Q: Almost two years ago I settled an arbitration action that was filed against me by a former client. Although I thought I had a very good defense, the attorney for my brokerage firm convinced me to settle since we were able to get out of it for significantly less than what the customer originally asked for.
The settlement agreement provided that the payments were to be made over an 18-month period. Unfortunately, due to some financial difficulties that I encountered, I missed the last two payments. I’ve now been served with a complaint from the client seeking the entire amount that he was originally asking for. Since we had a settlement agreement, isn’t the customer limited to only the balance of what I owe, i.e., the last two payments?
A: Fortunately, you sent me a copy of the settlement agreement so I could get a better idea of your obligations. Unfortunately, the settlement agreement you signed contains what is known as a “liquidated damages” clause.
Liquidated damages clauses are designed so that if one party breaches the contract (in this case the settlement agreement) the parties agree that the damages to be paid would be a specific number. This makes it easier for a party to claim their damages when they might be difficult to calculate. For example, a liquidated damages clause might be used in an employment contract in conjunction with a non-compete clause because if the employee tries to take clients with him when he leaves, it can be difficult to determine how much revenue the broker-dealer might lose.
In this case, the liquidated damages clause provides for payment of the entire amount that the customer was originally claiming, less what you’ve already paid, in the event of a breach of the settlement agreement. It also contains a “consent to judgment” clause whereby you essentially waive your right to challenge the legitimacy of the amount being claimed. The only defense you’d be permitted to raise would be to challenge the claim that you breached the settlement agreement. For example, if you could show that, in fact, you made all the payments as required by the agreement. Notwithstanding this, however, in some instances you may be able to renegotiate the settlement with a willing claimant if he or she wishes to avoid further litigation.
I’m actually pretty surprised that your attorney would have allowed a provision of this type to be included in a settlement agreement, but perhaps it was the only way to get the client to agree to such a lower amount. In any event, it is for this reason that it is crucial for a respondent or defendant involved in litigation to read any settlement agreement fully and go through each paragraph with their attorney who should explain everything.
QuoteAnyone who runs into financial difficulties and can’t meet the obligations of their settlement agreement should immediately contact their attorney so opposing counsel can be informed of the situation.
Additionally, anyone in a similar situation who runs into financial difficulties and can’t meet their obligations under the terms of a settlement agreement, should immediately contact their attorney so opposing counsel can be informed of the situation. This at least gives you the opportunity to try and make other arrangements before the opposing counsel holds the representative to be in breach of the agreement. The opposing attorney may not be willing to give you more time or make other arrangements, but I have found that respondents or defendants who show good faith in trying to meet their obligations, can usually buy some goodwill with opposing counsel. Of course, if late or missing payments become habitual, all bets are off.
Nevertheless, as I suggested, it may be worth the effort to speak to your attorney and see if you can work something out. Perhaps paying some additional interest may mollify the customer.