What is a Release?

A Release is a contractual promise to not enforce legal claims against someone, sometimes in exchange for monetary compensation or a promise to do something in return.

Most people will encounter releases in the form of the liability waiver signed when engaging in any recreational activity where there is a chance of injury (e.g. skydiving, go-karting, paintball). Releases used in this manner are typically a “take it or leave it” deal and aren’t negotiated. One party is the Releasor (promises not to sue), the other is the Releasee (promises something in exchange – for example, use of the go-kart track).

In more complex circumstances, both parties will have claims against each other, and can opt to sign a mutual release in which they are both simultaneously Releasor and Releasee. Here, there’s significantly more room to negotiate terms.

It can be risky to sign away a perfectly legitimate current or future claim – particularly if you’re worried about non-performance by the other party. To avoid this problem, consider negotiating to have funds and documents held in escrow (if your release involves a transfer of funds) along with a well thought out set of conditions precedent (obligations that must be performed or the other party will not be able to take advantage of the release).

What is  Escrow?

Suppose, in order to get a release from claims against it, Party A has to pay a large sum of money to Party B. The parties agree that the money will be delivered by cheque, however several issues can arise with cheques. What if the cheque is never delivered and Party B already signed the release? What if the cheque is delivered but bounces? What if Party B needs have a loan to pay you and there’s a chance the loan might not be approved?

Escrow involves a third party, often the lawyer for one of the primary transacting parties (called an Escrowee), who holds documents and assets in trust for both parties and only releases them to the appropriate parties once the conditions of the underlying agreement are satisfied. The Escrowee will be bound by their law society’s code of conduct to be fair and ethical to both parties, and to earnestly facilitate the transaction.

In the context of our release, if Party B obtains the funding and sends an electronic fund transfer or cheque to the Escrowee, the Escrowee then holds the money in a trust account. That money sits there until Party A submits the signed release. Upon verifying that everything is in order and after notifying the parties, the Escrowee releases the funds to Party A, and sends over the signed agreement to Party B. If an obligation has not been met, the Escrowee will not release the funds or the signed documents, and, depending on the client’s instructions, may return the money to Party B’s account, and Party A won’t be bound by the Release.

Use of escrow levels the playing field between the parties, encourage the completion of the transaction by taking out the elements of mistrust and risk of non-performance between parties.

Takeaways:

  • Be mindful of real-world concerns such as whether the other party can actually pay funds owed, or whether the cheque will clear
  • Pay close attention to the language of the release-who is released and what the release covers
  • Consider the use of an Escrowee to reduce the risk of non-performance

Author: Sahil Kanaya

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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