In law there are several main meanings of the word settlement. The most common meaning refers to when the parties to a dispute (both disputes that are being litigated before the courts, and disputes where court action has not been started) reach an agreement as to the case, which is said to 'settle' the claim.
A settlement, as well as dealing with the dispute between the parties is a contract between those parties, and is one possible (and common) result when parties sue (or contemplate so doing) each other in civil proceedings. The plaintiff(s) and defendant(s) identified in the lawsuit can end the dispute between themselves without a trial. Justice is not a central issue here, merely power: often one party has little option but to submit to the will of the other.
The contract is based upon the bargain that a party foregoes its ability to sue (if it has not sued already), or to continue with the claim (if the plaintiff has sued), in return for the certainty written into the settlement. The courts will enforce the settlement: if it is breached, the party in default could be sued for breach of that contract. In some jurisdictions, the party in default could also face the original action being restored.
The settlement of the lawsuit defines legal requirements of the parties, and is often put in force by an order of the court after a joint stipulation by the parties. In other situations (as where the claims have been satisfied by the payment of a certain sum of money) the plaintiff and defendant can simply file a notice that the case has been dismissed.
The majority of cases are decided by a settlement. Both sides (or the side with fewer monetary resources) often have a strong incentive to settle to avoid the costs (such as legal fees, finding expert witnesses, etc.), associated with a trial, particularly where a trial by jury is available. Generally, one side or the other will make a settlement offer early in litigation. The parties may hold (and indeed, the court may require) a settlement conference, at which they attempt to reach such a settlement.
In controversial cases, it may be written into a settlement that both sides keep its contents and all other information relevant to the case confidential.
Generally, when a settlement is reached in the U.S., it will be submitted to the court to be "rolled into a court order". This is done so that the court which was initially assigned the case may retain jurisdiction over it. The court is then free to modify its order as necessary to achieve justice in the case, and a party that breaches the settlement may be held in contempt of court, rather than facing only a civil claim for the breach. In cases where confidentiality is required by the parties, the court order may refer to another document which is not disclosed, but which may be revealed to prove a breach of the settlement.
Confidentiality is not possible in class action cases in the United States, where all settlements are subject to approval by the court pursuant to Rule 23 of the Federal Rules of Civil Procedure and counterpart rules adopted in most states.
In England and Wales, if the matter is already before the courts, except in a case where the claim is to be dismissed outright and the Claimant agrees to pay the Defendant's costs, the matter is usually dealt with by a consent order, signed by the legal representatives of both parties and approved by the judge.
To get around the issue of confidentiality referred to above, a special type of consent order, known as a Tomlin Order is entered into. The order itself contains an agreement that the claim is stayed and no further action can be taken in court (expect for referring a dispute in the implementation of the order to court, which is allowed). The order also deals with payment of costs, and payments of money out of court if any money is held by the court (as these are matters which must be dealt with by Court Order). However, the actual terms of the settlement are dealt with in a 'schedule' to the order, which can remain confidential. Breach of the schedule can be dealt with as breach of contract, or breach of the consent order.
In Israel, which is a quasi-common law jurisdiction, settlement agreements almost always are submitted to the court, for two reasons: (a) only by submitting the agreement to the court can the litigants control whether the court will order one or more parties to pay costs, and (b) the plaintiff (claimant) usually prefers for the settlement agreement to be given the effect of a judgment.
In criminal matters, the closest parallel to a settlement is a plea bargain, although this differs in several important respects, particularly the ability of the presiding judge to reject the terms of a settlement.