Unauthorized settlements: Overview, definition, and example
What are unauthorized settlements?
Unauthorized settlements refer to agreements or resolutions made without proper authorization or approval from the relevant parties, such as a company, organization, or legal entity. In legal or business contexts, a settlement is an arrangement reached to resolve a dispute, often involving payment or other terms. An unauthorized settlement occurs when one party makes a decision to settle a dispute or claim without the necessary approval from other involved parties, such as board members, senior management, or legal counsel.
For example, if a company's manager settles a lawsuit with a plaintiff without getting approval from the company's board of directors, this settlement could be considered unauthorized.
Why are unauthorized settlements important?
Unauthorized settlements are important because they can lead to legal and financial complications. If a settlement is made without the proper approval, the party that was not involved in the settlement may reject it, leading to potential breaches of contract, legal disputes, or financial losses. In businesses, unauthorized settlements can also lead to reputational damage, loss of control over key decisions, and even potential lawsuits if the parties involved feel their rights or interests were violated.
Ensuring that settlements are authorized is essential for maintaining legal and financial control, protecting stakeholders, and ensuring that decisions are made by those with the proper authority to do so.
Understanding unauthorized settlements through an example
Imagine a company that is involved in a contract dispute with a supplier. The company’s legal department is responsible for negotiating settlements on behalf of the company. However, a mid-level manager, without consulting legal counsel or higher management, agrees to a settlement that requires the company to pay $100,000 to resolve the issue. This agreement is considered unauthorized because it was made without the approval of senior management or the legal team, potentially causing financial and legal risks for the company.
In another example, a government agency employee might settle a claim for damages without following the required procedures or obtaining approval from the agency's legal department. The settlement could be challenged later, leading to legal consequences for both the employee and the agency.
An example of an unauthorized settlements clause
Here’s how a clause addressing unauthorized settlements might appear in a contract:
“No Party shall have the authority to enter into any settlement or resolution of any dispute arising under this Agreement without the prior written consent of all Parties involved. Any settlement made without such authorization shall be deemed null and void.”
Conclusion
Unauthorized settlements are agreements made without the proper authorization or approval from the relevant parties, and they can result in legal and financial risks. Ensuring that all settlements are properly authorized is essential for maintaining control, compliance, and protecting the interests of all parties involved. For businesses, organizations, and individuals, it is crucial to follow proper procedures for settlements to avoid potential disputes, legal challenges, and reputational damage.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.