Consider Whether the Promise of a Bird in the Hand is Better Than Two in the Bush

by Proskauer - Minding Your Business
Contact

When drafting settlement agreements, most lawyers give due attention to the scope of any release clause. And for good reason: for defendants, the extent to which the release protects against future litigation is critical, and for plaintiffs, the extent to which it preserves future claims may be equally critical. But lawyers – and particularly those representing plaintiffs – should also give thoughtful attention to the timing of a release clause in any settlement agreement. Otherwise, a plaintiff may find that its “compromise” was nothing more than a unilateral agreement to reduce the value of its claim.

Take this simple example:  Plaintiff sues Defendant for breach of contract claiming $100,000 in actual damages. Defendant offers to pay $50,000. Plaintiff, preferring the certainty of payment over litigation and collection costs, agrees to settle. The settlement agreement executed by the parties is simple:  it provides (i) that Defendant shall pay $50,000 to Plaintiff within 20 days of execution of the agreement; and (ii) for mutual general releases between the parties.  Day 20 comes and Defendant doesn’t pay. What rights and remedies does Plaintiff have?

The answer depends on when the release became effective.  And that, in turn, may depend on whether the settlement agreement is construed to be (i) a “substituted contract” wherein Plaintiff accepted the promise to perform the compromise as satisfaction of its underlying claim or, alternatively, (ii) an “executory accord” wherein Plaintiff accepted actual performance of the compromise as satisfaction of its underlying claim. See, e.g., Rucker v. Rucker

For example, in Rucker v. Rucker, the parties settled an action on a promissory note. The settlement agreement included mutual releases of all claims between the parties and a remedy in the event of default under the agreement (i.e. a confession of judgment). Based on the terms of the settlement agreement, the Rucker court found that the parties intended their settlement agreement to extinguish the obligations under the promissory note and replace them with the obligations under the settlement agreement: “the settlement agreement was a substituted contract that extinguished the promissory note and became the operative agreement between the parties.” When defendant breached the settlement agreement, the plaintiff was precluded from suing for the full amount of the underlying promissory note. That claim had been released by the settlement agreement. Plaintiff had only the right to sue for breach of the settlement agreement.

Similarly, in the hypothetical above, Plaintiff’s remedy for Defendant’s breach would be limited to enforcing the settlement agreement: a $50,000 claim. Thus, by entering into a “substituted contract” (without preserving its underlying claim in the event of a breach) Plaintiff would have lost half the value of its claim! By contrast, Plaintiff’s rights would not be so limited if the settlement agreement conditioned release on receipt of payment or otherwise preserved Plaintiff’s right to pursue the underlying claim upon breach.   See, e.g., Boulware v. Baldwin. Under such circumstances, Plaintiff would have the option to pursue the original $100,000 claim or to enforce the settlement agreement (but couldn’t obtain a judgment on both).

“Settlement agreements may have the effect of immediately and permanently extinguishing one party’s claims in exchange for the other party’s promise to perform.”   See Rosen v. Ascentry Technologies, Inc. (emphasis added). As shown above, this can result from a release clause that takes effect too soon, i.e., before receipt of the compromise consideration. Counsel drafting and reviewing settlement agreements should thus consider the timing of release clauses when drafting and reviewing settlement agreements to ensure that the deal that has been papered is the deal the client intended to make.

There may be circumstances where parties intend to make releases effective immediately. For example, parties may be unwilling to wait when the settlement agreement provides for the exchange of consideration to take place years after execution. Alternatively, there may be value in and of itself to liquidating the amount of a claim through a settlement agreement (particularly in states, like California, that offer an expedited procedure for enforcement of settlement agreements, see California Code of Civil Procedure § 664.6). Either way, the timing of a release can have significant consequences, and should be considered when drafting or reviewing any settlement agreement.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Proskauer - Minding Your Business | Attorney Advertising

Written by:

Proskauer - Minding Your Business
Contact
more
less

Proskauer - Minding Your Business on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.