How to write a settlement agreement

Step 1: Decide which type of settlement agreement you are writing

Before drafting a single clause, work out which regime governs your agreement, because the rules differ sharply.

• Employment settlement agreements (once called compromise agreements) settle claims an employee or worker could bring in an employment tribunal, such as unfair dismissal or discrimination. They are only valid if they meet the statutory conditions in section 203 of the Employment Rights Act 1996, section 147 of the Equality Act 2010 and the equivalent provisions for other claims.
• Commercial settlement agreements resolve business disputes, including breach of contract, unpaid invoices, warranty disputes or shareholder disagreements. They follow ordinary contract law and do not need independent legal advice to bind.

If a claim has already been issued, you can record the terms in a Tomlin order, which stays the proceedings while the payment and other obligations sit in a confidential schedule. During negotiations, mark correspondence “without prejudice” and “subject to contract” so that exchanges cannot be used as evidence and no binding deal forms by accident. In employment, pre-termination discussions can also be protected under section 111A of the Employment Rights Act 1996. Fixing the category first tells you which mandatory ingredients your draft must contain.

Step 2: Name the parties and set out the background

Identify every party by full legal name, and for companies add the registered company number and registered office so the release reaches the right entity. State the capacity in which each person signs, and extend the definitions to group companies, officers, insurers and successors where the release needs to bind or protect them.

Follow the parties with a short recitals or background section that describes the dispute in neutral terms and, if a case is on foot, records the claim number. Keep this narrative factual and add a clear statement that the settlement is a compromise and not an admission of liability by anyone. Accurate identification matters more than it looks: a release given by or to the wrong entity can leave the real party exposed to the very claim the agreement was meant to close.

Step 3: Set out the consideration and payment terms

Consideration is what makes the promises enforceable, so the money (or other benefit) must be spelled out precisely. If there is no consideration, execute the agreement as a deed instead. Cover the following:

• The exact amount, the payer and payee, the currency and the payment method (usually BACS).
• Firm payment dates, and for instalments, each due date plus the consequence of a missed payment.
• A clear breakdown between taxable elements (pay for work done, contractual notice, accrued holiday) and any compensation for loss of employment.
• A tax indemnity from the employee for any further tax or National Insurance that becomes due on the termination payment.

In an employment exit, the first £30,000 of a genuine termination or ex gratia payment can usually be paid free of income tax and National Insurance, but sums for notice are caught by the post-employment notice pay rules and taxed as earnings regardless of label. These thresholds and formulas change, so confirm them before you draft the numbers. It is also common to make payment conditional on the employee signing, returning company property, and (where used) a second adviser certificate signed after the termination date.

Step 4: Draft the release and waiver of claims

The release is the heart of the agreement and the clause most often litigated. In a commercial deal you can use a broad release of all claims arising from the dispute, whether known or unknown, and state whether it is one-way or mutual.

Employment waivers are stricter. A statutory waiver must relate to particular complaints, so a blanket “all claims” release will not, on its own, validly settle statutory employment rights. The safest practice is to list each type of claim being waived and pair it with a general contractual release. Concrete checks for this clause include:

• List named statutory claims (for example unfair dismissal, discrimination under the Equality Act 2010, unlawful deduction from wages, breach of the Working Time Regulations).
• Add a general release of contractual and common law claims connected to the employment and its termination.
• Carve out the rights that cannot be settled, such as accrued pension rights, the right to enforce the agreement itself, and personal injury claims the employee is not yet aware of.
• Include warranties that the employee has disclosed all known claims and has not issued or assigned any claim to a third party.

Match the release language precisely to the deal: too narrow and live claims survive, too broad and a court may refuse to enforce a waiver of rights that cannot lawfully be given up.

Step 5: Add confidentiality, references and the protective clauses

Once the money and the release are settled, layer in the terms that protect both sides after signing.

• Confidentiality and non-derogatory statements, defining what is confidential and listing permitted disclosures to advisers, immediate family and HMRC. Carve out whistleblowing and other legally protected disclosures, which cannot be gagged.
• An agreed reference, often annexed as a schedule, with a promise to respond to enquiries consistently with it.
• Restrictive covenants, either reaffirming existing post-termination restrictions or agreeing new, reasonable ones.
• Repayment or clawback provisions if the employee breaches a material term before payment.
• Boilerplate that carries weight: entire agreement, no oral modification, severability, counterparts, and a governing law and jurisdiction clause. Note that the law of England and Wales, Scotland and Northern Ireland differ, so choose the right one.

A confidentiality clause that tries to bar protected disclosures can be struck down and criticised by a tribunal, so build in lawful carve-outs rather than reaching for the widest possible wording.

Step 6: Take advice, execute correctly, then track every obligation

For an employment settlement agreement to bind, the statutory conditions must be met on the face of the document. Make sure the agreement is in writing, relates to the particular complaints, records that the employee received advice from a relevant independent adviser on the terms and effect of the agreement, names that adviser, confirms the adviser holds professional indemnity insurance, and states that the statutory conditions are satisfied. The adviser must be independent of the employer. Then execute the agreement correctly, as a signed contract supported by consideration or as a deed, with authorised signatories on each side.

Signing is not the finish line. Payment dates, the return of property, confidentiality duties and any second certificate all have to be tracked, which is where disciplined contract management earns its keep. A CLM platform such as Pactolane stores the executed agreement in a central repository with a full audit trail, routes it through approval workflows and eIDAS electronic signature, and sets renewal and deadline alerts so that payment dates and adviser certificates are not missed. Its AI copilot, PactAI, can extract key dates and obligations, produce a multilingual executive summary, score risk and flag conflicting terms, while a human makes every decision. Used this way, the platform helps a reviewer spot and organise the moving parts of a settlement without ever replacing the counsel who should sign it off.