A full and final settlement is a clause or agreement that formally resolves a debt or financial obligation. It is not mandatory for anyone to accept a full and final settlement clause, although it is unlikely that the payee will release the funds unless the recipient agrees to the full and final settlement clause.
Full and final settlement clauses may be used in compensation settlements, redundancy payments and partial and full settlement of outstanding debt. The purpose of the clause is to indemnify the payee against further claims from the recipient, for example to prevent an individual for suing for injury after being paid compensation.
Full and final settlement definition
A full and final settlement is an agreement between two parties, whether individuals or organisations. Once both parties formally agree to the clause, this closes the debt. If the settlement is lower than the outstanding debt, the creditor may mark the debt as “partially settled,” meaning this may have a negative impact on the debtor’s credit file.
The benefits of full and final settlement clauses are typically weighted toward the payee, as once the payment is made, they are able to treat the matter as closed. As a recipient, accepting a full and final settlement may be preferable to holding out for bigger or subsequent payments in the future. For example, a creditor may elect to accept a partial debt settlement as a full and final payment rather than risking the debtor becoming unable to pay the debt at all.
One major drawback of a full and final settlement clause is that they are not mandatory. The creditor has every right to reject the offer and in cases of debt, they can refuse the offer of payment and pursue you for the full amount. From the debtor’s point of view, offering a full and final settlement may introduce cashflow problems. For example, if they are in possession of a lump sum of money, they may elect to offer that as full and final settlement in order to clear debts and to forgo the benefit of having cash on hand.