What's the difference between a release and a covenant not to sue?

A release extinguishes the claim itself. A covenant not to sue keeps the claim alive but promises not to enforce it. Releases are stronger and more common.

Can settlement agreements be reopened?

Very rarely — only on grounds of fraud, duress, or mutual mistake of fact. Once executed, they're typically airtight, which is the point.

Are settlement payments taxable?

Generally yes for the recipient (with some exceptions for personal physical injury). The paying party may or may not deduct depending on the nature of the claim. Get tax advice — IRS treats different settlement components very differently.

Settlement Agreement

Resolves a dispute between two parties — releases all claims in exchange for payment or other consideration.

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SETTLEMENT AGREEMENT AND MUTUAL RELEASE

This Settlement Agreement and Mutual Release ("Agreement") is entered into as of May 4, 2026 between:

  Party A: Acme Corp., of 123 Main St, San Francisco, CA 94103; and
  Party B: John Smith, of 456 Oak Ave, Austin, TX 78701.

RECITALS
WHEREAS, a dispute has arisen between the Parties (the "Dispute"):

A dispute arose between the parties regarding services performed by Party B for Party A between January 2026 and March 2026, including allegations of unpaid invoices and disputed work product quality.

WHEREAS, the Parties wish to resolve the Dispute fully and finally, without admission of liability by either Party, on the terms set forth below;

NOW, THEREFORE, in consideration of the mutual covenants below, the Parties agree as follows:

1. SETTLEMENT PAYMENT
Party A shall pay Party B the total sum of $5,000.00 (the "Settlement Amount") within 14 days of the Effective Date.

2. MUTUAL RELEASE
Effective upon receipt of the Settlement Amount, each Party (on behalf of itself and its heirs, successors, agents, and assigns) RELEASES, ACQUITS, AND FOREVER DISCHARGES the other Party from any and all claims, demands, actions, causes of action, suits, damages, and liabilities of every kind, whether known or unknown, that arose out of or relate in any way to the Dispute, from the beginning of time through the Effective Date.

3. NO ADMISSION OF LIABILITY
This Agreement is a compromise of disputed claims. Neither this Agreement nor any payment made under it constitutes an admission of liability or wrongdoing by either Party.

4. CONFIDENTIALITY
The terms of this Agreement (including the Settlement Amount) are confidential. Neither Party shall disclose them to any third party except: (a) to legal, tax, or financial advisors bound by professional confidentiality; (b) as required by law or court order; or (c) to enforce this Agreement.

5. NON-DISPARAGEMENT
Each Party agrees not to make any disparaging statements (oral or written) about the other Party in any public forum, including social media. This obligation survives the termination of this Agreement indefinitely.

6. NO FUTURE LITIGATION
Each Party covenants not to file or maintain any lawsuit, claim, or administrative complaint against the other Party concerning any matter released by Section 2.

7. ATTORNEY FEES
Each Party shall bear its own attorneys' fees and costs in connection with the Dispute and this Agreement.

8. GOVERNING LAW; VENUE
This Agreement is governed by the laws of the State of California. Any dispute arising under this Agreement shall be brought exclusively in the state or federal courts located in California.

9. ENTIRE AGREEMENT
This Agreement is the complete and exclusive statement of the agreement between the Parties on its subject and supersedes all prior negotiations, representations, and agreements. Any modification must be in writing signed by both Parties.

10. VOLUNTARY EXECUTION
Each Party acknowledges that they have read this Agreement, understand its terms, have had the opportunity to consult with counsel of their choice, and execute it voluntarily.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.

PARTY A                                        PARTY B

By: _____________________________     By: _____________________________
Name: Acme Corp.               Name: John Smith
Title: ___________________________     Title: ___________________________
Date: ____________________________     Date: ____________________________

About this template

A settlement agreement is the document that ends a dispute — whether or not a lawsuit was filed. The single most important clause is the **mutual release**, which extinguishes any future claim either party might want to bring about the same matter. Without a properly worded release, the paying party gets nothing for their money — the other side could just sue again. The "from the beginning of time through the Effective Date" language is standard and important — it captures unknown claims that might surface later. The "no admission of liability" clause lets each side save face and is usually non-negotiable; insurance companies in particular will refuse to settle without it. **Confidentiality and non-disparagement** clauses are often the most negotiated parts — they're standard for employment settlements but increasingly common in commercial disputes after the rise of online review platforms. If the dispute involves a lawsuit already filed, you'll also need to file a stipulated dismissal with prejudice.

When to use it

After a dispute that hasn't yet reached a lawsuit but threatens to.
To resolve a pending lawsuit (often paired with a stipulated dismissal).
Severance agreements terminating an employment relationship.
Insurance claim settlements.
Landlord-tenant disputes.
Consumer disputes with merchants or service providers.

What to include

Recital of the underlying dispute (factual background).
Settlement payment / consideration with clear deadline.
Mutual release of all claims, known and unknown.
No admission of liability.
Confidentiality + non-disparagement (where appropriate).
Governing law and venue.
Voluntary execution acknowledgment.

Frequently asked

For settlements over a few thousand dollars or involving any ongoing relationship: yes, even briefly. The release language is the leverage point — getting it wrong can leave you exposed to claims you thought were resolved.

⚠ Legal disclaimer. This template is provided for informational purposes only and is not a substitute for legal advice from a qualified attorney. Always consult a licensed professional before using this document for any binding agreement.