What is a Mutual Release Agreement?
Mutual Release Agreement Explained
Parties to a contract can create and agree to be released from those contract obligations if they conclude that performance of the contract is not feasible or is no longer necessary. A mutual release agreement is prepared by the parties to a contract where, by mutual assent , they intend to discharge each other from any obligations they owe each other under the agreement. A mutual release agreement will typically recite: In other words, mutual release is a contract whereby the parties to the agreement agree to dispense with further performance of their contractual obligations under the particular contract and to mutually relinquish and discharge all claims, demands and rights between and among them.
Key Components of a Mutual Release Agreement Template
A mutual release agreement template should contain several key elements to be effective and comprehensive. The first element is the identification of the parties involved. This should include full legal names and, if applicable, business names of the parties who are agreeing to release any claims or liability against one another.
Next, mutual release agreement templates should clearly include specific release clauses. A basic mutual release agreement template must state that in exchange for the release, the parties agree to mutually discharge one another from future claims. Defining the scope of the claims that will be mutually released is also critical. This might include specific claims such as contract disputes, tort claims, and employment claims, or it could be defined broadly to include "any and all claims or causes of action that either party may have."
Another key element is the terms of settlement. These can be monetary or non-monetary and may include a description of benefits one party will receive in exchange for the release, such as the amount of money, property assignments, or obligations of other nature.
Additionally, both parties should be making representations and warranties in the mutual release agreement template. These are statements made by each party to confirm the truth of specific facts, often related to their authority to enter into the agreement and the absence of other legal impediments.
A notary or witness section is also an important element. The mutual release agreement template should provide a space for the parties’ signatures as well as a notary or witness section where the documents can be acknowledged to add a level of formality.
It is important to keep in mind that while there are standard provisions that are often found in many mutual release agreements, no two mutual release agreement forms are identical. It is a good idea to seek outside legal help to ensure that the right form has been selected.
Advantages of a Mutual Release Agreement
One of the main benefits of implementing a mutual release agreement is the legal protection afforded to both parties. Before entering into any sort of agreement, both parties should carefully consider some of the more commonly named and negotiated clauses in a mutual release. These clauses include, without limitation: Another benefit to a mutual release agreement is that it can significantly reduce costs for both parties. When two individuals or entities enter into a mutual release agreement, instead of spending time and expenses in litigation, negotiation can occur in which both parties can agree to a fair settlement.
When to Implement a Mutual Release Agreement
Mutual release agreement templates are commonly used in these types of situations:
1. Financial Settlements: Parties in certain financial transactions may find that the fees for litigation far outweigh a potential award. A mutual release agreement can be a useful tool in averting costly litigation, or to meet regulatory requirements in cases where the round of financial settlements is high enough to require a release. For example, if a corporation and a contractor agree to terminate their relationship amicably, they may find it beneficial to sign a mutual release agreement that absolves each of them of liability to the other. In this case, entering a mutual release agreement is a better alternative for both the contractor and corporation than seeking financial justice through time-consuming legal means.
2. Business Partnerships: When a business partnership dissolves, the parties usually need to enter into a mutual release agreement to resolve all claims and liabilities that may arise. In a large organization, for example, managers and executives of a company that seeks to dissolve should enter a mutual release agreement that defines their roles and relieves one another of all claims and liabilities after the dissolution. Mutual release agreements are important after the dissolution of a business because they help to protect both the disbanded company and its former employees from future conflict.
Tips For Tailoring a Mutual Release Agreement Template
Customizing a mutual release agreement template can be a relatively simple or a more complex task, depending on the legal and business considerations necessary for any particular situation. Generally, provided that you have a mutual release agreement template designed for your jurisdiction, the basic steps you would need to follow in customizing the template are the following:
Where you have more complex legal issues to address as part of the release , the best course of action is to work with an attorney or firm that regularly drafts release agreements and understands your industry and any jurisdiction-specific concerns that may exist. While some may try to cut corners in the preparation of these agreements by performing a search on the Internet for templates, public websites do not always provide reliable or adequately drafted templates. In other words, you run a risk if you do not use a release that is specific to your needs and that has been adequately reviewed for any unique issues that may arise in your situation.
Common Pitfalls and Mistakes in Mutual Release Agreements
Mutual release agreements should not be drafted in a hurried or careless manner, as failing to capture the mutual agreement of the parties may have unintended consequences. Below are several errors that should be avoided when drafting or signing a mutual release agreement:
• Failing to Include All Parties
It is equally important to review the list of proposed signees for accuracy. Rarely are the parties to the mutual release agreement properly delineated in the original agreement, or even worse, one party will sign his or her own signature on the mutual release agreement. If there is any question about whether all parties are included, and/or whether all parties signed the mutual release agreement, it’s best practice to have everyone sign the same agreement, and if possible, have all signers in the same room, so that proper signatures can be obtained.
• Releasing Claims Without Full Knowledge
Since the primary reference point for many settling parties, especially pro se parties, is the mutual release agreement, it is imperative that the details of the scope of release be made plainly clear. While many lay people can generally deduce the effect of signing a mutual release agreement without consulting with an attorney, releasees with some sophistication may need clarification as to what particular release provisions encompass.
• Including Overreaching Release Provisions
Although a mutual release agreement will typically contain some general language regarding the potential types of claims that could be released, many overzealous attorneys will include language that is too broad to encompass all of the claims that could possibly arise.
Legal Guidance and Considerations for Mutual Release Agreement
When engaging in a lawsuit settlement, it is vital for liability-limiting parties and any creditor protected by the settlement agreement to fully understand and communicate any risks to other parties and to carefully consider the legal implications of any document they execute. In most cases, this means seeking professional legal assistance and utilizing the most appropriate documents to avoid potential problems. As discussed in further detail below, some of these issues can include enforceability, jurisdictional differences in the scope of enforcement, and the effect the mutual release agreement may have on existing litigation or administrative proceedings.
The applicably law governing what type of mutual release the plaintiff must sign is state law. If a plaintiff is improperly required by agreement or contract that violates a state’s public policy to sign a general release (some courts will not uphold overly broad releases), then some courts may not uphold such a release, assuming it is properly challenged. All of this is to say that the law in the various states can vary, and in some cases case-by-case, along with the specific circumstances of each particular case. However, a court interpreting this particular type of agreement will ultimately look at three things: is the Court in the appropriate judicial district or jurisdiction, is the agreement in full and mutual good faith and does the agreement contain sufficient detailed information to protect its validity in future court challenges, particularly if it is a general mutual release agreement.
In addition, a court in any particular jurisdiction may also look at whether there has been or would be a chilling effect on a party’s right to sue or enforcement of another party’s rights. Meaning, a court may be reluctant to uphold an agreement where a chilling effect on a party’s ability to enforce its own rights, or where there is possible future litigation arising out of the same set of facts (a release or agreement too broad in its scope could apply to new claims based on the same facts). For example, a party may have a "received but not cashed" check transaction that becomes problematic once the person does become aware of it and then seeks to carefully and specifically clarify that the releasing and released parties have not settled any new or future causes of action . In addition, if the mutual release agreement contains a forum selection clause, that part of the agreement or release may affect whether or not the entire agreement is enforceable.
In some jurisdictions, party to a mutual release agreement need to look at what rights they may be waiving in addition to litigation rights and where those rights may be asserted in the future. If a party may want to continue to assert claims against another party, they need to make sure their agreement does not preclude those causes of action (some parties may try to assert the release was fraudulently obtained, for example, or that it is now voidable for another reason).
In particular, a party needs to look at the rights it has concerning federal and state fraud laws, antitrust laws and company charter documents (among numerous others) to ensure those rights are not improperly waived or elided. Further, a party needs to look at whether there are any rights that have been granted through federal statutes, in order to ascertain whether the release is enforceable. Whether a court will find a release enforceable will depend on several factors, including how long a party had to submit its claims and negotiate the release, how much time passed between a party’s last contact with another (this time limits may even be set by statutes or regulations), any prior negotiation history, other claims that may or may not be asserted and various other considerations.
During any settlement negotiations, parties should probably be wary of agreement terms, language about a right to litigation or even things that could be interpreted as such, but that they are willing to waive any right to bring litigation. In addition, the parties may consider how likely it would be that the other would secure a gain from bringing litigation, and how any litigation could impact any other party’s rights (such as the example discussed above of a check issue).
It should also be noted that sometimes a party may not even have the power to release the claims of another to begin with. In the example above, a parent company may not even have the power to release the rights of its subsidiary, which can also be a consideration for companies that have multiple subsidiaries. But this will in large part depend on the case, the issues and the parties involved, as well as public policy concerns and the applicable laws.