Commutation (In the context of contract law)

Commutation is the process whereby a person forgoes their right to future payments under a contract in consideration of the payment of a lump sum. The amount that a party agrees to receive as a lump sum is usually less than the amount that they are entitled to receive during any future payment period.

One of the most common types of commutation in this sense are insurance settlements. For example, an insurer and an insured party will reach a commercial agreement (i.e. a commutation) to discharge all liability (past, present or future). The commutation payment made by the insurer discharges them from future payment obligations and enables parties to either end or continue their relationship with a “clean slate”.

Another type of situation where a commutation may occur is in the context of pension payments. A party who is entitled to a pension may, instead of receiving weekly/monthly payments, may want to receive a lump sum payment in lieu of all or some of these amounts.