C. Release of Liability

• Library: Crafting Effective Settlement Agreements: A Guidebook for Attorneys and Mediators (ABA) (2018 Ed.)

C. Release of Liability

The most effective way to undermine agreement? Say the words, "Let's figure that out later."

A settlement agreement cannot become effective unless all parties agree on the same scope of liability to be released. However, most of the work in negotiating a mutually acceptable agreement tends to focus on the amount of money to be paid by the defendant to the plaintiff. At the moment of agreement on a dollar amount, parties often believe the case has settled, and it remains to the attorneys to take care of "the details." Thus, attorneys sometimes draft settlement agreements that specify the amount and timing of payment but leave the release to be drafted and signed—sometimes even after payment has been sent to plaintiff. The problem with this approach? At no point is there a valid settlement agreement.⁷⁵

The deceptively simple concept of "settling a case" encompasses nonobvious issues inherent in crafting an effective release. A release of liability can include all or just some of the causes of action asserted by the plaintiff. So, too, a release can apply to all or just some of the parties to the litigation, and a release can have a significant effect on other legal proceedings by including collateral l itigation in a global settlement, providing ammunition for liability or guilt in criminal prosecutions and administrative agency actions, or by allowing future lawsuits to proceed on previously unknown claims.

Consider the cautionary tale of Tomlinson v. Landers, in which an insurer acquiesced to settle physical injury claims for the policy limits of $100,000, but without securing agreement on the scope of the release.⁷⁶ Instead of a properly drafted release term in a written settlement agreement, the insurer attempted to secure an acceptable release by printing on a check stub a note that "payment will clear when [a] properly signed release is received in [the insurer's] office." The insurer included a release that it hoped plaintiffs would sign and return.⁷⁷ Plaintiffs' counsel requested that "certain language contained within the release be removed as inappropriate," and the insurer issued "a new release that omitted some, but not all, of the language Plaintiffs' attorney struck from the prior release."⁷⁸ The insurer filed suit to enforce the settlement agreement after plaintiffs failed to respond. The insurer, however, was out of luck. The Florida appellate court held that the dispute over language in the release constituted a lack of agreement regarding an essential term of the settlement agreement, and that the insurer's tendering of a check for the policy limits constituted nothing more than an offer to settle, which plaintiffs never accepted.⁷⁹

1. How to Craft an Effective Release

The process of crafting an effective release encompasses three steps.

a. Step 1: Research

Thorough research is far more boring than the shock of discovering your adversary knows something critical that you don't. One is decidedly less fun than the other.

Research the pending causes of action to determine whether there are any special statutory requirements necessary to make the release valid. Some causes of action require "magic language" for releases that are prescribed by statute.⁸⁰ Some causes of action require court approval of the settlement agreement (including scrutiny of the release) by a court.⁸¹ Some releases must be drafted with an understanding that relinquishment of some causes of action requires a waiting period.⁸² For this reason, attorneys must research the laws governing the release of the causes of action covered in the settlement agreement. For example, most jurisdictions do not allow waiver of future rights. Some claims require the defendant to advise the plaintiff of the right to counsel before executing a release or a waiting period. Especially in the employment realm, where numerous overlapping federal and state statutory schemes apply to safeguard employee rights, significant numbers of claims may require special considerations such as court or agency approval. In addition, the drafting of an overly broad release can itself incur substantial sanctions when an administrative agency determines that the release purports to encompass a plaintiff's rights that cannot be waived. In short, a release may require significant advance research to ensure its effectiveness and to keep attorneys and their clients out of trouble.⁸³

When the multiple claims to be released arise under different state and federal laws, the best practice may be to enumerate in the release each statute governing the claims. The advantage to defendants is that enumeration may defeat an argument that plaintiff signed a "general release" that does not cover a particular claim asserted. The disadvantage is that defense counsel must engage in research into the requirements of each type of claim released. In the employment context, this means that the research must encompass, at a minimum, requirements for releases under applicable state labor and wage laws, the federal Age Discrimination in Employment Act of 1967 (ADEA), the Older Workers Benefit Protection Act (OWBPA, 29 U.S.C. §§ 621 et seq.), the Employee Retirement Income Security Act of 1974 (ERISA, codified in part at 29 U.S.C. chapter 18) Title VII of the Civil Rights Act of 1964 (prohibiting workplace discrimination on the basis of sex, race, color, national origin, and religion). In addition, all of the tests for valid releases under these laws must of course be satisfied in the proposed release of claims. It can be a daunting task.

b. Step 2: Negotiate

Negotiation: the process of trying to change the mind of the person trying to change our mind.

Expressly negotiate and reach agreement on the legal claims, individuals, and cases to be released from liability. Case law includes numerous examples of purported settlements that evaporated when one party submitted a draft release to another party who had entirely different assumptions about the scope of the release. The exact terms of a release should be determined at the same time that the amount of money to be paid is agreed upon. As one court pointed out, "attorneys' energies are better spent making sure that release agreements accurately reflect their clients' intentions than in litigating what their clients really intended when they signed agreements including terms that counsel failed to analyze in the circumstances of the specific case."⁸⁴

When negotiating the terms of the release, be aware that a party probably has at least some duty to disclose material facts to other side in order to avoid claims of fraud in the inducement. Even a facially valid release may be invalidated when extrinsic evidence shows that one party withheld information that substantially affected the value of the claims released. For example, a release in a settlement agreement between business partners was held to be subject to claims of fraud where the partner benefitting from the release failed to disclose to the other side that the seemingly failing company to be transferred actually had imminent and bright prospects.⁸⁵ Thus, the court held that "the releases may have been obtained by fraud because" the partner benefitting from the release "failed to disclose his continued negotiations" with potential business partners that offered the excellent prospects.⁸⁶

The negotiation itself can support or undermine the validity of the release. For example, consider the test for whether an employee's release of claims under Title VII for discrimination is valid. Under this test, the courts "consider a number of factors, including, but not limited to: (1) the employee's education and business experience; (2) the employee's input in negotiating the terms of the settlement; (3) the clarity of the agreement; (4) the amount of time the employee had for deliberation before signing the release; (5) whether the employee actually read the release and considered its terms before signing it; (6) whether the employee was represented by counsel or consulted with an attorney; (7) whether the consideration given in exchange for the waiver exceeded the benefits to which the employee was already entitled by contract or law; and (8) whether the employee's release was induced by improper conduct on the defendant's part."⁸⁷ Notice that, more than half of the enumerated factors for the validity of a Title VII release concern the employee's experience during the medication.

In contrast to the obvious danger of failing to negotiate terms of a release are the hidden risks that sometimes inhere in negotiations over the scope of the release. Although parties are generally free to accept or reject offers to settle, inflexibility regarding the scope of a release can have serious adverse consequences. This risk tends to fall on insurers and other entities in states imposing duties to conduct good-faith settlement negotiations. One recent cautionary tale involves an automobile insurance company that issued a policy with a $30,000 limit and ended up owing a $3 million judgment after refusing to budge on the language of a release.⁸⁸ Although the insurer promptly offered to pay the policy limits to an injured motorist, the insurer steadfastly refused requests by plaintiff's counsel to allow the release to reflect a reservation of rights by plaintiffs to receive restitution from a state-sponsored victims' restitution fund.⁸⁹ Because the requested modification of the release was found by a magistrate to have been unreasonably withheld, the insurer became liable for the entire amount of plaintiffs' claims—exactly 100 times the policy limit.⁹⁰ In short, any insurer or entity with a duty of good faith and fair dealing in settlement negotiations must be careful when refusing demands regarding the scope of a release that might seem reasonable to a judge or magistrate.

c. Step 3: Draft

Writing is the bridge between idea and effect.

Draft the release to expressly delineate the identity of...