What is an Agreement Not to Sue?
An agreement not to sue is essentially a contractual promise by a party agreeing not to pursue a legal claim, whether through litigation or the filing of administrative complaints, for a specified period of time. All parties need to follow through with that promise or face a breach of contract or other legal claim in connection with a failure to follow through on the agreement .
Agreements not to sue can take many forms, from a "standstill agreement" to an "agreement tolling the statute of limitations" to a "standstill agreement." In each case, the precise terms of the agreement, including the date by which the complaint must be filed, and for whose benefit, is imperative in avoiding a breach of contract claim.
Legal Basis of Agreements Not to Sue
Understanding Agreements Not to Sue: A Comprehensive Guide
Recognizing the growing complexity of business and the increasing cost of litigation, courts have developed new forms of ADR as a means to resolve disputes without resorting to the courts. One such form of ADR is a structured settlement. A structured settlement is an alternative to protracted litigation where parties involved in different actions agree to forgo their claims against each other in exchange for the defendant’s permission to pay out claims to which they are exposed on an individual basis without risk of litigation. By using an agreement not to sue and structured settlements, claims can be resolved without the need for the defendant to rely upon a global release from liability.
While the legal foundation of agreements not to sue can vary depending upon the applicable law of a particular state, many common law principles align.
For example, in California, agreements not to sue have been expressly recognized in insurance contexts. See Agnew v. State Farm Mut. Auto. Ins. Co., 219 Cal.App.3d 1217, 1221-1225 (1990); Goolsby v. State Farm Ins. Companies, 218 Cal.App.3d 72, 75-77 (1990). Similar legal foundations have developed in other venues such as Pennsylvania, New Jersey, New York, Connecticut, and Florida. However, a court’s interpretation will be of great importance when the circumstances in the case involve a global release of liability rather than a structured settlement.
A general release is an instrument intended to divest the releasing party of important substantive legal rights previously held by that party. In other contexts, mutual releases have been upheld as long as they were the result of an arm’s length bargained for agreement between counseled parties. See Bahl v. Bank of America, 63 Cal.App.4th 1381, 1386-1387 (1998). However, when reviewing releases in the context of a global release, courts have scrutinized the circumstances more closely. Id. See also Agnew, 219 Cal.App.3d at 1224-1225; Goolsby, 218 Cal.App.3d at 75-77; see generally Canfield v. Brawer, 153 Cal.App.3d 494, 497 (1984) (stating that circumstances and intentions will determine whether a release is complete). Under such scrutiny, courts consider the following factors: (1) the importance of the substantive right released; (2) the particular relationship of the parties; (3) the surrounding circumstances within which the release is an agreement; and (4) whether there is any misrepresentation, mistake or duress. See id. at 1388-1391; Canfield, 153 Cal.App.3d at 498-502.
When reviewing agreements not to sue, courts have focused upon similar principles of public policy. Thus, the particular context within which the release occurs becomes paramount. For example, in Pennsylvania, all sale of fraud claims must be expressively preserved from a release. Bennett v. A.T. Masterpieces, Inc., 55 Pa. D. & C. 4th 439 (1998). In New Jersey, a release within a healthcare context intended to provide immunity to health care professionals must be enforceable as a matter of law. Connolly v. Port Authority of New York and New Jersey, 173 N.J. 144, 163-169 (2002). In New York, the court will look to whether the release was entered into for consideration and "whether the language of the release and the facts support a conclusion that the settlement is exempt from general policy." City of NY v May Dept. Stores Co., 263 A.D.2d 19, 21 (N.Y., 1999) (internal citations omitted).
When an agreement not to sue is structured, these policies can be recognized to have been minimized in light of the complicated circumstances within which an agreement not to sue is structured.
Pros and Cons
The major benefit of agreements not to sue is that they can save parties from the cost and time of going to court to obtain a dismissal of claims based on the same transaction or occurrence. That is, instead of getting a judge to issue an order disposing of the lawsuit, the parties can exchange dismissals of their respective lawsuits, filing the agreed upon dismissal orders with the court. This accomplishes the same result as a court order at substantially reduced expense.
The drawback to using an agreement not to sue, however, is that if either party was relying on the other’s agreement not to sue, that person might be very disappointed if the other decides to sue anyway. Without court sanctioned injunctions protecting a party, most agreements not to sue are not very effective.
Essential Components of a Binding Agreement
A legally binding agreement not to sue must include the following essential elements:
Mutuality. A valid legal agreement requires a "meeting of the minds," meaning that both parties must have the same understanding of the terms of the contract. This consensus to the basic substance of the agreement is known as mutuality, and is essential for the contract to be enforceable.
Consideration. As with all contracts, an agreement not to sue requires consideration from both parties. This element, which essentially refers to something of value that each party brings to the table and offers the other, can take various forms. In some cases merely a promise not to sue may suffice, e.g., when a defendant agrees to forgo the use of a legal claim in exchange for the payment of a reasonable sum on his or her behalf. In other cases, the consideration might involve a significant exchange of money, or the mutual exchange of releases. A contract, however, is not enforceable if it lacks consideration.
Common Situations for Application
Agreements not to sue are also commonly used in connection with personal injury lawsuits, where for example the claimant agrees not to sue the alleged tortfeasor in consideration for the payment of an agreed sum of money. These can often be found in commercial transactions as well, where one party will agree not to sue the other in connection with a business deal in exchange for certain benefits.
For example , settling partners in an ongoing business may agree not to sue one another in connection with any disputes that may arise from the past sharing of profits in consideration of a fixed payment as part of an overall settlement. The fact that the parties may not reach a general settlement of all claims does not necessarily preclude the use of these agreements. There can be situations in which a party may be satisfied for the moment just to resolve a particularly troublesome disagreement which may not otherwise be worth pursuing.
Drafting an Agreement Not to Sue
Agreements not to sue are contracts, and as such should include certain terms that are customary for contracts. What’s more, an agreement not to sue need not appear on a separate piece of paper or be manually signed on all of its pages in order to be valid and enforceable.
Rather, as an agreement not to sue is simply a type of settlement agreement, it may be contained in a larger settlement agreement and need not be signed on every page. Further, in some states (and in federal court) an agreement not to sue requires no more than the acceptance of an offer made by the defendant; in other words, an agreement not to sue can be effective with no more than the plaintiff’s written signature that references the defendant’s offer and thus accepts the offer. The agreement not to sue may also be contained in a formal stipulation in which the plaintiff agrees to be barred from prosecuting a particular action, and instead agree to prosecute another in its place.
A plaintiff facing abusive conduct may wish to create an adversary that will think twice before pursuing such conduct again. For example, a plaintiff could demand that any agreement not to sue should contain a mutual release barring both parties from future claims against the other, or contain an admission of violation of 42 U.S.C. § 3617. If the agreement contains a release, consideration for it should include the plaintiff’s waiver of potential claims against the defendant, in which case the defendant will be receiving something of value in exchange for giving consideration to the plaintiff. The defendant in turn can demand that the agreement not to sue contain a revocation period during which the plaintiff cannot revoke the agreement. Many states require that the revocation period be three days, during which time money paid as consideration for the agreement not to sue cannot be counted as consideration for the agreement to settle. Most importantly, the agreement should contain a representation by the party paying for the release that it has complied with the FHA.
Contesting an Agreement Not to Sue
An agreement not to sue is a contract with very specific and sometimes severe limitations. When the terms have become too restrictive, the parties may enter into negotiations to amend or rescind the agreement. In other instances, however, an agreement not to sue is disputed for other reasons entirely. When the parties are unable to resolve the problem on their own, there are two grounds for challenging an agreement not to sue imposed through a court order or judgment.
Mistake
The claim of mistaken content is most frequently advanced by the defendants of an agreement not to sue for a fixed sum. If the plaintiff finds himself in the position of having to pay a significantly larger sum for damages through the defendant’s counterclaim, then this will obviously seem like a grave error. This is why a contract rescission is made on the basis of material mistake or mistakes of fact.
The task of overturning the plaintiff’s agreement not to sue will be difficult since the plaintiff has likely gained something from making this particular decision . A benefit of this nature can be an incentive not to call it a mistake. The defendant, however, may have knowingly made a decision with the understanding that the legal fees and associated costs would be nominal.
Misrepresentation
Similar to a material mistake, misrepresentation is an untrue assertion made during contract formation. An untrue statement can include those that are deliberately false, negligent, or innocent, depending on the type of misrepresentation. If the agreement not to sue included false material representations, then this is sufficient grounds to challenge the validity of the contract.
The plaintiff will have to demonstrate that each instance of misrepresentation materially affected the decision to not bring suit against the defendant. Based on these assertions, the plaintiff may have grounds to rescind the agreement not to sue. If the defendant committed fraudulent misrepresentation in entering into the agreement, then the contract may be rescinded or cancelled.