Whenever you and the opposing party in a dispute agree to a settlement, either on your own or with the help of a mediator, it's important to promptly write it down. When a mediator is involved, preparing a written agreement is usually the last step in the mediation process. If you and your opponent negotiate your own settlement, you'll need to cooperate to reduce it to writing. Lawyers call an agreement to settle a dispute a "release," because in exchange for some act (often the payment of money), one person gives up (or releases) his or her claim against another. For instance, if the paint on John's building is damaged when Sandra, a neighboring property owner, spray-paints her building on a windy day, John might agree to release Sandra from liability (that is, not sue Sandra) if she agrees to pay $2,000 to have the damaged area of John's building repainted.
A written release is valid if it is signed by both parties; is fair, in the sense that neither party was tricked into signing on the basis of a misrepresentation; and provides each party with some benefit (if you pay me $500, I won't sue you and I'll keep my dog out of your yard). If either party later violates the terms of the settlement, the other can file a lawsuit and receive a court judgment for appropriate damages.
It's important to understand that settlement agreements are powerful legal documents. If you completely release someone who damaged your car for $500, only to later find out that the damage was more extensive, you'll be stuck with the $500 unless you can convincingly claim that the other party was guilty of misrepresentation or fraud in getting you to sign the settlement agreement. Of course, in most situations, where the details of a dispute are all well known, a settlement can be comfortably signed with the knowledge that the dispute will finally be laid to rest.
Assuming a small claims case has actually been filed, you may have a choice as to whether your agreement is presented to a judge and made part of a court order or is simply written as a binding contract between you and the other party. Especially if it's less trouble (sometimes getting a court order involves an extra trip to court), you may be tempted to accept a contract and not bother with a court order. Generally, I recommend against this unless you are sure the other party really will honor the agreement. A court order (judgment) is far easier to enforce than a contract. Especially if you suspect that the other side may not do what they promise, it is definitely worth a little extra effort to have your settlement contract incorporated into a judgment of a court. (This obviously won't be possible if the dispute is settled before a small claims lawsuit is even filed.)
There are different types of releases for different situations. You may want a general release or a specialized release that can be used for auto accidents, property damage, and personal injuries. There are also mutual release forms for use when both parties are giving up claims.
Any release you use should contain the following information:
Use witnesses. There is no legal requirement for a release to be witnessed, but if you don't completely trust the other person and think he or she may later claim "it's not my signature," a witness can be a good idea. If a release involves a lot of money or a potentially large claim, you may want to bolster the chances of its being upheld (should it ever be challenged later) by signing it in front of a witness or two who can later testify, if the issue arises, that the other party was under no duress and appeared to know what he or she was doing. If your release involves a small claim, it is not necessary to do this.
You can find sample release forms on the Nolo website and in 101 Law Forms for Personal Use, by Attorneys Robin Leanard and Ralph Warner.
Occasionally, disputes are settled while you are waiting for your case to be heard. Even on the day you go to court, it is proper to ask the other person to step into the hall for a moment to talk the matter over. If you can agree on a last-minute compromise, wait until the courtroom clerk calls your case by name and then tell the judge the amount you have agreed upon and whether the amount is to be paid all at once, or over time. Typically, the judge will order that the case be dismissed if one person pays the other the agreed-upon amount on the spot, or, if payment is to be made later, the judge will enter a judgment for the amount that you have agreed on.
Another possibility is that you and your opponent will agree to a last-minute attempt to mediate. If so, you will want to explain this to the judge, who in turn will normally delay ("continue," in legalese) your case until the mediation session takes place. If mediation works and your case settles, you and the other party should jointly notify the court clerk. Again, unless the agreed-upon amount is immediately paid, the debtor will normally want to return to court and have the settlement amount made part of an official court order (judgment).