San Diego Business Contracts: What is a Mutual Release Agreement?
A “mutual release agreement” is an agreement by which two or more parties agree to settle a dispute and to release each other from any future legal liability going forward. An experienced San Diego corporate attorney should be consulted for advice and counsel if you need a mutual release agreement drafted or if you are asked to sign one. Potentially important legal rights are being given up and there are risks if the mutual release is not in the proper form and covers the expected and agreed-upon scope.
A typical mutual release provision tends to be long and somewhat complicated in an attempt to cover all the legal eventualities. A typical example might read like this:
“Mutual Release: Each PARTY to this Agreement hereby releases each other from any and all actions, claims, rights, demands, suits, charges, complaints, obligations, damages, costs (including attorney’s fees and costs actually incurred), liabilities, losses, debts, set-offs, promises, contracts, agreements and controversies of any nature whatsoever, whether now known or unknown, arising from the beginning of time to the date of this Agreement, arising from or resulting from or in connection with any act or omission, event, transaction, occurrence, agreement, contract or relationship concerning the SUBJECT MATTER of this Agreement.”
This kind of agreement is enforceable and is a contractual mechanism that allows parties to avoid litigation in the future by giving up their claims against one another.
There are generally four important aspects to a mutual release:
- Liabilities released
In the example cited above, only the word “PARTIES” has been listed. But, often the word “PARTIES” is expanded to include others to be released like the parties’ heirs and assigns, the parties’ officers and directors, the parties’ affiliated corporations, and more. If a person or entity is not listed in the release, then that person or entity is not released from potential claims and litigation. Thus, it is important to ensure that the release covers everyone and every entity that is intended to be released.
In the example cited above, the scope is listed as “SUBJECT MATTER.” In an actual release, the scope should be specified. The Release should clearly identify whatever contract or property or purchase order or case or administrative hearing or charge that is being released. The scope can be limited, of course, by carving out some exceptions. But if the release is general and broad enough, then courts will deem the release to extinguish any claim that might arguably relate to the scope.
Since releases are intended to be all-encompassing, most releases will include the largest available time period — “all time” — and include the idea that the parties are releasing “known claims” and “unknown claims.” There are limits imposed by California Civil Code §1542 on releasing claims that are unknown, so legal advice is needed on whether to include the language.
Finally, a broad release like this covers all possible liabilities. Mostly, we think of risk of liabilities as money judgments from a lawsuit, but there are other money damages that might occur long before a judge/jury renders a verdict in a lawsuit. Thus, litigation costs and attorneys’ fees leading up to a lawsuit are generally released. Likewise, there might be fines or fees assessed by a governmental agency. Under a mutual release, the parties agree not to sue each other if such fines or fees are assessed. In the example cited above, a long list is presented. Sometimes, the list is shortened.
Mutual release agreements are used to settle and complete litigation, but they are commonly used in business and employment settings. For example, many employers have departing employees sign releases in exchange for severance packages. In those situations, the release is not mutual; it is a one-way or unilateral release by the employee of his or her employer.
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can also assist with setting up a new corporate entity, annual corporate maintenance, and can help review and draft business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.