Releasing Claims: What you should know before entering into Release Agreements
Jacob S. Taylor
Has your company ever asked a former employee to sign a release agreement? How about a former business partner? A release agreement involves an abandonment of a legal right or claim. For instance, an employee might release claims against an employer as a part of a settlement agreement. Though the employee might have been in a strong position to bring claims against the employer (say, for discrimination, harassment, breach of contract, etc.), the release will usually serve to bar any such claims, whether known or even unknown, to the mutual satisfaction of both sides. Generally, a release agreement serves as a valuable tool to help individuals and businesses avoid lengthy and costly litigation down the road.
Generally, a party who has agreed to release claims by entering into a release agreement will encounter difficulty in attempting to subsequently get out of a release agreement. In such instances, a party might later regret his or her decision to waive claims. Or, a party might discover that he or she could have obtained a more favorable outcome by not signing a release agreement. By bringing claims in spite of a release agreement, parties to a release agreement can expect a court to examine a number of factors to determine if claims should be allowed.
First, a court will consider whether the release agreement was the product of fraud. A party claiming that he or she was fraudulently induced to enter into a release agreement may have a chance of later avoiding a release agreement. Courts will not uphold release agreements that are based on fraudulent statements or conduct. Additionally, non-disclosure of important information can be considered fraud. Where such fraud occurs, courts will consider whether the party seeking to avoid the agreement reasonably or justifiably relied on such statements. In circumstances where a party reasonably relies on such statements or conduct, a court will not regard the relationship as an "arm's length" transaction, but as akin to a fiduciary relationship requiring a higher level of candor and disclosure.
Second, a court will take into account the impact of genuine mistake. In some situations, a party may have entered into a release agreement honestly believing it to mean something different. In these kinds of situations, courts will look to the complexity of the language contained in the agreement and whether it is open to more than one reasonable interpretation. Courts generally frown upon release agreements that are overly complex. The more complicated and confusing the language, the more weight a court will give to a claim of mistake. Of course, this does not mean that a release agreement should be vague. Furthermore, courts will consider the level of education of the party waiving claims. In general, courts will look at a "totality of the circumstances" in deciding whether to allow a party to avoid a release agreement on the basis of mistake. Nevertheless, a court will not set aside a release agreement merely because a party fails to appreciate the legal effects or consequences of waiving claims.
Third, a court will determine whether a party agreeing to release claims was suffering from a mental incapacity or duress. Along these lines, a court will determine whether the party agreeing to waive legal claims was under pressure from any outside influences at the time he or she entered into the release agreement. As an example, a party may try to avoid a release agreement by claiming immediate and urgent financial need. However, courts have ruled that such a circumstance is not a proper basis to avoid a release agreement.
In determining the above factors, a court will also look to whether a release agreement was supported by adequate consideration. In other words, a court will look to see if the party agreeing to release claims was given something in return. Generally, a monetary amount will suffice as consideration. However, a court will view with skepticism a release agreement that gives a party very little consideration when the released claims may have yielded much higher amounts. Moreover, courts will consider whether the party releasing claims was represented by legal counsel during release negotiations. The presence of legal counsel during such negotiations is typically a strong indication of a party's intent to release claims.
Whether your business obtains a release of claims from a party, or, on the other hand, agrees to release claims against a party, you should be aware of the possibilities and pitfalls of entering into release agreements. Being aware of such possibilities and pitfalls will go a long way towards helping you protect your business. An attorney with experience in employment and labor law can be helpful in drafting release agreements for situations involving the release of claims.
Generally, a party who has agreed to release claims by entering into a release agreement will encounter difficulty in attempting to subsequently get out of a release agreement. In such instances, a party might later regret his or her decision to waive claims. Or, a party might discover that he or she could have obtained a more favorable outcome by not signing a release agreement. By bringing claims in spite of a release agreement, parties to a release agreement can expect a court to examine a number of factors to determine if claims should be allowed.
First, a court will consider whether the release agreement was the product of fraud. A party claiming that he or she was fraudulently induced to enter into a release agreement may have a chance of later avoiding a release agreement. Courts will not uphold release agreements that are based on fraudulent statements or conduct. Additionally, non-disclosure of important information can be considered fraud. Where such fraud occurs, courts will consider whether the party seeking to avoid the agreement reasonably or justifiably relied on such statements. In circumstances where a party reasonably relies on such statements or conduct, a court will not regard the relationship as an "arm's length" transaction, but as akin to a fiduciary relationship requiring a higher level of candor and disclosure.
Second, a court will take into account the impact of genuine mistake. In some situations, a party may have entered into a release agreement honestly believing it to mean something different. In these kinds of situations, courts will look to the complexity of the language contained in the agreement and whether it is open to more than one reasonable interpretation. Courts generally frown upon release agreements that are overly complex. The more complicated and confusing the language, the more weight a court will give to a claim of mistake. Of course, this does not mean that a release agreement should be vague. Furthermore, courts will consider the level of education of the party waiving claims. In general, courts will look at a "totality of the circumstances" in deciding whether to allow a party to avoid a release agreement on the basis of mistake. Nevertheless, a court will not set aside a release agreement merely because a party fails to appreciate the legal effects or consequences of waiving claims.
Third, a court will determine whether a party agreeing to release claims was suffering from a mental incapacity or duress. Along these lines, a court will determine whether the party agreeing to waive legal claims was under pressure from any outside influences at the time he or she entered into the release agreement. As an example, a party may try to avoid a release agreement by claiming immediate and urgent financial need. However, courts have ruled that such a circumstance is not a proper basis to avoid a release agreement.
In determining the above factors, a court will also look to whether a release agreement was supported by adequate consideration. In other words, a court will look to see if the party agreeing to release claims was given something in return. Generally, a monetary amount will suffice as consideration. However, a court will view with skepticism a release agreement that gives a party very little consideration when the released claims may have yielded much higher amounts. Moreover, courts will consider whether the party releasing claims was represented by legal counsel during release negotiations. The presence of legal counsel during such negotiations is typically a strong indication of a party's intent to release claims.
Whether your business obtains a release of claims from a party, or, on the other hand, agrees to release claims against a party, you should be aware of the possibilities and pitfalls of entering into release agreements. Being aware of such possibilities and pitfalls will go a long way towards helping you protect your business. An attorney with experience in employment and labor law can be helpful in drafting release agreements for situations involving the release of claims.
Copyright 2006. Published for general informational purposes only, and should not be construed as legal advice. If you need legal advice please consult with your attorney.