What a Mutual Release is, how to construct, and what to know before signing one.
A Mutual Release is an agreement between two parties that each one will give up some or all legal claims they have or may have in the future against one another. A mutual release agreement is commonly used at the conclusion of an employment relationship (whether in the event of resignation or termination), in a purchase/sale of a business transaction, or at the conclusion of a dispute, as a document that crystalizes that compensation has been paid in full and that no other compensation will be coming. All three of these scenarios will frequently present themselves within a business context, so learning how to structure and draft a mutual release agreement, as well as learning to avoid traps if presented with one, is an essential learning topic.
Constructing a Mutual Release agreement: The Iron Rule - Be Specific
When constructing a release agreement be specific on the subject matter of the release. Constructing specific release agreements prevents issues regarding unknown conduct in the future. In the case of Biancaniello v DMCT LLP, as discussed in this article by Bernstein, Outerbridge, and McMahon, a broadly worded mutual release that was signed by both parties when Biancaniello was dissatisfied by the service provided became an issue years later, when a claim came to light. In this case, DMCT, Biancanliello’s Accountants, had negligently ended up costing them as much as 1.24 million dollars in tax liability, a fact unknown to them prior to signing the mutual release agreement after their termination from Biancaniello.
Biancaniello sought litigation, citing that the extent of DMCT’s negligence was unknown to them prior to signing the mutual release agreement. The court of appeal denied it. The court stated that as per the case of Bank of Credit and Commerce International SA v. Munawar Ali, they had to interpret the mutual release in accordance with the mutual intentions of the parties. The subject matter of that release was intended to address dissatisfaction with provided services, and the purpose of the release was “to wipe the slate clean,” according to the court upon examination of the release. The court concluded that the negligence claim against DMCT was one that arose from the services they provided, an area covered by the release agreement.
Justice Feldman went on to say that ”[t]he parties were wiping the slate clean in respect of that work. Had the client wished to exclude claims it might later discover arising from that work, it could have bargained for that result.”
What Biancanello should have done was draft an exclusion specifically regarding negligent provisions of services to be excluded from the release and therefore ensure that they had protection from anything undiscovered or unanticipated at the time of entering into the release, which the court would have accepted.
Exclusions are a set of specific wording in a mutual release designed to single out certain behaviors or actions to protect you from undiscoverable problems. As the Bianccanello case demonstrates by counterexample, drafting an exclusion in your release agreement that renders it void should negligence be discovered post-signing creates a possibility that you can protect yourself from unknown issues you may not be aware of.
How untruths can tarnish the mutual release agreement
Representations are helpful in creating a foundation or basis for providing a release, as they are commitments by the releasee that of certain truths, and if those commitments are found to be untrue, this can weaken the release.
For example: when obtaining a release from an employee, the employee may be asked to acknowledge that “they performed their duties to the best of their abilities”, or “that they have not performed immoral actions in the workplace and have no pending legal action against them”.
Should evidence of unwanted conduct surface in the future, making sure your intentions are well represented in the mutual release agreement indicates that the release was signed without knowledge of undiscovered (potentially fraudulent) activities.
For example, In the York University v Markicevic case a mutual release was voided when Markicevic fraudulently hid the nature of the losses he caused York University. His fraudulent schemes were discovered a long time after the signing of a mutual release agreement. That employee had hoped that the mutual release would protect him from legal action in the event that this fraud was discovered.
As discussed in this article by Couture, the court in this case held that a principle of a mutual release contract, is that “a contracting party who is induced to enter into a contract as a result of a fraudulent misrepresentation is entitled to rescission, and restoration of the benefits conferred on the other party to the contract.” The court of Appeal highlighted this principle when explaining how Markicevic’s fraud in dealings with York University allowed the release agreement to void, and for the university to recover borth the stolen money as-well as anything given to him via his severance package.
Confidentiality surrounding your mutual release agreement
Consider the use of confidentiality, non-disparagement and arbitration clauses to preserve the confidentiality of the parties on the matter surrounding the release.
Confidentiality and non-disparagement provisions
You may want to consider the scope of confidentiality surrounding your mutual release agreement, highlighted in this article by Tran and Choy. What these entail, is the right to silence either yourself or the other party from speaking publicly about the dealings of your mutual release. This is designed to protect your information from being leaked to potential rivals or the public, especially in situations dealing with a lump sum of money being paid to an ex-employee. However, before including these provisions, make sure there are appropriate carve-outs in place, such as the right to disclose information in a reactive manner in order to protect your reputation should the other party breach these provisions.
These are a type of clause reserved for more sensitive issues that caused a dispute, where you seek to prevent the public from finding out. In cases of sexual harassment for example, or situations that might reflect badly on you as an employer, arbitration allows you to resolve the issue in question confidentially and away from the courts and public eye under arbitral proceedings instead. This serves to protect the employer’s secrets and anything they do not wish to disclose as part of the release proceedings.
- Know what you are giving up - if you discover that you have been wronged years later and wish to pursue legal action, a release agreement almost always binds you in a state of inability to pursue legal action, and that is important to keep in mind.
- Fraud, if discovered, can void a mutual release agreement, consider adding representations to confirm what is known about the circumstances and conduct at the time of signing the release.
- Consider the use of confidentiality, non-disparagement and arbitration clauses to preserve the confidentiality of the parties on the matter surrounding the release.