What is a Settlement and Release Agreement?
There are two (2) primary types of agreements to be concerned with in this context. The first is often referred to as a "settlement agreement" or sometimes a "mutual release agreement," while the second is referred to as a "release."
A settlement agreement is a contract for a possible outcome of litigation, entered into by the parties in settlement of the matter. It is significant for another reason as well. A settlement agreement requires a "recital" provision, which is required under Georgia law. This is a short paragraph at the beginning of an agreement, after the parties have been identified, which contains the background facts of the matter, and states the exact legal result of that litigation, as determined by the parties, whether such matter is pending before the Court, or is resolved pre-litigation. This language provides binding judicial estoppel on the matter(s) covered by the settlement agreement , so that a party cannot come back later and say that the terms were something else, or that there was no resolution. As far as the Courts are concerned, they are "stuck" with what you and the opposing party agree to.
A release, is exactly what it sounds like, although it can take many forms. The most common type is the "full and final release of all claims," an often abbreviated term that overlooks a great many important and unique provisions that can be incorporated into the document to resolve many or even all issues in your case.
Be very careful about the terms of your settlement and/or release agreement(s). There is no law that requires such a document to be prepared by an attorney, although it is certainly prudent to have any legal documents signed and/or reviewed by an attorney. But just know that there is no absolute requirement for that to be done.
Important Elements for Inclusion in the Agreement
There are certain key elements that a comprehensive settlement and release agreement should contain. Among other items, the agreement should identify the parties involved, the scope of the release, and the consideration. The agreement also needs to contain confidentiality provisions and may need other legal provisions:
- (1) Identify Parties – First, the agreement must identify the parties involved in the dispute as well as their representatives. If the parties are corporations, the agreement should state by whom the individuals are signing. Relatedly, if one of the parties is a corporate entity, it is a good practice to list all of the affiliated entities and the complete names of the parent and all subsidiaries. Listing the affiliated entities will help eliminate any confusion in the future as to who the settlement and release agreement applies.
- (2) Scope of Release – Second, the scope of the release is critical and must be defined. The scope of the release has been held, for example, to apply not only to the specific dispute or claim between the parties, but can also cover other unspecified claims between the parties. Some settlements and release agreements simply provide for the release of specific disputes, while others are much broader and provide release for any disputes, whether known or unknown at the time of the agreement. The release may also apply to the parties themselves and/or their affiliates. Likewise, the release by the aforementioned may further apply not only to the parties currently involved, but to their predecessors and successors. Thus, defining the scope of the release is critical. In particular, a broad release can release not only bad faith claims but may also release other claims, such as those under the Pennsylvania Wage Payment and Collection Law. By way of example, the attempt to waive the statute of limitations has been found unenforceable when the waiver and release language was overbroad. The same could be said for an agreement that was intended to settle wage claims under the WPCL. In other words, if the scope of the release is to apply to all claims, then it would presumably apply to wage claims.
- (3) Consideration – Third, consideration and mutual promises must be "reasonably proportioned." Value has been in exchange for the promise that "the claims will not be pursued further." By ensuring that consideration is offered and received by both parties, this element is typically satisfied.
- (4) Confidentiality – Fourth, confidentiality provisions add value to the agreement. Typically, the provisions prohibit disclosure of the terms of the agreement, and use of the agreement document itself, to others than the parties. However, the disclosure of the terms by a third party can conflict with the terms of the agreement, such as a Non-Disclosure Agreement. Generally, all electronic and hard copies need to be returned to counsel for the disclosing party.
- (5) Other Legal Provisions – Finally, and as is present in all federally approved collective bargaining agreements, the agreement should contain a section that allows the parties to include provisions affirming that each party represents that each is competent to enter into the agreement and has had the right to consult with counsel. The agreement should finally provide that the agreement "constitutes the entire agreement of the parties, regardless of whether it has been executed in counterparts."
Best Practices When Drafting an Agreement
- Avoid technical jargon. Write in plain English and simple terms.
- Avoid pre-printed forms if they have not been crafted or customized to what you are trying to accomplish. Use language that meets your objectives and those of the other parties.
- Avoid legalese and court jargon. Do not write about anything that no one would understand (i.e., "indemnify the other side for any proceedings predicated upon the Pendente Litem Attached herewith"). If the reader has a law degree, then the reader will know what "pendente lite" means and that it is a "temporary order" or "temporary in nature." But if the reader does not have a law degree, "pendente lite" means nothing at all to them. It might as well be Hebrew or Klingon.
- Avoid repeating the same main point over and over again in different parts of the agreement. My mom always told me that repetition is the mother of learning, but when drafting a settlement and release agreement, repetition is the mother of confusion and ambiguity – and anti-climactic lawsuit disputes. Repeating the same point over and over again in an agreement is not persuasive, constructive, creative, or clever to anyone.
- Use the terminology the parties commonly use. For example, when referring to a client, always use such common names as "Client," "Patient," "Friedman," or "he/ she/ they" so the reader will know at all times who you are talking about. If the parties’ initials are important in the agreement, then use "F. D." for Friedman, "p." for patient, and "client" only when the full name is necessary.
- Avoid using the words "understand," "understands," or "understood" when referring to any action or conduct of a party. The word "understand" is defined in the Merriam-Webster’s Online Dictionary as:
To have (something) in your knowledge or mind; to know the meaning of (something); to be of the opinion that (something) is so; to accept as a fact or truth or regard as being acceptable as a fact; to be able to grasp the meaning, significance, or importance of; to grasp the idea of; to interpret; to know how; to grasp the idea of what (something is or means).
Same is true for the word "understanding." It is defined as "knowledge and comprehension of a specified thing; the power to make, correctly use or apply the knowledge; a mental, emotional, or legal appreciation; interpretation."
These words will be used elsewhere in the agreement, but not in the following context:
The parties have read and understood all of the terms of the Agreement. The terms of this Agreement shall be binding upon and inure to the benefit of the parties, their heirs, successors, and assigns and all persons or entities claiming under or through them.
These types of clauses can be deemed ‘conclusory,’ as in, they ‘assert a purpose but furnish almost no information.’ While it is true that these terms can be deemed ‘conclusory’ by the courts, that is not the reason to avoid using them when you are trying to get the other parties to ‘know the meaning’ of an agreement. If that were alone the reason to avoid these words, it would be enough. However, the real reason to avoid using the words "understand," "understands," or "understood" is because they do not mean anything. You cannot understand the meaning of an agreement if you never got it, did not get it, or could not get it in the first place.
Legal Considerations and Implications
Entering into a settlement and release agreement carries several legal implications that both releasees and releasors must understand. The most significant implication when negotiating a settlement and release agreement is the fairness and adequacy of the consideration and release. If an agreement is unfair, inadequate, or entered into under coercion, it may be set aside. There are two common pitfalls to obtaining binding settlements of employment claims through settlement and release agreements: (i) failing to give a designated person at least 21 days to consider the agreement before signing; and (ii) failing to obtain a knowing and voluntary waiver of claims under the Older Workers Benefit Protection Act ("OWBPA") from affected employees age 40 and older.
Generally, an employee may revoke a settlement and release agreement within 7 days after signing the agreement, which may not apply if the releaseed is a business entity as opposed to an individual. If the settlement and release agreement is intended to release and relieve the releasee of all claims under specific statutes, there are additional elements required for a release to be valid. For example, to be valid under the OWBPA, the release must, among other things, give the releasor at least 21 days to consider the agreement, advise the releasor in writing to consult with an attorney, and expressly refer to the releases being given under the OWBPA.
Common Use Cases for an Agreement
Settlement and release agreements can be effective tools in various circumstances. They are most often used:
In Employment Disputes
One common use is in resolving workplace disputes. For example, the employer may enter into a settlement and release agreement with a former employee alleging employment discrimination in exchange for money and/or other consideration. In these cases, particular care should be taken to comply with the relevant provisions of the Age Discrimination in Employment Act (ADEA). If the ADEA is implicated, there must be a knowing and voluntary waiver of ADEA claims, prepared in accordance with specific requirements under the ADEA regulations. This article will provide additional detail about the nuts and bolts of these requirements in the next section.
In Personal Injury Claims
Settlement and release agreements may also be used to resolve personal injury claims brought by an individual against a third-party tortfeasor . After an agreement is reached, in exchange for money paid by the third-party tortfeasor, the injured party will enter into a settlement and release agreement, releasing all claims against the tortfeasor and others who may be liable for the injury (such as a parent of an injured child). These agreements are usually prepared by the third-party tortfeasor’s attorney; however, it is sometimes beneficial for the injured party to have independent counsel review the terms of such an agreement.
In Business Disputes
Finally, settlement and release agreements are often used in the context of commercial disputes between companies, partners, or creditor/shareholders. For example, a company that has defaulted on its loan obligations owed to its creditor may be able to negotiate a settlement agreement where the creditor agrees to extend the due date on the loan in exchange for certain payments, additional security, or other consideration. There may be a separate release agreement in such context if necessary to further release any liability of corporate officers or owners of the company.
Need for Legal Counsel
The negotiation, drafting and finalization a settlement and release agreement is a critical component of any settlement. Therefore, parties considering the scope and terms of such an agreement should seriously consider seeking the advice and guidance of legal counsel, as the attorney is in the best position to consider the settlement and release agreement in the context of the entire case as well as of any applicable laws or regulations, such as those, for example, involving restrictive covenants, or whistleblower claims under the Sarbanes-Oxley Act. In addition, the attorney can best assist the client and the adverse party in fashioning a document that achieves the needs and/or protect the interests of both parties. The attorney also can ensure that the settlement and release agreement conforms to any rules or regulations of relevant arbitral or court forums, such as New York’s Stock Exchange and FINRA, as well as any other guidelines that govern the fairness of the settlement and release agreement.
Enforcement of the Agreement and Effects of Breach
As with any other contract, enforcement of a settlement and release agreement requires that the agreement be properly drafted and signed. If the agreement is ambiguous or not clear, then parties are free to present evidence outside the four corners of the document to explain their understanding of the terms of the agreement. As with any other contract, courts will read the agreement as a whole to give it meaning and will not create an ambiguity where none exists. In addition to the essential requirements for formation of contract, settlement and release agreements must also be supported by consideration, which may be either a benefit to the promisor or a detriment to the promisee. However, meaningful consideration is not required and the consideration does not even have to be valuable or adequate; mere "peppercorn" consideration is sufficient. Thus, in the case of a settlement and release agreement, consideration can be found from either party’s consideration of not pursuing its claim for damages, upon payment of some amount to settle a lawsuit, or upon a promise to do or refrain from doing some act, which promises need not be supported by a tangible benefit, but which must be of some benefit, however slight, to the promisor. In the employment context, the employee is often compensated for not bringing any future claims against the employer, and the employer may provide some additional form of compensation to settle the lawsuit or to build goodwill with the employee . The enforcement of these agreements is also subject to the same defenses to performance as other contracts. Generally, in the context of a private agreement, performance may be excused for accident, mistake or human conduct. In other words, the issues of miscommunication between the parties (i.e., mutual mistake) as to what the agreement provides is no basis for non-performance; the issues must go to the intent of the parties to the agreement. If the agreement is ambiguous, the court can consider extrinsic evidence offered by one party which the court finds credible to explain the terms of the agreement and to discern the intention of the parties. Once settled, the terms of an agreement cannot be set aside or altered without a showing of fraud, mistake or other grounds for equitable relief. The party seeking to avoid the terms of the agreement bears the burden of proof to establish its right to relief from the judgment and the court may consider extrinsic evidence to determine the issue when there is an apparent ambiguity in the terms of the settlement and release agreement. Accordingly, a party claiming conformity with the terms of a settlement and release agreement has the burden of proof to establish conformity with the terms of the agreement.