4 Things You Need to Know About Out-of-Court Settlements

Nowadays, various alternatives can help avoid taking a case to court and produce win-win solutions for both parties. These fall under an out-of-court-settlement procedure called alternative dispute resolution (ADR).

Even the most minor personal injury cases can tarnish reputations, damage relationships, and waste time and large sums of money—and with an out-of-court settlement, these consequences can be avoided. 

Below, you’ll find everything you need to know about an out-of-court settlement. Understanding its nature will help you evaluate whether this option is right for your case. 

What is an Out-of-Court Settlement?

An out-of-court settlement is an arrangement where both parties voluntarily agree to resolve a dispute without the court’s intervention. This allows both parties to control the case’s outcome; however, one party cannot force the other to settle the dispute outside of court. 

4 Important Things to Know About Out-of-Court Settlements

Here are some important things you need to know about an out-of-court settlement. 

1. There are various modes of alternative dispute resolution

ADR comes in different forms, including the following:

  • Neutral evaluation – Here, the parties present their issues to a neutral third party, who is usually an expert in the subject matter. The neutral party will then render an evaluation and assessment of the merits of the case. This procedure makes the process less expensive for the parties by reducing pre-trial costs while avoiding delays.
  • Negotiation – This is the most common form of ADR and is often used as a first attempt to resolve a dispute. Here, the parties will settle the issue through written correspondence or a meeting between all concerned parties. This type of ADR is less formal and more flexible than others, allowing both parties to control the process and the case’s outcome. 
  • Conciliation – Like neutral evaluation, this process requires the appointment of an unbiased third party called the conciliator, who weighs up the parties’ respective positions. The conciliator will then suggest a solution that works for both parties.
  • Mediation – This is similar to conciliation in that the parties appoint an independent third party. However, the mediator will not propose a solution but instead facilitate by evaluating the parties’ written submissions and individually meeting them to negotiate a mutually agreeable solution. Occasionally, the mediator gives a non-binding suggestion on the settlement terms. 
  • Arbitration – This ADR type is more formal than mediation and is held in a trial-like format. It has various forms, including national arbitration, international commercial arbitration, and investor-state arbitration. Depending on the parties’ agreement, the process can be facilitated by a single arbitrator or an arbitral panel. 

2. A settlement agreement serves as a contract between the victim and the defendant

An out-of-court settlement is basically a compromise between the parties. As such, it operates as a contract. Under the law, a contract is an enforceable agreement that defines and governs the rights and obligations of the parties. A settlement agreement typically contains the following:

  • The names of the parties
  • A “whereas” section that explains the reasons for the contract
  • A “no admission of liability” clause saying that the settlement does not include an admission of wrongdoing by either party
  • A “promise to pay” section stating the settlement amount that one party, usually the defendant, will pay the other
  • An invoicing and payment schedule with related details concerning the money transfer 
  • A “mutual release” clause declaring that the parties shall not make claims against each other

3. Settlements are often confidential

Trial documents are public records; anyone can access them. However, out-of-court settlement files are considered confidential. This is especially important when you want your personal information and issues out of the public eye.

4. Generally, the amount received in the settlement is taxable

As a general rule, settlement damages are treated as income and therefore taxable. However, some types of damages are non-taxable. They include the following:

  • Damages received on account of physical injuries
  • Damages received for non-physical injuries like emotional distress, humiliation, and defamation are not subject to federal employment taxes

Pros and Cons of Settling a Claim Out of Court

An out-of-court settlement has both pros and cons. Let us first look at some of its advantages: 

  • Saves time and money – An out-of-court settlement is cheaper than pursuing litigation because ADR mechanisms move faster than trials. In turn, the parties can save on costs and resolve the issue in a short time.
  • Brings less stress – Everyone’s stress threshold is different. However, since settlements get resolved faster, the stress won’t eat you away for too long.
  • Settles the dispute with certainty – A trial has uncertain outcomes since jury verdicts are more ambiguous than a judge’s. In certain situations, juries can be more empathetic toward the defendant than judges. With an out-of-court settlement, the parties have more control over the process and the agreement’s outcome, allowing them to settle the controversy with certainty. 

Meanwhile, one disadvantage of an out-of-court settlement is the low damages amount. A settlement is a compromise, which means that the damages amount may be lower than expected. In this instance, a personal injury attorney can negotiate a more reasonable settlement amount on your behalf. 

It’s Always Best to Have a Lawyer by Your Side 

Filing a personal injury claim doesn’t necessarily mean that your case will go to court. There are steps before it gets to that scenario, and one of those includes settling the dispute out of court. Whether you’re pursuing legal action in or out of court, it’s always best to have a lawyer by your side. 

If you’ve been injured in a personal injury accident, call a lawyer right away. RMD Law has a team of experienced lawyers ready for the tireless representation you deserve. Give us a call for a free case evaluation!

Aria Miran
Share this post

Need Legal Assistance?

Feel free to get in touch with us and we will get back to you as soon as possible

    CALL (415) 612-3725