A plaintiff and defendant are negotiating in the shadow of pending litigation. When the divergence between their subjective beliefs is sufficiently large, and they are not too risk averse, the litigants will forego settlement in favor of a contract that tailors the damage payments to suit their beliefs and preferences.  With CARA expected utility, the optimal contract is increasing in the likelihood ratio of their subjective beliefs.  When the litigants’ beliefs are normally distributed with divergent means, the optimal contract is linear in the court’s award and is flatter when the parties are more risk averse, when beliefs are more aligned, when the trial outcome variance is larger, and when litigation costs are endogenous. Implications for real world litigation practice include the use of high-low settlement agreements and partial settlement in multi-issue litigation.  Finally, the role of third parties, including litigation funders and insurance companies, is analyzed and discussed. Joint with JJ Prescott.