Voluntary settlement: resolve conflicts without going to court

Disputes and conflicts are an unavoidable part of both business and private life. Whether it concerns a payment that has not arrived, an agreement that has been breached, or a neighbour dispute that has escalated, there are rarely any winners in a long court case. A voluntary settlement is in many cases the fastest, cheapest and least conflict-ridden solution.

This guide explains what a voluntary settlement is, when it is the right solution, and what a settlement agreement should contain in order to be legally binding and possibly enforceable.

What is a voluntary settlement?

A voluntary settlement is an agreement entered into between two or more parties to end a dispute, without the case being brought before the courts. The parties themselves agree the terms of the solution and thereby avoid the time, cost and uncertainty a court case involves.

A voluntary settlement can be reached:

• Directly between the parties: the two parties agree the solution themselves
• With a mediator: a neutral third party helps the parties reach agreement
• With lawyers: lawyers negotiate on the parties' behalf
• Through a board: for example the rent tribunal or the Consumer Complaints Board

It is important to distinguish between:

• A voluntary (out-of-court) settlement: a private-law agreement
• A court settlement: a settlement reached during a court case and entered in the court record, which has enforcement power on a par with a judgment

When is a voluntary settlement the right solution?

A voluntary settlement is best suited when:

1. The parties want to preserve the relationship

Where business partners, neighbours, family members or former employees are involved, a court decision rarely preserves the relationship. A settlement can give a solution both parties can live with.

2. The case is complex and the evidence is uncertain

A court case always has an unpredictable outcome. If you do not have strong evidence, a reasonable settlement is often better than a lost case.

3. A quick solution matters more than the principle

A court case in the district court can take months to years, and an appeal even longer. A settlement can be reached in days or weeks.

4. The costs of a court case exceed the value of the dispute

For claims of DKK 50,000 or less, the case is as a rule handled under the small-claims rules, but even here time and costs can easily exceed the gain. A settlement is cheaper.

5. Confidentiality is important

Court cases are as a rule public. A settlement can be kept confidential, which can be important in commercial disputes, staff matters and other sensitive cases.

What can a voluntary settlement cover?

Voluntary settlements are used across many areas of law:

• Payment disputes: an unpaid invoice, a breached loan agreement
• Contract disputes: disagreement about the interpretation or performance of a contract
• Tenancy disputes: disagreement about moving out, restoration, rent
• Employment disputes: disagreement about dismissal, pay, holiday
• Compensation claims: personal injury, property damage, financial loss
• Family-law disputes: division of assets, children, maintenance
• Neighbour disputes: fences, trees, noise, access

What should a settlement agreement contain?

For a voluntary settlement to be legally clear and binding, the settlement agreement should contain the following:

1. Identification of the parties

Full names, addresses and CPR or CVR numbers for all parties.

2. The background of the dispute

A brief description of the conflict that has arisen and what the dispute is about. This matters so that the scope of the settlement is clear.

3. The content of the settlement

The precise content of the settlement, that is, what the parties agree:

• Payment terms (amount, due date, account)
• Obligations to act (what must be done)
• Waiver of claims (what the parties give up)
• Confidentiality obligation (if relevant)

4. Full and final settlement

The agreement should expressly state that the settlement constitutes a full and final conclusion of the dispute. A wording could be:

"The parties hereby declare that this agreement constitutes the full and final settlement of any dispute and any claim between the parties concerning [the disputed matter], and that the parties have no further claims against each other in this respect."

5. Consequences of non-performance

What happens if one party does not observe the settlement? State a penalty if appropriate, and consider whether the settlement should be enforceable (see below).

6. Signatures

A dated signature from all parties. A digital signature with MitID can be used and strengthens the evidence of who signed.

Can a voluntary settlement be enforced?

A voluntary (out-of-court) settlement is a private-law agreement. As a rule it cannot simply be enforced by the enforcement court in the same way as a judgment or a court settlement.

But an out-of-court settlement can be made directly enforceable. Under section 478(1)(4) of the Administration of Justice Act, enforcement can take place on the basis of a written out-of-court settlement about due debt, when it is expressly stated in the settlement that it can serve as the basis for enforcement. If that clause is included, the creditor can go straight to the enforcement court without first bringing a court case.

In practice this means:

• The settlement must be in writing and signed by the debtor (a digital signature can be used)
• It must concern due debt
• It must expressly state that it can serve as the basis for enforcement

An alternative is to combine the settlement with a debt instrument (gældsbrev), which under section 478(1)(5) can likewise form the basis for enforcement when this is expressly stated in the document. For claims concerning real property, registration may be relevant.

Mediation as a route to settlement

If the parties cannot reach agreement on their own, mediation can help. A mediator facilitates the dialogue and helps the parties find a solution without deciding the matter themselves.

Types of mediation in Denmark

Court mediation. The district courts offer court mediation, where a court mediator, typically a judge or lawyer, helps the parties. Court mediation is offered in connection with a pending court case. Advantages: free and with a high success rate. Disadvantage: only available when the case is already before the courts.

Private mediation. Private mediation is offered by lawyers, organisations and specialised mediators and is often used in commercial matters. Advantages: flexible, confidential and quick. Disadvantage: it costs money.

Complaint and appeals boards. Many industries have boards that handle disputes:

• The rent tribunal (private tenancy disputes)
• The Consumer Complaints Board (consumer cases)
• An appeals board in the building trade (tradesperson disputes)
• The financial complaints board (bank and financial-institution cases)

Tax matters for settlement payments

If you receive a payment as part of a settlement, there can be tax consequences, and they depend on what the payment covers:

• Compensation for lost earnings: as a rule taxable as personal income
• Compensation for property damage: often tax-free when it covers a specific loss
• Compensation for pain and suffering and permanent injury: as a rule tax-free
• A settlement amount in a business relationship: typically part of the business's taxable income

The rules are nuanced, and the tax treatment depends on the specific payment. Consult an accountant or lawyer about the tax consequences before entering a settlement involving larger amounts.

International settlements

If you do business with international trading partners, in cross-border disputes it is important that the settlement agreement clearly states:

• Which country's law applies (choice of law)
• Which country's courts have jurisdiction (venue)
• Whether the UN Sales Convention (CISG) applies or is excluded

The EU Mediation Directive (Directive 2008/52/EC) supports settlements reached through mediation in cross-border civil and commercial cases being made enforceable in the EU countries.

Common mistakes with voluntary settlements

1. Worded too vaguely. An agreement that "the parties will resolve the matter amicably" is not a usable settlement. Describe the concrete obligations.
2. A missing "full and final" clause. Without it, one party can bring new claims about the same matters.
3. Forgetting to address interest and fees. State whether interest and reminder fees already accrued are waived or included in the settlement amount.
4. Not signed by all parties. A settlement requires all involved parties to sign.
5. Missing deadlines. State precise dates for performance, not "as soon as possible" or "within a reasonable time".

Settlement vs. judgment: which is best for you?

Factor	Voluntary settlement	Court decision
Time	Weeks to months	Months to years
Cost	Low to moderate	High
Control	The parties decide	The judge decides
Confidentiality	Can be agreed	Public
Enforcement	Requires an express clause	Direct
Preserves the relationship	Yes	Rarely
Precedent	None	Can set a precedent

Settlements in employment disputes

One of the most frequent contexts for voluntary settlements is employment disputes, typically in connection with dismissal or summary dismissal.

When is an employment case settled?

• The employee has received a dismissal and considers it unfair
• The employer wants a quick resolution and to avoid a drawn-out case before industrial arbitration, the Labour Court or the district court
• Both parties want confidentiality about the terms

Typical content of an employment settlement

• Severance pay (the amount is agreed)
• Garden leave for any remaining notice period
• A reference or recommendation: what does the employer say?
• Confidentiality about the terms of the settlement
• A full and final settlement of any claim between the parties

Tax on severance payments

Under section 7 U of the Tax Assessment Act, severance pay is tax-free for the first DKK 8,000, while amounts above that are taxable as personal income. Other forms of compensation can have a different tax treatment, and the specific rules should always be checked with an accountant or lawyer.

Settlements in commercial-lease disputes

Disputes about commercial leases are often resolved by voluntary settlement, especially on moving out, restoration claims and rent adjustment.

A settlement in a lease relationship should clearly state:

• What is restored, by whom, and by when?
• Is the tenant's deposit released or set off?
• Are any claims for a rent reduction waived?

For commercial leases the rent tribunal's jurisdiction does not apply; disputes are decided by the courts or through mediation.

A confidential settlement: what is possible?

The parties can freely agree that the content of the settlement is confidential. A confidentiality clause can, for example, provide:

• That the settlement amount may not be disclosed to third parties
• That the existence of the settlement can be confirmed, but not the content
• That a breach triggers a contractual penalty

Limitation: a confidentiality agreement does not apply towards the tax authorities, the courts or in situations where the law requires disclosure.

Settlements with minors

If a settlement is entered into with a minor (under 18), the parents must take part as guardians. For dispositions of greater significance, approval from the Family Court House may also be required. Funds of a certain size belonging to a minor must, under the rules, be managed in an approved administration department. If in doubt, seek advice before entering the settlement.

Getting started with your settlement agreement

A well-worded settlement agreement ensures that all the necessary elements are included, including the "full and final" clause, clear performance deadlines and, if needed, an express provision that the settlement can serve as the basis for enforcement under the Administration of Justice Act. That is the best protection against the dispute flaring up again.