An employee and his employer entered into a settlement agreement concerning a severance and salary dispute that required the employer to pay $50,000. When the employer failed to make the payment due under the settlement agreement, the employee filed a lawsuit claiming the settlement agreement was void because the consideration specified in the agreement had never been paid and sought to recover the original claim amount rather than the $50,000. The employer counterclaimed, asserting that the settlement had been made and that the employee’s recovery was limited to $50,000. That is the employer’s position was the employee was bound to the $50,000 settlement even though the employer had not made the payment as promised. The employer argued that its “promise” to pay $50,000 precluded the employee from pursuing its original claims, since the original claims had been released due to the employer’s “promise.” The employer’s stance was that the settlement was a “substituted” contract that upon signing by the employee immediately and forever extinguished the employee’s previous claims.
The Court rejected the employer’s argument because in Washington, a settlement agreement is presumed to be an “executory accord” unless the parties clearly intended the agreement to be a substituted contract as the employer was asserting. With an executory accord, pending full performance of the accord (the compromise agreement) the original claim is merely suspended, it is not discharged until the promised performance is complete. Breach of the accord empowers the claimant with the choice of the accord or the original contract. Thus, the court held that the employee could either choose to take the $50,000 or seek recovery of the original claim, presumably which was substantially more than the compromise amount of $50,000.
There was no clear evidence in the settlement agreement itself that indicated that the original claim was discharged in the settlement agreement. The presumption was that the parties’ contemplated that the original claim was merely “suspended” pending performance of the accord (payment of the amount due).
The Court reasoned that had the employer simply paid as it promised in the settlement agreement, the employee would not have been allowed to revive its original claims, but in light of the employer’s breach, the employee was allowed throw the settlement agreement out and pursue its original claim.
Practice Pointer: In a settlement agreement, to make sure the settlement agreement is “executory,” the release in the document should be conditioned upon the payment. To make it a “substituted” contract, the release should read that all issues are released, except for a breach of the settlement agreement.