What is a Release Agreement?
Release Agreements: A release agreement, also known as a settlement agreement, is a legally binding contract that settles a dispute between two parties. The primary purpose of a release agreement is to ensure that one or both parties waive their right to pursue any further legal action against the other relevant to the dispute that the agreement is resolving. It is not uncommon for a release agreement to set forth any financial settlement terms of the dispute being resolved, including whether any funds are one-time or on-going, and whether the funds are to be paid in lump sum or installment payments. Release agreements often contain language releasing not only parties to the agreement , but also their officers, directors, shareholders and principals, as well as their past and future affiliates, successors and assigns. Additional specifics about how to comport with the agreement (e.g. requiring a party withdrawing from a business entity to sell his or her interest back to the company), mutual non-disparagement releases, and acknowledgement of payment details, are often included in the agreement, although these are not strictly necessary components of a valid release agreement. The enforceability of a release agreement can be a difficult factual issue, particularly release agreements containing non-compete and/or non-solicitation restrictions.
Different Types of Release Agreements
A release agreement can be categorized in a number of different ways. The following are the most common types of release agreements:
General Release
A general release contains broad language that is intended to relinquish all known claims or legal rights. A general release may contain an explicit waiver of any claim that has arisen as of the date the release was signed or an express waiver of all claims that could be asserted at the time the release was signed. A general release is typically associated with the release of all claims by an employee in connection with the termination of his or her employment, or, most frequently, at year end or bonus time, as noted above. Example: The Employee acknowledges that the foregoing waivers and releases extend not only to the Employee’s employment and the termination of the Employee’s employment, but also for and to all periods prior to the date of this Agreement. The Employee further waives and releases all claims that he or she may have against the Company, its affiliates, subsidiaries, and their successors, agents, officers, directors, employees, administrators, fiduciaries, insurers and assigns, arising in law or in equity out of or in any way relating to the Employee’s employment with the Company and the Employee’s termination of employment.
Mutual Release
A mutual release, as further discussed below, is a two-way release that releases claims by both parties to the agreement as well as claims by the releasing party against its counter party. A mutual release is usually specific in scope to the release of applicable claims between each of the parties. A mutual release generally occurs between two or more parties as part of the settlement of actual or threatened litigation; as part of an agreement resolving or avoiding litigation; and in connection with the sale of business assets or stock of a company. Example: Each party waives and releases all claims against the counter party, its subsidiaries, affiliates, officers, directors, employees, administrators, fiduciaries, insurers and assigns, arising in law or in equity out of or in any way relating to the [agreement] and/or the events leading to its negotiation and execution.
Unilateral Release
A unilateral release is a release agreement under which only one party releases claims it has against the releasing party. A unilateral release is commonly used in the context of a release of an employee’s claims against his former employer in connection with a negotiated severance package. Example: The Employee hereby releases and forever discharges the Employer, its affiliates, subsidiaries, and their successors, agents, officers, directors, employees, administrators, fiduciaries, insurers and assigns, of and from any and all claims, liabilities, demands, and damages of every nature whatsoever, whether now known or unknown, which the Employee has or may have against the Employer, arising from or in any way related to the Employee’s employment with the Employer, and/or the termination of that employment.
Essential Clauses in a Release Agreement
A typical release agreement will usually have several key clauses that are significant to the overall agreement. A major area of concern for a litigant in a release agreement is the scope of the release. This typically concerns what claims are "released" by the agreement.
The waiver of claims clause is generally a broad waiver of both known and unknown claims and dismisses any potential future claims. Depending upon the parties and context of the release agreement, the waiver of claims can extend to third parties or companies or indemnification from any claims third-parties may have against the former employee.
An individual may also need to consider whether the release agreement includes confidentiality provisions. For example, it is typical for employment-based release agreements to contain non-disclosure and confidentiality provisions for proprietary information. These types of provisions are also common in severance agreements for executives or high-level employees. Such an agreement may extend to restrictions on disclosing the terms of the agreement, the circumstances of exit, or items of value such as etching a separation agreement into stone in the public square of personality.
Advantages and Drawbacks of Signing a Release Agreement
An effective release agreement can provide critical legal protection for all parties involved in a transaction or relationship. Releases are effective tools for wrapping up all remaining issues between appropriate parties when they are used correctly, but the risks associated with their use must be weighed against the benefit of ensuring that all claims between the parties, and some all claims relating to third parties.
The primary benefit of a release agreement is that it can protect a party against making a claim and/or being subject to a claim. An example of this would include an employee who has been terminated by an employer who has not yet paid wages that are due to the employee. The employee could bring a cause of action against the employer for failing to pay the wages that are due, but the employer could require the employee to sign a release in exchange for payment of the wages. When the employee signs the release the release acts as a contract in which the employee agrees to give up his or her right to sue.
In the example above, the employee is able to receive something from the employer (the payment of back wages), and upon receipt of that payment, the employee agrees to release the employer from liability related to the payment of those wages. As long as the employer makes the payment due it will receive a legal benefit by having the employee release all other claims against the employer including claims that may not be known to either side. To the employee, the benefit received in exchange for signing the release is to finally receive payment for the wages that the employee is due.
From the employee’s perspective, whether taking money from the employer in exchange for signing a release is advisable would depend on the chances of winning a lawsuit against the employer, and whether the settlement offered by the employer is worth giving up the right to sue the employer.
Without admitting liability, signing an effective release agreement can also guard against being sued by a former partner or co-owner of a business and by current and former employees, directors, officers and related third parties such as investors, shareholders and debtholders. A comprehensive release agreement should cover all relationships within the parties’ organization and specify all individuals who shall be bound by the terms of the release. For example, if all of the debtors agree to sign the release agreement, the bankruptcy trustee most likely will not have standing to challenge its effect.
Conversely, there both risks and drawbacks to entering into a release agreement that may cause significant damage to the parties. For example, an employee of a company who has been terminated as discussed above may have a claim for age or gender discrimination or other torts such as emotional distress or assault. In signing a release, the employee runs the risk of waiving those claims because the release may be broadly written to cover "unknown" causes of action. Even if the employee disclaims all knowledge of a potential claim up front, the employer may still escape liability without actually committing any act to harm the employee.
Another obvious risk of a release agreement is if it prevents further actions necessary to collect on a debt. In a business, one partner could refuse to honor the terms of a release agreement signed by all the partners and later claim any further debts owed as having been forgiven by the release. The risk then becomes having to rely on the historical good conduct of the other partners in order to ensure that the release is honored. If one partner blindsides the others and then refuses to perform his or her end of the bargain in accordance with the release agreement, litigation may ensue.
For an individual, an obvious disadvantage to signing a release is the risk that this also waives the right to sue. For example, if a minor child is released from liability for a car accident caused by the parent, the insurance carrier may not be liable for loss of consortium owed to the child for another loss of society attributable to the parent’s negligent behavior in the child’s life. Another example is if what is entitled to the release agreement is separate from the parent’s misconduct such as sexual abuse, the release may prevent the minor child from recovering for such abuse.
Legal Effects of Release Agreements
The legal enforceability of release agreements is rooted in a longstanding public policy. As the California Court of Appeal has stated, "Public policy favors the settlement of disputes, including those over employment contracts." Vasquez v. Superior Court, 80 Cal.App.4th 380 (2000). In fact, "a settlement agreement is entitled to a ‘strong presumption in favor of enforceability.’" Id. (citation omitted).
Given this strong presumption in favor of enforcement, a party challenging a release agreement bears the burden of "not only showing the impropriety of the agreement but also of substantiating any claim of unconscionability by proving it is not only oppressively unfair, but that it [i.e., the agreement] enlightens noone as to its consequences." Waller v. Truck Ins. Exch., Inc., 153 Cal.App.4th 132, 144 (2007). Thus, even though the consensus among California courts is that the burden rests with the party challenging the validity of a release, courts will still look at whether the release was "institutionalized,’ contained a mutual release of unknown claims, or whether it was otherwise unconscionable due to fact such as the absence of counsel, a failure to understand the subject matter, or other circumstances demonstrating that the consenting party lacked understanding of the subject matter." See Cotran v. Rollins Hudig Hall Int’l, Inc., 17 Cal.4th 93, 118 (1998); Waller, 153 Cal.App.4th at 144.
The courts go on to note that there are circumstances where one party may have "far greater bargaining power than the other, resulting in a contract of adhesion." See Waller v. Truck Ins. Exch. , Inc., 153 Cal. App. 4th 590, 615 (2007). For example, employers may take advantage of their economic power "to impose economically oppressive provisions on the employee." Id. However, releases entered into in the employment context are weighed less severely in the balance of unconscionability because: (1) the employer’s superior bargaining power is diminished since the employee could bring Feha claims even in the absence of a waiver under an alternative legal theory, and (2) the choice to enter a release with a waiver of civil rights claims is coupled with the important social policy advance of avoiding high cost litigation.
Because most termination and severance agreements between companies and employees will involve the waiver of unknown claims, the scope of any waiver should be critically analyzed before agreeing to release an employer from an unknown future claim. In addition, while the party challenging a release bears the burden of showing impropriety, it is often difficult to determine what claims or rights are unknown and what impact this unknown future claim may have on the process. In attempting to fairly gauge the scope of unknown claims and what potential future claims may be made by a party, it is helpful to use an attorney familiar with the particular subject area who can provide realistic options for release and waiver language.
Because California has a strong policy in favor of settlement, it is critical to understand whether an enforceable release, waiver and indemnification agreement and its scope of coverage is appropriate for transaction and/or separation agreements.
Essential Steps in Creating a Strong Release Agreement
Drafting a release agreement is not an easy task, as there may be many issues to consider. Trying to include too many things in a release may cause it to be void. On the other hand, if you do not include all of the necessary information in a release, you may be leaving much too much risk on the table. The following are some suggestions for writing an effective release:
- The release should include a well-defined release period. If the release is in the form of a Severance Agreement, as an example, the release should include a specific date by which the employee must decide to accept or reject the Severance Agreement (or the severance payment agreed to in a Collective Bargaining Agreement). Under the Older Workers Benefit Protection Act, this date must be at least twenty-one (21) days from the date that the employee receives the Severance Agreement. In addition, the release period must be clearly spelled out elsewhere in the release.
- Give the terminated employee sufficient time to consider all contingencies before signing the release.
- Include a section that requires the employee to assert that they knowingly and voluntarily are waiving their rights to sue for any basis other than the specifically enumerated claims that are mentioned in the waiver provision of the release, such as Age Discrimination in Employment Act claims, Title VII claims, etc. In other words, the waiver provision in the release should be as list of specifically enumerated claims that the employee is waiving, not a blanket waiver to sue at all.
- As a tip, while the Severance Agreement should include all of the release requirements, the release portion of the Severance Agreement need not be put together in one paragraph. It can be divided up into as many paragraphs as necessary.
When to Consult a Lawyer Regarding a Release Agreement
It is generally a good idea to at least briefly consult with an attorney about the release before you sign it. In fact, the Workers’ Compensation Insurance Carrier is required to provide you with a list of local attorneys so that you may make an informed decision about whether to have an attorney review the release agreement before you sign it.
There are a number of reasons why you should ask an attorney to look at this release. For instance, if you have not yet undergone any surgery, other than a general examination, the terms of the release agreement could be problematic. If you haven’t seen a doctor for any amount of time, but you agree to give up any right to ever get the surgery that you might need because of this work-related injury, you are giving up all of your rights without any compensation in return .
You may not be aware of all the procedural steps to take after signing the release and if you try to see a doctor without following through with those steps, your benefits could be suspended, or terminated. You may also be giving up your right to receive certain palliative treatments or diagnostic tests, which effects your ability to treat your condition and fully recover from your injury.
An attorney can also advise you if you should request any other types of compensation, or whether you do not currently have any additional compensation claims outside of the workman’s compensation realm.