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Posted by on Mar 14, 2016 in Publications |

A Cautionary Tale on Drafting Settlements

A Cautionary Tale on Drafting Settlements

Last week the California Supreme Court delivered a stern lesson to litigants about the critical importance of ensuring that every settlement agreement is carefully drafted and reviewed for the specific case it is intended to resolve. This case should serve as a reminder that a failure to constantly evaluate settlement agreements for potential ramifications can create unexpected – and unwanted – results and should deter litigants and attorneys alike from simply recycling the same old settlement agreements over and over again without reviewing and revising them.

Plaintiff Prevailed By…Settling?

In its opinion in Maureen DeSaulles v. Community Hospital of the Monterey Peninsula the Court found that, under Code of Civil Procedure section 1032, the plaintiff should have been deemed the prevailing party – and thus entitled to recover certain litigation costs – because the payment of settlement sums by defendant to plaintiff was a “net monetary recovery.” In so finding, the Court held that “[w]hen a defendant pays money to a plaintiff in order to settle a case, the plaintiff obtains a net monetary recovery and a dismissal pursuant to such a settlement is not a dismissal in defendant’s favor.” This therefore leaves plaintiff as the prevailing party, not the defendant, and thus entitled to costs.

In short, the Court held that, unless the parties agree otherwise, if a defendant settles with a plaintiff and pays him any sum of money, the plaintiff is by default the prevailing party and entitled to costs. In this particular case, since the hospital defendant’s settlement agreement didn’t provide for whether costs were waived by the settlement, the Court found that the trial court was required to find the plaintiff to be the prevailing party and entitled to costs.

Careless Settlements Lead To Unexpected Results

Why does this matter? In the United States the majority of lawsuits settle before trial, typically with defendant paying some sum of money to the plaintiff, even if it’s merely a small sum (e.g. nuisance value) to get the plaintiff to walk away. The general idea, of course, is that by paying the agreed-upon sum, the defendant will be free of any further obligation to the plaintiff – the defendant certainly does not expect to have to effectively finance a portion of the plaintiff’s former lawsuit on top of that.

Yet this is precisely what would be required of a defendant if it failed to arrange for a waiver of costs in the settlement agreement. Although the fees in DeSaulles were ultimately relatively low – about $23,500 – one can easily imagine a case where the fees numbered in the hundreds of thousands, given that costs can amount to a significant sum, particularly if they include expert fees. An unpleasant surprise to say the least.

One Story, Two Lessons

The moral of the story? There’s two. First, defendants would be wise to take the Court’s advise and always make sure to require a plaintiff to waive costs before there is ever an agreement to make a settlement payment. Something to the effect of: “It is understood and agreed that each Party shall bear his or her own costs, attorneys’ fees, and all other expenses whatsoever incurred in connection with the Lawsuit as identified herein.”

That said, one thing should be noted – many, if not most, settlement agreements already have language to this effect, making this generally a non-issue. However, this language is typically there because it is generic settlement language a lawyer has always used or simply the result of the rote copying of a prior settlement agreement that seemed to work – not because there was a conscious and deliberate evaluation of the possibility that the California Supreme Court would rule that the very act of settling may obligate a defendant to finance plaintiff’s litigation costs.

Which leads to the second moral of the story: litigants must approach any settlement agreement with skepticism and caution, carefully parsing and weighing every phrase and paragraph to ensure that there is no possibility that unwanted and unexpected obligations are being incurred. In other words, never assume that simply because a settlement agreement worked before it will work again – put in the time to make sure it will work for the current case.

TLDR: A defendant must always require a waiver of costs before settling with a plaintiff. More importantly, every settlement agreement must be drafted to address the particulars of the current litigation and further must also be carefully reviewed and evaluated in its entirety in order to account for every possible contingency that could create problems in the future.


If you’re involved in a lawsuit or risk management and have any questions regarding current or potential legal issues, we would urge you to contact an attorney as soon as possible to obtain advice, guidance and representation. At Baker, Keener & Nahra, we have the experience, skill, and drive to get the best possible results for our clients, no matter the size of the case or the scope of the problem. So if we can be of any assistance to you, please contact us and let us know how we can help.