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In some jurisdictions, certain types of contracts have terms which are set by statute. For instance, employment contracts might include a certain minimum number of vacation days, or lease agreements might limit overdue rent penalties to some percentage. The statute will specifically say that contract terms which would waive these requirements are void.

Now, suppose that, say, Landlord and Tenant enter into an agreement which violates the statute, with the overdue rent penalty set arguably too high. Rent is late, Landlord demands the listed penalty, Tenant argues that the contract term is void. There's some question over interpretation, though, and in lieu of a lawsuit Landlord and Tenant settle out of court, with Tenant agreeing to forego any claim in exchange for some partial remedy.

Is the out-of-court settlement itself enforceable? After all, its terms had the same basic effect as those in the original contract, allowing a penalty above that allowed by law. If Tenant had second thoughts later, could they successfully argue that the settlement itself should be rescinded? Is it possible to effectively settle a lawsuit over terms which might be statutorily limited?

I suspect that the answer here is widely applicable, but let's take English law.

  • "Tenant argues that the contract term is unenforceable.": the term is not merely unenforceable, it's void. A contract has to be legal, and any part which isn't has no effect. – Steve Melnikoff May 11 at 13:57
  • @SteveMelnikoff Understood. Edited. – Sneftel May 11 at 14:22
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An out-of-court settlement is a contract

Assuming it meets the requirements - if it isn’t a contract, it’s unenforceable. If it is a contract, it’s governed by the same laws as any other contract - including any that make it void.

In general, you can make and follow unenforceable agreements - you just can’t turn to the court to settle a dispute. However, making an agreement in contravention of the law may be in and of itself an offence - depending on the law and the circumstances. “Against the law” is not the same as “punishable by law”. For example, consumer protection law typically prohibits deceptive and misleading conduct, usually with large penalties - an agreement which both parties know is unenforceable is not misleading or deceptive; one where one (or both) don’t know that might be.

Now a court-ordered settlement is not a contract and enforceable as a judgement of the court.

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  • Right, which was the basis of my question: Is it possible to effectively settle a lawsuit over terms which might be statutorily limited? – Sneftel May 11 at 22:58
  • @Sneftel of course it is - the term us unenforceable so the person relying on it loses. – Dale M May 11 at 23:09

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