not reach the issue of whether Youkilis had apparent authority.

Enforceability of Oral Settlement Agreement

The court considered whether the unsigned settlement agreement was binding by applying the factors outlined in Winston v. Mediafare Entm’t Corp.: “(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.” 777 F.2d 78, 80 (2d Cir. 1985).

First, the court agreed with the District Court’s conclusion that the parties did not make any express reservation to be bound only by a written document. For Smith to expressly reserve his right not to be bound absent a writing Smith was required to convey “forthright, reasonable” signals of his intention to do so, but he did not.

Further, the parties confirmed with the Magistrate Judge on the record that they had reached an agreement, demonstrating the parties’ understanding that the settlement’s reduction to writing was only a formality.

While the parties stated on the record that the settlement agreement was “tentative” and would require the completion of necessary documents, there was no indication that they considered this anything more than a ministerial final step. Further, the only open terms concerned confidentiality and non-disparagement.

Second, the court concluded that the oral agreement included all material terms, such that the third Winston factor favored enforcement. The two terms that had not been finalized—confidentiality and disparagement—were not topics of negotiations during the settlement conference and defendants did not contest Smith’s preferences regarding either.

Third, the District Court’s announcement of the terms of the settlement agreement on the record in open court functioned as the equivalent of a memorialized writing, even though the parties planned to later reduce the settlement agreement to a more formal writing. Therefore, the fourth Winston factor weighed in favor of enforcement.

The court did not address the second Winston factor—whether there has been partial performance of the contract—but concluded that the three Winston factors it did evaluate favored enforcement of the oral settlement agreement. The Second Circuit affirmed the District Court’s grant of the defendants’ motion to enforce.

Conclusion

The Smith decision illustrates the importance of announcing a settlement on the record. This act makes the settlement agreement much more likely to be enforceable, even if the amount is not disclosed.

Here, the statement by the plaintiff’s counsel in open court that the parties had settled served as evidence of both his authority to enter into the settlement on his client’s behalf and of the parties’ intent to be bound in the absence of a written agreement.

Parties entering into oral settlement agreements in principle should be aware that such an agreement may be enforceable, even if they change their minds before it is reduced to writing.

This is particularly the case where other conduct by the party indicates assent to the settlement, including attendance of settlement discussions between counsel and offering a settlement amount lower than the final sum.

Lastly, practitioners should keep in mind that courts are not likely to view terms relating to confidentiality and non-disparagement as material, and the fact that they remain open will not bar a court from enforcing the rest of the settlement agreement.

Christine Kim, an associate at the firm, assisted in the preparation of the article.