What is a Mutual Rescission and Release Agreement?
A mutual rescission and release agreement is not uncommon in the world of litigations and settlements. Many settlements and agreements have a mutual rescission and release agreement as part of the final paperwork. In it, each party agrees to rescind any portion of the underlying agreement that they do not like. A party cannot sue another party for breach of the agreement so long as they have agreed to the mutual rescission and release agreement .
In this type of settlement, each party feels they were wronged in some way during the litigation process or felt they cannot win at trial and therefore, seek a middle ground to some of the unresolved issues which is acceptable to both parties. A mutual rescission and release agreement should be put into place so that no party can sue the other over the issue(s) contained in the rescission and release agreement.
Legal Effects and Advantages
Legally, a mutual rescission and release agreement is typically considered a final covenant not to sue and a general release. When entering into one of these agreements, there are always legal implications that the parties should consider. While the effects of a mutual rescission and release agreement can sometimes be irreversible, the agreement offers additional benefits to the parties. For example, a mutual rescission and release agreement can be a favored alternative to litigation. Instead of taking the time and money to get a court judgment or some other type of verdict (which is rarely a final disposition), a mutual rescission and release agreement can simply release all claims between the parties in exchange for some payment, performance, or value of benefit.
Necessary Components
Mutual rescission and release agreements contain a number of standard elements. In most cases, a mutual rescission agreement will identify the parties to the agreement or the claims being released, recite the factual background giving rise to the dispute, provide for a mutual release of future claims between the parties, and specify that all preexisting obligations between the parties under a contract are terminated or canceled.
Typically, an effective mutual rescission and release will contain a number of or all of the following items:
A mutual rescission and release agreement should only be utilized when the parties to the prior contract agree that no party is at fault and there are no legal rights or duties that the parties want to preserve. If a claim has been made or discovery has been exchanged and there are existing obligations under the contract that the parties wish to enforce after the termination date, it is unlikely that a mutual rescission agreement will be effective to terminate such rights. In addition, disputes might arise when one party to a contract attempts to rescind the contract while remaining in violation of the party’s existing obligations under the contract.
Steps to Drafting and Execution
When executed to finalize the winding down of a relationship, mutual rescission and release agreements typically will include general waivers and releases of claims as part of a settlement of disputes. The background for execution of a mutual rescission and release agreement will vary based on the context of the transaction. In most cases if an individual or entity is entering into such an agreement the motivation for doing so will be obvious. However, often in complex transactions involving the separation or termination of an executive, it may be necessary to draft the agreement to capture the nuances of the deal, including carefully documenting a bona fide arm’s-length negotiation of the lawfully enforceable consideration at the core of the agreement.
It is important for the drafting of the agreement to identify and address the following categories of provisions:
Mutual rescission and release agreements are generally drafted between the applicable parties and their counsel and must be executed in order to be enforceable. In the context of a winding down of a successful transaction, the parties often will have entered into a letter agreement at the outset of the transaction addressing the agreed-upon terms of the winding down of the transaction, including with respect to the timing and other procedures. In the context of an employment agreement termination, the employer and executive will often have been in contact or subject to ongoing negotiations toward the final terms of the termination of the employment agreement.
Key provisions of a mutual rescission and release must include a clear rescission of the underlying agreement(s) (i.e., the termination of the parties’ respective rights and obligations thereunder) and an agreement by each party to waive all claims against one another. Depending on the specific context of the transaction, the parties often will negotiate carefully-drafted disclosure schedules identifying the waivers and releases that are being granted.
The signatories to the agreement often will sign the agreement at a later date than the date of the agreement. To the extent that the material terms of the agreement will be publicly disclosed (e.g., the resignation of an executive), it may be appropriate to execute the agreement and withhold disclosure pending the broader dissemination of information to interested parties. In addition, in some cases a signing condition may be a condition to funding an escrow account for a series of contingent payments under an agreement (such as under an earn-out arrangement) and/or to the counterparty receiving a material governmental approval.
Parties will often seek to obtain a valid signature to the agreement from another party to the agreement prior to the parties’ executing the agreement. In such cases careful attention should be paid to confirm the validity of the earlier signatures, and, where appropriate, the agreement’s effective date can be stated to be the date of final signature in order to make clear that the agreement shall not be enforceable until the earlier signatures are confirmed to be valid and the agreement becomes fully-executed.
Another significant pitfall to be avoided when drafting mutual rescission and release agreements is language that is difficult to read or that could be interpreted to be inconsistent with enforceability, such as informal syntax, run-on sentences, incomplete or unclear antecedents to pronouns, etc.
Common Use Cases
Mutual rescission and release provisions are common in several circumstances, including:
Separation Agreements – Because the signing of a release is a statutory requirement for voluntary termination of employment under the federal Older Workers Benefit Protection Act, it’s standard to include mutual rescission and release language in separation agreements that are provided to terminated employees. In addition to federal age discrimination considerations, there are also various state law requirements associated with any written waiver or release of discrimination claims, such as requirements to be given more than 45-days for review of the separation agreement for group terminations under the federal Workers Adjustment and Retraining Notification Act ("WARN Act"). We have provided links below with additional information on the applicable age discrimination and WARN Act requirements.
Dispute Resolution – We have seen mutual rescission provisions used in multiple contexts as a tool to resolve conflicts related to the interpretation of contracts and settlement agreements. For example, the parties may agree that despite their inability to reach a settlement on certain terms of a contract , mutual rescission provisions will allow the agreement to terminate automatically.
Business/Asset Purchase Agreements – Mutual rescission provisions are often found in business purchase and sale agreements to address various contingencies and resulting uncertainties associated with the closing of the transaction. Specifically, if the parties are unable to close due to regulatory problems, the parties will often agree to terminate the agreement and cancel any obligation or liability to each other related to the purchase agreement. As an example, the acquisition of a license to buy beer importing rights was killed because of a challenge to the transaction by a major beer wholesaler that would have required an anti-trust review by the Justice Department, and the parties agreed to the following provision that is typical:
If for any reason the Transaction cannot be consummated, or if a notice is given in accordance with Section [#] of this Agreement and the Transaction is not consummated within [amount] days after such notice is given, this Agreement shall forthwith become null and void and of no further force and effect and the parties shall have no liability to one another hereunder.
Legal Considerations and Potential Risks
When entering into a mutual rescission and release agreement, there are several important legal considerations and possible risks that parties should take into consideration in order to avoid problems down the road. For instance, certain parties must be directed to or specifically identified in order to be bound or released by a release. Moreover, the release should be sufficiently specific as to what is being released. As almost all contracts are enforceable, it is also worth noting that permits may be required for enforcement in certain circumstances. Each category is briefly listed below:
Multiple Parties – Statutes that may require a particular person to be identified or directed to for the release to be effective. For example, if a creditor releases a debtor, the creditor may also have to direct the release to the principal or any co-makers of the debt.
Specificity – Generally, a release should be specific enough to provide notice to a party as to what is being released.
Permits – In some cases, individual permits may be required prior to a release being enforceable. For example, release of a surety bond with respect to an environmental permit may require a permit modification or transfer in order to be effective.
Seeking Legal Counsel
As can be seen from our discussion above, mutual rescission and release agreements present a variety of potential pitfalls for unsuspecting parties. Therefore, it is critical to consult competent legal professionals before signing such an agreement. Your attorney can help you in a number of ways:
First, your attorney can help you avoid an unfair agreement. Because employers have a great deal of experience with noncompetition agreements, they are often able to convince employees that the release terms are "standard" and "necessary." However, mutual rescission and release agreements are relatively new, and employers are trying to learn their way around them quickly. As a result, many companies will use noncompetition agreement forms with just a few additional lines of text that offer the employee the "opportunity" to release all of the company’s claims against them. However, as demonstrated above, this can lead to serious problems for the employee when he or she is terminated for what the employer describes as poor performance or other "unsatisfactory" reasons. Your attorney can help avoid such problems by drafting an agreement that features clear and broad language outlining exactly what claims you are giving up in exchange for the company’s agreement not to enforce the noncompetition agreement .
Second, your attorney can alert you to the risks involved in entering a mutual rescission and release agreement. When you sign a mutual rescission and release agreement, you may be surprised when—instead of avoiding litigation, the employer brings a new lawsuit against you based on some supposed violation of the noncompetition agreement. This risk can be avoided by conducting adequate due diligence into the employer’s conduct and by negotiating appropriate representations and warranties into the mutual rescission and release agreement.
Third, your attorney can help you understand the full range of options available, which often exceed what is provided by the standard form agreement. As mentioned above, many companies have boilerplate mutual rescission and release agreements. However, an experienced employment law attorney will be able to suggest additional terms to protect you in the future. For example, while your employer may simply ask you to agree to "resign your position," your attorney may be able to insert language that offers you specific protections, such as, "resigning for the purposes of retaining your severance payments and retiring from your post and entering into this rescission and release agreement with no other effect on your employment with the company."