What is a Settlement Release Agreement?
A settlement release agreement is a contract between parties that ends a dispute or lawsuit by having the parties agree to certain conditions. In essence, a settlement release agreement is a concession of a claim to secure a benefit. The benefit may be worth more or less than the claim, depending on the value assigned to each side. This is frequently the reason that a party agrees to settle a case. The parties to the settlement agreement can stipulate what future conduct they both agree to follow through the agreement. Many settlement agreement stipulations include confidentiality and ….
Frequently, the parties are employees and employers, which is why it is referred to as a "Release Agreement." In employment situations, the employer is the drafter of the release agreement; it offers something to the employee. Many of these agreements include a clause stating that the employee is releasing employment claims against the employer in exchange for severance. An employment release agreement is typically signed upon termination of the employee’s employment. A release agreement in the employment context is enforceable according to its terms unless otherwise unenforceable. For example, the agreement cannot contain unlawful terms or other provisions. Settlement release agreements, in general, cannot release claims which are illegal to release. More specifically, an employer cannot obtain favorable treatment, violate public policy, or induce a material change in a party’s position among others. A release agreement cannot release prospective claims. To the extent that a claim occurs after the signing of a release agreement, the claim could not be included in the release; it would have to be agreed upon in a separate release agreement.
So , when does one need to enter into a settlement release agreement? Generally speaking, settlement release agreements are used to resolve an existing lawsuit. The parties can resolve the existing lawsuit through a settlement release agreement signing, and the lawsuit will be dismissed upon approval by the court, if needed. Or the parties can draft a settlement release agreement and sign it without filing a lawsuit or motion with the court. Often, the settlement release agreement is used in a personal injury context. As stated above, a settlement release agreement is usually used to settle a case already pending in court. However, a settlement release agreement not only can be used to settle pending litigation but also to prevent future litigation. A "stand-alone release" agreement is a settlement agreement that is entered into even where no lawsuit has been filed. A stand-alone release agreement can be negotiated between parties without the fear of litigation if the parties believe that there are sufficient reasons to have a settlement release agreement. If done correctly, a settlement release agreement will enforce the statute of limitations barring future litigation. Conversely, if done incorrectly, the statute of limitations for the claim could be revived.
As stated above, a release DOES NOT preclude possible future litigation for claims that occur after signing a release. It only precludes claims that occurred before it was signed. Therefore, only existing claims that the parties have are released, not possible claims. Claims that are based upon occurrences that have not yet happened or that become known only after the signing of a release are not covered by the release. There are nuances to this general principle.
Essential Elements of a Settlement Release Agreement
Settlement release agreements typically contain the following key components:
Parties – a definition section that names the parties to the settlement release agreement;
Scope of Release – what is being released;
Consideration – what is the person signing the settlement release agreement receiving in exchange for signing it;
Covenant not to sue – what lawsuits are being dropped; and
Legal Effect – what claims are preserved and how does the law impact the settlement release agreement.
With regard to scope of the release, sometimes it is limited to the allegations in the original complaint or other document, or sometimes it covers all legal claims relating to any of the allegations. It is always important to understand the effect of what is being released.
Types of Settlement Release Agreements
In addition to the general settlement release agreement that is most commonly used, many other types of settlement release agreements exist as well to resolve more specific issues. For example, a general release agreement is frequently used when settling personal injury cases for workers’ compensation claims. However, such general settlement release agreements are not useful in all circumstances, and so there are specific types of settlement release agreements that can be used for special circumstances. Different rules may apply to specific types of settlement releases that are not included in general releases.
One form is the special release. A special release is a clause that is added to a general release agreement, limiting its scope. This applies to situations in which the settlement amount paid is not meant to include certain claims or type or claims. For instance, such a release may be used when the case’s focus is on obtaining compensation for one particular issue, such as loss of wages, while other issues are not related to the compensation offered. The release of liability will include only the losses for the issue addressed by the lawsuit and its settlement.
Another type of settlement release is the mutual release. A mutual release is an agreement between two or more parties in which each party releases the other or each of the others from any additional liability. For instance, when two businesses enter into a settlement agreement among themselves, they may wish to execute a mutual release of liability in order to resolve the potential for suits between the parties in the future arising from the parties’ relationship with regard to the released issue.
A third type of settlement release agreement is the recalled offer of settlement. An offer for settlement that is accepted by the other party is not legally binding until a written agreement is executed by the parties themselves. Acceptance of the offer is effective if it includes assent by the other party or agent or attorney of the other party. An acceptance is ineffective if the offer is revoked prior to acceptance. Such an offer will be effectively revoked if it is withdrawn, the proffering party is declared insane, or the estate of the proffering party is sold.
How to Negotiate a Settlement Release
Once a settlement has been reached, the next step is to implement a settlement release agreement. A settlement release agreement is an important step towards protecting the legal rights of all parties involved. A release is defined as "the party’s abandonment of a particular thing claimed." In other words, when one party releases another party from liability, they are giving up (abandoning) their right to sue the other party for a specific harm in relation to the liability that is being released. Although a release is a waiver of liability by one party toward another party, it should not be confused with a waiver of the rights of the parties. Rather, a release is meant to accomplish a specific purpose, and a waiver of rights is meant to accomplish something more general. The compromise made during the settlement release also limits future liability. A listing of the specific released obligations is known as the "scope of the release."
The first thing a party should do when negotiating a settlement release agreement is read the entire document before signing it. The party should know exactly what they are signing, and they should understand what they are giving up legal-wise. It is hard to know what may happen in the future. Therefore, it is important for the scope of the release to be as broad as possible. If the scope of the release is too narrow, it will not shield the defendant from future suit in regards to the release of liability. If a party finds that they have unknowingly signed a settlement release that was not broad enough, it is very difficult to go back to ask that the release be broadened.
During negotiations, the party who benefits from the settlement release will often ask for a very narrow scope. If the compromise does not benefit them in a way that is important, then they will need to be encouraged to agree to a substantial scope so that the party who is paying does not leave themselves open to the future suit.
Parties whose rights are being released should also conduct some research so that they know the approximate full value of their rights. Most defendants want to resolve claims for as little as possible. However, it is important that the settlement release accurately reflects the value of the right being released in order for the plaintiff to receive a fair settlement for their injuries.
Another important factor is that it is generally good practice to have legal counsel draft a proposed settlement release agreement. This is always better than allowing the opposing party to draft the document because opposing counsel may omit key language, fail to clarify a term, expand upon the scope, or include an entirely new provision that may not be in the best interest of the plaintiff.
Legality and Enforceability
While the scope of a release is intended to be broad and enforceable, there are legal reasons that a release may not be enforceable. If the language in the release is vague, ambiguous or unclear, a court may determine that the intent to release specific claims is not sufficiently clear. Likewise, a release may not be enforceable because the person releasing claims may not have the legal capacity to effectively release claims due to mental incapacity or other conditions. Further, if the release is secured through coercion, duress or fraud, it will not be enforceable. If the release seeks to exculpate a defendant from intentional or reckless misconduct, such a release is not enforceable under the public policy of most jurisdictions. In addition, a minor plaintiff or a minor restat can be effectively released only with prior approval of the court or with the appointment of an appropriate guardian ad litem, who may be required to report to the court regarding the adequacy of the proposed settlement. A claim may not be effectively released for fear of criminal prosecution , unless the prosecuting authority expressly consents to the release. If there is a legal reason why a release may not be enforceable under the law applicable to the claims being released, a properly drafted reservation of rights clause in the release agreement will be effective to preserve the legal arguments for the effect of the release as to claims that either have not been released, or have not been given final effect by the release. Although there is conflicting authority on the enforceability of a reservation of rights clause in a release, the reservation will be effective unless there are legal reasons why it is not required. Assuming a reservation clause is valid, it should clearly be applicable only to claims which are specified or addressed in the release as being reserved. This insures that the reservation is not construed as a general reservation, applicable to future claims which might arise but are not based on a specific risk otherwise contemplated within the subject matter of the release.
Pros and Cons of Signing a Settlement Release Agreement
A settlement release agreement can prove beneficial when it is truly desired to finally resolve the dispute and or enforce a settlement agreement which has already been agreed upon by the parties. However, settlement release agreements are sometimes presented by the other party as "take it or leave it" propositions which make it appear that signing the settlement release agreement is your only alternative for resolution of all claims and disputes. Also, in some instances when the settlement release agreement is presented by the other party, it may also include language which would limit your ability to pursue future claims which an attorney might later recommend to be pursued based on facts not known to the attorney at the time of drafting and review of the settlement release agreement.
If the claim is actually settled, once the settlement release agreement is signed and executed there is no longer a case or controversy between the parties, and dismissal can be obtained from the court and the matter is closed absent gross bad faith or fraud on the part of the other party to the settlement release agreement. The above has also been upheld in the application of a settlement release agreement to settle a family law claim involving a support award where generally the rule of res judicata precludes re-litigation of the issue of child custody, time-sharing, and/or support where there is no significant change of circumstances and the issue was determined in a final judgment and/or order. An effort can be made to modify a support award at the trial court level and then reapplied to the court of appeal, and the issue of fraud or bad faith must be addressed directly by the court of appeals if it is requested by the trial court. The complete agreed upon settlement release agreement must be filed with the court to obtain the court’s approval of the settlement release agreement where the issues and claims were submitted to the court for determination and final adjudication.
Examples: Practical Applications
Case Study 1: Large Settlement
In a high-profile bank fraud case in Michigan, the state accused a former mortgage company owner of defaulting on $5.39 million in loans when his company filed for bankruptcy. The creditor, who had claimed that he loaned money to the company, sued the former owner of the mortgage broker and reached a settlement with him for the amount due and owing. The credit had filed a financial proof of claim with the court, but did not have security interests in the properties involved. Satisfied with the terms of the settlement agreement, A resolution was reached between the creditor and the former owner of the mortgage brokerage. There was a trial against the company, and the creditor won. however, his appraisal of the properties did not show that enough equity existed to cover the loans.
Case Study 2: Suing the Wrong Party
In another example , the Department of Justice filed a lawsuit against a telemarketer and others involved in an alleged unlawful advance-fee scheme that targeted more than 200,000 consumers. According to the complaint, the telemarketer and others with knowledge of its company operations misled consumers into believing that they were likely to receive loans. The lawsuit alleged that the defendants charged consumers advance fees in the range of $300 to $900. The advance-fee scam owners settled their case for $15.2 million. The Department of Justice filed the settlement agreement in federal court in Miami, last month. The settlement agreement also required the involved parties to provide full accountings of their holdings. Defendants in the complaint must also pay restitution to consumers by paying restitution to the states’ attorneys general so that each AGO can locate and provide restitution to eligible consumers.