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Enforceability of an Oral Settlement Agreement

March 18, 2014 By Emily F. Belanger

Maryland courts have routinely treated settlement agreements just as any other contract, concluding that as long as the basic requirements to form a contract are present, the contract, be it settlement or otherwise, is binding.  In the case of Clark v. Elza, the Maryland Court of Appeals took a look at the enforceability of oral settlement agreements.  The case involved a car accident between the parties.  As with most cases, before the case went to trial, the parties verbally agreed to settle the claim.  The Defendants forwarded several settlement documents to the Plaintiffs, including a Release.Prior to the Plaintiffs executing the Release, however, Plaintiffs’ changed their minds and decided not to go forward with the settlement because one of the Plaintiffs had more extensive injuries than once thought.  Defendants filed a motion requesting that the trial court enforce the verbal settlement agreement.  The trial court held that the verbal settlement agreement was an executory accord (an agreement to discharge a pre-existing claim) and therefore not binding on the parties.  The Defendants appealed.

The Court of Appeals agreed with the trial court, but only in part.  The Court held that the verbal settlement agreement was, in fact, an executory accord.  However, the Court held that “[a]s long as the ‘debtor’ (i.e., the defendant in a tort case) neither breaches the accord nor provides a reasonable basis for concluding that he will not perform, the ‘creditor’ (i.e., the plaintiff) has no right to enforce the underlying cause of action [the lawsuit arising from the accident].”  Therefore, the oral agreement to settle the case was enforced.

It has often been said that “an oral contract is as good as the paper it’s written on.”  In Clark, however, the oral contract to settle was valid, despite not being written.  The Clark opinion makes one thing clear: think long and hard before you verbally agree to settle.  And just to be safe, get it in writing.  

Interestingly, and although not addressed in the Clark Opinion, even if the statute of limitations on the underlying tort action has run prior to the execution of the Release, an oral settlement agreement is enforceable.  An exception to this general rule exists, however, if the settlement is contingent on an expressed deadline for the return of the executed Release.