Can a Lawsuit Settlement Offer Be Rescinded?

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A settlement agreement is a binding contract.
A settlement agreement is a binding contract. (Image: PhotoObjects.net/PhotoObjects.net/Getty Images)

The majority of civil lawsuits are resolved through settlement. A settlement is a contract between the parties to a lawsuit that ends the case without a trial. Typically, the plaintiff agrees to dismiss the case and the defendant agrees to pay the plaintiff a certain amount of money. Once the parties reach a settlement agreement, it becomes a binding contract, which can only be rescinded for limited reasons, such as fraud by one of the parties. However, a settlement offer is just that -- an offer. An offer does not become a binding contract until the other side accepts it.

Contract Formation

Under basic principles of contract law, a contract is formed when there is an offer by one side, acceptance by the other and the agreement is supported by adequate "consideration," which means that both sides exchange something of value. Unless the person making the offer (the "offeror") specifies that his offer will expire at a certain time, an offer remains open until the other side (the "offeree") rejects it. If the offeree makes a counter-proposal in response to an offer, that functions as a rejection of the initial offer. The new proposal becomes an offer that the other party can then accept or reject.

Negotiations

Parties to a lawsuit typically exchange several offers and counter-offers before reaching a settlement. For example, the plaintiff may tell the defendant that he is willing to accept $1,000 to settle the case. If the defendant responds that he is willing to pay $100 to settle, then the plaintiff's initial proposal is considered rejected and the plaintiff may then raise or lower his next proposal as he sees fit. In other words, the defendant's counter-proposal extinguished the plaintiff's offer to settle for $1,000, and the plaintiff need not leave that offer on the table.

Revoking an Offer

If one party to the lawsuit makes a proposal to settle the case and the other side does not respond, then the party who made the settlement offer can revoke it even though the offeree hasn't rejected the offer outright. Contract law allows a person to revoke an offer any time up until it is accepted, unless the offer specifically states that it would remain open for a specific time. This protects the offeree from having to wait indefinitely for the other side to make a decision.

Put It in Writing

Many assume that a settlement agreement is not binding until it is signed by both parties. That isn't usually true. Once there is a "meeting of the minds," meaning that both parties understand and agree on the terms of the contract, a binding contract is formed, even if the agreement is oral. Nonetheless, it is customary and wise to put settlement agreements in writing to avoid later disputes about the terms of the agreement.

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